Hedge Fund Blow Up Letters to Investors: Where are the Apologies?

Yesterday’s closing of Ospraie Management LLC’s Ospraie Fund Ltd. prompted me to open up my collection of investors letters from numerous hedge funds that blew up. If you want all the letters, I’ll be happy to share.

Ospraie Management LLC letter to investors (9/2/2008):

“The losses were primarily cause by a substantial sell-off in a number of energy, mining, and resource equity holdings during a six-week period characterized by some of the sharpest declines in these sectors in the past ten to twenty years. As the Fund’s performance deteriorated, we made the decision – despite continued confidence in the Fund’s positions – to reduce and de-lever the portfolio significantly due to concern of incurring even greater potential losses.”

“After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.”

This is one of the very few letters that contains the word “sorry” in it.

Insana Capital Partners Legends Fund L.P. letter to investors (8/8/2008):

“Over the past 14 months, Insana Capital Partners Legends Fund L.P. (“Partnership”) has faced stiff economic conditions amid an historical, and global, financial market dislocation. Despite the challenging environment, the Partnership has lost approximately 5% of its value, while the S&P 500 declined 20% from its most recent peak to its most recent trough.”

Why is the fund comparing the S&P 500 return from its peak in October to the funds performance since July 2007? This is very misleading since the time periods do not match up. The S&P 500 closed at 1,455.27 on 7/31/2007 and the S&P 500 peak occurred on 10/11/2007 at 1,576.09. If the period between 7/31/2007 and 7/31/2008 (1,267.38) were compared, the S&P 500 would have been down 12.9%. The fund still beat the index, but it was grossly overstated at 20%.

“Due to lock ups and withdraw terms of the underlying funds, liquidation is expected to take a substantial amount of time, likely to be a year or longer. Given these circumstances, we are suspending subscriptions and withdraw from the Partnership, effective immediately.”

What subscriptions? Like people are going to be throwing money at the fund. Liquidation taking over a year? No thanks. Now that’s called dead money. I’m sure investors are hurling insults right now.

Oh, and no mention of the word “sorry” or “apologize” but an “It has been an honor to do business with all of you over the last 14 months” statement.

Remember Sowood Capital Management? They sent a letter to investors of the Sowood Alpha Funds (7/27/2007):

“In light of tightening market conditions particularly in the past week, we felt it was prudent to increase liquidity and reduce levels of risk in out portfolio. We continue to meet all of our margin requirements and all of our obligations to counterparties”.

Talk about an incomplete letter: the AF Ltd. fund lost 57% in July and 56% YTD (2007) and the AF LP fund lost 53% in July and 51% YTD (2007).

3 days later (!!!) Sowood announced that they’re closing shop and calling it “a painful and difficult decision to sell substantially all the fund’s portfolio to Citadel Investment Group” in a follow-up letter dated 7/30/2007. This was contrary to the previous letter, but...

Jeff Larson said sorry! “We are very sorry that this happened”. Give him some credit.

We can’t forget Bear Sterns (BSC) former Chairman Jimmy Cayne’s letter to investors of the BS High-Grade Structured Credit Strategies and the BS Enhanced Leverage Fund (7/17/2007):

“Fund managers and account executives have been informing the Funds’ investors of the significant deterioration in performance for May and June. The preliminary estimates show that there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007”.

What investor would stay with a fund that literally lost all of their money? Couldn’t tell them sooner? I see, you didn’t want to scare them. Great stewardship, Mr. Cayne.

“In light of these returns, we intend to seek an orderly wind-down of the Funds over time”.

Wait, what returns? Didn’t you just say that there’s little and no value in these funds?

“I have enormous confidence in BSAM and the ability of our talented professionals to bring you the highest quality products and services now and in the future. You can count on us to deliver”.

Blatant lying, well-documented. Was there a “Sorry” or an apology? Nope.

Sailfish Capital Partners is another liar based on letter to investors (2/27/2008):

“Therefore, based on the above-mentioned market conditions, cumulative redemption requests and overall fund performance, Sailfish Capital Partners…has determined the normal operations of the fund is no longer in the best interest of the fund's shareholders.”

Wait a minute. On 1/18/2008 (one month before the blow up), Sailfish’s Mark Fishman mentioned that the firm never had troubles with their prime brokers like Sowood or Bear Sterns did and that “this is by far not a blowup.”

Way to go, Mark. Don’t even bother apologizing now.

Let’s take a look at Amaranth LLC’s letter to investors (1/9/2007):

This particular letter was straight to the point, itemizing each area of the remaining business (at that time). The itemized list was so boring, I had to skip to the last paragraph.

“We anticipate another round of significant mandatory redemptions/withdraws during the first quarter, after which there will be a small remaining capital balance in your General Account, and for participating investors, the DIs”.

Thanks for the crumbs, but no “sorry”? None. Do these managers know how to apologize, or are they so full of themselves?

Next up, Archeus Capital Management LLC’s letter to investors (10/30/2006):

The first three paragraphs were standard “fluff”, but the next paragraph reads: “However, one obstacle we have not been able to overcome has been the negative sentiment which has snowballed as a result of our third-party administrator’s failure to properly maintain the books and records of our funds. This failure, and their subsequent inability to property re-reconcile the funds’ records, led to a series of investor withdraws from which we have not been able to recover”.

Let’s blame everyone but ourselves! Don’t funds keep records too? Too much golfing, fine dining at the Masa, and 5th Ave shopping, I bet. I wonder why the administrator wasn’t fired when problems first arose?

No “sorry”, but two paragraphs worth of “thank you this and thank you that”

The absolute worst was Sam Israel’s Bayou Fund. He sent out three separate letters dated 7/27/2005, 7/29/2005, and 8/11/2005.

The first letter: “It is with great regret, but with an overriding sense of pride and accomplishment in a job well done to the best of our abilities, that I announce the closing of the Bayou Family of Funds at the end of July 2005”. (What the!!!)

“What has become very clear to me during this time is that the years when your children are growing from young dependent children into independent adults are extremely fleeting and precious. Therefore, it is my intention to spend some time relaxing and enjoying my children and focusing on rebuilding my personal life”.

That’s really sick. I bet your kids are really proud of you now, Inmate #84430-054.

The second and third letters were too full of it. I won’t be able fit all the lies in this article.

Conclusion

I counted two apologies out of eight. I know that there are enough blow ups to write a 1,000-page book, but it is clear that the vast majority of managers just don’t know how to apologize to their investors after losing billions or take responsibility for the losses (blame the markets, the models, other funds, the broker, the administrator, the world, etc.) After all, aren’t hedge fund managers the stewards of capital? Many of the managers even went as far as to lie to their investors and graciously documenting it on paper.

Current and future hedge fund managers can learn a lesson from all of this: if you screw up, be honest, be quick, take full responsibility, and say “I’m Sorry”.