Hedge Fund Operators: Don't Bet With Warren Buffett - By: Barry Lycka

In June, Warren Buffett, the CEO of Berkshire Hathaway, made a big bet - a million dollars to be precise. He bet Protege Partners LLC, a New York City money management firm that runs funds of hedge funds that they could not beat the S&P 500 over the next ten years. I know it's early, but Buffett is showing signs that he's easily winning this sucker's bet. How do I know?

Mark Summers III, a hedge fund manager and owner from Chicago is shutting his firm and retiring. Last summer, he managed $300 million.

"What I've learned about the hedge-fund business is that I hate it," says Mr. Sellers, a former stock analyst with Morningstar. "I have enough money that I don't have to work, and why should I put myself under that much stress?"

The past year has been brutal for hedge funds, and September looks to be the worst month in a decade in the industry, according to Hennessee Group, which advises hedge-fund investors. Funds of all sizes have been battered, but the bigger players can often endure rough times.

The day of reckoning can arrive remarkably fast for managers with assets under the half-billion-dollar mark, like Mr. Sellers, who started July with performance up 50% on the year but by the end of last month was down 20%.

"There are real questions about who can stay in business," says Andrew Fishman, president of Shonfeld Group, a New York brokerage and trading firm whose hedge-fund clients range from about $200 million to $3 billion in assets. The most vulnerable are under $1 billion, he says. "There are guys who should not have been in business, and this will force them out, but guys don't want to give up easily."

Smaller hedge funds are the most likely to fail in today's markets, industry experts say. They often have shorter track records, and their overhead expenses eat up more of the fees they collect, leaving less wiggle room when profits decline. A lot of smaller managers hoped to increase their funds' size this year by attracting new money, but as the economy declined, that pipeline dried up.

Three-fourths of the estimated 10,000 hedge funds globally have less than $500 million in assets, according to Hedge Fund Research

These funds-of-funds, as a whole, have lost more money this year than the average hedge fund industrywide, so they're seeing big withdrawals. In Mr. Sellers's case, his fund had profited handsomely since 2003 by taking concentrated stakes in companies on the rise.

The summer was rough, but September was really "ridiculous," he says. Mr. Sellers contends that he probably could be riding out this year's storm if his client base included bigger, less-skittish clients. But institutions wouldn't allocate to him because he has had substantial swings in performance, even during years he has finished with gains of 20% or 50%.

adapted from WSJ

About the Author

Dr. Barry Lycka is the president and owner of http://LesTout.com, the number one sopurce of internet guidance.

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