Hedge Fund Street

Count down for SEC regulations to take force in Feb 2006: Some must dos for hedge funds

With less than six months to go before the SEC hedge fund law will go fully operational, it is important to understand what the regulation entails. A whitepaper in this regard was unveiled by SEI Investments and is a kind of guide for hedge fund managers to spruce themselves up before the time is up. SEI Investments is a global provider of asset management services and investment technology solutions.

The paper is titled "Countdown to Hedge Fund Adviser Registration: Essential Steps to Take Now” and lists down various points to keep in mind before the fund gets registered with SEC in Feb 2006. The paper warns that the regulation which looks quite mild and harmless is in fact not quite so and that the un-registered funds may find themselves at a loss if they do not fully understand the implications. It is not just some paperwork but involves a good amount of planning and restructuring.

For starters, the paper states that the funds have to address the issue of conflicts of interest involved in an adviser’s brokerage practices, especially concerning the use of soft dollars. The funds will also have to develop ‘fair and equitable’ trade allocation practices. What it means is that the fund has to treat all its investors as equals. It has to be fair to all. Any exception to this rule has to be well documented and disclosed to the regulatory authorities. Should there be trade errors, the fund has to have definite rules for handling the same. They should avoid the use of soft dollars in order to make good the losses incurred by their brokers.

Another point highlighted in the paper pertains to payment for introductions made by a broker-dealer. The paper states that the fund should pay for all capital introductions made by a broker-dealer registered in the very state where the introduction was made. Added to the list is a recommendation for code of ethics for fund managers specifically pertaining to short selling, accepting gifts and trading restricted stock.

And lastly there is an advice on valuation practices, adviser performance advertising, proxy voting procedures and E-mail retention procedures, all of which have to walk the tight rope from Feb 2006 onwards. Hedgeco.net reports:

“According to the White Paper, Hedge Funds must also develop trade allocation practices, which must be "fair and equitable" to each client over time. Consistency is important and exceptions, in the rare instances that they occur, should be documented and disclosed.”

Read More: SEI Investments outlines top issues for Hedge Funds prior to registration

CGM Focus Fund: A mutual fund that looks like hedge fund

We have been told time and time again that mutual funds are safe when compared to Hedge funds. We have also been told that mutual funds are unidirectional and make money when the market is on an upswing alone. And we are absolutely sure they cannot sell stocks short. Well all this may well be proved wring by the time you reach the end of this write up.

Introducing - CGM Focus Fund (CGMFX), a no-load mutual fund that invests in a blend of growth and value stocks--mostly mid-caps and the best part of the story is that the fund is also permitted to sell stocks short. The fund comes from the stable of Capital Growth Management. CGM Focus Fund has a glorious history of triumphs with the most recent year-to-date through Sept. 9 returns of 28.5%.

The reporting of returns in case of mutual funds is relative as compared to absolute returns reporting of hedge funds. The fact is still not altered with the fund reporting an effective annual compound rate of return is 21.4% since its inception in 1997. Compare this with the dismal 3.7% compound annual growth rate of the S&P 500 Index over the same period. The success of the fund may be attributed to both the inherent flexible nature of the fund as well as the skill of veteran manager G. Kenneth Heebner.

Mr Heebner also manages at least three other funds from the same group - CGM Capital Development (LOMCX), CGM Mutual (LOMMX) and CGM Realty (CGMRX). He is known for his bold stance on changing portfolios which he thinks will not work, in a blink. He recently unloaded home builders and steel firms and instead picked up energy firms and raked in huge profits.

All this looks too good to be true. There have been some down hill rides for the investors of this fund but overall the funds performance has left them quite pleased. While some bets might pay off, some might not. Therefore it may be wise for the weak hearted to stay away. Forbes.com reports:

“The attraction of putting money into a hedge fund is that you're not betting on the direction of the market, as much as you are the skill of the person who's managing it.”

Read More: A Mutual Fund That Goes Both Ways

Now hedge funds finance films!!

If you thought entertainment was just entertaining and fun, think again. Entertainment and film making is hard core business with millions of dollars earned or lost while providing entertainment for people. We all know that the films have their own financers. What we did not know that money came from hedge funds too. Take the case of Walt Disney Co which makes movies for children and adults alike. It has recently indicated that it is going to loose money in the fourth quarter of 2005 which will be close to $300 million. It has raised a whopping sum of $505 millions from investors.

This has been done primarily with the objective of reducing the overall risk for the film company. The company first started using partnerships to fund films in the 1980s. In 1990, the company which was then the No. 2 U.S. media company was able to raise $600 million through Touchwood Pacific Partners. After 1996, almost a decade later, Disney has joined hands with The Kingdom Films LLC partnership to finance 40 percent of production and distribution costs for about 32 films over the next four years.

For this they will get 40 percent of the profits, including box office and video sales. This news was made public by Natacha Rafalski who is the vice president of corporate finance at Burbank, California-based Disney. Disney however will get 60% of distribution fees and profits. Kingdom Films has been set up in June by Credit Suisse First Boston whose DLJ Investment Partners II, a $1.6 billion investment fund, is the lead investor in Kingdom Films. CSFB has raised $135 million in equity and $370 million in debt from hedge funds, insurance companies and mezzanine funds. Rafalski mentioned that earlier hedge funds required higher returns to invest. But not the scenario has somewhat changed. They have now been able to design a structure which is mutually beneficial for both Kingdom films as well as for the hedge funds.

Through the years, film making has become a very costly proposition. Just to give you an idea - the average price for producing and marketing a major motion picture has already crossed the $100 million mark. The deal with Kingdom Films is that they will finance all the live-action movies produced under the Walt Disney and Touchstone Pictures labels during the next three to four years. They will however not be included on production of some animated films and some prequels and sequels. Disney will produce 15 movies this year against 19 movies that were made last year.

The long term financing partnership is beneficial for partnerships like Kingdom films since the risk of loosing money is less for several movies as against financing one movie that was to work but just did not. Bloomberg.com reports:

“The deal guarantees Disney distribution fees and 60 percent of the profits, Disney spokesman David Caouette said. Disney last week said its film unit will have a fourth-quarter loss of as much as $300 million.

Read More: Disney Taps Hedge Funds, Investors to Share Film Funding Risk

Netage Solutions Appoints Mark Bimonte as Regional Manager for East Coast operations

With the hedge fund industry growing at a phenomenal pace, the need to manage investor money more effectively is the need of the hour. Investors are demanding more professionalism from their hedge funds. The software industry catering specifically to alternate asset industry also seems to be growing. They help the investment managers from varied fields like hedge funds, private equity, venture capital and funds of funds to manage investor’s money well. Apart from this they are able to improve investor relations and address compliance requirements through these software.

Netage solutions is one such vendor that is focused on providing complete software solution to demanding alternative asset industry including hedge funds. In order to cater to the growing demand for comprehensive software for the hedge funds industry world wide, they have opened offices in several key cities such as Boston, San Francisco, London, Sofia and New York. Even the team is undergoing expansion. They have recently appointed Mark Bimonte as Regional Manager for East Coast operations and head of Netage’s New York office. He will look after the regions need for Netage’s suite of hedge fund software products, InvestorDynamo™.

Mr Bimonte has about six years of experience in selling software for alternative assets. He will be responsible for directing his sales team in promoting flagship enterprise applications, sales coaching, and territory management. The appointment was made public by Stuart Sheppard, VP of Sales for Netage Solutions. Mr Sheppard described Bimonte as a ‘seasoned sales professional’ who has a sound background of selling alternative assets software. It may be noted that Netage Solutions provide global front-office software for the alternative assets industry. Bobsguide.com reports:

“Mark Bimonte brings to Netage six years of sales experience in the alternative assets software industry. Before joining Netage, Mark held several sales management positions at an investment information data provider and leading hedge fund software vendors.”

