Hedge Fund Street

Dow Jones Newsletters Launches a weekly on the Hedge-Fund Industry

Hedge Funds can be a tricky business for even the most informed investor. However a market for niche products such as these exists. As an answer to this demand, Dow Jones Newsletters today launched a new weekly publication called – Hedge Fund Trades. The newsletter is tailored keeping in mind the varied needs of hedge-fund managers, prime brokers, institutional investors, mutual-fund managers and other market participants.

The magazine intends to provide a detailed coverage of current hedge-fund transactions along with analysis of completed investments. It will also provide an overview of opportunities that the fund managers are taking advantage of these days.

Kenneth Andersen, editorial director, Dow Jones Newsletters claims that currently there is no single source of documented information that has the resources to provide a global perspective on the market for hedge-fund professionals. The weekly newsletter, fills up this need gap and provides holistic information to a wide spectrum of readers. 

Hedge Fund Trades has an advantage over any other trade journal or news letter. It has the editorial strengths and financial-market acumen of Dow Jones & Company. This will enable it to provide market-focused approach of the hedge-fund business.

In its inaugural issue, the news letter has a write up on how hedge funds are playing the retail sector. It also has articles such as how a manager is putting options at the center of his merger-arbitrage fund. While talking of trends, it examines the reduced scope for trading in international bonds. The editorial content is not restricted to the US and covers trends and issues from across the globe. Home.businesswire.com reports:

“The newsletter will be staffed by a dedicated team of reporters with significant experience covering financial markets. In addition to its editorial resources, "Hedge Fund Trades" also will provide hedge-fund investment data from Dow Jones Hedge Fund Indexes”

The tale of one hedge fund and a coffee shop

The story has its’ beginning in 2001 when an Ohio based stock broker struck upon a novel idea to make quick money. His coffee shop was drowning and he needed money to take it out. So he launched a fictitious hedge fund! The fund was called Applegate Investments after his own name Gregory Applegate. He claimed to his unsuspecting investors that he ran the fund for Regis Securities, a brokerage where was working since Jan of that year.

His charisma and convincing power helped him to collect a whooping amount of over $5.8 million. The best part is that he never promised the sun, moon and the stars to his investors. He just offered to get them returns of 8% on their investments. And he still got money from them. Why? Because he promised not to charge them any fee for managing the assets. He would simply keep all the earnings over and above the 8% for himself, which obviously no one had a problem with. No body had a problem with the proposition because he also promised that should he fall short of giving the guaranteed returns, he would fund the short fall from his own pocket.

Between 2001 and 2005 the ingenious Mr Applegate was able to collect almost $6 million from about 140 investors. He sold his fund to the investors by telling them that the Applegate fund would be investing in tax-exempt securities. To make his dealings more credible, he produced false monthly client statements for his investors. His older clients never suspected any thing because he used new investors' funds to pay off earlier investors.

With the money he collected, he propped up coffee shop - Friendzy's Coffee Shop. He also went ahead and like a good citizen donated close to $76,000 to the Ashland Community Art Center, where Applegate's wife served as the executive director way back in 2003. He was considered as a trustworthy community leader with diverse tastes. He apparently loved animals and led a program to rescue abandoned and homeless dogs. Every thing seemed to be just right, and then the bubble burst!

Like every thing else, his good period ended when an investor’s financial adviser discovering that the share price on one of the financial statements for Applegate's supposed hedge fund was not the actual market price. The police, FBI and SEC – all swung into action and now the investigations are on. Only the future will tell if the investors will get some of their money back.

Moral of the story: Do your homework and check all credentials well before you commit your money anywhere.

Read more on this on Businessweek.com

FSA advices institutions to do their own due diligence before investing in hedge funds

In February 2006, US hedge funds will have to follow some rules specially those pertaining to them being registered by SEC. This is a land mark move and perhaps will pave a way for further controlling the previously unregulated industry. Now the question that is being asked is whether rest of the world will follow suit?

Recently Tom Huertas, head of wholesale bank regulation of Financial Services Authority (FSA) brought up this question yet again. He was speaking at the Reuters Corporate Finance Summit. He said that the existence of hedge funds in the financial industry was a very positive development of our times. It offers investors with a broad range of investment options. For institutional investors in particular this seems to be a good way to boost returns. But they should never forget that the industry is known for its unpredictable nature. They stand to loose every thing if they are not cautious. Therefore they have to carry out their own due diligence before taking any step in this direction.

He reminded those gathered that in its June discussion paper, the Authority had outlined some of the risks hedge funds pose. These risks included erosion of confidence, disruption of liquidity and challenges in valuing portfolios. There is also a paper that highlights the reservations of the authority especially in context with the funds being sold to individual investors.

The FSA mandates that all hedge fund managers in London register with it. But a tight control over them is currently not possible since most of the hedge funds themselves are registered in offshore centers such as the Cayman Islands that offer privileges like low-tax and light regulation. Today.reuters.co.uk reports:

“Institutions such as pension funds should carefully check out the hedge funds they invest in and understand that they may be risking their capital if a fund collapses, the Financial Services Authority said.”

EU financial stability may be under threat from hedge funds: ECB

Chairman of the ECB's Banking Supervision Committee, Edgar Meister indicated that the rapid growth of the hedge funds industry may adversely impact EU’s over all financial stability. He pointed out that the threat really comes from the creditors and counterparties (implying banks) of the hedge funds. He was presenting the ECB's annual report on banking stability.

He said that while the risk exists, it is important to know that today most banks dealing with hedge funds have advanced risk management standards. However, the ‘opacity’ of the industry cannot be ruled out. This lack of transparency of hedge funds adversely affects the banks' ability to aggregate their exposures to hedge funds' and hence some monitoring may be required. During the presentation, he also added that even the private equity funds can pose a new type of risk and is something that may require monitoring as well. This is so because the usual high leverage on loans secured by funds can increase banks' exposure to them. Forbes.com reports:

“In the short term, the overall outlook for banks in the euro zone is 'broadly positive', with short term conditions looking 'fairly robust' in most EU countries. But in the medium to long term, high oil prices and large global imbalances may pose a possible risk for the banking sector”

John A. Levin of BKF Capital Group will close its event-driven fund shortly

John A. Levin, a unit of BKF Capital Group is in the process of winding down its event-driven investment fund. Event-driven funds generally buy securities in distressed companies which are likely to reorganize in the future. The reason for closure of the fund is apparently exodus of key people from the fund due to ‘unspecified compensation issues’.  The event-driven portfolio of John A. Levin & Co is about 17 % of the group’s assets under management.

The firm has been experiencing problems since the beginning of this year. Some of the reputed people who have left the company are namesake John A. Levin and hedge fund veteran Barton Biggs. Recently Henry Levin, Frank Rango and some other members also resigned from the firm. The firm sure is disappointed with the events and says that they were not able to reach an agreement with any of them in a timely manner. Today.reuters.com reports:

“Earlier this year, chief executive and namesake John A. Levin resigned from the firm after dissident shareholders won a proxy battle and three seats on the board. And in July, hedge fund veteran Barton Biggs resigned from the BKF board”

Chapwood Capital launched to help start up hedge funds cut their business risks

Now investors of hedge funs in the US can have some tension fee nights. Knowing their interests are being taken care of by experts can be very reassuring for any investor. For Hedge Funds in particular where returns can be expected to be higher than the average financial investments, the risks too can be really high. What if one had a reliable third party that could help you keep a reality check on ones investment?

As an answer to this, Chapwood Capital a US based investment firm has recently been launched. The firm promises to offer investors in hedge funds a way to cut the business risks of investing in hedge funds. They are offering services like legal and compliance duties, accounting, reporting and risk management apart from covering operations and technology.

Chapwood's chief executive Craig Pollak stated that according to some estimates, 15 to 25 percent of new hedge funds are unable to make it through the first year of their operations itself. This may even be true in spite of them having strong investment skills. The reason for this lies in the fact that these new startup hedge funds may be lacking basic experience in handling the day-to-day running around involved in a business of this nature.

