Hedge Fund Street

Investors swoon over Hedge Funds like Mutual Funds!

When the whole world is running after the hedge fund money, can the Mutual Funds investors be far behind? Some time back we had a write-up on the emergence of mutual funds that behave somewhat like hedge funds. Some mutual funds today employ strategies that are generally used by hedge funds. They are thus able to outshine their simpler counterparts in generating more returns for the investors. The profits may not be as high as that for hedge funds but are still noteworthy.

Investors find them a good alternative because the mutual fund managers charge less fees than the hedge fund managers. Apart from this there is better transparency as the rules and regulations for this investment tool are very rigid and strict. They are forever under the eyes of vigilant regulators hence the instances of fraud are limited. Then there is this issue of liquidity. Where as most of the hedge funds have mandatory lock in terms, most mutual fund units can be bought and sold when ever the investor wants. Mutual fund investors also enjoy higher level of oversight. 

The Wall Street Journal has observed that Mutual funds that are looking at achieving absolute returns like hedge funds are becoming more popular with the masses. They are attracting more and more investors every day with the promise of giving guaranteed returns. In the past two years itself their the number of hedge funds like mutual funds has increased several times. Vivienne Hsu manager of the Charles Schwab Hedged Equity Fund, predicts that the market will see more of such funds in the very near future.

There are others who do not share the same optimism though. They feel that due to stock markets flat performance this year, it might be tough for mutual funds to effectively employ hedge fund strategies. The fact that most mutual funds performance fell short of those of benchmarks such as S&P 500 also adds weight to their argument. Financial Planning reports:

“The 35 hedge-like mutual funds that Morningstar tracks manage a collective $12.7 billion, as of Sept. 30, while two years ago they managed $4.6 billion. More mutual funds are expected to head in the direction of hedge fund-like mutual funds, experts say.”    

McDonald's faces pressure from Pershing Square Hedge Fund

Some companies are facing the interference of outside investors in the regular management of the companies. Sometimes this is also referred to as shareholder activism when the stake holders force the company’s management to undertake major policy changes. These are cases where the outside investors buy a major stake in the company and hence acquire the right to be party to the management’s decision making process. They do it primarily with the intention of improving the stock prices so that the shareholders are benefited.

A recent case will illustrate how an outside investor who has stake in options but not in the shares of the company is attempting the company to make structural changes in its business strategy. The victim company is McDonald’s. The stake holder having 4.9% share in options is Pershing Square Capital Management. William Ackman who is the managing partner of Pershing, has asked McDonald’s to spin off 65 percent of its 8,000 company-owned restaurants. He has also suggested that the fast food giant borrows $14.7 billion against its real estate. This he feels will increase the share prices of the company by at least 50%.

However, Jim Skinner, McDonald's chief executive officer has downright rejected the recommendation. Another stake holder Vornado Realty Trust who has 1.2% stake in the company, had suggested that the land underneath the McDonald’s restaurants should be converted into a Real Estate Investment Trust. This suggestion was also shot down by Jim Skinner.

The case of Mc Donald’s is just one amongst the several attempts being made by the edge funds to make profits out of restructuring the management’s strategies. The case of K Capital Partners and OfficeMax is just another example. Media giant Knight Ridder Inc is up for sale following the pressurizing of Private Capital Management Inc. CFO reports:

“Recently, Vornado Realty Trust purchased a 1.2 percent stake in McDonald's, which came on the heels of market speculation about whether the fast-food chain would convert the land underneath restaurants into a real estate investment trust.”

Another reinsurance firm from Citadel hedge fund

Several hedge funds have been seen lately to be going the reinsurance way. Hedge funds like Ritchie Capital Management, Soros Fund Management and Moore Capital have already launched reinsurance firms. Citadel Investment Group also has a presence in the reinsurance market with its firm called CIG Re. Citadel has now added another reinsurance firm to the list with the launch of its second reinsurance firm called New Castle Reinsurance Co. Ltd. It is noteworthy that all these firms are based out of Bermuda.

