High-Flying Hedge Funds See Dark Days

Sept. 26, 2008 — -- Tough new regulations. A devastating bankruptcy. A growing government investigation.

Welcome to the new world of hedge funds. Once known for their outsized profits, many funds today are reportedly seeing losses that rival or exceed those of other investors caught in today's market turmoil.

But the stock slump aside, some hedge funds have a whole other set of problems: the bankruptcy of former brokerage heavyweight Lehman Brothers, an investigation by the Securities and Exchange Commission and new trading rules that ultimately limit how many funds do business.

Lehman Brothers' bankruptcy, the largest in U.S. history, directly affects a limited number of hedge funds. Still, the funds that are affected face traumatic times. One senior hedge fund manager, who declined to be identified, worried whether his firm would be able to extract the investments it had held with Lehman.

"We find ourselves in the unbelievably frustrating, infuriating position that our assets are stuck and no one will return our calls or return our assets. For a fund like ours it's an untenable position to surmise that our assets are completely frozen and we have no ability to trade them," he said.

"For the past week, we've been asking a simple question: Please tell us the status of our assets. Even more essentially, tell us where our assets are."

Some hedge funds are heading to court on the Lehman issue. Two New York-based funds are contesting Lehman's bankruptcy plan while a London fund filed a lawsuit to recover $50 million held by Lehman, the first in what is expected to be a series of such legal claims.