What Chapwood is offering to hedge funds is a fee sharing arrangement wherein it provides all the necessary help to the fund. For instance it has appointed a Chief Financial Officer with over 12 years of experience in the Hedge Fund industry to help its partners through the hedge funds maze. This many would agree is a luxury and can be afforded by bigger hedge funds. In this case, the CFO will serve as a third-party risk monitor or outside reviewer. The caveat here is that Chapwood is interested in partnering only with experienced money managers so that their partnership will be truly worthwhile.

Chapwood Capital will cater to the demands of investors such as institutions like pension funds and also wealthy investors.  Today.reuters.com reports:

"We're only going to partner up with experienced (money) managers," said Pollak, who was previously managing director and head of product development at U.S. investment firm FrontPoint Partners.

EU internal market chief not in favor of binding hedge funds

Charlie McCreevy, EU's internal market commissioner feels that alternative investment funds such as hedge funds should not bound by tight regulations. He was speaking at a hearing of the European Commission on future legislation for investment funds when he put forward his views. He stressed that the industry has been moving on quite well with out much regulation in place. As such there is no need to disrupt something that is working well already. By attempting to bind these investment funds with tight rules and regulations one would kill the spontaneity and thus the growth rates that these funds have been enjoying.

He pointed out that the funds in Europe have grown fourfold in the past 12 years and currently account for almost one third of the $14.4 trillion global investment-fund industry. Right now the European Commission is spearheading a reform of the financial services sector chiefly to remove obstacles to growth of the industry at large. But at the same time they will also take a look at whether the retail investors are equipped to cope with changes in the market. Signonsandiego.com reports:

"Even an educated investor needs reliable information to make informed choices," he said. "Fee disclosures and clear information on risks and investment policies are crucial."

Hedge Fund finds an innovative way to boost returns

One of the key characteristics of Hedge funds is the ability to continuously re-invent or change its strategies. Armed with this flexibility, they are able to make money even when the going is tough for traditional investment tools. All that a fund manager has to do is think out of the box. A recent example of London based Psolve Alternative Investments investing in an esoteric area of trailer park finance is an interesting one. Its managing director, Soondra Appavoo sees great revenue walking out of the investment.

He feels that by keeping ones eyes open to a variety of investment strategies, a hedge fund can garner better returns that what is currently being earned. Standard & Poor's Fund Services indicates that hedge fund returns so far this year have been around 3.3 percent, but Psolve is confident of closing the year with a profit of 15%. He feels that smaller hedge funds have a direct advantage of size and speed of acting and hence can rake in bigger moolah compared to their bigger and bulkier counterparts. Psolve manages about $300 million in three funds of hedge funds. Bigger hedge funds are nervous of taking risk these days because they do not want to loose money. Smaller funds on the other hand have less amount to handle and therefore their bets are smaller and of course the risks are proportionate. They have a direct advantage of ‘nimbleness’.

Trailer park finance may sound quite unconventional at first but Appavoo’s argument in its favor can bowl you over. He says that there are quite a few poor people in the U.S. who need to live in trailers. They need to buy trailers but off late banks are not very enthusiastic about giving loans to smaller companies. So a category does exist. The only flip side is that there is risk of unsecured debt transaction because the trailer owners do not own the land on which the trailers are parked. Today.reuters.co.uk reports:

"You've got to look where the opportunities are and the opportunities come from niche markets. Niche markets can sometimes be esoteric, like trailer parks, or sometimes mainstream," Appavoo told Reuters on Wednesday

BaFin clears TCI’s name from Deutsche Boerse episode

Deutsche Boerse had made headlines some months back when some of it’s top brass were removed on accusations of concerting with some hedge funds for an apparent takeover bid. Its Chief Executive Werner Seifert was removed and the matter went in for intensive investigation. BaFin, the Germany's financial watchdog has been investigating the issue. Recently, as part of its findings, BaFin has cleared the name of The Children's Investment Fund (TCI) from the episode. It failed to find any correlation between the fund and the former chief executive. TCI had led a kind of shareholder mutiny against Deutsche Boerse by asking it to pay out shareholders instead of making acquisitions.

The British hedge fund, by doing this had upset the German bourse operator’s plan of buy the London Stock Exchange. A strong link was therefore being seen between the fund and the top brass. It was also being speculated that the shareholders under the leadership of TCI were attempting a takeover. Prices of shares of Deutsche Boerse had gone up to record levels over this speculation.

However it has now been made clear by BaFin that there is not enough evidence to prove that the two worked together for a supposed takeover bid and worked against the management and supervisory board.  It further added that under German law shareholders with stake of over 30% can make a formal takeover offer for the remaining shares. The hedge funds involved are now not required to make that offer.

On this news, now the boerse’s stocks are down as the rumor of a takeover is thrown out of the window. In order to pacify angry investors, the Frankfurt based bourse operator has appointed Reto Francioni as it’s new CEO. It will also be returning 1.5 billion euros to shareholders through share buybacks and higher dividends. The time frame indicated for this activity is up to May 2007. In the mean time, it is being speculated that in order to better the strained relations with foreign shareholders, the German bourse under the leadership of its new CEO will revive merger talks with SWX which failed last year. Today.reuters.co.uk reports:

“A source at SWX has told Reuters that Francioni is almost certainly expected to revisit merger talks with the SWX, which failed last year. Analysts say Francioni would have to act very cautiously in this direction to avoid a new confrontation with investors.”

Hedge Funds in South Africa: Small but promising!

The Hedge fund industry is spreading its tentacles every where and South African market is no exception. Though the percentage of investment of hedge funds in South Africa is very small in the overall investment market, its future is bright. Simon Peile, head of African Harvest Alternative Investments, commented recently that today some of the larger retirement funds have started to make allocations specifically to hedge funds. Therefore one can be optimistic that in future hedge funds will not only survive but develop well.

Commenting on the issue of occasional frauds rocking the financial community every now and then he said that when the industry itself is so large, such instances are bound to happen. Judgment regarding their workability or sustainability should not be passed loosely. With particular reference to the Bayou Management collapse, he said that such cases should serve as eye openers for investors. Investors have to do their homework before they take a plunge into the field. Bayou fraud occurred because the fund was not using a third party custodian, and a third party administrator. This is an absolute must for a strong hedge fund with a clear conscience. He added that in South Africa most of the hedge funds have proper distribution of duties with third party professional administrators.

People tend to ask questions such as when is the right time to invest in hedge funds, this according to him is an inappropriate way of addressing the question regarding timing and hedge funds. Hedge funds have to be seen exclusively as a way of reducing the overall risk in one’s portfolio.

On the question of whether hedge funds perform better in a bull phase or a bear phase, his response was measured. He said that the hedge funds are structured in such a way so as to give returns when the equity market is going down and on the other hand it can loose money when the market is doing exceptionally well.

Next he addressed the issue of retail investing. He said that right now retail investing into hedge fund is not well developed. The main reason for this is lack of regulation. However, as soon as hedge fund investments will fall under the Collective Investments Schemes Act situation will change. For now retail investors have to be contended with investing in endowment policies that invest in hedge funds. These policies have lock in periods of varying length for say up to five years. Investors should not mind this, as the over all risk to their investment is being minimized in the bargain. As it is, he feel that Hedge funds should be seen as a long-term investment. If one sees the instrument as merely as a market timing exercise he may be in for trouble.

Read the complete transcript of the conversation on Transcripts.businessday.co.za

Wales has its first FSA approved Hedge Fund

Financial Services Authority (FSA), a regulatory body in charge of overseeing the UK's financial services industry has given it’s approval for launch of first Hedge fund of Wales. The fund is called Cadwyn Global fund and is managed by Cardiff headquartered Cadwyn Capital. The fund has raised £17m in July and has managing partner Gerry Holtham as its lead investment manager.

Mr Holtham has worked with Morley Fund Management as its chief investment officer. His experience of Tactical Asset Allocation (TAA) at Morley had helped the firm to be consistently successful over a period of five years. To some extent Cadwyn Global fund’s processes will capitalize on this expertise. FSA has conducted stringent assessment of Cadwyn's management and administration procedures. It has based its approval on the strong credentials and experience of Cadwyn team. Icwales.icnetwork.co.uk reports:

“The approval is a significant development in Cadwyn's ambition to establish itself as a leading independent investment fund manager in Wales.”