The move towards reinsuring the insurance companies against the payouts expected during natural calamities is not very old. Hedge funds have moved into the sector in search of better returns. This move is specifically significant in a scenario where the returns from traditional stocks and bond strategies have been steadily declining.

Investing in reinsurance seemed to be a good option when seen in the light of how many natural calamities hit people in the modern day. People none the less like to insure themselves with the assurance of protecting themselves from some unknown disaster (however insignificant statistically) in the future. Therefore the premiums keep rolling in and the insurers and reinsurers keep making hay while the sun shines.

But then every once in a while major calamities like hurricane Katrina and Hurricane Rita strike resulting in heavy payouts. This can severely affect the pockets of these very firms. 2005 was one such watershed year. None the less, it did not prevent Citadel from venturing into the field yet again with another reinsurance firm.

The timing for the launch of the new firm is quite right with increased premiums under the shadow of the recent calamities. As such the new firm is up for good gains. However analysts feel that this might be short lived if the occurrences of 2005 repeat themselves the next year during the hurricane season. None the less the current situation is quite rosy and this is the way the firm wants to see it.

The new venture is backed by $500 million in fund assets. The parent, Chicago-based Citadel, has over $12 billion under management. Its earlier reinsurance firm CIG Re was formed in September, 2004 with $450 million in capital. The new firm has earned an ‘A-‘ rating from A.M. Best Co., the insurance rating agency. The high rating is given to the new company on the credentials of Citadel itself and its experienced management team. Reuters reports:

“But while CIG Re suffered what has been termed substantial losses from hurricanes Rita and Katrina this year, it did not stop Citadel from establishing the new company.”

Three ex-Citadel portfolio managers join Pequot

Three of the best portfolio managers of Citadel Investment Group have joined Pequot Capital Management Inc as Managing Directors. The three managing directors have a varied experience and have been specially hired to build Pequot’s equity trading and event-driven strategies. Pequot is based out of Westport, Connecticut and is a $7 billion hedge fund group. One of the MDs Peter Labon is experienced in TMT (technology, media and telecom) and was Managing Director at Citadel from 2001 to 2005.

The second Managing Director, Carson Levit managed equity long-short product at Citadel. He was also Managing Director there between 2001 and 2005. Steve Pigott has experience in managing event-driven merger arbitrage funds. Some time back the Fund had hired a prominent Morgan Stanley banker, Byron Wien, as chief investment strategist who will start working in the company from December 2005. Reuters reports:

“Pigott was most recently a portfolio manager at Marin Capital Partners, where he managed an event-driven merger arbitrage fund. Marin, which specialized in convertible arbitrage strategies, shut down earlier this year.”

AlexForbes and Peregrine form a new Funds of Funds

Alexander Forbes and Peregrine have recently announced the formation of a fund-of-hedge-funds (FoHF) joint venture. Alexander Forbes, South African financial Services will be represented by Alexander Forbes' (AlexForbes) Investment Solutions arm’s Caveo Fund Solutions. Peregrine is South Africa’s largest single-strategy hedge fund manager. The two firms will together manage over 100 billion rand in combined assets.

David Bacher, has been hired as investment Director of Caveo. He was earlier in charge of hedge fund investments at Investment Solutions. He mentioned that the benefit of funds of hedge funds cannot be overlooked. They offer the investor a blend of different hedge fund strategies and hence may be regarded more stable in the long run. Reuters reports:

“Alexander Forbes' (AlexForbes) Investment Solutions arm, a multi-manager, will launch Caveo Fund Solutions with Peregrine to take advantage of the two institutions' more than 100 billion rand in combined assets under management”   

Ontario Securities Commission considering revising critical Hedge Fund rule

Canadian regulator, Ontario Securities Commission (OSC) is considering removal of exemption for principal protected notes. This might adversely affect the inflow of retail investor money into the already small Canadian hedge fund industry.

