Hedge Fund Street

Hedge Funds Do Well in Second Quarter

There was apprehension in the hedge fund industry that the recent weak returns could potentially instate panic resulting in a rush of redemptions, but not only did hedge funds come out unscathed, they managed to see inflows of new money in the second quarter. For the second quarter, assets under-management have reached an astounding $1,025 billion due to the high level of inflows, according to Hedge Fund Research. Hedge Fund Research also declared that the average hedge fund gained 1.1 percent in the second quarter. Many analysts also had concerns regarding the downgrading of the debt at General Motors and Ford that occurred in early May. interestingly enough, that event did not seem to have a profound long term effect, according to Hedge Fund Research. According to The Financial Times:

“We are seeing a decline in fund flows from what was a record high level in the last quarter. With moderating returns and generally difficult conditions, hedge fund investors are clearly being cautious about allocating new funds to the industry,” said Joshua Rosenberg, president of HFR.

Read more: Hedge fund cash flow still strong

The MIR Absolute Return Fund based in Australia which is a long-biased hedged equity long/short fund that consists of two different long and short portfolios, recently received a four star rating from Standard and Poor's (S&P) Assirt rating. It has also been declared as being "strong" in the Australian Shares Hedge Fund sector. Despite the four star rating, S&P has showed some concern over the fund. According to The Financial Standard:

The fund employs constraints for both its long and short components. In relation to the short portfolio 3 per cent of the fund’s net asset value is used as the maximum level. The S&P/ASX 200 index weight plus 10 per cent is used as the maximum stock position for the long portfolio.

Read more: Four star rating for MIR Absolute Return Fund

Banner Month for Hedge Fund Returns in Europe

June was a banner month for hedge funds in Europe, with the average return raising to the highest level in 18 months, according to trade publication EuroHedge. The EuroHedge Composite Index indicated that hedge fund returns leapt to 1.30 percent last month, when there was only a .59 percent gain in May. April proved to be the worst month since the scare in emerging markets prompted the collapse of the now infamous Long Term Capital Management, with losses at .50. Ultimately, average returns for the first half of the year were 3.35 percent. According to Reuters:

Hedge funds which trade fixed-income securities were the worst performers with returns of 0.15 percent in June and 1.60 percent to date this year.

Read more: European hedge fund returns rise

New Hedge Fund, Takara, to be Launched

A new hedge fund named Takara, that will focus on weather and weather-related commodities, is being launched by Mark Tawney and Bill Windle. The fund, which is based in Houston, is expected to start trading in August once $150 million to $200 million is raised. According to a source that chose not to be named, Tawney and Windle have sought the help of George New of Riverside Capital.

Zivic will allegedly facilitate the the establishing of the new hedge fund. Interestingly enough, Zivic did not comment on his involvement with Takara. There is much speculation surrounding the departure of Tawney and Windle, who both worked for Swiss Re. The reasons for their departure is still unknown. According to Db.riskwaters.com:

Zivic would not comment on his role in respect of Takara, but did say that both private investors and funds of funds are drawn to these more esoteric markets due to their high margins and the potentially high returns from volatile energy and commodity markets.

Read more: Former Swiss Re weather experts launch hedge fund

SEC Discusses Hedge Fund Leverage Regulation

One of the number one hedge fund strategies of using borrowed money to heighten bets in a market, has many worried, but the Securities and Exchange Commission does not intend to regulate it anytime soon. This key strategy, known as leverage, can take a bad turn and elicit market chaos. The SEC does indeed acknowledge the necessity to watch over hedge funds though. The high risk exists because funds can potentially borrow two or three times their capital in the hopes to magnify returns. According to Reuters.co.uk:

"We have potential huge bets being made and if they are wrong and we have a serious domino effect ... we can realise that student loans could be affected by something happening in Russia," Roel C. Campos, SEC commissioner, told a Managed Funds Association symposium.

Read more: U.S. SEC eyeing hedge fund leverage

Hedge Fund Manager Found Guilty of Tax Evasion in Tiburon

Former hedge fund manager, Randolph Bronte from Tiburon, was sentenced to three years and five months in prison on Wednesday. Bronte was found guilty in federal court on evading $1.5 million in income taxes as well as filing false income tax returns. Luke Macauly, U.S. attorney's spokesman stated that some of the evidence presented in the trial exhibited that Bronte did not submit $4.9 million in income taxes that was a result of offshore hedge fund activity.

According to records, Bronte has not paid income taxes since 1994. The trial revealed that Bronte had various accounts in the Cayman Islands, Bermuda, and the British Virgin Islands. Bronte managed to hide his income in those accounts for years. According to Cbs5.com:

The spokesman said Breyer stated during the sentencing that he considered Bronte a continued flight risk and recommended that prison officials place him in a medium-security prison that would inhibit his ability to flee.