Hedge Funds: A saga of scandals that rocked the industry

When the going is great, every one goes home happy but the problem arises when the going gets tough! Recent times have seen far too many hedge fund scandals, frauds and collapses to ignore. The secretly managed investment category has for long created it’s own rules and flaunted them with equal ease. So much so that even the most sophisticated investor is sometimes bowled over by the sweet sugary talk of Hedge Fund managers.

What goes up must come down and hedge funds, according to some analysts are following the same trend. The heady days of double digit mind boggling figures are over. What remain now are some leftovers and fine memories of those fantastic years and not to mention the stench of one scandal after another which is plaguing the investors one month after another.

Hedge Funds seem to be going the same way as railroad stocks, junk bonds, third-world debt and tech stocks. Very recently, Refco, a commodities Broker filed for bankruptcy protection. Refco booked profits by borrowing and lending securities for hedge funds. Liberty Corner Capital, one of the hedge funds that did business with the broker, is said to have been engaging in offsetting transactions at the end of each quarter, and the beginning of the next. This allowed Phil R. Bennett, chief executive of Refco, to keep almost $545 million in bad debt off the company's books. This truth was well hidden away from unsuspecting bankers, auditors and investors. Today Refco has filed for bankruptcy protection and its chief executive faces criminal charges for his actions. 

Bayou Management is a story of how hedge funds managers can continue to dupe investors year after year and yet go un-noticed. The fund which was reportedly managing assets worth over $450 million has today just left a trail of angry and beaten investors. The fund that started in 1997 was able to keep a healthy trickle of investors by showing them made-up financial statements until its fraud came to light in August this year. All that is left today is $100 million that was discovered in a bank by Arizona investigators.

Then there is the sordid tale of John Whittier of Wood River Capital. He is accused of raising several hundred million dollars from investors by telling them that thought he does not have a clear cut strategy, he will not put more than 10 percent of the fund in any one investment. He later went on to invest two-thirds of the total assets into two small wireless companies that are today worth only 25% of their original value.

If this was not enough to set your stomach churning, read on. The former chief operating officer of Durus Capital Management was involved in artificially boosting returns by first buying two stocks that were not being traded much. He intended to inflate the share price and earn a big bonus on his investment but it fell flat. As soon as the market got a whiff of the foul strategy, the stocks crashed and along with it crashed funds of over $300 million.

The story of collapse of Philadelphia Alternative Asset Management goes a step ahead of that of Bayou Management. Its fund manager, Paul Eustace invented funds with fictitious returns. Thereafter he mingled the investments with his personal funds. SEC claims that the manager was able to hide $175 million in losses from his investors by conveniently putting them away in brokerage accounts run by another Man Group.

All these instance indicate that the industry has been running wild for quite some time now. It is time to tie it down in the wider interests of the investors at large. One cannot ignore that today, with more and more college endowments, insurance companies, pensions and mutual funds investing in the category, the funds are touching the lives of very middle class strata too. And with predictions like the asset mass crossing $2 trillion mark by 2008, the urgency to put checks and penalties has never been more.

For more on this topic read Washingtonpost.com

VC Debt Firms uneasy with Hedge Funds encroaching upon their territory!

Hedge Funds thrive on identifying new and yet newer areas where they can invest and rake in the profits. The traditional ways of Hedge funds investing money are already cluttered with over 8000 funds in the market. As they do not have clear cut strategies that they have to stick to, they are able to experiment with a lot of newer ways to invest.

One way was to move to newer markets such as Asia after the US and EU markets had reached saturation points. Setting up re-insurance under writing after the recent spate of natural calamities is another. The point being made here is that the funds are discovering newer ways to invest and make money and their inherent flexibility and not much regulation is helping them to do so.

A yet innovative way of investing is by lending to high-tech startups. This category is generally funded by venture capitalists that take a part of the equity of the firm in exchange for funding their operations. These days however, Hedge Funds are offering loans to the high-tech startups in search of hefty returns on the same which are in the range of 9 and 12 %.

Venture Capitalists are not taking this matter very kindly. They are seeing this as a clear cut encroachment into their territory. They feel that the hedge funds are providing these companies with ‘ill-advised’ loans which the companies may not be able to even repay.
   
Silicon Valley Bank and Sand Hill Capital are two well known Venture debt firms. They recently lashed out at hedge funds accusing them of making money by loaning money to startups to help them expand their operations without diluting ownership. Start-ups that need the cash are not complaining since they do not have to part with the equity. What they are not realizing is that repayment of loan will be a major issue and will loom over their heads for a long time. For hedge funds too this cannot be seen as a long term lucrative investment option – something that they call ‘unsustainable’. So if they do not get their returns they will not invest again.

Read more on this on Redhering.com

Oz Management & Caxton Corp invest in Centennial Bank

Centennial Bank’s shares began trading Oct. 3 on the Nasdaq market. Since then the bank has been able to attract two major hedge funds who now have control over 20% of the bank’s shares. One of the hedge funds is Oz Management LLC. It is currently holding 10.2% stake in the Colorado based bank. The second hedge fund with a little less control over the company with 9.2% is Caxton Corp. This information was revealed when the two funds submitted their investment filings with the U.S. Securities and Exchange Commission.

Bruce Kovner, who has been voted as the country’s 93rd richest person by the Forbes magazine is the founder of Caxton Corp. He reportedly has a net worth of $11 2.5 billion. The company under him has been able to amass close to  $11 billion under management.

Oz-Ziff Capital Management was started in 1994 by Hedge Fund manager Daniel Och. The group of funds is ranked amongst the 20 largest hedge funds in the world. Daniel Och, the founder of the company left Goldman Sachs to start Oz-Ziff Capital Management. He was also in news in spring this year as a big investor in British soccer team - Manchester United. The group manages more than $10 million in assets.   

As of now the intention of the two hedge funds seems to be ‘investment’. They have not given any indication so far about wanting to control interest in the company.      

Zsolt Bessko, Centennial Bank 's general counsel attributes the interest generated for investors in the public company squarely on the reputation and fan following of John Eggemeyer. Eggemeyer is the bank’s chairman and CEO. He purchased Centennial Bank Holdings last year. The purchase was made through his investment firm, Castle Creek Capital. Castle Creek Capital also purchased Guaranty Corp. of Denver. 

The investors who have invested in the bank besides Oz and Caxton include: Franklin Mutual Advisers, Aim Advisors, Wellington Management Co. and Dreman Value Management. The amount that flowed in has more than compensated Eggemeyer for the $520 million he spent to purchase the two companies.

Centennial Bank Holdings Inc., owns local financial institutions such as Centennial Bank of the West, Collegiate Peaks Bank and Guaranty Bank and Trust Co and has a market value of $700 million.

Read more on this on Deneverpost.com.

Hedge funds investment in India: The current scenario!

Asian market has been emerging as a lucrative market for many hedge funds. Though Hong Kong and Singapore top the list, a lot of activity has also been seen in the Indian market. With money making opportunities becoming rare in US and EU, hedge funds the world over have been seen aggressively pumping money in India.

To substantiate this take a look at the figures. According to some estimates 20-25% of the foreign funds flowing into the Indian market are from hedge funds. And up till now, in 2005, FIIs have invested close to $8.6bn in India. Out of this $2-3bn has come from Hedge funds alone.

However the investors now seem to have hit a stumbling block. One of the main contributors to the current situation is the rising interest rates in the US. Till now hedge funds were taking leveraged positions in emerging market equities by borrowing cheaply in the US. But with the interest rates in the US going up, the cost of leverage for hedge funds has gone up sharply. 

Another key reason is the depreciation of the local currency, Rupee. Dollar has appreciated in the last few months against most currencies and the Indian Rupee is no exception. A depreciation of around 3% has made the currency touch a low of Rs 45.18 recently. And this has hit the hedge funds adversely says Mr KR Bharat of Advent Advisory Service. He added that since the funds investing in India are leveraged funds they cannot stay put in the market and wait for the market correction mode to pass over. 

VVLN Shastry of Firstcall India, an advisor to foreign funds, commented that since the gap between the cost of funds and returns is narrowing, the hedge funds are now pulling out money from the Indian Market.  Economictimes.indiatimes.com reports:

“These funds also raise money through mortgages as rates were quite low a few months ago. The US mortgage rate, that was hovering at around 2% about six months ago, has now spiralled by over 400 basis points to a high of 6%”

Hedge fund task force: What will it do?