Currently the law permits hedge funds to sell even to smaller retail investors. They are able to do this via principal protected notes – PPNs. Through PPNs, investors are assured of getting back their principle as well as the returns generated through exposure to one or more underlying hedge funds. The exemption is generally referred to as "bank-debt exemption". Through this exemption, large banks or financial institutions can issue debt without filing a prospectus. This also allows the PPNs to stray from the rule of having only accredited investors who are generally wealthy individuals who pour in large amount of money into the funds. 

Generally the affluent class is considered more hedge fund investment savvy and is also more risk friendly. Because of the exemption, the product is sold to even those investors who do not understand the nuances of the complicated investment tool. As such it may be somewhat risky for them as they may not understand the concept of volatility. OSC is considering this action after the recent collapse of Toronto-based firm Portus Alternative Asset Management Inc. The fund was using PPNs and its collapse affected over 30,000 investors. Portus’s PPNs were guaranteed by Societe Generale which is a large French banking group.          

Five years back, the Canadian hedge funds industry was worth only $4 billion. Now it manages assets of over $30 billion. Analysts feel that PPNs have chiefly been responsible for fueling this growth. Canada.com reports:

“Mr. Moore is heading an OSC committee looking at changing the way hedge funds are regulated after the Portus scandal this year. The Financial Post first reported the regulator's review in August.”

New offshore hedge fund launched by Dreman Value Managements

After successfully launching an onshore fund in 2003, Dreman Value Management is now launching an offshore fund. The new fund is called High Opportunity Hedge Fund. The fund will be managed by Dreman himself. Dreman has an experience and comprehensive research based data pertaining to the industry which he brings to the table. He has developed a proprietary model based on the findings of his research foundation Dreman Foundation, Inc.

His model has been tested on the onshore fund launched in 2003 and has been found to be successful. Since its inception, the fund has returned 28.6 per cent versus the S&P return of 27.8 per cent. After two years of impeccable track record, the fund has now opened its doors to investors and will soft close at $1 billion Dreman Value Management, LLC has more than $13.7 billion assets under management. Hedge Week reports:

“Dreman has consistently applied a contrarian value approach to investing by utilizing, as part of his research methodology for building a value portfolio, the same quantitative screening methodology that has been adopted for this fund.”

Strategic Investment Dialogue attempts to give a fresh perspective to Hedge Fund Investing

When an industry like Hedge funds is growing at such a phenomenal rate, it is imperative to do a reality check and situational analysis every once in a while. This helps the managers and investors to gain broader insights into the industry which is so lost in the daily ups and downs in their race towards generating returns. Last month saw the coming together of institutional investors, investment managers, investment advisors, academics, and regulatory experts to do just this. The forum was sponsored by Strategic Investment Group. And the event aptly called the ‘Strategic Investment Dialogue’ had its second annual gathering in San Francisco towards late October. 

The event was organized to promote meaningful discussions among fiduciaries and leaders of the investment community on issues which are relevant to institutional investors. Key discussions revolved around ways and means to maximize returns while minimizing over all risk. More specifically the participants explored the underlying trends toward securitization of assets and associated processes. Understanding how processes relating to decoupling and re-coupling alpha and beta and how they are likely to develop. The forum also brought together sharing of success and disaster stories relating to the implementation of various strategies. The invitees also discussed the practices for governance in an era of increased scrutiny and regulation.

President and CEO of Strategic Investment Group, Hilda Ochoa-Brillembourg said that the initiative was necessary in the context of humongous changes that are taking place in the marketplace today. Investors and hedge funds alike are affected by the changes taking place in this very dynamic market.

The attendees were asked to vote on several key issues in order to gauge the overall opinion of the industry. They voted and gave comments on various topics including impact of regulation, use of strategies and how to reduce key areas of risk. All the ideas and comments are being compiled by Strategic Investment Group. The compilation will be aptly called - Absolute Returns, Relative Risks: The Changing State of the Art in Strategies for Investing in Hedge Funds. The report will be available in full form to the attendees. However excerpts and key highlighted issues will also be available to the public at large. Interested managers and investors can request the same from Strategic or by visiting www.nationalstrategicinvestmentdialogue.com.

