Hedge Fund Ethics
Hedge Fund Industry Ethics
A few weeks ago I posted a note hoping to create a conversation around hedge fund industry ethics and best practices. Just this morning I found an interesting article on hedge fund ethics, again it appears that the most challenging part of setting any code of ethics for the industry is that hedge fund manager are so diverse, their operations, investments, and even scheduled lifespans are often drastically different from one fund to the next. As hedge funds are forced to innovate to produce returns in 2009 while also securing capital for distressed assets I believe this diversity will only increase over the next few years. Here is the article on hedge fund ethics:
Hedge funds took a battering 2008 - and as they have been battered by the storm two questions of "right" and "wrong" have been coming up that show that there are ethical codes at work here, but no agreement on what the "right" answer is.
And here's where the "ethical" questions come up:
If your fund is down and you know it is going to take years to recoup the losses and get paid at 20% of profits again do you:
a) stay with the fund until you have recouped the losses and made your investors whole - working for "psychic income" as Kenneth Griffin of Citadel fame told the New York Times or
b) leave - retire, switch to a new fund, start a few fund - basically start again? If you had many years of excellent performance before this one terrible year you may well be able to raise another fund.
In the first case there's a moral high ground to climbing back out and keeping your commitments to your investors, but maybe the second case makes sense if you can't climb back out from that fund. Maybe you can't keep your key players or your strategy no longer works and your investors are better off with you closing the fund and returning their money.
The second question is whether to allow investors to take money out of the hedge fund. Again hedge funds are not acting consistently. One of your investors wants to pull his money out - do you
a) allow him to knowing that doing so could hurt the remaining investors that are staying in because you'll be forced to selling into a falling market? Much of the volatility in November and December was redemption selling as hedge funds were force to liquidate equities and debt so investors could withdraw funds. Or do you
b) tell investors they can't take their money out and you are going to hold it until it is a more stable time to sell?
Again this is a current raging debate in the hedge fund world that takes on the ethical language of right and wrong. I know I'd want to be able to get my money out if I'd lost faith in a fund! source