This September marks the 10th anniversary of the 9/11 terrorist attacks on the World Trade Center, a devastating event that ushered in a series of terrible U.S. policy decisions from which weve arguably not quite recovered. Without the more than $1.2 trillion spent to finance the wars in Iraq and Afghanistanand the deep political schism that theyve wroughtwould the U.S. debt have been downgraded last month? Would the Fed have kept printing money to keep the economy and Wall Street afloat until it burst some seven Septembers later? (And then there was more money to patch that up, of course.)
Those of us who live in New York recall how fragile our world seemed right after September 11, 2001. That perception was often reinforced during the ensuing decadeas well as this summer. But if ever there was a beneficiary of all the uncertainty, it was hedge funds. Institutional investors that saw their portfolios decimated between 2000 and 2003 began the desperate search for yield that led them into the arms of hedge funds, creating a $2 trillion industry.
Hedge funds proved a good choice: They survived the next calamitous Septemberthat of 2008better than most financial players. True, many didnt survive, but overall, hedge fund returns didnt fall as much as the major indices. The next September2009AR Magazine launched in the belief that the institutional march into hedge funds would continue and the industry would flourish.
Now comes September 2011. Hedge fund returns have been paltry so far this year; the AR Composite Index gained a mere 2.2% through July. Some major funds have had trouble coming to terms with the new political paradigm in our post-2008 worldand were either wrong about markets or overly cautious. But as we report in our Armageddon Now! in-depth analysis, the pessimism that kept hedge fund managers from benefiting earlier in the year may soon pay off.
Investors will be watching. Since 2008, theyve been judging hedge funds in large part by how they behaved during the financial turmoil. Those who gated or side-pocketed continue to earn investors ire. But for the first time, those polled in our Hedge Fund Report Card (whose results are in this issue) say their main concern in rating hedge funds is performance. Really, its all about the money. Even the now-defeated, now-deceased Osama bin Laden knew that much.