Read More: Hedge Fund CRM and Compliance Vendor Netage Solutions Appoints East Coast Sales Manager

Now retail investors also have access to hedge funds!

Now here is one Hedge Fund that caters to the retail segment apart from being appealing to the whole sale investors. Macquarie Bank through its Macquarie Newton Hedge funds have for the past three years been managing assets for large investors. The funds offer variety as far as strategy is concerned as well as differential exposure to risk. The range of funds that are already on offer includes five single strategy funds - special events fund, Australian Absolute Return Fund, Buy Write Fund, Global Futures Fund and Global Equity Futures Fund – enhanced.

Apart from this the fund also offers single manager multi-strategy fund called the Macquarie Newton Multi-Strategy fund. This fund offers investors entry into four of the single strategy funds within one investment. The new fund that is being launched is very specialized as it is attractive to the retail investor. We are talking about the investor who is hedge funds savvy but lacks the opportunity to actually invest since the initial investment amount asked for is usually quite high. Through this fund the investor will be able to have access to the famed absolute returns with relatively lesser amount of money.

Cathy Kovacs, Macquarie Bank division director for its equity markets group commented that the financial scenario is changing. People are now generally comfortable with funds that use short selling strategies in contrast to what was there in yesteryears. She mentioned that the fund has very high growth targets set for the next two years. The current asset stands at $92 million and the projection for the next two years is to make this figure jump over five times to around $500 million.

She is feels that the task is not too daunting. According to her, both domestic as well as offshore investors will be quite excited about the fund as it also caters to the real Asian market. The Asian market is really on an upswing, especially Hong Kong, Singapore and Japan. As such more and more investors want to invest in funds that are investing in this geographical area. Thefinancialstandard.com reports:

“Macquarie Bank division director for its equity markets group Cathy Kovacs says the market has now changed with the growth in alternative investments and advisers who more comfortable with funds who use short selling strategies”

Read More: Hedge Funds open to the retail market

Hedge Funds may have to lower their management fees under pressure

Pension funds that were earlier adopting a wait and watch strategy with regard to investing in hedge funds have joined the bandwagon in a big way.  Their clout is now a force to recon with. The hedge funds simply cannot afford to ignore them any more. This figure is only expected to rise in the coming years. Hence in all fairness and business sense, the hedge funds may have to bow down to the wishes of the pension funds to lower their asset management fees.

Average hedge funds till date demand 1-2% asset management fees from their investors. Apart from this they have a concept of performance fees, which really implies that should the fund be able to surpass a watermark point, they are entitled to take up to 20% of the profits. This translates into a lot of management fees. While this may be acceptable to the high net worth individuals, pension funds have to watch their bottom lines as well. The prime reason for them to have entered the hedge funds fray was to increase their profits in order to meet the raising pension demands by an aging workforce.

The pension funds are therefore trying to push down the asset management fees charged by these hedge funds and they may be forced to comply. This was mentioned by Richard Grottheim, chief executive and chief investment officer of Sweden's AP7 retirement fund at a conference organized by Finance IQ. The sheer clout of the business being offered by such funds will tend to drive down the fees to acceptable levels. Add to this is the current reality of dismal market performance.

Just to state a point, last year the hedge fund industry closed at 9.5% returns and this year only 4.2% has been achieved so far. Industry analysts feel that this figure will not cross 7-8% even this year. In view of the substandard performance of the hedge funds over the last two years, it is but natural for the pension funds to make such a demand. Hedgeco.net reports:

“Over the years, a growing number of pension fund managers have dedicated larger level of assets to hedge funds, following the collapse of the equity markets.  Such strategy was aimed at meeting the rising pension demands by an aging workforce.”

Read More: Pension Fund managers want to push down hedge fund fees

New emerging market hedge fund in the offering

Excellence Nessuah will be offering a hedge fund aimed at foreign institutions. The fund will specialize in emerging markets using a long/short strategy and will be managed out of Israel. Its main objective will be to carry out overseas investment for foreign investors. The fund, which plans to garner $120 million by the year-end, will be traded on the Irish Stock Exchange. The fund will be managed by former director of emerging markets at UK investment house Hermes, Mr Robert Clements.

The fund is targeting a return of 15% annually. Roni Biram, chairman of Excellence Nessuah is quite upbeat about the funds prospect and mentioned that this move represents group expansion and further commitment in the area of foreign investment. The firms’ services include global and domestic asset management, investment banking and underwriting, FX trade and advisory services, derivatives trading, brokerage,mutual fund and provident fund management and ETF’s . Globes.co.il reports:

“Excellence Nessuah has announced that it is setting up a hedge fund to specialize in emerging markets. The fund is primarily aimed at foreign institutions. It will be managed from Israel, and carry out investments overseas for foreign investors.”

Read More: Excellence Nessuah launches emerging markets hedge fund

Atlantic Investment wants Sonoco Buyback

Another company is struggling to fight back the onslaught of an activist hedge fund. This time it is a Dutch packaging company called Sonoco Products this is the victim. Alexander Roepers of Atlantic Investment Management has 5.6% of Sonoco's outstanding shares and is demanding that the company offer a Dutch tender or an accelerated share-repurchase plan. Atlantic Investment's strategy seems to be similar to that of Carl Icahn at Kerr-McGee and Mylan Labs.

The fund is looking at living with more leverage with Sonoco as against an acquisition drive. Sonoco seems to be doing fairly well and has a hold rating maintaining a leading position in its core markets for paper tube containers and composite cans. Key Banc analyst Christopher Manuel comments on the success possibilities of both the options suggested by the hedge fund. Thestreet.com reports:

"Shareholders have the right and opportunity to express their opinion," said Alan Cecil, a vice president of investor relations at the Hartsville, S.C.-based global packaging company.”

Read More: Hedge Fund Wants Sonoco Buyback

Hedge funds focus seen shifting from making profits to amassing assets

Today the focus seems to have shifted from generating returns to amassing assets as far as hedge funds are concerned. The truth is that this year’s ups and more importantly downs promise to show overall lesser returns from the industry. The industry which is so used to seeing double digit returns seems to be in for a rude shock by the year end. However the quantum of money flowing into the funds is ever increasing. The reason for this is clear. Managers want to make a quick buck. The more assets they attract, the more will be their asset management fee chunk.

Apart from the asset management fee, there is a 20% share of profit which will ensure that the bottom lines of the hedge funds are not affected. However little is being thought of about the investors who are investing in swarms in search of bigger profits. This observation was made by Mark Yusko, president and chief investment officer of Chapel Hill, North Carolina-based Morgan Creek Capital Management at a Reuters summit. Today.reuters.com reports:

“Industry experts have long noted that some of the sharpest financial minds are moving into hedge funds, the industry's hottest asset class. But some also say the industry attracts managers who have no other choices”

Read More: UPDATE 1-Reuters Summit-Hedge funds focus on assets, not returns

Retirement announcement of chief supervisor of BaFin

Volckmar Bartel, the chief supervisor for institutional, retail and hedge funds in Germany for BaFin has announced his retirement. This was made public by the company’s spokesperson recently. BaFin is a financial services regulator and was created in 2002 after the merger of Germany’s regulators for banking, insurance, securities trading and asset management. Bartel will be retiring by the end of September. His successor has not been named so far but will definitely be someone who is well known in the German fund industry like his deputy Thomas Neumann.