Strategic Investment Group was founded in 1987. Its initial objective was to provide discretionary integrated portfolio solutions that would combine active portfolio management and rigorous risk management. It also aimed to open architecture manager selection. Strategic Investment Group manages approximately $10 billion in assets as on today. PR Web reports:

“The session examined the challenges and complexities associated with successfully harnessing the power of hedge funds to maximize returns and reduce key areas of risk.”

Kaman wins its battle against hedge fund

Another shareholder activist fought but failed. The company being coerced into changing its ways - Bloomfield-based Kaman Corp and the Hedge Fund – New York Based Mason Capital. Mason capital had acquired 8.3 % shares of Kaman Corp. It subsequently went on to attempting to derail the changes that the company was progressing on the front of stock structure by substantially outbidding the board. The hedge fund filed a suit against Kaman to block its planned recapitalization. However the court announced its ruling in favor of Kaman. This development was revealed by Paul R. Kuhn, president and CEO of Kaman.

Kaman Corp is an aerospace company and is over 50 years old. It is a privately run company and had a two tiered stock structure. This gave the firm's founding family and some insiders the right to call all the shots despite holding only 3% of the company’s outstanding shares. As part of the recapitalization process Charles H. Kaman and his family have surrendered voting control of the company. Now there exists only one tier of shares and therefore all shareholders have equal voting rights. For achieving this Kaman had to pay a premium of about $32 million to buy out the voting shares.

Though the court has allowed for appeal by Hedge Fund Mason but the fund has no intentions to take this forward. For Kaman removal of this obstacle as well as completion of recapitalization has heralded a new era of prosperity al together. They are now talking to the kind of investors who they had never ever thought of bringing into their fold. Courant reports:

“Then Mason filed suit, based on a Connecticut business law that was originally designed to protect the state's companies from hostile takeovers.”

Clarksons Capital hedge Fund to start trading in Freight derivatives

Pierre Aury, managing director of Clarksons Capital has reconfirmed his intent of launching shipping-only hedge fund. The fund is registered in Cayman Islands and is being launched in early 2006. Starting with seed money of $ 20 to 30 million the fund expects to attract at least $ 200 to 300 million. The fund plans to generate returns to the tune of 15 to 20% by using high-risk trading strategies in both the dry bulk and tanker markets, primarily derivatives. Clarksons Capital is a hedge fund floated by world’s largest shipbroker, Clarksons. Mr Aury made it clear that they are looking at investors who can invest upward of GBP 1m only.

The fund is currently being targeted at investors from outside the shipping world and expects to attract at least 20 clients to begin with. The fund will charge the regular management fee of 2%. On top of this a performance fee of 20% will be charged on the profits generated by the fund. Though the shipping people are not the exact target right now, the managing director says that in due course several shipping people are likely to join up as well.

Pierre Aury has a wealth of knowledge about the shipping industry. He has however hired several managers with hedge fund experience to manage the fund. Their exact background is not known though.

Shipping derivatives have been seen to be on a continuous growth path so much so that their overall traded volumes have increased by over four times in the last four years. Apart from this the fact that two more clearing services having opened up in London as well as in New York has had a positive influence on the trade. Other key players in the shipping-only hedge funds are Oceanic, Azimuth and Sector Asset Management. Hedge Week reports:

“Aury estimates that Clarksons Shipping Hedge Fund, as it will be known, could attract around 20 clients, and is being targeted in the first instance at professional investors from outside shipping, rather than shipowners in particular.” 

Pension Funds and Hedge Funds….

Hedge funds are seen as ‘wonder’ money makers of the financial market. That is to say that amongst all the traditional investment vehicles available to investors today, hedge funds make the most money. While this is true, no one can deny the fact that the downside of these risky investments can be quite detrimental as well. Therefore one does not have to be a genius to figure out why the more traditional ‘Pension Funds’ are being drawn to them. Though they have not taken the plunge in a big way they are testing waters by staying on the outskirts. For hedge funds, big institutional investors such as Pension Funds spell increased asset inflow.