Read more: Marin Hedge Fund Manager Gets 3-Year Sentence

Hedge Fund Industry Plans to Institute Code of Conduct

Because of the apprehension and obscurity surrounding hedge funds, the industry is contemplating the idea of instituting a code of conduct. The $1 trillion dollar hedge fund industry is hoping that a code will help alleviate some of the stress over severe risk that investors have. The Alternative Investment Management Association is currently spearheading a project in which working groups will be formed for discussions that will include various proposals for codes of conduct.

The currently unregulated industry believes that a code will be an alternative to actual regulation. Hedge funds have fallen under watchful eyes recently because of the concern that exists that risky strategies could potentially cause price swings that would render financial markets unstable. According to Reuters.com:

While a code of conduct would carry the handicap of being non-binding, the FSA said, it would have "the core benefit that it may lead to an overall reduction in risk". Also increased investor confidence would mean that "the risk of overreaction to market developments may be mitigated".

Read more: Hedge fund industry to consider code of conduct

Fairfield County Claims Hedge Fund Industry's No. 2 Spot

Connecticut's Fairfield County has been described as the "epicenter of the world's top 100 hedge funds," by Bruce McGuire, president of the Connecticut Hedge Fund Association. It is quite a bold statement, but not one that is unwarranted being that Greenwich based hedge fund manager, Edward Lampert earned one billion dollars last year making him the highest paid hedge fund manager in the world. Also, 14 of the world's largest hedge funds can be found in Fairfield County as well as 12 percent of the global hedge fund industry is managed by Connecticut based firms. The Fairfield County hedge fund industry is indeed ranked No. 2 globally, with New York not too far in the lead. According to Fairfieldcbj.com:

For the past seven years or so, hedge fund managers have been migrating out of Manhattan and into the Greenwich-Stamford-Westport corridor, that migration increasing after 9/11.

Read more: County's hedge fund industry second largest in the world

S&P Explains Risks in Hedge Funds

After researching into hedge funds, Credit ratings agency, Standard & Poor’s has expressed that there is currently a low risk of a systemic meltdown occurring, which could extend over the financial markets due to a leveraged position. Ever since hedge fund, Long Term Capital Management collapsed in 1998, there has been an almost palpable fear among investors and managers alike. S&P, perhaps helping to dissolve some of the existing fears, commented that the situation with Long Term was “overblown.” The explanation that S&P offered was that hedge funds that were in need of money to meet redemptions obtained it rendering no market disarray.

S&P did acknowledge the possibility of events occurring that potentially could have an effect on the market. Recently, there has been greater incentive for managers to take greater risks, which adds to the fear of collapse. In 2006, when changes to securities regulation in the U.S. occurs, some of the existing fears pertaining to risk may be put to rest.
According to Ifaonline.co.uk:

”Although hedge funds provide liquidity and facilitate risk transfer in the global capital markets, a sudden liquidation of leveraged positions due to margin calls could destabilize certain markets, particularly if collective redemptions of similar positions trigger a downward spiral of market prices outside of modelled expectations.”

Read more: Systemic hedge fund risks real, says S&P

Rookie Hedge Fund Managers Outperform Their Elders

Rookie hedge fund managers outperform more experienced hedge fund managers according to, hedge fund tracker Hedge Fund Research. Hedge Fund Research has coined the phrase, "rookie effect" to explain the counterintuitive phenomenon that is taking place. Newly anointed hedge fund managers know they need to gain investors by outperforming the already established managers. Because of their need for investors, new managers are willing to take more risks that often times benefit them in the end.

New, smaller funds have more flexibility which enables them to go from trade to trade while focusing on their best investments. Conversely though, during the first two years a hedge fund is operating it is more prone to failure than older funds. As funds grow their transaction costs do get higher though. According to CNN.com:

"When funds are just starting they don't have a critical mass of investors," he said. "Therefore if they do not make returns they don't get performance fees. Without performance fees they don't survive. A year and a half of flat returns out of the box and you're not in business."

Read more: New hedge fund managers outperform vets

Risks in Hedge Fund Trading

Growing at a 50 percent annualized rate, the credit derivatives market is a cause for concern for many because of the proverbial safety net that seems to be lacking. The Bank of England as well as other regulators have voiced their concern over the potential risks involved with the $8 trillion credit derivatives market that the hedge fund industry utilizes in their daily assessments. With hedge fund trading gaining in speed and complexity, many are worried that the market will not be able to keep up. According to Forbes.com:

"Hedging can hurt when a trade is 'crowded,' and...in such circumstances, volatility can suddenly spike and spreads move in unplanned-for ways," Tucker explained in London on June 23.

Read more: Dangers Abound In Hedge Fund Trading