Bartel had been involved in the implementation of Germany’s investment law of January 2004. This law is of landmark importance since it helped the growth of German hedge fund industry by allowing the products to be sold openly for the first time and also for them to be domiciled in the country. As of now over 20 fund of hedge funds and 18 single hedge funds have been approved by BaFin. IPE.com reports:

“A BaFin spokeswoman said a successor to Bartels had not yet been named but could be prior to his retirement. One likely candidate is his deputy Thomas Neumann, who is well-known in the German fund industry.”
    

Read More: Germany: BaFin fund regulator Bartels to retire

Lufthansa not to allow hedge funds to take over easily

Lufthansa, the German Airline is also facing a possible attack from the hedge funds. This seems to be in response to the market value of the airline being too low. Industry experts feel that in the current scenario of raising fuel costs, the current valuation of Lufthansa estimated at $6.28 billion is too low. This definitely is being seen as an opportunity by hedge funds that have been seen to be buying a lot of shares of the airline recently. Wolfgang Mayrhuber, the CEO of Lufthansa Airlines, however assured everyone that they will give a tough fight to the hedge funds.

He however declined to comment on the possible strategies at this stage. Never the less, he did mention that due to bilateral air connections agreements it would be very difficult for hedge funds to attack the company. Even Commerzbank has shown concerns over a possible onslaught of the hedge funds on the bank in the wake of them controlling anywhere between 10 to 15 percent of the bank’s stock. Hedgeco.net reports:

“According to Mayrhuber, a growing number of hedge fund managers have acquired large shares of the airline, and such shares were purchased during market dips.”
   

Read More: Lufthansa CEO says company will avert any hedge fund attack

Accenture to provide data management services to Citadel Investment Group

Citadel Investment group has retained the services of Accenture to take care of its data management needs. Citadel manages assets of over $12 billion along with its affiliates. Accenture’s services have been retained for a period of 10 years. In the course of this 10 year period Accenture will be responsible for range of standardization, infrastructure and support services for reference date. Reference data is a category that includes codes, identifiers and other information pertaining to stocks, bonds and other financial instruments.

A holistic approach will be employed wherein the software services company will be in charge of both incoming as well as outgoing data. This will ensure that all the information pertaining to the client are accurate and well sorted so that easy retrieval of information is possible at any step. The deal also includes providing grid based infrastructure apart from complete data and information technology administration. Chronline.com reports:

“The deal covers a range of standardization, infrastructure and support services for "reference date," a category that includes the codes, identifiers and other information pertaining to stocks, bonds and other financial instruments.”

Read More: Accenture bags 10-year deal with large hedge fund

Two days ‘World Hedge Fund Summit’ in Canada

Come October and Canada will play host to a spectacular event organized specially for the hedge fund industry. The industry has seen phenomenal growth in the recent years. Changes in strategies, policies and regulations all across the globe has heightened the need for a comprehensive event focusing on various aspects of the somewhat mysterious industry. The two-day event that is being organized at the 5-star Niagara Fallsview Casino Resort between October 16-18 promises to bring the industry experts together to widen the net of the industry.

The event will have over 75 speakers from all across the globe and is intended to provide a holistic idea of the booming industry. With over 600 delegates expected to attend the event, the summit will provide an excellent platform for networking and exchange of views. With fees priced at $670 per delegate, the event will be in the reach of several big and small hedge funds alike. And for pleasure, there is the scenic Niagara Falls which the venue will be overlooking. Other attractions include Canada's wine country and an entertaining social program. Biz.yahoo.com reports:

“The growth in capital committed to these alternative investments which currently stands at over $1 Trillion US, has created the need for a major hedge fund conference such as ours”

Read More: Canada plays Host to the WORLD HEDGE FUNDS SUMMIT in October

Need for review of hedge funds rules highlighted by US Treasury Undersecretary

The issue of how much of freedom to be given to the mammoth hedge fund industry comes up again and again. This time U.S. Treasury Undersecretary Randall Quarles brought forward the aspect of more comprehensive oversight of hedge funds. He was speaking on a panel on financial regulation, which was organized by Institute of International Finance. He questioned the existence of policy response to recent changes in the structure of capital aggregation industry.

Though the SEC has set some basic regulations in order in the US but the question being asked is if it is enough especially taking into consideration that the size of the industry has crossed $1 trillion. He stressed upon the point that the current regulation only offers narrow consumer protection as against a comprehensive, systemic view of the industry, which is really required at this stage. At the same gathering, New York Federal Reserve President Timothy Geithner said that greater sophistication in financial markets and concentration of banks and other institutions into larger firms has made it harder to evaluate the ability of the firms to really withstand financial shocks that are bound to happen. He was of the opinion that regulators and bankers must develop ways to assess and protect against risk. Today.reuters.com reports:

“Recent Securities and Exchange Commission rules requiring fund registration focus on a narrow consumer protection aspect of the loosely supervised, $1 trillion hedge fund industry, rather than a more comprehensive, systemic view, Quarles said.”

Read More: UPDATE 1-US Treasury official-Hedge fund rules need review

Hedge Funds and ‘Shareholder Activism’

Hedge Funds are amongst the most dynamic financial instruments available today. They are the fastest growing investment tool. In value terms, total asset under management has long surpassed even the $1 trillion mark. And it continues to grow. In its quest for greater returns, the instrument utilizes several techniques and strategies operating in cross-functional sectors. With little or no stringent regulation in place, this mysterious tool pulls money from any where it can.

Off late several instance of firms being bullied by hedge funds has been witnessed. They call it ‘Shareholder Activism’ which really means that the Hedge Fund picks up the cause of profit hungry shareholders and fights for it with the company. The act is supposedly to enhance the value of shareholders. For this, the Hedge Fund identifies a firm which is undervalued. It then figures out how the share value of the company can be increased. After this, it slowly starts acquiring shares of the company from the market. Once it has a substantial stake in the firm it starts demanding changes in the company policies or strategies from the management.

Some arm twisting methodologies may also be employed in order to get the firm to accept the changes being suggested. That may also in some instances direct the company to sell of a particular business that they feel is not worth pursing or even ask it to initiate a share buy back spree. All this in order to make the company’s share value go up.

A lot of times, this act is considered to be heinous because of the short term objective of the hedge funds involved. They rake in the moolah and leave the company for it to grapple with its own problems. Some times this also forms a basis of a long term symbiotic relationship wherein both benefit from each others association. Hedge Funds in these cases act as watch dogs over the actions of the management and prevent them from faltering.

Here are a couple of examples from recent times of Hedge Fund activism and how they affect the companies:

Christopher Hohn, who started London-based Children's Investment Fund Management LLP in 2003 led an assault on Frankfurt- based Deutsche Boerse, Europe's largest stock exchange by market value, to stop a $2.3 billion bid for London Stock Exchange Plc. Hohn and other shareholders said the deal was too expensive and this boosted Deutsche Boerse stock This led to Werner Seifert being removed as chief executive of Deutsche Börse in May this year.

Fresenius Medical Care, a provider of dialysis products, some time back amended a plan to convert preferred shares into common stock after Citadel Equity Fund and Och-Ziff Capital Management lobbied for the change. This also proved to be good for the shareholders.

Billionaire financier Carl Icahn with the backing of powerful hedge funds, managed to win himself and two allies seats on Blockbuster's board. Blockbuster is a renowned movie rental chain. At the company's annual meeting on May 11, he was able to defeat chairman John Antioco for re-election. Though the board has since moved to reappoint him, the point is made. Icahn now has a three-year term on the Blockbuster board, so maybe his money will be parked for the duration, but there is nothing to guarantee that his hedge-fund partners will stick around.

According to Thomas Taylor, head of Greenwich, Connecticut-based Taylor Cos., there are about 90 activist hedge funds worldwide today in comparison to 40 three years ago.

