Hedge funds sent out letters to investors in the last few weeks to explain away their abominable performance in the third quarter, writes Lucy Kellaway

WHAT DO you do when you lose billions of dollars short-selling Volkswagen? Here is what hedge fund managers did last week: they sat down and cried.

This was the most delicious detail in an utterly delightful story. To read that these tough guys wept because no one had told them Porsche had built up a stake in the carmaker must have delighted many commuters as they made their chilly way to work last Wednesday. It filled me with special satisfaction, as I had just been doing some detailed textual analysis of the letters that hedge funds have sent out to investors in the last few weeks to explain away their abominable performance in the third quarter.

There is much to deplore in these, but the phrase that most stuck in my gullet came from Greenlight Capital (one of the funds to have lost heavily in Volkswagen). It signed off its letter with the quotation: "There's no crying in baseball." This managed to be both butch and banal; to quote glibly from a Tom Hanks movie when you have made the savings of your investors shrink was insultingly crass.

And now we know it isn't even apt: there may or may not be no crying in baseball, but there is crying in hedge funds.

Never mind VW; the letters make one want to cry, even without further provocation. Admittedly they must have been devilish hard to compose given the size of the losses, but one might have thought normal principles would apply: keep it short, stick to the facts and try to offer some hope for the future.

The two letters I studied - one from Greenlight, the other from TPG-Axon Capital - follow a rather different set of rules.

Extraordinary times, it seems, call for extraordinary communication techniques.

Rule One is to keep it long. If you haven't got anything nice to say, bang on forever about any old thing. The Greenlight statement runs to nine pages. TPG-Axon is an interminable 17. The message to investors is that even if they are not getting a lot of money, they are certainly getting a lot of ink.

Rule Two: get in a brief apology early on and move on swiftly. Greenlight refers fleetingly to being "frustrated" by the results and glancingly admits to "mistakes".

TPG-Axon is more graceful: "We are sorry to have let you down," says Dinakar Singh, who has gone to the trouble of signing the letter himself. (The Greenlight one is more coy about authorship, signing itself "Greenlight Capital".)

Rule Three: Undermine the apology by blaming the weather. You can't get too many perfect storms into a communication of this kind. Or headwinds. Or treacherous waters.

Rule Four: Blame the market and diagnose mental illness. Greenlight complains of the market's schizophrenia; TPG-Axon of its manic depression.

Rule Five. Blame anyone else you can think of. Greenlight blames the banks; it blames governments; it even blames Microsoft, which it used to invest in. "We've given up on MSFT for now as we feel better investing in companies where management at least appears to be trying to work for shareholders." Which is a bit rich, given everything.

Rule Six: Say things that reflect well on you, even if they have little to do with the subject in hand. TPG-Axon begins its letter by saying "2007 was a remarkable year across global markets". If a news reporter dared to begin a story with such a historic irrelevance he would be fired on the spot.

Rule Seven: Preface many sentences with "Candidly" - the TPG-Axon letter has such a generous helping of these that one wonders if the sentences that don't begin this way are not candid at all.

Rule Seven: Work on the emotions. "We are immensely grateful for your support," says TPG-Axon, creating the vague impression that it is more of a charity than the most red-blooded form of capitalism.

Rule Eight: Create a feeling of human warmth. Greenlight tells us that some of its staff got married during the quarter and that one guy has done a charity run in aid of Alzheimer's.

Rule Nine: Sound upbeat about the future. TPG-Axon declares that its newly restructured portfolio is "fresh", which makes it sound like a personal hygiene product. It goes on to say that investors should continue in their "support" as its team is the greatest. "We have focused on hiring the best athletes, and developing our people organically, rather than building a patchwork team poached from other hedge funds," it says. Which is mainly impressive for being a four-way mixed metaphor.

What I would like to know is whether these letters have calmed investors by distracting them from the matter in hand, or whether they have made them even crosser. A recent piece of research from the Harvard Business School has looked at what happens when politicians dodge a tough question by answering something else instead. They prove that so long as the dodge is deftly executed the results can be much better than if they had answered the question head-on. But when the dodge is noticeable, it backfires horribly, causing anger and distrust.

The question investors surely wanted answered was: what the hell have you done with our money? To answer it with perfect storms and an Alzheimer's fun run might mollify some, but if I were an investor I would be not merely tearful, but quite put out, too.

Finally, one last wrong note was struck by Greenlight. It declared that its annual dinner will be held at the National History Museum. Dinosaurs and hedge fund managers? Bad imagery. - ( Financial Timesservice)