Seeking Alpha – With the news getting worse and worse for the hedgies (e.g. Fortress, Thomas Lee, D. E. Shaw), it’s time for a rethink on hedge funds.

For hedge fund investors: You probably went into them believing that they were uncorrelated absolute return vehicles, or pure alpha. Isn’t it funny how correlations all go to 1 in times of crisis? Maybe it’s time to return to your roots and understand the role of alternative investments in your portfolio.

For hedge fund managers: The really successful ones began fifteen or twenty years ago as small, nimble, guerilla investors. Somewhere along the way the guerillas came down from the hills, got big and became the government. Maybe it’s time to return to the hills again.

Investors thought hedge funds were the panacea when the hedgies showed positive returns in the post-Tech bubble crash. Ultimi Barbarorum writes:

Last time we had a bear market, hedge fund fortunes were made. Andor Capital, William von Meuffling, Crispin Odey, Chris Hohn, even Jim Cramer when he was trading, all made out like bandits producing 20-50% returns on the short side in 2000-2002, many after having doubled their money by being long in 1999.

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1 Chose a name

A posh part of London or New York can be suitable, as in Pershing Square Capital, Cheyne Capital and Thames River Capital.

Or you could choose something slightly aggressive such as Tiger Capital, Citadel Capital or Centaurus. Among the big financial firms, it is voguish to squeeze as many meaningless words as possible into the title of a hedge fund. Length is not a sign of quality, however; a Bear Stearns hedge fund which went from $642m to zero was called the "high-grade structured credit strategies enhanced leverage fund".

2 Get a brass plaque in the Cayman Islands

Nearly all hedge funds are legally registered in tax havens to avoid both the taxman and to skirt regulatory hurdles – the sunny climes of the Caymans and Bermuda are particularly popular. Theoretically, a fund registered in London would have to register with the Financial Services Authority, but this has never actually happened. An FSA spokeswoman says: "Nobody ever registers hedge funds in the UK. If somebody did, we’d be scratching our heads over how to deal with it. We’d have to devise something."

3 Set your fees

The real fun starts here. Hedge funds are enormously lucrative – their standard fee arrangement is "two and 20". This means that as a fund manager, you can take 2% of clients’ money up front before you do anything, then keep 20% of any appreciation on the value of your fund. For successful hedgies, that means a phenomenal payday. For example, if a fund raises $1bn from investors and achieves a 30% rise in value over a year, the fund’s management earns $78.8m. Crispin Odey – one of London’s leading hedge fund managers – has just paid himself £28m after his firm successfully negotiated the credit crunch to make more than £55m profit in the past financial year. Most of the remaining £27m will be shared among Odey Asset Management’s 11 other partners. The fund manages around £2.7bn of assets.

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Times Online – The esteem of John Waples for the hedge funds (“Get used to volatility: the hedgies are in control”, last week) was not very sound financial journalism.

Who else but these grossly leveraged entities would have the capital or the appetite for the short-selling that we have seen during the course of this economic turmoil?

Waples should turn his investigative attention to our so-called regulators who, with every conceivable avenue of inspection available to them, have failed to track down the City insider traders who have made millions from this financial system.

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