Wetherell Mayfairs Fitnes Properties

Steve Forrest

As world markets shudder, the hedge funds based in London, once the toast of the city's flashy financial elite and magnets for cosmopolitan capital, have stumbled badly.

The increasingly global sweep of the credit crunch and the collapse of Lehman Brothers have punished all manner of hedge funds - secretive investment pools that rely on generous lenders and a high tolerance for risk to thrive.

But in London, where a number have already shuttered, the hedge fund retreat has a pointed resonance. Along with celebrity chefs, Russian oligarchs and Italian soccer coaches, hedge funds that established operations here in the past decade have been seen as a mark of London's hip new spirit of decadent cool - a notion reinforced by the pound's long period of strength and the boom in home prices.

Now, the failure of Lehman Brothers, which had deep financial relationships with some of the largest hedge funds in the world, has unsettled an already jittery market - sparking fears that some hedge fund assets might be frozen there and thus be unavailable for sale if investors choose to redeem them.

For GLG Partners, the largest, most scrutinized hedge fund in London - whose founding partners were originally backed by Lehman - the uncertainty added to broader concerns.

Its funds are down on average 11 percent through August - albeit in a very difficult market - and at least $4 billion is expected to depart this November when its most recognized and successful trader leaves to start his own fund at the end of the month.

In a statement, GLG said it had pulled the bulk of its assets from Lehman last week and that any remaining exposure was not material. It declined further comment.

None of that, however, dissipates the darkening mood that has taken root within the hedge fund community here, one that is felt most acutely in the London enclave of Mayfair where GLG and most other funds are based.

"The bling is gone," said Peter Wetherell, a top real estate agent in Mayfair, whose client list includes hedge fund executives, Arab sheiks and others in search of a Mayfair mansion.

With his bonhomie, deep summer tan and a chunky silver watch that hangs heavy on his wrist, Wetherell seems a fading emblem of a more exuberant time.

Standing outside his office, just opposite Scott's, the fashionable restaurant and nightclub, he shakes his head. "Its tough out there and the streets are quieter now," Wetherell said. "You will see people being less ostentatious about their wealth - but it hasn't been a bad party, has it?"

Indeed not. In Mayfair, however, the first signs of what many observers say could be a debilitating hangover are already evident.

According to Wetherell, the volume of deals he has handled so far this year is down sharply - 48, compared to 136 a year earlier. And during the usually busy lunch hour, many of Mayfair's high-end shops on Mount Street - from the Porsche dealership where £112,000, or $200,000, Turbo Carreras are for sale to a tobacconist selling £47 Havana cigars - were empty of customers.

The list of 2008 hedge fund implosions here is growing. It began with the precipitous fall of Peloton Partners this spring and has included others like Pentagon Capital. More recently, the troubles have extended to funds caught short when commodity prices began to spiral downward, including RAB Capital and Red Kite Capital.

"It is a particularly challenging market," said Christopher Keen, a partner at Culross Global Management, which manages a portfolio of outside hedge funds for investors. "There are more funds in forced liquidation than at any time I have seen in the last 10 years."

But it is the condition of GLG, which manages $23 billion and will celebrate the first anniversary of its listing on the New York Stock Exchange in November, that symbolizes both the headiness as well as the vulnerability of the London hedge fund boom.

Founded by a group of former Goldman Sachs private-client executives in 1995, GLG - the name represents the first letter of the last name of the three founding partners, Noam Gottesman, Pierre Lagrange and Jonathan Green - became a meritocratic melting pot of sorts by attracting aggressive, foreign-born traders and giving them room to run.

Their extraordinary asset growth swung the pendulum of influence from the City of London, as the financial district is known, and the traditional banking and insurance company arbiters of financial power to the hedge fund central in Mayfair.

As their returns soared, so did their sense of swagger. And no one was more fascinated than the London media, which paid close attention to the £150 million paydays of the leading hedge fund operators, the grand houses and their country mansions.