However the pension plan investment rules permit only a very small percentage that can be invested in alternative investment funds and as such cannot account for bulk. For instance, in Africa, funds are allowed to invest only 2.5% of their total portfolios in hedge funds. The reason for this is clear. Several hedge funds have gone wrong in the past. Well so have other financial instruments, but the hedge funds are dragged to the gallows primarily because they are quite secretive in their operation.

Therefore funds like pension funds are still a little vary of investing in them. In US too, out of the 158 institutional retirement funds, only five are invested in hedge funds as on date. However this equation might soon change with more and more pension funds wanting to take the plunge soon. It is estimated that over 100 pension plans will start investing in hedge funds say in the next 3 years.

Some of these observations were made by Simon Peile of African Harvest Alternative Investments. The lure of hedge funds does exist, but he warns that the investors should be wise in selecting their hedge fund and not opt for the first hedge fund that crosses their path. Money Web reports:

“Simon Peile of African Harvest Alternative Investments makes a compelling argument for a portion of your retirement fund to be invested in a hedge fund. The returns, he says, are better than other asset classes, but also with less downside risk.”

Another hedge fund from Citigroup Investment Deutschland KAG

As an answer to the growing demand for a German onshore hedge fund solution, a new hedge fund is being launched under the German Investment Law. The new fund will be managed by GLG Partners and will follow long/short strategy. It is aptly named ‘GLG Equities Long Short – CI Fund. Its main focus will be on European Stocks and the fund plans to take full advantage of promising trading exposures in other asset classes as well.

The master KAG solution from Citigroup Investment Deutschland KAG is looking at providing managers from Germany and abroad to access the German market via them. Christoph Lampert, CEO of Citigroup Investment Deutschland KAG sees the launching of the third hedge fund as a very positive sign. The group has a proven legal structure which is in full compliance with the German investment law. As such the new hedge fund is expected to gain tremendously from the reputation of the group. Hedge Week reports:

“The new GLG Equities Long Short – CI fund will be managed by GLG Partners, one of the largest hedge fund managers in Europe, and as the name suggests will follow long/short equity strategy” 

CEIOPS to create forum to gauge impact of hedge funds on Pension Plans

More and more pension funds are today looking at hedge funds and other financial instruments that will help it to generate better returns to tide over the crisis of redemptions due to aging workforce. This does indicate that the smaller investors are being put to some risk which is definitely higher than what they have invested in the instrument for. Insurance is another such field. Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) now wants to act as a supervisor for debating issues that impact occupational pension supervision, insurance and reinsurance primarily in the EU.

The outfit also aims to gauge the impact of other financial sectors like hedge funds, credit risk transfer etc on them. It is also currently involved in surveying the use of hedge funds in structuring unit-linked life insurance products. To aid this function, it plans to create a chat room on its website. IPE reports:

“CEIOPS, in its draft medium term work plan, also said it plans to assume the function of a “thinktank” in the area of insurance and pensions supervision. It plans a chat room on its website.”

Hedge fund K Capital becomes a shareholder activist

Here is another example of hedge fund shareholder activism in action. Recently Boston based K Capital demanded that OfficeMax Inc put together a detailed turnaround plan to help improve business. K capital own 8.6% shares and is the largest shareholder in office supplies chain OfficeMax Inc. October end results of the chain were quite dismal and thus it led to K Capitals attempt to take the matter into their hands. It has asked the management to put forth both short term as well as long term plans and relevant benchmarks in order to access the proper functioning of the chain.

They have also initiated the process of asking independent board members to begin assessing the strategic value of the company. Some time back the company had extended the term of its chairman and Chief Executive. The hedge fund has specifically warned the company not to take such steps that are not good for the company as well as for the shareholders. Reuters reports:

“The hedge fund, which last month said it was "disappointed" the company extended the term of its chairman and chief executive, also asked OfficeMax not to take other actions that would "frustrate shareholders' legitimate rights to implement changes."