Hedge Funds industry regulation requirements by SEC are now being seconded by several players in the marker. Though it was being scoffed at earlier, investors and analysts are seeing merit in putting some scrutiny checks in place. Recently, Richard Blumenthal, Connecticut Attorney General spoke in favor of regulation at a hedge fund conference sponsored by Institutional Investor magazine in New York City.

Referring to some high-profile scandals and collapses, the Attorney General said that the need for regulation is there. In fact it is more now than ever especially in the light of recent collapse of Stamford-based Bayou Management which indicates how far the roots of fraud can percolate in the society. He showed concern about SEC being overburdened with enforcement and regulatory responsibilities. He said that the need of the hour was for states including Connecticut to lend a helping hand of sorts by supplementing and backstopping the activities of Securities and Exchange Commission.   

Mr Blumenthal added that a hedge fund task force has been put into place for the job. The task force will make recommendations on state and federal regulation. It also plans to look into issues pertaining to disclosure requirements, conflicts of interest, government enforcement, fraud penalties and auditing requirements. Courant.com reports:

“Government oversight and scrutiny, indeed regulation, is no longer a question of when or whether - the time is now - but how much and what specific steps," Blumenthal said, according to a prepared text released by his office.” 

How will 2005 end for hedge funds?

The prediction game of how the current year will end has already begun. The quarters that went by were not spectacular by any scope of imagination. If one compares the returns of the hedge funds of 2003 or even 2004 with that experienced this year, he will see a story of dismay emerging. The year started on a Luke-warm note and the second quarter was a washout. Quarter three did however help the industry to gain feet but then under the current market scenario, experts are not expecting a miracle out of the last quarter.

Analysts feel that that the long/short equity funds that take long and short positions in stocks will in particular end the year with mid-single digit percentage gains. Unlike the last year, a 4th quarter rally cannot be expected to repeat itself this year. 

Larry Smith, the chief investment officer at Third Wave Global Investors adds that though the performance in comparative terms is not so encouraging, the over all picture is not so grim. He states that hedge funds are still outpacing the broader markets in the current year. Even in a market which has been offering less volatility, most of the major indexes have given returns in the range of 5 to 7%. For instance, Hedge Fund Research, a Chicago-based hedge fund tracker of 1,600 funds gone up by 7.3 % for the three quarters gone by. In the third quarter itself it posted gains of 5.6 %.

But then it is good to see the big picture and examine what factors are responsible for the sub standard performance of funds in general this year. Firstly, there has been over crowding of the Hedge fund market with every body looking for ‘alphas’ which logically are limited in any type of market. Secondly, there has been a rise in short-term rates engineered by the Fed. This obviously is keeping the U.S. equity prices down, thereby offering limited opportunities to funds to make money. Lastly, there has been a lack of volatility or swings in the markets, which also has limited the number of opportunities that are likely to arise for hedge funds to make money. Money.cnn.com reports:

“Peter Borish, who manages a global macro hedge fund called Twinfields Capital, said that while volatility may not have hit its lowest levels yet and we may see another decline before it perks up again, he thinks volatility will come back soon.”

What does SEC regulation mean for Hedge Funds?

Let’s start with why SEC is trying to regulate the hedge fund industry. The rule code worded ‘206(4)-7’ is a dictate from the regulatory authority to bring on some amount of accountability and discipline into the free-for-all no-holds-barred investment arena of hedge funds. It has been especially designed to prevent violations of the federal securities laws. It requires hedge fund advisers to register with the SEC before February 2006.

Apart from this, they have to review the policies and procedures set out by SEC for their adequacy and the effectiveness of their implementation at least once a year. What this means that the advisers who have been complying with the authority since October 2004, now have to review their performance of the year gone by. This is not as simple as it sounds. What they have to do is report all compliance matters that have come up in the last one year. They have to include information pertaining to reviews of routine compliance on a daily, weekly, monthly and quarterly basis. Now this is a tough nut to crack since most of the funds are battling with documentation problems. To SEC it may seem to indicate an impending fraud or misappropriation of investor funds and hence detrimental to the overall image of the fund.

It does not end here! Advisers have to stay current on the rules which may be amended from time to time. They have to continuously refer to appropriate journals and compliance related news or even receive periodic regulatory guidance from third parties. SEC on it’s part plans to keep a check on compliance of main rules as well as to amendments through it’s annual reviews.

Though the SEC mandates at least annual review, it is in the best interest of the fund to keep it’s documentation updated and generate compilations every quarter. This will not only keep them abreast of their own activities but also indicate genuine effort on their part on their mark sheet.

We are now talking of two things here – registering with SEC and annual review report. Which ever be the case, one has to keep in mind that these are not only time consuming but also require a great deal of information pertaining to compliance issues. The paperwork therefore has to be done by a professional, either someone capable within the organization or perhaps a third party proficient in the field.

Now comes the question of what is it that has to be documented? Hedge funds have to reconcile trades executed against the prime broker’s records on a daily basis. This would form the base for weekly, monthly, quarterly and annually prepared reconciliations. Apart from this the funds have to ensure that valuation are also reviewed and supported. One more caveat exists. This part of the review has to be done by a person other than the trader. Because if it is the trader who is executing the trade there may be compliance problems as SEC may regard it as intent to commit fraud.

Another spoke in the wheel is the need for the broker to be in the know of the designated individual(s) within the adviser organization who is authorized to execute trades. What it implies is that every thing has to be documented diligently leaving no room for discrepancy.

SEC’s guidelines on marketing of hedge funds have also gone a wee bit tighter. Apart from all the do’s and don’ts that existed earlier, SEC will subject the registered fund managers to routine audits. The regulatory authority will now have onsite examiners who will not only ask questions pertaining to compliance of exemptions but also how the entire thing is documented.

Now all this does explain why so many hedge funds were resisting the move by SEC to introduce regulations into this unregulated investment field! Hedgeco.net reports:

“The best procedures may be in place, however, if not properly documented, the adviser will not only lack support for the annual review, but more importantly the adviser will not be able to demonstrate a sound and robust compliance program.” 

Hedge Funds go the cinema way!

With the small tubes gaining popularity, bigger screen are taking a back seat. What is happening the world over is happening in the US also. So much so, that the cinema house owners are calling it their ‘bleakest time’ ever. The sales of cinema ticket have hit an all time low. Hedge funds no doubt are looking at this as an opportunity to make money.

Wall Street Journal recently reported that a lot of hedge funds have been seen buying shares of theater chain Carmike Cinemas Inc. Carmike Cinemas is the third-largest film distributor by number of movie screens in the US. Hedge funds are hopeful that the stocks of the chain are at an all time low and will soon recover.

Carmike has reportedly only recently invested a huge sum on what it calls ‘improvement’ of the chain. The halls are primarily located amidst small communities as against big cities that have no dearth of entertainment. What is keeping the investors upbeat is that a big number of good family entertainment movies are soon to hit the theaters. This should get the cash registers ringing and therefore translate into more value to the shareholders.

Just to give figures the three major hedge funds that have invested into the chain have a combined stake of 18%. These funds are Stadium Capital Management (Bend, Ore), Fine Capital Partners (New York) and Watershed Asset Management (San Francisco). Seeing the flurry of activity in the recent weeks, it is but natural for rumors of ‘takeover’ to do rounds. Money.cnn.com reports:

“Despite the industry's woes, investors are buying up shares in Carmike, a Columbus, Ga.-based theater chain that is little known outside of small and midsize markets, the Journal said in its "Heard on the Street" column.”

Now two mutual funds that behave like Hedge Funds!!

What every small time investor, envious of hedge fund investors and their returns has been waiting for is finally here. Rydex Investments has recently launched two mutual funds aptly called Rydex Hedged Equity Fund and The Absolute Return Strategy Fund. Both the funds will use market neutral strategies to help small mutual funds investors to have a taste of absolute returns. Market neutral strategies are generally employed by hedge funds to help generate profits in any type of market scenario. The two funds are likely to offer investors access to investor tools, which were earlier not available to investors of traditional investment vehicles. With these tools the investors will be able to make profits even when traditional stock and bond fund products generate small returns or even losses because of down or range-bound markets.   