The question now is whether what's good for hedge funds is really good for the company or its other shareholders too? More and more hedge funds are taking on the activist role today. Isn’t it, reasonable to question their intentions? What are they actually looking for? Are they looking for companies' long-term success to lift share values or are they simply maneuvering just to get a quick rise so they can lock in gains and bail out? Detnews.com reports:

"Hedge funds -- which are barely regulated investment funds generally made up of money from wealthy individuals and institutions -- have been corporate activists before. But they are taking on a more pronounced role in corporate dealings this year, publicly meddling in everything from merger decisions to executive compensation"

Read More: Hedge Fund Managers Shake Up European Companies, Stoke Returns

and : Hedge-fund activism sparking concerns

Mutual Funds and Hedge Funds: Twins separated at birth

At the onset Mutual Funds and Hedge Funds might look a little similar and they indeed they are. The two collect money from investors and after collecting a decent sized corpus invest in various investment instruments. And the similarities end here. Hedge Funds are very different in their wealth accumulation and investment strategy when compared to Mutual Funds.

Mutual Funds are within the reach of common man since the initial amount that has to be invested is quite low. Hedge Funds on the other hand require their investors to invest to the tune of $1 million or more. Funds of hedge funds however accept lower investment of minimum $25,000 but even this amount is high where when compared to that of MF.

Another key differentiator is the asset management fees. Whereas Mutual Funds operate only on a basic management fees of 0.5% to 1.5%, Hedge Funds demand around 2% of asset as management fee along with up to 20% share of profit. What this implies that Hedge Funds can earn more (and they do) in comparison to Mutual Funds.

Another point where they are different is measurement of returns. Mutual Funds gauge their profits/ returns in the context of a specific market index or a specific sector. Therefore they may have outperformed a certain index in their returns but may still be far from making actual profits on the seed money. On the other hand Hedge Funds profit reporting is absolute. This means that if the hedge fund has made 5% profit it is actually the returns on the actual asset under management. Mutual Funds and Hedge Funds also differ in the source of money being invested. The former employs only the investor money to invest in comparison to hedge funds that invest their own money and also borrowed money along with investor money.

Now comes the issue of regulation. Mutual Funds are a tightly regulated lot. They can invest in only predefined, committed financial instruments like shares, bonds etc. They are restricted from purchasing many types of derivative instruments, leveraging, short selling, real estate commodities etc. Hedge Funds are loosely regulated and are bound by fewer rules. This enables them to employ any strategy they desire in order to produce favorable results.

Regulation also throws up the issue of ‘Risk’ Mutual Funds are traditional investment vehicles. They are governed by several stringent rules and as such cannot put investor’s money to much risk. Hence the moderate to low returns from the category. Hedge Funds on the contrary have risk written all over them and are fit for high net worth individuals with greater appetite for risk and returns alike.

Coming back to profits, Hedge Funds can make money in any type of market condition, provided there is some degree of volatility. Therefore they make money irrespective of the direction of the market. Mutual Funds can make profits only when the market is on an upswing. Lastly there is the factor of incentivising. Mutual Funds do not have any rewarding structure inbuilt into the system even if a phenomenal return is achieved. Hedge Fund managers are at an advantage of being monetarily rewarded for surpassing ‘water-mark’ levels and hence are more motivated to generate returns compared to their Mutual Funds counterparts. Thus the story of Mutual Funds and Hedge Funds – The story of two dissimilar brothers separated at birth. Hedgefundcenter.com reports:

“Domestic Mutual Funds have disclosure requirements and are otherwise heavily regulated. These regulations restrict the Fund from purchasing many types of derivative instruments, leveraging, short-selling, real estate and commodities.”

Read More: Mutual Funds vs. Hedge Funds - the differences 

Task force to examine possibility of reforming the Connecticut state’s hedge fund laws

Yet another attempt to reform hedge fund laws was made recently when officials in the state of Connecticut discussed the possibility of formation of a task force. The underlying event which has prompted such a move is the fraud investigation involving Bayou Hedge Fund Group which is currently on. The group's founder Samuel Israel III had recently informed it's investors that he was closing shop and would return their money. But the same is yet to happen. In the last few years, Connecticut has become a sort of haven for hedge funds from across the world.

The sheer size of money available with the richest of the rich residing here along with relaxed tax norms are the major attrating features. A fraud of this nature has left several investors and and state officials stunned so much so that a step like this is being contemplated. It is believed that such an action can have major implications on the hedge fund industry. The impact that the proposed reforms can have on the recently passed hedge funds laws are still unclear. Hedgeco.net reports:

"What is still unclear about the additional regulations by the state is how such a move would affect the new hedge fund laws passed last year under the former Securities and Exchange Chairman William Donaldson."

Read More: Connecticut officials to consider Hedge Fund Reforms

$101 million seized by Arizona authorities may belong to Bayou Hedge Fund

$101 million was recently seized by Arizona authorities who feel that the money belongs to the Bayou Hedge Fund Group which is currently being investigated for fraud. They were working on a tip off that informed then that the fund was siphoning off investor money to several accounts across the world. Arizona Attorney General Terry Goddard is of the opinion that the statements made by those who have been transferring these amounts are contradicting. As such it is clearly indicative of a fraud.

It may be recalled that founder of Bayou Hedge Fnds group had promised to return investor money before closing his shop but has not done it so far. Some time back there was a sucide note which was found in relation to the case. The note was tracked back to Daniel Marino who was the Chief Financial Officer of the group. He is said to be suffering from depression following several calls from investors who want their money back. Meanwhile the $101 million recovered is being kept in the Arizona State Treasury. Hedgeco.net reports:

"Arizona Attorney General Terry Goddard told investors and news correspondents that such action often indicates fraudulent activity according to him. Explanations given by those transferring the money seem to be contradictory."

Read More: Arizona authorities seize $101 million in Hedge Fund Probe

Bayou Hedge Funds: The story so far

While the investigations are still on to ascertain the extent of fraud comitted by Bayou Hedeg Fund, it may be worth having a look at why it happened and when did it actually start. Simon Israel III, founder of Bayou Hedge Funds has maintained from the start that he is a third generation trader, coming from a family of successful commodities traders dating back to the 1890's. However facts suggest that he was indeed a low-level order taker who bounced from one obscure firm to another.

The story of deceit actually starts from 1996 when he founded Bayou Hedge Fund Group. The group comprised Bayou Superfund LLC, Bayou No Leverage Fund LLC, Bayou Affiliates Fund LLC and Bayou Accredited Fund LLC. Through his funds he aimed to make 1 percent to 3 percent a month. He claimed that atleast half of his portfolio was long, and half was short. He also told his investors that he owned Bayou Securities, which served as the funds' executing broker. This, he explained, benefited the funds by way of quality execution, reduced clearing costs and shared expenses.

The investors who were impressed with his pidgree were instantly roped in by the sops offered. Unlike most hedge funds, Bayou did not charge any management fee from his investors. 20% profit share did exist but no body really minded parting with the amount as long as their money made money. The minimum investment required was also low - $250,000, compared with $1 million or more for other funds. And the icing on the cake was that there was no lock in period and investors could actuall take their money out every month if they so desired.The group's highest returns were claimed to be in 1997, its first year of operation, when it climbed 32.5 percent. The fund reported astonishing double digit profits despite market upheavels like Nasdaq bubble burst in 2000.

Bayou showed false returns of market-beating gains of 26 percent in 1999, almost 20 percent in 2000 and 7 percent in 2001and continued to rope in new investors. Actually the fund was busy making losses when the investors were being made to believe the opposite. In 1998 he tried to recoup trading losses by raising fresh funds from investors and was successful. Apart from this he made sure that all his trades were executed by Bayou Securities, the brokerage firm owned by him. This gave him the benefit of crediting back the commissions generated by the Bayou funds' trades. The commissions were almost always high because he was know for his rapid-fire trading technique.