New hedge fund association set up to provide un-influenced information

The hedge fund industry has up till now known to be highly secretive in its operations. Some frauds and scandals and loads of ups and downs later, some regulations are being put into place. But the point still remains, who do you go to for some reliable advice? Hedge funds themselves will never say any thing bad about themselves. The regulators will not have the complete information, because if they had all the information, no fraud could possibly take place. Then there are hedge fund consultants who can advise potential investors. But then again, they take fees from hedge fund managers and hence their recommendations can be considered doubtful.

Connecticut Hedge Fund Association seems to have an answer to this problem. They are looking at becoming a kind of clearinghouse for information for investors and others in the industry. They will be providing critical un-influenced information about the various strategies or approaches in practice. Along with this they will be providing information on what all information an investor should demand from his hedge fund manager and how he can actually sense a fraud brewing. Being fore warned, the investors can reduce allocation or pull out altogether thereby reducing their overall risk.

The group’s commitment to the cause is reflected in the constitution of its board itself. The group members hail from different constituents of the industry including hedge funds, institutional investors, foundations, consultants, pension funds and others. The group is headed by Bruce McGuire as its president and as of now has some 40 member firms so far. Reuters reports:

“There is no lack of issues in an industry that has doubled in asset size in the last five years and now includes an estimated 8,000 funds, with the hedge-fund-rich area of Greenwich, Connecticut, considered something of an epicenter for the industry.”   

Hedge funds dislike the idea of being charged 50 pounds for FSA breakfast

Here is a story of how someone playing in millions can kick a fuss over someone asking for small change. Financial Services Authority (FSA) organized a meeting with the hedge fund managers to apprise them of what it expects the members to do and how it feels that they should conduct themselves. Regulation has recently become a hot topic of discussion across the globe. This is stemming from the basic need of putting some checks in the industry so as to safeguard the interests of investors. The situation is attracting a lot of attention because the alternative investment vehicles that were available to only the institutional investors or the ultra rich is now percolating down to the masses as well.

Coming back to the FSAs meeting: The organizers of the meeting have asked all the attendees to pay for the breakfast that is going to be served at the meeting. The price is pegged at 50 pounds. A petty amount one may feel for the managers some of whom form the top earners in the financial markets. Despite this reality, there is uproar about why the amount is being charged.

The argument being presented is that when the funds are paying the authority almost 50,000 pounds per year for being allowed to trade, why are they asking to be paid for the breakfast. The registration invite sent out to the industry included the details of what to expect at the meeting and mentions very clearly that the registrations will not be entertained without the mentioned ‘breakfast’ fee.

The fund managers feel that this could have been acceptable if the organizers were imparting a training of some sorts. But to pay for a breakfast where they are being invited to listen to the representatives of FSA on how they will be imposing regulations on the invitees is absurd. The FSA however maintains that a fee of this kind has always been charged when ever an event like this is being organized and went on to specify that the breakfast will include croissants, pastries and coffee. Reuters reports:

“The audience with Andrew Shrimpton, the head of the FSA's new hedge fund supervisory unit, is in early December and the regulator said it will give hedge fund managers a chance to talk over industry issues.”

Alternative Asset Center announces release of the 5th annual Directory of Fund of Hedge Funds

Alternative Asset Center (AAC) is a leading independent provider of research based information on alternative investment industry. Earlier this month it announced the release of its 5th annual Directory of Fund of Hedge Funds. The directory is priced at $890 and can be ordered from AAC's website, http://www.aa-center.net.

The directory is a compilation of over 900 global funds of hedge funds and includes expanding analysis, results and perspectives of the industry. ACC has released this directory as an answer to the industry’s need for comprehensive information on the industry. It includes comprehensive sections on returns distribution, capacity, accessibility, transparency, regulation and risk and may be found useful by industry professionals and sophisticated investors alike. It provides complete fund performance data until June 2005.