Rydex Hedged Equity Fund is expected to use strategies like building portfolio consisting of long positions in value stocks combined with short positions in non-value stocks. They will also use long positions in growth stocks and short positions in non-growth stocks. Along with this some other investment strategies like merger arbitrage and covered call options are also likely to be used.

The other innovative fund launched by Rydex is the Absolute Return Strategy Fund. The fund expects to use market neutral value and growth strategies and other such commodities or fixed income in order to generate income.

The two funds are innovative because they have been able to address the long-standing need of play safe investors to have above average returns on their investments. Traditionally hedge funds that are fames to generate such returns require the investors to part with huge sums of money. For instance investor has to invest upwards of $1 million in order to gain entry into the coveted funds.

Off late this amount has come down to $250,000 for several funds of hedge funds, but is still quite out of reach of common investors. Compare this with the average money, $1,000 that the investors of any of the two new mutual funds have invest in order to gain entry into the funds. This definitely is a worthwhile option to explore. Today. Reuters.com reports:

"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"    
 

Hedge Fund assets to cross $2 trillion mark by 2008

A lot has been said about the future of the hedge funds industry but the report from TowerGroup is the best yet. The research conducted recently predicts a bright future for the industry that is battling with its own set of inadequacies and regulatory problems. The survey report predicts that the industry is expected to grow at a phenomenal pace of about 15% per annum. So much so that the quantum of assets under management will reach or perhaps cross the $2 trillion mark by 2008.

That is to say that the industry will grow by over 75% in the next 3 years. These predictions have certain caveats attached to them. The growth at this rate will occur if the hedge funds continue to lower their investment minimums, particularly fund of funds managers. This will obviously bring in more and more retail investors into the fold and hence help in amassing greater corpus. This prediction also takes into account the growth of interest of institutional investors wanting to pour in more and more money into the funds.

Matthew Nelson who is an analyst in the Investment Management research practice at TowerGroup commented that the chief ingredients for fueling this growth are changing client base and use of multiple prime brokers. Add to this the increasing regulation by the SEC. All these are drivers for pushing demand for better technology and transparency. And of course the fund managers have to rise to the occasion by quickly broadening their technology capabilities and service offerings to keep pace with the demand. Matthew Nelson is also the author of the report. He added that one has to also take cognizance of the fact that at this point prime brokers are pushing into hedge fund administration and also the global banks are continuously acquiring traditional fund administration providers. This will have far reaching implications for the growth of the industry.

The report also suggested that the though the quantum of assets under management will increase, the number of hedge funds are likely to remain very much in their current range. Hedgeco.net reports:

"The new survey also concluded that the emerging hedge fund client base in addition to the asset growth projections would create new opportunities for hedge fund affiliated service providers."

Hedge fund managers expect more regulations in the future

The new regulatory rules that have been put into place is giving several hedge funds sleepless nights. With the last date of registration with the SEC less than four months away thins are really hotting up. There were several concerns that were brought out at the MARHedge World Wealth Summit held recently. Several renowned fund managers and veterans alike participated at the summit.

The opinion was unanimous - the current regulation was not the last it's kinds. Members commented that one could expect several similar rules in the future. The anti-lobbying against the registration requirement is not because hedge funds are scared of regulators. They are afraid that once the current rule comes into effect in Feb 2006, more will follow suit. This will further open the funds to tighter scrutiny by the regulators.

There is also a talk doing rounds that some people n the industry are checking out the feasibility of forming a self-regulatory vehicle. This would be similar to the National Association of Securities Dealers (NASD). NASD is an association of brokers and dealers in the over-the-counter securities business.

The attendees were also concerned about the possibility of SEC extending its tentacles into the private equity sector. And therefore the end to further regulation is nowhere near. They also commented that if the regulatory authorities thought that by regulating the hedge funds industry they could bring down instances of fraud, theay are mistaken. The regulation will have very little effect on fraud in the industry as this really is not a real problem at present.

According to the SEC directive, Hedge fund managers in the US of have to register with the SEC. All the formalities for the same have to be completed before 17th December 2005. The new law will come into force from Feb 2006 for all hedge funds with the exception of those hedge fund managers that are approved for short-term exemptions. Theroyalgazette.com reports:

"Mr. Marshall, who oversaw 70 inspection staff while at the SEC, said the trend towards more regulation is global and that greater hedge fund oversight is already in place in some jurisdictions outside the US"

Christopher Cox sees Internet as a way to nominate corporate directors

In what ay considered to be a rather bold and revolutionary step, chairman of the Securities and Exchange Commission, Christopher Cox has made some bold statements pertaining to nomination of corporate directors. He has suggested that large number of shareholders in a limited company should be able to nominate their own representative on the board. Currently the procedure being followed is called 'plurality voting'. Here, nominees however unpopular with the shareholders can be on the board if they can get a single vote in single-slate elections. This is not very good for the shareholders as the elected representative may not be able to keep their interests in mind while making a decision.

But quite sadly, the SEC proposal for increased powers that never came to a vote. It winded up in complex discussions pertaining to increased (read prohibitive) costs of mailings to shareholders for launching a slate of director candidates on their own under the current system.

The chairman hinted at the possibility of using modern age technology to solve the problem. He said that Internet could be used quite effectively and economically in order to do the job. This, he assures, will dramatically bring down the costs of communications to and among investors. This then could pave the way for more shareholder-inspired competition to company nominated directors.

He equaled shareholder democracy to political democracy and said that it can be enhanced by Internet communications. Cox's argument and perseverance in this direction is in continuation to his views at the Senate Banking Committee hearing held in July to weigh his confirmation.

Since Christopher Cox came into power, he has been under tight scrutiny regarding his work temperament and approach. Many were optimist about him rolling back at least some of the mandatory hedge funds regulatory requirements. He on the contrary went ahead and confirmed that not only did he conform to his predecessors work; he will make sure that the same will be implemented.  Accounting.smartpros.com reports:

"To date, the often-complex public discussion, which included an SEC proposal for increased powers that never came to a vote, has centered on mechanisms that would allow large shareholders, in limited circumstances, to nominate directors who would be carried on company proxy materials"

Hedge-fund manager charged with insider trading by SEC

Insider trading is a serious offence and a Massachusetts hedge-fund manager and some others have learnt their lesson the hard way. Securities and Exchange Commission (SEC) recently accused a former employee of Citizens Bank of getting her hands on critical information pertaining to Citizens Financial Group Inc. acquiring Charter One Financial Inc in 2004. The accused is charged with sharing this information with her husband and others.

Armed with this information, the defendants were able to make profits of more than $750,000. One of the defendants bought call options for his personal account and for his hedge fund, GTC Growth Fund. When the acquisition finally took place, the stock of Charter One stock rose more than 22%. The accused were therefore able to amass a decent profit. Add to this, they had also tipped of their relatives who also too full advantage of the situation. Boston.com reports:

"The complaint, filed in U.S. District Court in Boston, alleges that, between Michael Tom purchased Charter One call options, which increase in value with a rise in the stock price, for his personal account and for his hedge fund, GTC Growth Fund."   

Pay by touch gets funding from unconventional route - Hedge Funds

What happens when innovative financing backs revolutionary technology - a sure shot winner in the making! Such seems to be the case with San Francisco-based Pay By Touch. Pay By Touch Solutions develops retailer payment systems using "biometric" touchpad technology. This revolutionary technology enables customers at departmental stores or elsewhere to use their fingerprints instead of the traditional credit cards.  All they have to do is have their fingers scanned by a device, which identifies them and there after authorizes payments for the goods bought at the outlet.   

Stores like Piggly Wiggly in Carolina have already adopted the technology and offers it as another payment option. Some more stores like Albertsons and SuperValu in the U.S. and OSG Co-Op in the U.K are on the brink of introducing the service.

The company recently raised $130 million in financing, largely from hedge fund investors. For venture-backed growth companies, this is a rather uncommon path to follow. They usually get all their financing done by VC firms that take a part of the equity in return for the money they put in. Pay By Touch Solutions on the other hand was interested in debt financing that would leave their equity alone.

The additional funds have been garnered $75 million by way of senior secured notes from Och-Ziff Capital Management, Farallon Capital Management and Plainfield Asset Management. Add to this $55 million was raised in convertible preferred notes. In this case, Getty Trusts and Ron Burkle, founder and managing partner in the Yucaipa Cos played a major role. 