The entire fraud was comitted with with so much skill that none of Bayou's lower-level employees knew about the charade that began in 1998. Slowly Bayou Hedge Funds amassed $440 million from its investors. Much of this money according to recent revelations were either spent on creating a high lifestyle for self and some more siphoned off worldwide into different accounts via different channels. Just to give an idea on his extravagant lifestyle - Simon Israel rented a 1920’s-era stone mansion in Mount Kisco, N.Y., for $32,000 a month, and bought himself a Bentley.

In 2003, some market savvy investors saw holes in his reporting and actual performance and started withdrawing money from it. Between 2003 and 2005, Israel has had two encounters with the regulatory authorities wherin he was fined $8,500 and $7,500 for irregularities. All still seemed good till 2005 wherin earlier in the year, he declared to his investors that he was going through a difficult divorce and as such needed more time to spend with his children. He said that he was winding shop and that he would pay off all the investors by August. August has come and gone and there is no sight of the money.

A recent revelation of a 6 page confession cum sucide note (of a sucide which never happened) from the company's Chief Financial Officer, Daniel E. Marino has helped to throw some light on the entire modus operandi of the master bluffer. Arizona Authorities have recently seized $101 million seized which seems to belong to Bayou Funds investors further confirms some part of the story. More to come in the following days and weeks. Thejournal news.com reports:

"If you intend to steal someone's money, based on our experience, they would have left, not spoken to the clients at all," Intelisano told the cable television network. He also said that the last two months of statements from the fund were "certainly false."

Read More: Bayou used marketers, brokers to get clients
and: Clues to a Hedge Fund's Collapse

Fund of Hedge Funds Hesitant to Go Public

The founders of the fast growing Funds of hedge funds, are hesitant of listing on the stock market. Listing on the stock market means a degree of control will be lost and the founders are unwilling to do so unless the price meets their expectations. These type of companies enable investors to engage in a number of investment strategies with the convenience of a single package deal.

Christopher Fawcett, partner at hedge fund business Fauchier Partners, believes that many of these owners are simply waiting for prime pricing before going into a public offering. After the 2000 equity market crash, the hedge fund sector flourished as investors attempted to disperse their risk. Excluding London based hedge fund firms, Man Group and RAB Capital, hedge funds and fund of fund businesses have continued to remain privately owned. Fawcett also believes that most investors will utilize fund of funds to invest in hedge funds. According to Reuters:

"Many (of the firms) are owned by the founders and are cash-generative. They are good businesses to hold onto. The bigger fund of fund groups have not used the public markets," Fawcett said.

Read more: Fund of hedge funds shy of floating

Rydex Mutual Funds Mimic Hedge Funds

Rydex Investments introduced two unique mutual funds today. The new funds will somewhat mimic hedge fund strategies thus making the returns resemble that of hedge funds as well. Rydex is attempting to offer investors a way to still make money through their mutual funds using hedge fund strategies despite that fact that the market may be down. The Rydex Hedged Equity Fund will be instituting strategies known as "market neutral" which will be utilized by hedge funds, investment pools geared towards wealthy investors, and institutions. According to Reuters:

With traditional fund products investors had "limited tools to mitigate down markets" and "didn't have anything to address it head on," David Reilly, director of portfolio strategy for Rydex, said at a briefing in New York.

Read more: Rydex launches two "hedge fund-like" mutual funds

Hedge Fund Fees Predicted to Drop

In the past hedge fund managers have had a "take it or leave it" attitude with clients when it came to their considerable fees. Unwilling to waiver, many hedge fund managers charged hefty fees and clients, left with no alternative, would pay. However, now it is believed by insiders that hedge fund fees will soon fall.

Due to the fierce competition and the fact that pension funds are currently well placed, hedge fund fees falling is not merely wishful thinking for investors. At a conference held in Sweden earlier this week, Richard Grottheim, chief executive and chief investment officer of Sweden's AP7 retirement fund said, "When we invested three years ago it was hard to negotiate fees. It was 'take it or leave it'. I think it is easier now with the expansion of the (hedge fund) industry taking part. The trend (in fees) will be downward." Specific numbers are not known, but it is estimated that there are more than 8,000 hedge funds in existence. With performance down and more firms entering the picture, insiders say that the typical management fees of one to two percent charged, plus performance fees of up to 20 percent have no where to go but down. According to CNN:

The industry is now attracting a flood of people eager to collect billions of dollars in new money to earn the fees some investors are willing to pay, according to Mark Yusko, president and chief executive of Morgan Creek Capital Management, which is based in Chapel Hill, North Carolina.

Read more: Hedge fund fees expected to fall

Incubators Emerge as a Success in the Hedge Fund Market

The already over inundated hedge fund market, with its dwindling profits has seemingly left hedge fund managers undeterred. The highly unregulated funds have been subjected to much scrutiny over the past year, and while they will remain relatively the same, the funds will have to abide by some new regulatory requirements. The new regulations combatted with the more stringent demand of pension funds have led a steady stream of hedge fund mangers to incubators or seed capital firms. This new approach is essentially a shot of energy for the initial startup.

This has been such a successful notion that many insiders are saying the best thing for managers to do is not to set off to start their own hedge fund, rather, they should invest and focus on startup hedge funds. New York hedge fund incubator, Capital Z, sees approximately 800 new proposals for hedge funds a year. Most of these proposals never see the light of day; however, for the few that do, success is not guaranteed. Capital Z has the ability to spread out their risk and really only needs to "hit it big" with just a few. According to Forbes:

"As regulations evolve requiring more hedge fund managers to register with the SEC as investment advisers, nascent managers may look with greater frequency to seed investors to provide infrastructure to help with compliance," says Ron Geffner, partner at Sadis & Goldberg, which specializes in hedge funds.

Read more: Seeding The Hedge Fund Universe

Hedge Fund Managers Looking at New Strategies for Absolute Returns

Hedge fund managers have recently been making bold decisions when pertaining to the management of their funds. Being that trading opportunities are not what they once were, managers are looking in new directions and have begun to trade risk premiums to ensure their investors absolute returns. Hedge fund managers are also looking towards alternative betas, which Ian Morley, the chief executive of Dawnay Day Olympia Hedge Fund Firm aptly describes as, "...returns generated from exposure to forms of systemic risk, they include factor timing, volatility risk, default risk and liquidity risk ... and are in addition to the alpha returns that investors seek from hedge fund manager skills."

Experts believe that this new approach to hedge funds is fleeting being that once a manager is aware of an opportunity it will most likely disappear. The interesting dilemma is that the initial disappearance of opportunities is what lead hedge fund managers to pursuing risk premium strategies in the first place. According to HedgeCo.Net:

The pursuit of alternative premiums as a strategy has gained acceptance among institutional investors, such as pension funds and insurance groups. There is however some confusion about the differences between alpha and beta returns. While relative value strategies generally relate to strategies, “such as convertible bond arbitrage and long/short equity, which buy and sell assets on the basis that prices have temporarily shifted away from their fair values, global macro strategies which makes directional bets on bond, currency, commodity and equity markets based on economic trends are seen by some investors as a beta-type strategy.”

Read more: Hedge Fund managers increasingly pursue risk premium strategies to boost returns

Honey the Hedge Funds shrunk!

Though slightly, the hedge fund industry shrunk by the end of second quarter this year. Much of this downfall is being attributed to the frustrated withdrawal of money by high net worth individuals. Second quarter was characterized by bleak performance of the hedge fund industry overall, devaluation of bonds of two auto giants and several hedge funds closing shop. High net worth clients who have high risk tolerance and a very short term view of investments were particularly frustrated by the dismal performance of the hedge funds industry.