AAC Business Development Manager Nicolas Berner said that the edition is highly detailed, statistically- accurate and greatly-expanded. It is a must have guide for sophisticated investors and money managers researching this lucrative and rapidly expanding sector.   

ACC was founded in July 1999 as a research company and since then it has been involved in thoroughly investigating the hedge funds industry and providing key information and insights to the investors on the ever evolving market. It published its first three directories in 2001 and currently maintains data on over 9,000 hedge funds and funds of hedge funds. The center has long standing relationships with over 2,000 alternative investment managers across the globe.   

With over six years experience in data collection and maintenance, AAC analysts and research staff have established relationships with over 2,000 alternative investment managers. ACC has witnessed a steady growth in its popularity as a reliable information provider. This is reflected in the steady growth in subscription and contribution since its inception. In 2005 alone, the center boasts of its products being purchased by over 40 countries. Yahoo reports:

“The company published the industry's first Directory of Fund of Hedge Funds in 2001. Since inception Alternative Asset Center has seen steady growth in subscription and contribution, with a steep rise in the past 18 months”

FSB regulator for making hedge funds more palatable for retail investors

The appearance of Jurgen Boyd at the Hedge Funds World Africa conference took several participants by surprise. Mr Boyd is the Financial Services Board (FSB) collective investment scheme regulator. Several hedge funds had put up stalls at the venue and were in the process of distributing leaflets. This activity of marketing the product(s) to the public is not allowed according to the hedge fund laws. However, the fact remained that that the seminar had a majority of delegates who were representatives of the industry itself. This definitely allowed them some relief to the participants but the organizer might be in some problem with the regulator over the issue.

At the conference My Boyd impressed up on the delegates that the FSB was in the process of creating a modified version of Collective Investment Schemes (CIS) that would allow them to function as hedge funds primarily aims at retail investors. The Hedge Fund CIS would be allowed to use leverage and hence enable smaller investors to be part of the larger hedge funds investment community. Money Web reports:

“To get around legislation, hedge funds regard themselves as “investment clubs.” Investors are members of the club rather than of the public. A similar tactic has been adopted by a number of unlisted-share peddlers around the country.”

Hedge funds push for merger of Deutsche Boerse & Euronext

Attempts are being made for merger of European bourse operator Euronext and rival Deutsche Boerse. The effort is initiated by some hedge funds that have shares in either of the two or both. They feel that the merger will crate value for shareholders. The hedge funds want the merger to be ‘nil-premium’ which therefore implies that the surplus cash that would be generated due to cost cutting, would be shared with the funds. This is how they hope to improve shareholder value.

In the last one year, European exchanges have been the target of hedge funds. The reason for this affinity lies in the fact that these exchanges are natural monopolies with strong steady cash flows. They also have large reserves since they are floated with little or no debt. What also happens is that when there is a build up of liquidity on the exchange, it attracts more liquidity and makes it difficult for others to enter the business. This takes place even though there are no legal hurdles. 

When one sees objectively, there are some similarities that the two suitors possess. For instance, both of them have vertical business models which include an exchange and a clearing house and both have large derivatives businesses. They also control approximately 50% of all the global exchange traded derivatives business. In Europe however, both of them put together, control the entire market. Therefore there is not surprising that the two are being ideal fit for each other.

The talk of the merger is not new and dates back to early 2004. At that time the proposal was shot down since the two had the aura of being two very strong personalities. There was also some regulatory concerns from the German and French governments. The merger would have initiated a lot of unemployment and that is the very consequence that the two economies could not afford just then.

The similarity also extends to their approach toward LSE. Deutsche Boerse made a bid for the London Stock Exchange last year that did not quite materialize since the hedge funds opposed the move. The opposition was led by The Children's Investment Trust and Atticus Capital. Euronext also talked about merger with the LSE around the same time. But where share holder relations are concerned, the two have had a very different history. While Euronext always preferred to take its shareholders into confidence, Deutsche Boerse did just the opposite. Reuters reports:

“Hedge funds would like what is known as a nil-premium merger between Euronext and Deutsche Boerse which would allow cost-savings to be shared equally between the shareholders of the two companies.”