Apart from this, the company was confident that for this type of business they did not need help in attracting management talent, which comes in as a package deal when one deals with VCs. They have however brought on board John Morris who is a former senior IBM executive. John will be the company's president and chief operating officer. Today.reuters.com reports:

"An additional $55 million was raised in convertible preferred notes, with investors including the Getty Trusts, an original backer of the company, and Ron Burkle, founder and managing partner in the Yucaipa Cos., and others. UBS advised Pay By Touch"

US Bond prices causing concern to Hedge funds!

Following is a perfect example of how historical precedents cannot always be used for future trend analysis. Hedge funds have been betting on lower prices for U.S. Treasury bonds. They feel that the interest rates of U.S. will one day outweigh the strong Asian demand for Treasury issues. The logic behind this thinking is that generally when interests rates rise, generally bond prices go lower and therefore the yields are higher.

However this time around the phenomenon has not occurred and the hedge fund managers are wondering what went wrong. Generally the computer systems through the concept of probability are able to predict future trends basis the old performance data. But this time around, the statistical analysis data provided has not been of much use. About 16 months back the U.S. Federal Reserve raised benchmark overnight interest rates by 0.25% point.

This increases brought up the figure from a historical low of 1%. This resulted in 10 year Treasury Bills giving a yield of 4.8%. This was a bonanza time. Three months later however the figure fell to 4% and now almost after a year the figure is somewhere around 4.35%.

In the same timeframe the U.S. Federal Reserve has raised benchmark interest rates to 3.75%. It doesn't always pay to wait!. Hedge funds that were able to sell off U.S. Treasury issues in March 2004 when the yields were around 4% could get decent returns. But funds that waited for better returns to come their have suffered. They are still waiting for a positive run. IHT.com reports:

"In June 2004, when the U.S. Federal Reserve raised benchmark overnight interest rates by a quarter of a percentage point from a historical low of 1 percent, yields on 10-year Treasury notes jumped to around 4.8 percent"

Hedge Fund Fraud and Why it Happens

In recent months there has been an inordinate amount of scandals in the hedge fund industry. The Bayou Management debacle as well as the fraud charges that Wood River hedge funds faced (to name only a few) have whipped the Securities and Exchange Commission into a frenzy and ignited a huge debate regarding what should be done to stop the fraud. The SEC has documented 20 cases against hedge funds this year already, while in 2004 there were only 19 and a mere two in 2000. The increasing number of scandals has fueled discussions about what is actually going on in the world of unregulated investment pools meant for the wealthy investor and institutions, known as the hedge fund industry. More importantly perhaps, investors and insiders question how to clean up "one of Wall Street's fastest growing sectors."

When looking for answers one of the most logical reasons is growth. In the past five years alone, the number of hedge funds has doubled. According to Hedge Fund Research, there are more than 8,000 hedge funds in existence with assets under management totaling $1 trillion. Simply put, the greater number of funds means that a great chance exists for a manger to cheat.

The hedge fund industry has become highly competitive, with many mangers taking huge risks and stopping at nothing to garner trading business. This could potentially result in managers not being thorough in their dealings.

Yet another reason why things have gone awry pertains to the fundamental nature of hedge funds. They have very little regulation. It was understood as well as accepted that investors who invested into hedge funds, those with an income of $200,000 and up or a minimum net assets of $1 million, didn't require full protection of federal securities laws. Time has changed the investment world though. Inflation has been a means of new-found wealth for some, the problem is that they remain un-savvy when it comes to investment. Also, retirement money belonging to police officers, firefighters, and teachers are being funneled into hedge funds, hence, it is argued the need for more regulation.

Although hedge funds don't have any stringent regulations to abide by, there are some new regulations that are now being enforced. The SEC is hoping to eliminate some of the fraud by having hedge funds register with them. The way it stands now though, only hedge funds with assets of $30 million or more and at least 15 clients need to register. With new scandals erupting on what seems to be a regular basis now, that could soon change. According to Business Week:

Not much -- at least for now. SEC staffers are mulling whether to require more disclosure in the registration form. But tougher regulation of advisers or the funds they manage would be strenuously opposed by the hedge-fund industry, whose deep pockets open doors on Capitol Hill.

Read more: A Guide to the Hedge-Fund Maze

New Robertson-backed fund tests "liquidity theory"

Here is one more player to add on to the already bursting figure of 8000 hedge funds existing today. Charles Biderman has floated a new hedge fund, called Trim Tabs Asset Management. The fund is supported by the legendary technology banker Sandy Robertson. Sandy Robertson sees this fund to be quite different from the others in existence today. The new fund rests on the plank of 'Liquidity Theory'. The theory presupposes that markets gain or lose on changes to the sum of outstanding shares.

Therefore the primary driver of the stock market, according to the theory, isn't really earnings but due to changes in the total number of outstanding shares that are traded on stock exchanges. Only time will tell whether TrimTabs' strategic differences will be able to produce the kind of gains that are now expected of hedge funds. Robertson who is 74 now is the co-founder of Silicon Valley's famed former powerhouse Robertson, Stephens & Co. and is also an avid investor in hedge funds. News.moneycentral.msn.com reports:

"For instance, the theory suggests that markets tend to rise following periods when corporations buy back shares, buy other public companies or take other measures that reduce the pool of available stock."

Risk based returns should be the benchmark of judging performance of hedge funds

Lately, more and more investors are getting concerned about the performance of hedge funds particularly in comparison with the equity returns. What is happening is that they are not taking in to account the relative risk involved. Therefore the comparison may be a little unfair feel analysts. Saleem Siddiqi, partner at U.S.-based fund of hedge funds manager, Tapestry Asset Management said recently that Hedge fund returns are usually more consistent and less volatile. This is so because hedge fund managers, in a bid to hedge their investment risks, use a variety of strategies including short selling or using derivatives.

He talked about 'Sharpe ratio' as an indicator of risk adjusted return. Sharpe ratio is actually the difference between return and a risk-free interest rate divided by volatility of returns. For a return, which is of high quality and is less volatile this ratio will be above 1. If you look at hedge funds, in several cases they have been seen to produce a consistently better return than equity markets. Today.reuters.com reports:

"One such common denominator is the risk-adjusted return or the Sharpe ratio, which is the difference between the return and a risk-free interest rate -- normally the yield on U.S. Treasury bills -- divided by the volatility of returns"

Aberdeen Asset Management shifts focus from selling traditional investment instruments to Hedge Funds

Aberdeen Asset Management Plc has been constantly endeavoring to move away from small time individual investors. In the same direction, it now plans to sell hedge funds to big institutions and high net worth individuals. This is not an emergency change of strategy but instead can be regarded as a carefully designed maneuver. Martin Gilbert, Chief Executive Officer of Aberdeen Asset Management Plc was quick to add that the firm was not jumping into the arena just yet.

It plans to make the move a little later when they are better prepared and equipped. They plan to take on more clients and also double their assets by purchasing Deutsche Asset Management's U.K. business. The company currently has 28 billion pounds and hopes to get another 46 billion pounds on completing the purchase of Deutsche Bank AG's U.K. fund business. Aberdeen reportedly offered 265 million pounds for the unit.

Along with the business, the firm will also take over all of the 100 bond fund managers from Deutsche and a third of the 60 stock fund managers. The firm plans to run the proposed funds with its existing managers and analysts. Though nothing formal has been declared, the fund may be started by selecting 20 favorite stocks of its managers.

More and more traditional investment companies have been seen to be turning to hedge funds for the big money. The returns by way of higher management fees and performance fees, has lured firms like Legg Mason Inc. to buy hedge fund company Permal Group for as much as $1.39 billion in June. Even Britannic Asset Management, the Scottish money manager has recently hired two managers in order to start hedge funds.

The Scottish firm was established in 1983. By setting up hedge funds for institutions and high networth individual, the company, kind of completes the shift of focus from small investors to big game players. Last December the company reimbursed 78.3 million pounds to small investors after the collapse of some funds known as split-capital trusts. Bloomberg.com reports:

"Legg Mason Inc. agreed to buy hedge fund company Permal Group for as much as $1.39 billion in June, while Scottish money manager Britannic Asset Management hired two managers last week to start hedge funds."