The shrinkage was primarily witnessed in single manager funds. Money continued to flow into funds of funds. The latter give lower returns and as such are less likely to take unnecessary risks. Therefore risk averse investor category like pension funds continued to pour money in the fund of funds. Today.reuters.com reports:

“The reason for the slight decline, according to industry analysts and data from the Barclay Group, may be that wealthy individuals, the hedge fund industry's oldest clients, have recently become frustrated with returns.”

Read More: Hedge fund industry shrinks as rich clients leave

Is the brain drain from Mutual Funds to Hedge Funds for real?

Why will someone knowingly bargain for more work and less compensation? It is possibly because he is unable to get a job where he gets a vice versa deal. This very much seems to be the scenario as far as fund managers are concerned. The good traditional Money Managers operating in the Mutual Fund category are being poached by Hedge Funds. They are continuously being pulled into Hedge funds by offers of higher remuneration with additional performance pay thrown in.

The managers are also provided with enough freedom to employ various strategies to generate returns. Unlike in Mutual Funds, the managers can make money when the market is only on an upswing; Hedge fund managers can do it any market scenario. This implies that at any time the Hedge Fund manager can in-fact generate returns and add to his performance bonus. Hedge Funds also have lower regulatory barriers for new managers as compared to Mutual Fund. Deep pockets enable hedge funds to get the right talent when ever they want. Mutual Funds on the other hand are not so rich and therefore loose their star performers to Hedge Funds more often than not. So what the hedge funds have is the smartest brains in the investment arena. They are also able to attract right talent straight from B-schools. The new managers understand that they have to work hard whether they are managing Mutual Funds or Hedge Funds.

Therefore it comes as no surprise that these young managers aim to be part of Hedge Fund team rather than Mutual Funds or any other traditional investment tools. These were very much the points highlighted on the issue of brain drain by Mario Gabelli, Chairman of GAMCO Investors Inc at the Reuters Hedge Fund Summit in New York recently. Hedgeco.net reports:

“Gabelli told conference attendees at the Reuters Hedge Fund Summit, “A Hedge Fund manager in theory has the smartest people. They are very focused, highly incentivised, by and large”

Read More: Traditional Money Managers face challenges from brain drain to Hedge Funds

Dutch Financial Regulator concerned about excessive participation of Pension Funds in hedge funds

After Hong Kong asking for transparency in Hedge Funds operations, Dutch Financial Regulator Autoriteit Financiële Markten (AFM) has also hopped on to the band wagon. The Dutch regulator’s primary concern arises by the increase in number of pension funds investing in the alternative investment vehicle. Pension funds have been seen to be investing huge sums of money in the asset class lately. This may lead to a situation wherein some time later, they may acquire a big share of the hedge fund market. This may be alarming, since this particular investor class is quite ignorant of the investment strategies and moves that the hedge funds employ.

This obviously puts a lot of risk sensitive individuals to excessive risk. The vulnerable lot has a lower appetite for risk but the pension funds have been seen to have increased their participation in the quick and high return but high risk product. AFM presented a 74 page report on an exploratory study of conduct-related issues pertaining to the Hedge Fund industry. This report conveys its concern about considerable allocation to hedge funds indirectly exposing a much broader section of the public to this investment category.

The sheer size of inflows of pension funds money in the coming years may have an impact on market volatility too. AFM also questioned the hedge fund manager’s depth of understanding of the market. It also said that perhaps they sometimes do not have the complete picture of the market they are operating in and therefore may use certain strategies that may put this investor class at greater risk. It shared facts that reveal that currently only 5 single manager and around 45 fund-of-hedge funds are registered on the Dutch market. After providing all the arguments, the report however indicated that the need for regulation is not immediate and urgent and that any step in this direction should be taken only after a detailed extensive study has been conducted. IPE.com reports:

“The AFM noted that pension funds were investing in hedge funds in an effort to diversify and boost returns. “What seems clear is that hedge funds will increasingly depend on institutional investors for their capital.”

Read More: Dutch regulator concerned about hedge funds

Raymond Nolte to be new CEO of Citigroup’s Hedge Fund of Funds

Raymond Nolte has recently been appointed as the CEO of Citigroup Asset Management’s Hedge Fund of Funds. Nolte moves to Citigroup after having spent 20 illustrious years at Deutsche Bank. At Deutsche Bank, Nolte was the Managing Director of the Bank’s Absolute Return Strategies when he decided to change over. He was responsible for both Absolute Return Strategies for both Fund of Funds as well as the single manager hedge funds portfolios. At Citigroup, Nolte will oversee Citigroup’s hedge fund forum product along with being involved with the firm’s hedge fund of funds operations.

Nolte will be based out of New York and will report directly to Chief Executive Officer of Citigroup’s global hedge fund of funds Group, David Vogel. Mr Vogel believes that Raymond Nolte’s extensive background in hedge fund segment will significantly enhance and strengthen the firm’s business platform globally. With over $42.8 billion in total investor assets, Citigroup Alternative Investments provides a wide variety of products including private equity, real estate, hedge funds and structured products for high net worth individuals and institutional accounts. Hedgeco.net reports:

“While at Deutsche Bank, Nolte was the Managing Director of the Bank’s Absolute Return Strategies, which includes both Fund of Funds as well as the single manager hedge funds portfolios.”

Read More: Citigroup selects Nolte as new CEO of its Hedge Fund of Funds

Unique Data Warehousing solution for Hedge Funds unveiled by Bank of New York

With the world of hedge funds becoming bigger by the second and its complexities increasing, the need for a strong data warehousing software has never been greater. In response to this demand, Bank of New York has developed data warehouse exclusively for hedge funds. The software is housed within the Bank's technology platform for hedge funds known as Praeeo. It is claimed to be an automated and secure solution for meeting the real-time information needs of hedge fund managers. The data warehouse provides the fund managers of funds of hedge funds with the much needed complete range of reporting and transactions.

The system is now capable of providing services such as consolidated reporting and distribution, transparent trade work flow management and the works. The new enhanced system can now also act as a state-of-the-art storage resource for business records that can enable a client to store data about its fund structures, financial statements and dealing forms. The executive vice president at The Bank of New York, Brian Ruane mentioned that data warehouse is a proof of their strategic focus on providing innovative, end-to-end technology solutions to their hedge fund clients. Fineextra.com reports:

“The Bank of New York, a global leader in securities servicing, has created a unique data warehouse for funds of hedge funds that provides an automated and secure solution for meeting the real-time information needs of hedge fund managers.”

Read More: Bank of New York develops data warehouse for hedge funds

Insiders Say, Hedge Fund Investors Beware

Hedge Funds are "downsizing" and are no longer reserved for the ultra wealthy. A substantial sum is required by securities laws for an investor to be deemed "qualified. A net worth of $1.5 million or an investment of at least $750,000 in the fund is necessary.

Now, some fund companies are allowing investors to buy stake in mutual funds that invest in hedge funds regardless of their net worth. Insiders have forewarned the "average retail investor" to tread lightly in the hedge fund arena unless they are truly investment savvy. Even experts were fooled when the now out of business, Bayou Securities, professed to have $440 million in assets with a stellar record and promised a big payback and instead swindled investors out of their money. Insiders plea for "buyers to beware." According to MSNBC:

Back when hedge funds were far less popular, investors had a much better chance to do well. The typical fees were much lower than today's: 1 percent of assets and 20 percent of profits. But now—with 8,000 hedge funds, higher fees and mediocre markets for most stock and bond classes—hedge-fund investors are doing less and less well relative to the market.

