Where Is My Marlboro Man?

It's been a good week for cowboy watching, since many notables have been climbing in the saddle to take on new challenges:

? The trial began out west for former Enron CEO-gunslingers Kenneth Lay and Jeffrey Skilling.

? President Bush (a Texan at heart) began his sixth year round-up with his State of the Union address.

? Ben Bernanke started his new job as monetary policy's Wyatt Earp, that is to say, as chairman of the Federal Reserve.

? And, on top of it all, the hands of the clock are moving closer and closer to High Noon for hedge fund managers, the biggest cowboys of the business world, who are trying to keep their herd of investors from deserting them.

This cowboy-watching week also brought the beginning of Oscar season with the movie, "Brokeback Mountain", gaining eight nominations along with an inside track for Best Picture. Which puts me in mind of another far-from-typical cowboy movie that won Best Picture in 1969: "Midnight Cowboy" with Jon Voight and Dustin Hoffman. It was the first X-rated movie to win Best Picture, and its gritty theme of male prostitution in New York City was every bit outside the norm as "Brokeback Mountain"'s gay cowboy theme is.

America loves its cowboys. One way or the other, we yearn for the simpler, freer life of those riders on the open Western range. The theme never gets old, from musicals like "Annie Get Your Gun" and "Oklahoma!" to John Wayne westerns to HBO's edgy and brilliant "Deadwood" series.

In the business world, hedge fund managers have been our equivalent of the Marlboro man – lean and rangy, quietly but effectively getting their jobs done without any interference from the usual authorities. They play outside the rules that other financial institutions must follow. They handle the really big money, and they pretty much call their own shots.

But over the past few months, their Big Sky landscape has changed considerably for the worse – mainly because they haven't been able to get the returns on their investments that justify the fees they charge. Standard & Poor's index of 42 hedge funds shows a gain of only 2.3 percent in 2005, less than what ordinary townsfolk could have made by investing in the S&P 500, which gained 4.9 percent in 2005. Moral: If you can't deliver the goods, then you don't get the pay-off at the end of the cattle drive.

Latest figures on the business of hedge funds point toward the beginning of the end for their heyday. According to a story in Business Week magazine (Jan. 19, 2006), the $1.1 trillion industry has doubled since 2000, but net money flows were down 44 percent in the third quarter from a year earlier, "[a]nd they slowed to almost nothing in the fourth quarter, observers say."

Without money, hedge funds can't exist, and Business Week also reported that Chicago's Hedge Fund Research said that 484 hedge funds – more than 6 percent of all hedge funds – had closed up shop through the third quarter of 2005.

The February issue of The Elliott Wave Financial Forecast points out that the "industry's asset base is beginning to erode. According to fourth-quarter figures, investors withdrew more than they put into hedge funds for the first time in 10 years."

EWI's analysts foresee a huge liquidity squeeze coming that will cause more hedge funds to fail in droves, and they predict that more of these cowboy managers may turn to rustling cattle to keep investors from taking their money out: "Temptation will get the best of many overwhelmed hedge fund managers. With more than $1 trillion in assets to manipulate, it should be no small affair. Move over Enron, Tyco, and Martha Stewart; the really big scandals are ready to start popping."

Which brings us full circle to the two former Enron CEOs on trial this week. The bankruptcy of Enron brought down a cast of thousands, from the top wranglers to the lowliest cowpokes in Houston. As the sun passes high noon, many of the hedge fund managers who rode high during the earlier part of this decade may be humming the Midnight Cowboy theme song as sung by Harry Nilsson:

Everybody's talking at me

I don't hear a word they're saying

Only the echoes of my mind

People stop and stare

I can't see their faces, only the shadows of their eyes.

I'm going where the sun keeps shining through the pouring rain

Going where the weather suits my clothes

Banking off the northeast wind

Sailing on summer breeze

And skipping over the ocean like a stone.

Here's one last thought: Mama, don't let your babies grow up to be cowboys – or hedge fund managers. It's rough on the constitution.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta's president. She is a graduate of Stanford University.