Hedge Funds Suffering Economic Hangover

Hedge fund managers are keeping up appearances, holding their festive annual conference in the Cayman Islands. But not everyone attending is sanguine about what the future might hold.

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MICHELE NORRIS, host:

And I'm Michele Norris.

Today, the Bush administration unveiled new guidelines for hedge funds. These are not regulations; they're just suggestions. Hedge funds are, by their nature, unregulated. They can invest more freely than banks and insurance companies. While the Bush administration was releasing guidelines, a group of hedge funds managers was meeting in the Cayman Islands. So far, this has been a tough year for their business.

But as NPR's Adam Davidson found out, hedge fund managers are celebrating in the Caribbean.

ADAM DAVIDSON: Before we get to the problems hedge funds are facing, there is something more pressing — Helen Spork wants a drink. The bartender is setting up for the big hedge-fund party but says he can't serve alcohol yet, only water.

Ms. HELEN SPORK (Wife of Sextant Capital's Otto Spork): Water. No, I'd like some beer please.

(Soundbite of laughter)

DAVIDSON: This seems like a rich metaphoric…

Mr. OTTO SPORK (Founder and President, Sextant Capital Management): Very rich metaphor.

DAVIDSON: That was Helen's husband, Otto Spork. Let me explain this whole metaphor thing. Hedge funds are obsessively secretive and they don't like to talk to the media. I finally realized the only way to get them to discuss their business was to ask questions obliquely. Otto Spork runs Sextant Capital Management, a Canadian hedge fund. He and I jumped on this metaphor. The bar is right there, we can see all the drinks, but they won't serve.

Mr. SPORK: Not yet.

DAVIDSON: Is that what hedge funds are going through right now, nobody is serving money?

Mr. SPORK: Basically. Yeah, it's hard to raise money in this environment.

DAVIDSON: Describe the world a year ago or before the crisis.

Mr. SPORK: There was open bar and any drinks were available.

DAVIDSON: Just lots of money for anybody?

Mr. SPORK: Pretty much, yes.

DAVIDSON: Hedge funds need bank loans; it's their blood. The whole point is to borrow billions of dollars, invest in some exotic and secret way, pocket the profit and pay back the loan. But these days, hedge funds can't get loans so easily. Many banks are in trouble, so they won't lend as much. And that means hedge funds can't make as much money.

Mr. SPORK: There are has been so many excess and so much booze handed out that the party is now drunk that they basically have to let the alcohol wear off, so to speak.

DAVIDSON: We have an international hangover?

Mr. SPORK: Yes, we do. Yes, we do. And it needs to be cleansed. And, you know, unfortunately it will be a bit painful to cleanse it as most people are aware that it ends up with a hangover.

DAVIDSON: Over the past few years, hedge funds made a lot of investments that look good at the time but turned out not to be so attractive.

Spork says that government regulation will only slow the market's self-cleansing. For now, he says, the bar will stay closed for another couple of years. At least the metaphorical bar, the real bar, the one that the GAIM Cayman Hedge Fund Conference that opened promptly at six.

(Soundbite of music)

Ms. REBECCA PARCHMENT (Miss Cayman Islands): My name is Rebecca Parchment. I am the reigning Ms. Cayman Islands.

DAVIDSON: Wearing what may be the world's tiniest bikini, Ms. Cayman Islands was the official host of the GAIM Cayman Hedge Fund Conference Carnivale. And what a carnival it was. Right on the beach, there were Cubans cigars, hand-rolled in front of your eyes. There were piles of fresh seafood and deserts, rum-tasting sessions. I ran into a more ebullient Otto Spork.

Mr. SPORK: We're drinking rum fudge now.

DAVIDSON: I got to tell you, if the hedge fund industry is suffering, they sure suffer in style.

Mr. SPORK: Yes, (unintelligible).

DAVIDSON: Then the fireworks started.

(Soundbite of fireworks)

DAVIDSON: It's not exactly clear what the fireworks are celebrating. Hedge funds are not doing great; they're down around 3 percent on average this year. But most are still in business, which is saying a lot. Not long ago, some wondered if most hedge funds would close up shop if they had enjoyed their last drink.

Adam Davidson, NPR News, Grand Cayman.

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