2011 passed with a series of enormous shakeups in the field of investment funds. Many failed, while only a handful succeeded. Anyone with a keen eye toward the hedge fund industry knows that it sometimes feels like watching rapid evolution in action. Last year was a prime example of this, when several promising titans were deposed. Here's a look at the top five startling hedge fund failures that took place.
The high volatility experienced in 2011 rocked what is perhaps the largest hedge fund to have experienced sharp downturns. HSBC's Global Strategy Hedge Fund saw devastating losses of nearly one third of its total value, continuing a three to five year losing streak. European debt crises were particularly to blame, as this fund's exposure to international assets sent it spiraling down along with markets abroad.
Once one of the most popular hedge funds, this high returning investment wiped out once again in 2011. Mismanagement and international exposure led to severe decreases that swiftly sidetracked the profitable road it was on earlier in the year. Matterhorn fees also remained exceptionally high, even by hedge fund standards, which further cut into the losses experienced by individual investors.
Assets across the spectrum in the Sprott Asset management fund crashed throughout 2011. Many of the losses were directly due to the bad business decisions of manager Eric Sprott. His mistakes largely came as a result of placing too much emphasis on large companies from the S & P 500 that fared poorly, such as the one million dollar position he placed in Sandisk shares. Although Sprott funds have yielded impressive results in the past, it will be harder to move beyond this black mark on their reputation.
The Fairholme hedge fund made massive bets on financial stocks in 2011, and unfortunately, they came up as losing ones. Bank of America, AIG, and Citigroup were just a few of the troubled assets that led Fairholme down into the depths of despair as the year trundled on. The fund ended with a staggering double-digit loss, and no reduction in fees, making it one more lose-lose prospect for investors who hope to make their gains by relying on experts.
The fund managed by this unorthodox businessman turned investment strategist was slammed by turmoil in the financial sector, much like his peers in hedge fund leadership. The Pabrai fund was worst hit by losses in Wells Fargo, Goldman Sachs, and other assets issued by banking institutions. While the worst of the erosion was somewhat made up by the end of the year, Pabrai's fund will still find itself hard pressed to undo the damage in 2012.
The nausea-inducing failures at these five major hedge funds form a strongly cautionary story for investors thinking about putting their money into hedge funds. In fact, 2011 may be the beginning of major changes in the industry. These top failures and a series of less notable shakeups have broken the myth of steady leadership by experts, who may be forced to lower fees in the coming years to appease investors.