Hedgies on the Back Foot

It wasn't so long ago that hedge funds were the definition of coolness - both in the Square Mile and Wall Street. With their in-office basketball courts and swimming pools, expensively casual dress-codes and even their own "hedgestock" music festival, so-called hedgies stood astride the financial world.

But somehow, with utmost subtlety, the pecking order has changed. Hedgies are on the back foot.

Private equity has edged out the hedge-fund industry this year as the brashest, most affluent sector of the finance world - a phenomenon epitomized by the Blackstone boss Stephen Schwarzman's lavish 60th birthday party for 300 of New York's finest socialites in February.

This week, the pendulum swung further as it emerged that many hedge funds - including ventures run by Bear Stearns, Barclays and Goldman Sachs - have struggled desperately to cope with an outbreak of global financial jitters. The boss of one firm, United Capital Asset Management, is even having to sell his $11m Sikorsky helicopter and $16.5m ranch in Aspen to face straightened times.

Computer models used by more mathematical hedge funds have shown themselves to be wanting under stress. In essence, they tend to pick similar stocks - and when a handful began selling, microchips began making lemming-like trading decisions.

Unaccustomed to having to explain themselves, hedge fund managers have been forced to write letters to their clients explaining why they are doing quite so badly. The Wall Street Journal has amassed an impressive collection of this mint-new literary genre - and it points out that the word "sorry" tends to be glaringly absent.

The verbal acrobatics tend to be impressive. Barclays Global Investors (BGI) is defiant in the face of losses at its 32 Capital Fund, which is 7% down on the month even after a late pull-back. Everyone else, it says is to blame.

"We believe that the catalyst for the abrupt rise in volatility has been non-BGI quantatively-managed hedge funds de-levering their portfolios, ie, liquidating their positions," writes managing director Minder Cheng.

Liquidations by these rival funds, he says, have been prompted by several factors including "redemptions by fund-of-funds" and "voluntary reductions in gearing levels brought on by the recent change in the volatility regime". That last explanation is a curious one - Cheng is explaining that volatility has been caused by funds selling out due to volatility.

Still, he reckons there's nothing to worry about: "We believe that this increase in volatility is technical rather than fundamental in nature."

A Connecticut fund, AQR Capital Management, takes a different tack - it doesn't divulge the size of its losses in its letter, but prefers to adopt a vague, curiously jocular, tone: "Many of you have heard rumors concerning us over the last few days. If the rumors are that we've had better weeks, then they are accurate. If the rumors are that we are in some pain over the recent widespread quant stock selection woes, then they are accurate. If the rumors are more severe than that, then they are simply false."

All this flannel is counter-productive according to Ronald Wohl, a Maryland-based consultant specializing in business communication.

"When you have an emergency, people tend to go back to a defensive situation. The problem, basically, is people don't want to accept guilt," he says. "While they'll write in very clear language to sell something, they'll backpedal in language which they think protects their backsides."

In Australia, hedge fund Basis Capital has lost 80% of certain investors' money. The firm explained euphemistically that it was having "valuation issues" which made it "impracticable to be able to fairly calculate the net asset value" of one fund.

New York-based Tykhe Capital at least admits that its nine-day drop of between 17% and 31% in value is "disappointing", helpfully adding: "As always, we are available to answer your questions and we will continue to furnish daily NAVs and keep you informed of significant developments."

Catherine Baker, founder of Plain Language Communications, says it makes good financial sense to be upfront: "When you communicate clearly in the first place, you don't have to repeat yourself constantly - that saves time and money. It will also reduce the stress on the recipients of bad news if they don't have to spend time trying to decipher what's happening."

Brevity can be a virtue. Highbridge Capital Management only takes two paragraphs to tell its clients that its fund has dropped by 18% in little over a week.

"We have been actively managing our exposure through this challenging market environment," it says.

There has, however, been the occasional outbreak of humility. Jeff Larson, the boss of Sowood Capital, a Boston-based firm which shut its doors after losing more than half of its $3bn value, doesn't mess around with fancy words.

"We are very sorry this has happened," he says. "We have always attempted to do the very best for our investors. A loss of this magnitude in such a short period is as devastating to us as it is to you."