One of the most arduous tasks a hedge fund manager must perform in these troubled times is to write the periodic letter he sends to investors updating them on the performance of the fund. If things have gone awry, should he manfully take the rap – or should he (Russell Brand-like) evade the blame? Prospect has got hold of one such letter that gives an answer.
In the good times, of course, these documents were lengthy bragathons. In them, the manager usually sought to play down the impact of (generally favourable) market conditions and to play up his own unusual investment genius (known in the trade as his alpha). It was after all these market-beating skills that allowed him to draw substantial fees from the fund.
This style has mutated as the downturn has worsened. Now the market, rarely mentioned on the way up, has emerged as a significant influence on investment performance—as a recent gem of a letter from Toscafund shows. This is a London-based hedge fund, set up by a former banking analyst called Martin Hughes, which has been badly caught up in the downturn by its predilection for investing in banks, fund management companies and house builders, none of which have especially flourished in the recent environment. In the year to 30 September (the investment period covered in the letter) its fund was down 57 per cent.