The Mighty Hedged Funds on SALES!

At the end of October last year 2007, the FTSE 100 was 6,721. Just a year later, and now the index is 3,890. That’s a fall of 42%!

US, London and Japan stocks are far from alone. Share prices have plunged round the world, and have recently fallen so fast that there’s the smell of blind panic around. What’s more, now the great and the good among the politicians and central bankers are competing with each other to tell us how bad the recession will be, and how long it will last. In other words, this might seem to be about as bad as it gets – Sir John Templeton’s fabled point of “maximum pessimism” - which is just when contrarian investors start coming into their own.

But while sniffing out shares that have fallen right out of favour isn’t too difficult right now, there’s a much bigger problem out there. Hedge funds are in forced sale mode! Stock markets may be in fire-sale territory (even longer-term bears such as Jeremy Grantham believe stocks are now closer to being undervalued) but a lot of the big sellers are the hedge fund managers. They bought stocks with borrowed money, and are now having to offload them.

While we can’t yet know exactly what’s being sold, we do know there’s plenty more stock still in the pipeline. The hedge fund industry has been staggering through its worst time in two decades, with an average loss of 17% this year. That beats the performance of most global stock markets, but it’s still not exactly great for a concept that was supposed to be able to sidestep declining markets (though to be fair, ‘short-selling’ bans haven’t helped recently).

Now the heat is really being turned up. Some 8,000 hedge funds with more than $1.7 trn in assets are “being caught in a vicious cycle” say BusinessWeek’s Matthey Goldstein and David Henry, “as worried investors pull out their money”. The problem lies in the mix of plunging markets and massive de-leveraging, i.e. paying down debt, across the financial system. Over the three months to September, another $179bn was wiped off the value of hedge fund assets by falling asset prices, according to Hedge Fund Research.

Spooked by the market falls, and keen to have ready cash at hand, investors have been pulling their money out at a rapid rate, with almost $31bn being withdrawn over the quarter – which means hedgies need to sell more assets to repay clients. On top of this, as markets fall, lenders are also cutting credit lines to their hedge fund customers or are making ‘margin calls’, i.e. demanding that those funds come up with extra cash to back up their borrowings.

And as if that wasn’t enough, the Lehman Brothers bankruptcy is still tying up tens of billions of dollars-worth of hedge fund assets. Lots of money managers had “parked” cash and other securities at the investment bank's prime brokerage operation. But these accounts are now frozen.

But it’s about to get even worse...

That’s more than enough bad news for any industry to cope with. As many as 30% of hedge funds will be shutting up shop “in a Darwinian process”, says Emmanuel Roman at GLF Partners, and the US authorities will force-feed regulation onto the rest: “there need to be scapegoats, and they are going to go hunt people”. That will make business even harder, and lead to even more forced selling.

In London, out of 450 hedge funds, more than 100 could be at risk, says Miles Costello in The Times. New York Professor Nouriel Roubini, who has been spot on about how bad things were going to get, agrees that hundreds of hedge funds will fail. “We've reached a situation of sheer panic. Yet I fear the worst is ahead of us. Don't be surprised if policy makers need to close down markets for a week or two in coming days”. This is pretty apocalyptic stuff. But the cavalry isn’t about to appear over the horizon.

US Treasury Secretary Henry Paulson confirmed to Bloomberg yesterday that unregulated firms like hedge funds won't initially get government aid as “we're focused on regulated financial institutions.” So “you can argue that it could be worse than Wall Street because no one is coming in to save the hedge funds”, says Hank Higdon at Higdon Partners.

Why you shouldn't go bargain hunting just yet? What does this mean for the ordinary investor?

Well, because of the hedgie effect, share prices could easily fall some way further than anyone expects. “The market’s going to overshoot on the downside”, says Peter Boockvar at Miller Tabak, who sees the Dow tumbling to 5,000 next year, more than 40% below today. “When that occurs, I’ll be a raging bull”. So it’s a brave man, or woman, however contrarian, who’s prepared to dip more than a very small toe in the market with the hedge funds in forced sale mode for some time to come. I certainly wouldn’t be buying any funds, passive or actively managed.

Period.

