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Friday, September 21, 2007

Hedge Fund Managers, Cold Sweats and Soothing Words from a Psychologist

The American writer Tom Wolfe termed bondtraders "Masters of the Universe" in his 1987 novel Bonfire of the Vanities.

It was the year of the Black Monday market crash and also one where another work of art had a big impact on the attitude of the public to business - Michael Douglas playing asset-stripper Gordon Gekko in the movie Wall Street. (see his famous "Greed is Good" address to shareholders.)

Fast -forward 20 years and the hedge fund manager has replaced the bondtrader as a Master of the Universe - or so they think!

Top 25 hedge fund earners raked in more than $14 billion in fees in 2006 - equivalent to the GDP of Jordan or Uruguay

The big cats get lots of cream and today, the Forbes magazine list of the top 400 richest Americans has more than half who are hedge fund or private equity managers.

Not all the Mr 20%'s are plutocrats (the deal apart from most of their earnings being treated as capital gains, resulting in people like Warren Buffett's secretary paying a high tax rate - Buffett calls hedge fund managers "helpers - gives managers 20% of profits or more, together with fund fees of 2-5%.

What has been striking in recent years is that average returns are far from jaw-dropping compared with general market returns.

This week the New York Times had a story on the reaction to hedge fund losses in August when the general market advanced. Many readers must have enjoyed the schadenfreude.

A Times report said that after years of eye-popping returns, sudden losses can be wrenching. Aware of the psychological impact that high-pressure trading can have, several funds have retained psychologists to counsel stressed managers.

“It has been a very challenging period for these people,” said Jonathan F. Katz, a psychologist who works with large hedge funds. “I have seen people shaken, their confidence eroded. They are upset and depressed.”

The writer noted that such anxieties become all the more acute when taken with the boundless spending habits developed at the height of the hedge fund bubble.

As an example, Katz cites a client who, in the middle of the market turmoil in August, found himself closing on an expensive apartment in Manhattan.

“All of a sudden, two or three of his major positions were down,” Katz said. “He was on an emotional roller coaster. He had put himself out there, and now he felt horrible because he had lost his firm tons of money.”

The Times says such distress can result in what some call a social contagion, as hedge fund executives let their woes at work affect their personal lives. Investors have said that their golf scores soar, that they lose their appetites and wake up in the middle of the night in a cold sweat!

To be sure, many investors are cool headed enough to not let inevitable setbacks derail them. But others find it hard to keep their sense of self insulated from losses.

“Some people are debilitated by it,” said Ari Kiev, a psychiatrist who works principally for SAC Capital, the hedge fund founded by Steven A. Cohen. “You can’t sleep; you can’t eat; you have catastrophic thoughts about losing your house.”

The Times says that a prominent hedge fund investor, who like the other executives who discussed their anxieties asked not to be identified, spoke of a crisis of confidence. “

"It’s an intellectual destabilization,” he said. “All of a sudden, your funds are down 5 percent and the S.& P. is down 1 percent. Once you were master of the universe, but the market makes you humble.”

Humble for how long?

Some people are debilitated by it - yes indeed - such as those at the bottom of the pyramid who are subject to foreclosures.

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