Hedge funds slump as global slowdown wreaks havoc

As the eye-popping profits of hedge funds dry up amid the financial crisis, the industry looks set to shrink substantially in its European headquarters of London over the next year.

Discretion is everything in London's exclusive Mayfair district which is quietly home to a third of the world's hedge funds, the highly speculative investment vehicles often blamed when markets plunge.

A small brass plaque on a door tucked in between Chanel and Versace boutiques is often the only sign of their existence. But those highly polished doors cannot hold back the same chaos that has swept through the rest of the finance world.

John Godden, Chief Executive Officer at hedge fund consultancy IGS Group, is one of the rare figures in a secretive world to speak openly about the scale of the problems. He was in the process of drawing up next year's aims for his group when US investment bank Lehman Brothers collapsed in September, and panic buttons were pressed all over the financial world.

"Our business model was to manage growth. Now, it is about managing decline," admitted Godden, whose company manages about 100 hedge funds. "Everything was still going in July and August. We were expecting a turn in the stock markets – but not some banks to disappear."

Not only did Lehman's lend to many hedge funds, its disappearance was a psychological blow to the industry.

Godden said: "On the Friday, we had a call from (ratings agency) Standard and Poor's saying they still believed Lehmans was a triple A," he said, using the term for the highest rating. "The next Monday, it went bust. We found that the impossible was possible."

The effect was immediate. "Everything stopped. Nobody invested. Nobody bought," Godden recalls.

By the end of October, hedge funds were at their lowest level since late 2006, according to the US-based body Hedge Fund Research.

Hedge funds have often become the scapegoats when markets rapidly lose value because of their policy of ruthlessly aiming to maximise their profits rather than – like many funds – simply on outperforming an index. Gains of nearly 20 per cent were common in 2003 and many funds were making 10 per cent a year over the next four years as equity markets rose.

But as banks refuse to lend and profits on equity markets evaporate, the hedge funds are feeling the pinch.

And the alleged $50 billion fraud of US financier Bernard Madoff looks likely to make the super-rich think twice before plunging their money into investments.

Emmanuel Roman, the Co-Chief Executive of Europe's biggest hedge fund GLG, has warned that thousands of funds will disappear "in a Darwinian process," either collapsing or closing because of meagre profits.

Estate agents – so often the barometer of the British economy – are noticing that their once reliable clients are pulling in their horns.

"Hedge funds are now much less active in taking office space and are likely to remain so, at least in the short term," said Peter Damesick of agents CB Richard Ellis.

"The problem is who else... will pay more than £100 per square foot for offices in Mayfair?"

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