Real Estate may hold the key to future prosperity of Hedge Funds

Hedge funds have been seen courting real estate investment markets lately. The shift from the so-called conventional hedge fund investment strategies to real estate is a recent trend. Industry analysts feel that this trend is likely to be there for a while. The shift to this sector seems to be prima facea due to decreasing moneymaking opportunities from the mispricing or event driven opportunities. The hedge funds are now looking at more lucrative markets or sectors and real estate investments is one of them.

Recently a symposium was conducted in Monaco, which brought together managers both from hedge funds (considered as completely liquid investments) and from the real estate investment industry (the most illiquid of the alternative investments). This was the first time in 10 years that the two came together at the High-Performance Investing Symposium from Information Management Network's. It was highlighted that in the last few years, the number of real estate investment markets and products has increases many fold. Dominic Field, director at CSFB Real Estate Private Fund Group, mentioned that the future of real estate is bright and likely to stay unlike the small blip it showed in the early 1990s.

Hedge funds are taking cautious first steps in the direction with the lure of average IRR offered in the range of 20 to 25%. This is a decent return when one considers that in the last few years, the hedge funds have been witnessing a gradual decline in their returns. One would recall that in 2003 the average return registered was 15%. In 2004 however this value came down to 9.5% and the industry will be happy if it closes the current year around 5 to 7%.

Hedge funds are generally associated with quick in and out strategies generating instant returns. Real estate investments are quite unlike the traditional hedge funds investment strategies. They require long time commitment of 'buy and hold'. Quite typically the investor is required to hold the property for at least two to three years. But then analysts are seeing this as a positive shift especially taking into account the growing number of pension funds that are looking at the hedge fund industry for returns albeit with some general assurance of predictability.

The real estate industry is also facing some threats primarily due to expansion in bond yields. However unlike in the 1970s and the 1980's the current property Bull Run could last for a while. It is imperative at this stage to understand the reason for the category showing a possible upswing. When one invests in property, the pricing generally takes place taking into account the rent one receives from that property or more specifically the rent as a proportion of the capital value. It therefore trades at a premium to the risk-free rate, or the yield on government bonds. And with the U.S. Federal Reserve raising the interest rates, global bond yields have been witnessing an upward swing.

But again the real talent is in identifying the investment opportunities, as this cannot be regarded as a global phenomenon. Germany for instance is showing good promise on residential property with the rent and home ownership levels are considerably low. It therefore can provide upside potential for investors. Today.reuters.com reports:

"This stellar performance has attracted the attention of the $1 trillion hedge fund industry, which is making its first tentative steps into direct opportunistic investment in properties -- generally offering internal rates of return of 20 percent to 25 percent and above"

Bank for International Settlement reiterates need for scrutiny over hedge funds

Hedge funds, the world over are the least transparent lot amongst the various investment tools available. They are often plagued by secrecy and wild financial maneuvers. This obviously means that they are a lot more risky than the traditional investment tools available today. The need for putting in some checks has been highlighted several times in the last couple of years and more so in the current year. With more and more funds being involved in frauds or simply collapsing due to wrong moves, the voice in favor of regulating the industry is gaining some strength.

Recently Malcolm Knight, General Manager of Bank for International Settlement stated there is a positive need to scrutinize the way in which the funds are sold to smaller investors. Bank for International Settlement, is a forum for the world's central bankers. Mr Knight mentioned that this was quite essential since the overall amount that the investors had to cough up in order to invest in the high return investments was upwards of $1 million.

Off late more and more hedge funds have been seen to be lowering this amount to a mere fraction of it. As such the hedge funds are now within the reach of smaller investors. The smaller investors not only have less amount to invest, but also have a risk appetite which is quite low when compared to a traditional hedge fund investor. As such they are likely to be very adversely affected in the event of a hedge fund fraud or collapse or even a leverage move by the fund manager, which went wrong.

While talking about the need for some scrutiny, Mr Knight indicated that it is unlikely that the growth of hedge funds is likely to impose a systemic risk to the financial market as such. The argument in favor of this is the fact that the industry is now over $1 trillion in size and though some disasters are bound to occur in the way, the market overall is unlikely to be really effected.

Nevertheless it is imperative for the regulators to look seriously into the issue of small time investors investing in this category. One may recall that BIS was in news earlier this year too with the concern about the raising involvement of banks' exposure to hedge funds. Today.reuters.co.uk reports:

"But he said: "All hedge funds have a trillion dollars in assets and they have a heterogeneous group of investors and they have different strategies. So I don't think they pose a systemic risk to the world's financial system."

Specialist research team from Mellon HBV to identify opportunities in Asia

Asia has recently emerged as the hedge funds delight lately. More and more hedge funds seem to be pulled towards the market due to the opportunities existing there. Hedge Funds capitalize on the opportunities arising out of market anomalies and misprising. They also benefit from the event-driven opportunities that a particular market has to offer.

US and European markets seem to be well taped up as far as newer opportunities are concerned. A kind of saturation has set in with the volatility being less and mispricing opportunities already exploited. It is but natural in such a scenario for a hedge fund to look for fresher pastures elsewhere. Joining the bandwagon of making money in Asia is Mellon HBV Alternative Strategies LLC, a subsidiary of Mellon Financial Corporation.

It has recently established a specialist research team in Hong Kong to cover Asian markets. The main objective of the newly founded research team is to identify further event-driven opportunities throughout Asia. It will therefore support Mellon HBV's global multi-strategy discipline. Andy Shpiz has been deputed as the director for Asian research of Mellon HBV.

The company is headquartered in New York and has a wholly owned investment management subsidiary located in London. The combined assets between the two are over $1.1 billion. The amount is essentially invested in distressed and event-driven investment opportunities. The company is understandably ubbeat about the potential of the new market and Mickey Harley, chief executive officer at Mellon HBV has even referred to investing aggressively in Asia as "The Next Frontier". Hedgeco.net reports:

"Mellon HBV Alternative Strategies LLC is an investment management company that seeks superior risk-adjusted investment performance primarily for institutional investors via an array of alternative investment disciplines"

Another hedge fund collapses

Portus Alternative Asset Management was the fastest growing hedge fund in Canada till now. It had managed to garner over $800 million through various products. Last count of investors who had invested in the collapsed fund stood at 26,000. The fund is now shut and investigations are on. This is yet another of the hedge fund disasters that has shaken the hedge fund industry this year. Although the reason for collapse is immediately not known, others in the category have met with similar fate essentially due to low volatility in the market.

This year in particular has been somewhat of a dry year for the entire industry with returns not crossing the 5% mark. Optimists still believe that the yaer will end with the average funds registering a return of around 7%, which is still high when compared to the other traditional investment vehicles. Hedgeco.net reports:

"Until regulators shut it down in February, Portus Alternative Asset Management was one of the fastest-growing hedge funds in Canada, raising in excess of $800 million through its various products from almost 26,000 customer accounts"

IOSCO to draw rules to tame hedge fund

Regulating the almost unregulated hedge funds category now seems to be only some way off. Despite the global lobbying against regulation, several financial groups are involved in either presenting papers or drawing firm rules for taming the untamed. Latest in the fray is the Global financial market watchdog group, the International Organization of Securities Commissions (IOSCO). IOSCO declared recently that it is quite seriously looking into formulating regulatory rules. Though a date is yet to be set for the rules to be ready, the work seems to be in progress. It is a long drawn process as the industry today has crossed the $1 trillion mark and the total number of operational hedge funds too has bloated to over 8000.

Off late there has been a spate of hedge fund frauds and some overtly risky strategies have been witnessed that has led to the increase in demand for regulation. US regulators have uncovered at least 51 hedge funds fraud with a combined fraud amount to the tune of $1 billion. Hedgeco.net reports:

"Technical advisers to IOSCO meeting in Frankfurt did not set a date for when the rules would be ready, but said the hedge fund industry, now comprising about 8,000 funds managing $1 trillion in investments, would be consulted from the start."

Experts feel that the hedge funds number will decrease

The current number of hedge funds across the globe is pegged at 8000. Experts now feel that the market will somewhat slowdown in the future. As such there is likelihood of the overall number of hedge funds going down to somewhere around 5000. Spearheading this belief is Tanya Styblo Beder, chief executive of Tribeca, Citigroup's single manager proprietary hedge fund unit. She made this observation and gave sound logic behind her belief at the symposium held by the Information Management Network on high-performance investing.

