Regulators Plotted to Kill “Bad” Hedge Funds

The past year has been remarkable in many ways...and it is too bad many hedge fund managers did not hang it up like James Palotta, who closed his small-cap hedge fund last year to focus on his larger cap "Raptor" fund:

August 2007
"Some of our core longs were simply crushed," wrote Pallotta, according to excerpts reported by Bloomberg. "Compounding matters, our short book failed us, which was enormously frustrating."

"For the first time in the history of our equity strategy, we received virtually no performance contribution from our short book against the backdrop of a precipitous market decline," he wrote.

"It is now our view that a consumer recession is likely -- if not happening already," he wrote, warning that could further affect investment returns. "All bets are off in a recession or a climate characterized by fear of recession." Boston.com

Pallotta has a good nose, and noticed trading was starting to get a little squirrelly. But he probably did not foresee Hedgistan trading so aggressively against Hank Paulson and the rogue SellSide institutions that levered themselves up far beyond what a typical hedge fund manager would think prudent. The hedgies had the early lead as the battleground in financial stocks quickly turned into all out war, which prompted Hank Paulson and his fellow regulators to plot to "kill the bad Hedge funds and heavily regulate the rest."

Indeed, email records from a dinner Dick Fuld had with Treasury Secretary Paulson would seem to indicate that groundwork for the war against hedge funds was being laid down this spring, and the unthinkable moves regulators made in September really put a hurt on the hedge fund managers.

Paulson knew how the hedgies were positioned and then lowered the boom on them, largely succeeding, although mutually assured destruction might kill us all in the end. Is he MAD?

Funds such as Tontine Partners were reportedly down as much 66% YTD entering October, and now with the Fed ready to make unsecured loans and perhaps even inject equity into banks, we are on the verge of additional maneuvers that would have been considered outlandish prior to September 2008.

Great job Hank, but for me your legacy remains the Webvan IPO.

But I am looking forward to the coordinated global rate cut. And if it does not work, well, I am sure you will think of something else.
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April 12, 2008
Lehman Email Document

August 25, 2007
Hub fund chief tells investors of $400m loss
Boston.com
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