Read more: Hedge-Fund Horrors

Weather derivatives trade increases after Hurricane Katrina

While hurricane Katrina has devastated thousands in the southern part of US, it has filled some coffers as well. Global trading of weather related commodities saw a surge shortly after hurricane Katrina hit the continent. The entire US gulf coast region has been severely affected by the hurricane and has led to global increase in petrol and gas prices. Hedge Funds investing in weather related commodities and their futures increased their betting drastically. Weather derivatives derive their volatility from weather having an impact on commodity prices.

This volatility helps generate opportunity for hedge fund managers to acquire leverage positions. Hedge Funds gain or loose when the weather rises above or falls below the stipulated level. Recent reports suggest that the number of weather derivatives traded at the Chicago Mercantile Exchange in 2005 has almost touched 500,000 compared to 122,000 in 2004. Hedgeco.net reports:

“According to news reports, the impact of Katrina has pressured hedge funds and other distributors of weather related derivative products to hedge additional exposure of such trading instruments”

Read More: Hurricane Katrina fuels complex weather derivatives traded by Hedge Funds

Chief Accountant of SEC announces departure from the commission

The chief accountant of SEC, Donald Nicolaisen has decided to leave the commission. He is planning to go back to the private sector after having served at SEC for two years. Nicolaisen’s contribution to the SEC has been greatly acknowledged by all. SEC chairman Christopher Cox has lauded Nicolaisen’s contribution towards introducing and passing initiatives in the area of Financial Disclosure. He is also duly recognized for participating in establishing new protections for investors during the implementation of the Sarbanes Oxley act.

Donald Nicolaisen has served with two chair persons in a short span of 2 years – William Donaldson and Christopher Cox. He is a certified Accountant since 1969. He was previously working for PricewaterhouseCoopers (PwC) as a senior partner prior to joining the Securities & Exchange Commission. As of now he has agreed to stay on at SEC till the time his successor is found. He has also given assurance that his departure will only be after the transition is complete. Hedgeco.net reports:

“He added, “I am also honored to have served under the leadership of Chairmen Christopher Cox and William Donaldson and am very proud of what I have accomplished and the steps we have taken to protect investors and to provide stability to our markets”

Read More: SEC Chief Accountant to leave the commission

Asian Hedge Funds oversight policies should be reviewed – Hong Kong

Global Hedge Fund Industry has crossed the $1 trillion mark out of which about $65 billion is contributed by Asian Hedge Funds. The growing Hedge Funds industry and the particular enhanced participation of retail investors has been causing some concern lately. Recently Hong Kong raised this issue at the Asia-Pacific Economic Cooperation meeting in South Korea. It urged the Asian government to review their oversight policies on Hedge Fund activities. It may be recalled that the Asian currency crisis in the late 1990’s was attributed to Hedge Funds. The case was brought to IMF where the funds were acquitted of the act.

Sometime later in 2002, Hong Kong Securities Regulator imposed minimum standards for Hedge Funds Managers wanting to sell Hedge Funds to general public. Now as the hedge funds are becoming more and more popular with the retail investors, Hong Kong feels that there is a need to put some regulations into effect primarily from the angle of safeguarding the investors. Hedgeco.net reports:

“The call led to an IMF investigation that cleared hedge funds from such charges. The Asian countries began introducing hedge funds in their jurisdictions most notably Singapore, Hong Kong and Malaysia”

Read More: Hong Kong urges Asian Governments to review Hedge Fund oversight policies

Hedge Funds and Transparency

Much is being said lately about requirement for transparency in the field of Hedge Funds. And more importantly how it affects the Hedge Funds and the investors? Lets start with what is it that makes hedge funds different from any traditional investment tool. Flexibility is one and mega returns is the other hallmark of Hedge Funds. Hedge funds use several strategies of varying degrees of complexity and risk that enables them to adapt to any market scenario and hence the flexibility. This very property of being able to change coats in different situations helps them rake in profits when other investment tools are merely trying to survive. However though most hedge funds do inform the investors about the chief strategy that they plan to employ in the course of money generation, several information gaps remain.

Investors are often clueless about the actual sequence of events that transpire at the high profile Hedge Funds offices. This is quite different from say mutual funds scenario wherein the investors are aware of sector allocation and can relate to ups and downs which are generally reflective of one or the other index in the market. The lack of knowledge of what transpires in the course of generating returns and incurring losses on their money makes investors uneasy about the tool.    

Hedge funds employ various strategies like investing in asset classes such as stocks, bonds, commodities, currencies, and return enhancing tools such as leverage, derivatives, and arbitrage. The permutation and combination can be quite confusing for even the most well-informed investor. Add to this the common popular misconception that all hedge funds are volatile because they use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using lots of leverage. Reality is that less than 5% of hedge funds are global macro funds. And of course most hedge funds indeed do not make their positions and betting details public.

Optimists can regard this information lacuna as a safety lever. Hedge funds take specific positions after taking into consideration several market situations, most of which are dynamic. A position can be reversed almost as quickly as it had been taken if the market trend changes. Information savvy investors might try to ape their hedging positions in correlation with the chosen hedge fund but may fail to jump back in an adverse situation simply because they are not aware of the other market fluctuations. This may cause them to loose every thing. Therefore lack of transparency might be a boon in situations like this.

On the flip side there are hedge fund blow-ups that suggest that some funds are either putting the investors through some unnecessary risk or are simply siphoning off investor money to their own accounts. There are several of these blow-ups that have rocked the financial market lately. Some transparency might therefore help the investors to be privy to their actual action. But then how can there be a tradeoff which can be beneficial for the investor?

The question is indeed a tricky one! Answer to this might lie in introducing two types of intermediaries between the Hedge Funds and the investors. These intermediaries, can act as a friendly buffer between the sensitivities of the hedge fund manager and the information requirements of the investor. One of this is Fund of the Hedge Fund community and the other is the array of risk measurement firms.

Both these intermediaries have the ability to take sensitive data in its raw form and package the information in a comprehensive form to meet the risk measurements needs of the investor without compromising the fund manager. Fund of hedge funds use a ‘index-plus’ approach wherein they follow the trends of chosen hedge funds, by closely monitoring their moves. This is a way of minimizing risk. Risk measurement firms create investable indices which are easily accessible and are designed to bring the economic returns associated with hedge fund investments to a wider audience to enable them to access returns in a more focused way. Hedgeweek.com reports:

“Hedge fund infrastructures have moved towards the accepted standards of custody as a distinctly separate function from investment control – particularly in the form of the managed account platforms that are becoming more prolific”

Read More: Transparency is the key to wider hedge fund acceptance

Short Sellers Prove to be Top Performers

The Chicage-based firm that tracks hedge funds, Hedge Fund Research, has put out a report that illustrates that short sellers were the top performers when looking at all different funds. According to the report, short sellers returned 2.78 percent on average the previous month. From January to August of this year it was up 7.07 percent as well. Information compiled by the New York based company, Hennessee Group, also showed that short sellers average return was 10.49 percent through August. Second only to European Stocks, short sellers were the top performers this year. According to Reuters:

"Short sellers generally perform in inverse proportion to the Standard & Poor's 500 Index, and in August these short sellers were on the better side of the trade," said Joshua Rosenberg, president of Hedge Fund Research. Most major stock indices posted losses in August.

