C.E.O. Survival Guide: The Hedge Fund You're Running Kissed a Chunk of Its Value Good-bye It happens to the best of them: A trader goes wild and disaster ensues. What to do when it happens to you.

By Caroline Waxler

Say you're running a hedge fund and . um, well, one of your traders makes a huge bet that goes bad. A horrible situation, but it doesn't have to mean the end of your business. Should you find yourself in the beginning stages of a similar scenario, here are some tips on how to stabilize things and recover.

1. Call Your Lawyer
Not sure when to start getting concerned? Here's a measure: If the losses cross the 10-percent mark in just a few days, get your attorney on the phone.

2. Reconsider Your Math
If your mathematical investment models are no longer working, stop using them. Amaranth Advisors, which in a few weeks said good-bye to nearly two thirds of its $9.2 billion assets, was successful as a diversified multi-strategy hedge fund, but ran into trouble when it focused (and kept focusing) too much on a natural-gas play that didn't pan out. Give your strategies a rest if everything is going wrong.

3. Don't Give Money Back to the Investors
When you set up a hedge fund, ideally it provides for people to get their money back only at specified times and with 30 days written notice. Don't make exceptions. Making sure your investors are locked in for a predetermined period of time is key to running your fund: You're making bets assuming you'll have the money to make good on the contract. If the investors' money can evaporate at a moment's notice, you won't be able to.

4. Quietly Get Liquid
Sell everything you can that isn't essential to your company's business. However, be very discreet when looking for a buyer. Don't approach 10 people. Approach just one whom you think will keep quiet. It's essential that this news not get out. For one thing, if lenders hear that you're in trouble, they'll jack up their rates. But the most important reason to keep selling secretive brings us to the next point.

5. Use the Liquidity to Cover Margins
If there is a default under any of your securities contracts-for example, the inability to meet a margin call-then other parties with whom you have contracts to buy or sell may claim their contracts have been breached. (In the complex world of hedge funds, everything is connected.) If other parties claim their contracts are invalid, they will seek to break those which are profitable for you and enforce the ones which are profitable for them.

6. Correct Any Circulating Misinformation
Your P.R. counsel, says Michael Sitrick, chairman and chief executive officer of Sitrick & Company, needs to be vigilant about ensuring that any inaccuracies out there are corrected immediately. If you nip something before it gets picked up by the wire services, you should be okay. However, once incorrect information is fully disseminated, it's harder to get the right story out.

7. Play Down the Situation
If you are calm, others will be too.

SOURCES: Michael Sitrick, chairman and chief executive officer of Sitrick & Company, a strategic communications firm; Michael Robinson, senior vice president, Levick Strategic Communications, L.L.C.; and a prominent lawyer, highly experienced in this area, who wouldn't let us print his name.

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