Father and Son

I try to be a good father. Give my son everything he needs. Pay for his phonics class. Take him and mom out for fine dining. Have yearly photo shoots... etc...

But compared with Dick Hoyt, I suck.

You see, eighty-five times he's pushed his disabled son, Rick, 26.2 miles (41.92 km) in marathons. Eight times he's not only pushed him 26.2 miles in a wheelchair but also towed him 2.4 miles in a dinghy while swimming and pedaled him 112 miles in a seat on the handlebars - all in the same day.

Dick's also pulled him cross-country skiing, taken him on his back mountain climbing and once hauled him across the U.S. on a bike. Makes taking your son bowling look a little lame, right?

And what has Rick done for his father? Not much - except save his life.

This love story began in Winchester, Mass., 43 years ago, when Rick was strangled by the umbilical cord during birth, leaving him brain-damaged and unable to control his limbs.

"He'll be a vegetable the rest of his life," Dick says doctors told him and his wife, Judy, when Rick was nine months old. "Put him in an institution."

But the Hoyts weren't buying it. They noticed the way Rick's eyes followed them around the room. When Rick was 11 they took him to the engineering department at Tufts University and asked if there was anything to help the boy communicate.

"No way," Dick says he was told. "There's nothing going on in his brain."

"Tell him a joke," Dick countered. They did. Rick laughed. Turns out a lot was going on in his brain.

Rigged up with a computer that allowed him to control the cursor by touching a switch with the side of his head, Rick was finally able to communicate. First words? "Go Bruins!" And after a high school classmate was paralyzed in an accident and the school organized a charity run for him, Rick pecked out, "Dad, I want to do that."

Yeah, right. How was Dick, a self-described "porker" who never ran more than a mile at a time, going to push his son five miles? Still, he tried. "Then it was me who was handicapped," Dick says. "I was sore for two weeks."

That day changed Rick's life. "Dad," he typed, "when we were running, it felt like I wasn't disabled anymore!"

And that sentence changed Dick's life. He became obsessed with giving Rick that feeling as often as he could. He got into such hard-belly shape that he and Rick were ready to try the 1979 Boston Marathon.

"No way," Dick was told by a race official. The Hoyts weren't quite a single runner, and they weren't quite a wheelchair competitor. For a few years Dick and Rick just joined the massive field and ran anyway, then they found a way to get into the race officially. In 1983 they ran another marathon so fast they made the qualifying time for Boston the following year.
Then somebody said, "Hey, Dick, why not a triathlon?"

How's a guy who never learned to swim and hadn't ridden a bike since he was six going to haul his 110-pound kid through a triathlon? Still, Dick tried.

Now they've done 212 triathlons, including four grueling 15-hour Ironmans in Hawaii. It must be a buzzkill to be a 25-year-old stud getting passed by an old guy towing a grown man in a dinghy, don't you think?

Hey, Dick, why not see how you'd do on your own? "No way," he says. Dick does it purely for "the awesome feeling" he gets seeing Rick with a cantaloupe smile as they run, swim and ride together.

This year, at ages 65 and 43, Dick and Rick finished their 24th Boston marathon, in 5,083rd place out of more than 20,000 starters. Their best time? Two hours, 40 minutes in 1992 - only 35 minutes off the world record, which, in case you don't keep track of these things, happens to be held by a guy who was not pushing another man in a wheelchair at the time.

"No question about it," Rick types. "My dad is the Father of the Century."

And Dick got something else out of all this too. Two years ago he had a mild heart attack during a race. Doctors found that one of his arteries was 95% clogged. "If you hadn't been in such great shape," one doctor told him, "you probably would've died 15 years ago."

So, in a way, Dick and Rick saved each other's life.

Rick, who has his own apartment (he gets home care) and works in Boston, and Dick, retired from the military and living in Holland, Mass., always find ways to be together. They give speeches around the country and compete in some backbreaking race every weekend, including this Father's Day.

That night, Rick will buy his dad dinner, but the thing he really wants to give him is a gift he can never buy.

"The thing I'd most like, "is that my dad sit in the chair and I push him once."

By Rick ReillySports Illustrated
- Used with permission

Dick and Rick Hoyt have a book and DVD. To learn more about this very special father and son team go to: www.teamhoyt.com