Read more: http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=2005-09-14T185229Z_01_N14656725_RTRIDST_0_FINANCIAL-FUND-HEDGES.XML

Gabelli predicts more Hedge Fund blow-ups in the future

Recent blow-up of Bayou Hedge Fund has yet again triggered off the debate of whether Hedge funds will be able to produce the kind of returns that the investors have almost taken as a norm. Bayou Hedge Fund, thought to be managing assets of over $300 million collapsed less than a fortnight back. Speaking at the Reuters Hedge Fund Summit in New York, chairman of GAMCO Investors Inc, Mario Gabelli sounded extremely pessimistic about the industry’s continuous performance. This, he stated, is despite the fact that Hedge Funds attract the best money managers.

The compensation to these managers, according to some estimates, has crossed the $1 billion mark. The losses incurred are primarily due to the varying degree of leverages that the hedge funds employ. Alternatively this may also be due to the inability of the managers to cross the previous ‘High-Water’ mark. This high-water mark is noteworthy since the fund manager is paid only after he succeeds in crossing the previous mark. Hedgeco.net reports:

“He said at the summit, “Even if they work hard and are honest, they are going to loose money the old fashion way. And to the degree that they are leveraged and to the degree that there’s something called the high-water mark, that’s the prescription for a blow-up”

Read More: More Hedge Fund Blow-ups likely – Gabelli

Sale of Hedge Funds to non-traditional clients under probe

Recently there has been a rise in sale of hedge funds to non-traditional individual investors. The National Association of Securities Dealers is currently probing the methodology employed by these funds to attract these investors. Earlier hedge funds required the investors to invest upwards of $1 million at initial investment amount. This figure has now dropped to just about $25,000. This is risky because the traditional hedge fund investor has high propensity for risk. That is to say that he has deep pockets and as such is able to take out this huge sum for investment purpose.

But by bringing this limit down, hedge funds are now attracting even those investors who really cannot afford to take so much risk. Hedge funds draw investors due to their ability to give high returns in any market condition. Therefore by bringing this limit down, the moderate individual investor is also pulled towards the investment instrument in search for high returns. For them this can be a very dangerous play. They stand to loose all their savings.

NASDAQ has issued letters to several brokerage firms lately enquiring them about the pull tactic being employed by them. They are also being asked as to the kind of warnings that they issue to small investors in particular. More importantly they want to know if the funds are really telling the investors that the entire investment amount can go into the drain if a particular strategy employed by the fund goes wrong. As per rules these funds are required to issue warnings to the investors before they invest. Some of the firms who have received inquiry letters include Citigroup, Merrill Lynch, and UBS AG. NASD authorities are tight lipped on the progress of the probe and are also not confirming whether this act is subsequent to an incident nor are they saying anything to confirm any decision taken by the authority. In the past, NASDAQ has levied fines against firms which have been observed violating the basic rules laid down regarding marketing of hedge funds to non-traditional clients. Hedgeco.net reports:

“A number of brokerage companies have received inquiry letters from industry regulators relating to the sale of hedge funds to investors. Goldsmith also told Dow Jones that the NASDAQ is continuing with its efforts to examine such issue, but no details were provided.”

Read More: NASDAQ to probe the sale of Hedge Funds
 

Performance reporting now becoming a norm for Hedge Funds

Hedge Funds for long have been regarded as a mysterious game fit for rich and ultra rich. No body really knows what is going around and much of what the funds talk about themselves, is generally believed. Thus these loosely regulated financial instruments have till now been functioning without feeling the need for sharing performance and portfolio related data with their investors. All this is now changing with a huge number of institutional investors demanding more realistic and accurate reporting of their strategies, performance and portfolio. The numbers speak for themselves – In 2004 there were only 4000 hedge funds whose performance data was being compiled by Hedge Fund Research, a Chicago based industry tracker. Today this figure has climbed to 5000.

The research firm also pointed out that Institutional investors like pension funds and endowments have been getting more active with hedge fund investments lately. The industry tracker also indicated that about $375 billion in investment assets are being controlled by the relatively newer hedge fund of funds vehicles. This accounts for nearly one-third of all the total assets managed by hedge fund portfolios around the world. Hedgeco.net reports:

“HFR also noted that about $375 billion in investment assets are being controlled by the relatively newer hedge fund of funds vehicles, accounting for about one-third of all the total assets managed by hedge fund portfolios around the world.”

Read More: Hedge Funds to woo new investors through performance reporting

German Elections: Boom time for Hedge Funds

Upcoming national elections in Germany later this month is expected to be boom time for several Hedge Funds. Hedge funds capitalize on market fluctuations and hence the current elections are being seen as one that would provide ample of such opportunities. A change in government is expected and with that change a large number of economic reforms are expected to follow suit. A lot of Hedge fund activity has recently been observed in the German market. According to one estimate almost a quarter of the German market is controlled by the funds. This obviously means that they have considerable clout to bring about changes in company policies and business strategies.

Commonly referred to as ‘Shareholder activists’ due to their role in bringing about reforms, these companies push the management to make changes in their way of functioning and business plan in order to improve revenue or to improve shareholder value. Some recent examples of this activity were observed in the removal of Werner Seifert as chief executive of Deutsche Börse in May and with Medical Care, a provider of dialysis products having to amend a plan to convert preferred shares into common stock on the insistence of some hedge funds. Iht.com reports:

“Determining the share of the German market that is owned by hedge funds is difficult because much of the data are not published in Europe, Meissner said. Lehman based its estimate on examinations of trading flows and discussions with companies”

Read More: A boon for hedge funds

Hedge Fund Charlatan Exposed

Sam Israel III, an "investment charlatan," promised staggering returns to investors and instead shuffled their money around with no intention on holding to his lofty promise. He was was exposed after shuffling around $100 million after the fall of his Bayou Management LLC's hedge fund. Only after Israel continued to attempt to shuffle the money around by enlisting help all over the world, did employees of financial institutions catch on. Arizona authorities have since ceased the $100 million. Israel's antics are an investor's worst fear realized which has prompted much discussion among investors as to whom they can trust. According to The Hartford Courant:

In the Bayou case, it was branch-level employees who blew the whistle. "Everyone in the banking industry has gotten religion," said Ian Comisky, a money-laundering expert. Banks report lots of innocuous activity to authorities "defensively," he added, "but it seems like they picked up something correctly in this case."

Read more: Stamford Hedge Fund's Transfers Set Off Alarms

Hedge Fund Consolidation Temporarily Ceases

There was much speculation in the hedge fund industry whether or not "take over" deals would occur. While it appears to have been a fleeting thought, there is still talk of hedge fund firms to join large financial companies as a result of the more seasoned managers retiring. These were the main points discussed at the Reuters Hedge Fund Summit last week.

Low returns combatted with the demise of certain credit markets have disabled the positive performers from bringing home a staggering pay day. Still, the hedge fund industry has not exhausted all avenues. Investment banks are finding their way into the industry as a means of new revenue. The question is whether or not the managers will remain or retire, giving way to a new generation of hedge fund managers. According to Reuters:

"I do see large financial institutions who can't attract that capability continuing ... to buy hedge funds and funds of hedge funds," said Jane Buchan, chief executive officer of Pacific Alternative Asset Management Co. "A lot of these large hedge funds are being run by people who are now approaching their late 40s ... do they turn it over to junior or do they try to monetise?"

Read more: Hedge fund consolidation has only stalled

Accenture and Citadel Unite for Ten Year Deal

Accenture signed a monumental 10-year agreement with hedge fund manager Citadel Investment Group in which they will dispense data management services. The specifics regarding the financial aspects are so far unknown. Accenture will be dealing with the incoming and outgoing client data for Citadel which currently has assets over $12 billion. Accenture will be providing information regarding, but not limited to, "infrastructure and support services." According to Computer Business Review:

The company will also provide grid-based infrastructure, as well as data and IT administration and support services.

Read more: Accenture bags 10-year deal with large hedge fund