How fund managers grovel.

The following fictitious letter, with two possible endings, is compiled largely using the exact words used by fund managers at Citadel Investment Group, Greenlight Capital, and TPG Axon, among others, in letters sent to investors in recent weeks. The alternative ending owes much to Andrew Lahde of Lahde Capital. All the words have, however, been rearranged and no longer necessarily reflect the views of these managers.

Dear Crunch Capital investors:

Our Big Absolute Return Fund (BARF) returned minus 23.4 percent net of fees in the third quarter of 2008. We are embarrassed by our performance, and we remind you that we eat our own cooking as the largest investors in our funds.

Last year was a strong one for us, and the first half of 2008 was solid. In sharp contrast, the last quarter has been abysmal, and we are sorry to have let you down with the terrible performance of the portfolio.

Candidly, in hindsight we grew a bit overconfident in our ability to navigate treacherous waters. By June, we were already materially reducing risk. But midyear economic data threw markets for a loop. Everything that had gone up in the past few years-equities, foreign currencies, and commodities-was dumped by investors as they fled in the other direction.

The July reversal in markets caused damage to many hedge funds, which had clearly been in "extreme agreement." As a result, investors have been unwinding trades that might otherwise make sense because 1) they are nervous about short-term losses, 2) they are reducing risks and leverage generally, and 3) they are possibly facing redemptions from their own investors.