The decrease seems to be a consequence of rising cost structures and short-lived market trends dividing the industry between boutiques and large multi-strategy funds. Rising costs are likely to be a major factor since the hedge funds will require a lot of scale to survive and that is not possible for all the hedge funds in existence today.

It is believed that the so called boutique hedge funds are more likely to specialize in selected areas such as trades linked to catastrophic events, insurance derivatives and credit arbitrage. Multi investment strategy is more likely to be the game plan of larger funds.

Market today is providing lesser and lesser opportunities for trades to be executed. Today the average age of a trend is a couple of weeks in comparison to months in yesteryears. Add to this the fact that most of the money is generally made in the first 72 hours of the trend being spotted. Such a scenario is very risky as well as demanding and therefore not a game that every one will be likely be able to play. Today the money is really in areas such as global macro strategies and in statistical arbitrage that exploits small differences in prices between different securities. The question here is, how often can this be really spotted and made use of?

In a bit to survive in a low volatile market, hedge funds are increasingly being seen to be indulging in profiting from mispricing. They spot companies with strong fundamentals and which are underpriced. Thereafter they slowly acquire substantial number of shares in the market. Having done this, they motivate or bulldoze the management to adopt changes in strategies and policies that would ultimately bring up the share prices and therefore enhance shareholder value. Thereby they benefit from the entire process. Now experts feel that this act is ultimately reducing the volatility of financial markets overall and ultimately making trading harder for the funds themselves.

All this might sound gloomy, but actually it is not. The future of the hedge fund industry, according to experts, lies in going a little less micro and by going in for portfolio constitution.  Economictimes.indiatimes.com reports:

"Ms Beder said boutique hedge funds would specialise in areas such as trades linked to catastrophic events, insurance derivatives and credit arbitrage. Large funds would focus on multi-investment strategies."

Hedge Funds not receiving funds from European Pension Funds

Much of the hype surrounding the glamorous hedge funds seems to be wearing off. Greenwich Associates have conducted a survey whose results were made public recently. The report indicates that European pension funds may not be actively participating in hedge funds to the extent that was publicized. They have been aggressively been seen to promote the concept of investing in hedge funds with the view to maximize returns.

This change in attitude for the relatively cautious category comes from the high demand imposed by the rapidly increasing aging workforce. Despite this reality, the funds actually have not seriously invested in the category. To substantiate the point, the European pension funds have been allocating no more than 1% in hedge funds and private equity for each of the past three years. It is also interesting to note that the number of pension funds that were planning to use hedge funds has dropped from19% in 2004 to a dismal 8% in 2005.

Also disheartening is the fact that proportion expecting to hire a hedge fund manager has also fallen from 23% to 8%. But die-hard optimists have arranged for a large number of hedge fund conferences all over Europe for the next year. But the question remains - in this era of lowered intentions of investing in the category, will this strategy work at all and specifically, are they going to be attended at all?

This may be perhaps because of the fix that the safety conscious funds are in currently. The dilemma between the need to generate additional returns and new accounting rules that seems to penalize risk-taking. This is worth taking into consideration especially in the context of deteriorating solvencies at Continental pension funds.

While there is a constant pressure to improve returns, new mark-to-market accounting rules are prompting many European funds to essentially put on hold plans to shift their assets from government bonds to equities and other potentially higher-yielding investments. IPE.com reports:

"It said they are caught between the need to generate additional returns and new accounting rules that seem to penalize risk-taking. The comments come in Greenwich's 2005 report on the European investment management industry."

The latest on Bayou Hedge fund Fraud

Bayou funds fraud in recent times is a clear indicator of how much the hedge funds investors may loose if they are not watchful. The founder and chief executive of US hedge fund Samuel Israel and his head of finance Daniel Marino have been charged with committing fraud of millions of dollars. Samuel Israel launched the fund in 1996 and since then has been progressively indulging in defrauding its investors.

This he now admits was done by reporting false rates of return on the fund as well as creating a phoney accounting firm as a cover. Daniel Marino has also been an active participant in the entire process. One may recall that he admitted to this fraud via his six-page suicide cum confession note where he bared all the dirty secrets of the fund. The both have now pleaded guilty and are likely to be sentenced on 9th January. If found guilty, they may face imprisonment for up to 30 years. News.bbc.co.uk reports:

"Chief executive Samuel Israel and the fund's head of finance Daniel Marino admitted to defrauding investors by misrepresenting the value of the fund."

Hedge Funds and Loyalty - The truth unveiled!!

Off late investors have been inundated with news of hedge funds facing an investment crisis with more and more funds generating less and less returns in the last few months. There are reports about investors pulling out of investments and the hedge funds shrinking in size.

Recently Hennessee Group conducted a survey on the current attractiveness of the investment tool and whether authentic investors are really pulling out money. The survey findings indicate that contrary to the reports doing the rounds, hedge funds have a fairly loyal base. This base confirms that they will continue to invest in the dynamic funds irrespective of reports of lackluster performance. Though the hedge funds are not striking gold like in its heady days of some years back, still they are beating the traditional investment tools.

According to the report, 91% of investors feel that their hedge fund holdings are meeting or beating expectations. 93% of those surveyed, intend to maintain if not increase their holdings in the near future. Just to indicate how the funds are actually faring in the sideways moving market here are some statistics. The S&P hedge fund index is up by 2.22% year-to-date-after discounting management fees. Nasdaq market index fell by 1.07% and the S&P 500 stock index could only garner 1.39%. Hedge fund performance figures are definitely better than these. For instance Hennessee Group's hedge fund index has gone up by 4.5% in the same duration.

The Hennessee Group is a New York firm that advises institutional and private investors on where to make hedge fund investments. The group surveyed 94 investors from various categories with a combined asset base of $278 billion. Out of this the investors have reportedly invested one-third of their investable assets in hedge funds. Apparently there has been no difference in the quantum of funds from previous years.

The main reason for this loyalty also stems from the fact that there are not very many places that high net worth individuals and institutions can think of investing which promise possibility of higher returns when the going is even slightly favorable. For instance even an average money market fund has an average yield of 2.30%, according to Bankrate. 

Average hedge fund investors continue to invest in these lightly regulated and risky investment instruments fully aware of the exorbitant fees that continuously eat into the profits. Nonetheless they still prefer to go with them. Difference in satisfaction levels have however been noted with average direct hedge fund investor being more happier with the performance than fund of funds investors. The former is historically raking in better profits than the latter. This year alone there has been a straight difference of 4% in the profits registered by the two.

The report however cautioned that while this may be a current loyalty pattern, the going might be somewhat tough with the implementation of stricter regimes by SEC scheduled for Feb 2006. The investors will demand compliance with SEC regulations from their hedge funds. Forbes.com reports:

"It's a tribute to the proliferation of hedge funds in the last two years and to the relatively low-volatility, sideways-moving equity markets that have put a serious crimp in investing strategies"

Refco Executive Charged with Using Hedge Fund to Mask Millions in Debt

The suspended chief executive of Refco Inc. has been charged with securities fraud. Philip Bennett, the chief executive in question, was suspended after it was alleged that he utilized a hedge fund to mask an astounding $430 million in debts owed to the company. Since this news has surfaced Refco has issued letters to investors informing them that their financial statements dating all the way back to 2002 are most likely not accurate and should not be referred to. Naturally, since disclosing this information the company's shares have taken a hard blow.

Proceeding Bennett's suspension, William M. Sexton who had just recently announced his resignation, has been named CEO of Refco. Discussions with the Securities and Exchange Commission are currently in progress regarding an audit of Refco. It isn't all bad news for investors though. Refco has declared that the company does indeed have sufficient liquidity to keep the company running; however, they did also acknowledge that the transactions could possibly precede the company's bid to go public. Analysts continue to rate Refco's shares as "in-line," with the caveat of proceed with caution. According to Marketwatch:

For the year ended Feb. 28, Refco reported $1.33 billion in revenue and $176.3 million of net income. For the three months ended May 31, the company reported $411.6 million of net revenue and $42.6 million of net income.

Read more: Ex-Refco CEO charged with fraud
Exec allegedly used hedge fund to hide $430M debt

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