Julius Baer Diversified Fixed Income Hedge Fund reorganizes itself

Julius Baer has announced its plans to reorganize its Diversified Fixed Income Hedge Fund into a Master/Feeder structure. The change will be implemented from 3rd January 2006. This move was approved at an EGM held on 25th October by the shareholders. What is proposed is that the fund will transfer all its assets to JB Diversified Fixed Income Master Hedge Fund. JB Diversified Fixed Income Master Hedge Fund is a limited liability company formed on 9 September 2005 under the laws of the Cayman Islands. The new fund will thereafter issue shares of its fund to all the share holders.

The fund will also undergo changes like Change in authorised share capital of Fund and creation of additional share classes. Its name changes from "Julius Baer Diversified Fixed Income Hedge Fund" to "JB Diversified Fixed Income Hedge Fund". Hedge Week reports:

“The shareholders of the Fund have approved the change of the name of the Fund from "Julius Baer Diversified Fixed Income Hedge Fund" to "JB Diversified Fixed Income Hedge Fund" effective immediately”

Are hedge funds made for you?

Here is some information about hedge funds that you were not so sure you could ask someone. Hedge funds were originally designed for a simple reason of making continuous money irrespective of the trends of the stock market. Some say that the pioneer in the field was Alfred Winslow Jones who designed the first hedge fund way back in the 1940s. It was designed in such a manner that when an investment is done, it is sheltered or ‘hedged’ from the downsides by investing elsewhere also.

There are various strategies that combine to form the hedge funds as we know them today. Chief amongst them is the long/short equity fund strategy. This strategy is also the best understood and often used amongst all the strategies available. Here the fund ‘goes long’ on the equity that they expect will appreciate within a trading timeframe. This means that they are buying the shares that they expect to appreciate. Simultaneously they ‘go short’ on the shares that they feel will go down in value. Therefore they sell borrowed stock so that they can buy them back at a lower price and therefore make a profit. So they go long with half the money and go short with the other half thus aptly called ‘pair trades’. This type of strategy took advantage of equity prices going up or down and is generally referred to as being ‘market neutral’.

With time several other strategies have emerged and investment types are as diverse as they can get. Therefore, hedge funds are not only investing in equity alone now a days but are investing in unconventional areas such as energy sector, real estate, reinsurance, cinema chain and the works.

They currently have a ‘free wily’ existence with hardly any regulations in several markets. This will however change drastically with SEC implementing several regulations in the coming year. Also what is spectacular about their existence is the fact that unlike separately managed accounts, hedge funds are generally partnerships which brings together money from many investors in a single account. They also require the investor to shell out a tidy sum in the name of fees. They charge 2% asset management fee apart from up to 20% performance fees. What it actually means is that though your fund will report huge profits, the actual profit to you after deducting the fees etc may not be very different from some of the better performing traditional investment tools. For instance if the investor expects a net return of 10 %, the hedge fund would have to post a gross return of nearly 15 %.

Therefore at the onset the hedge funds may seem to be a dream come true for your invested money, reality may be far from it. Only those with a lion’s heart to withstand the crests with the troughs can think of surviving the realities of hedge funds world. Santa Cruz Sentinel reports:

“While reliable statistics on the collective performance of hedge funds are hard to come by, a number of studies indicate that hedge funds provide no advantage over more traditional, less costly investment vehicles.”

FSA paper on risk and regulatory engagement hedge fund gets a mixed response from AIMA

FSA, the premier regulatory authority of hedge funds in UK had presented a paper titled - Hedge funds: A discussion of risk and regulatory engagement. The paper was coded DP05/4 and was presented to AIMA in the month of June this year. The paper was prepared after in-depth industry analysis and presented its views on hedge fund regulation within UK. AIMA had immediately got to work of analyzing the paper and the recommendations made therein. For this it had brought together professionals in the field so as to form the largest working group of members that had ever been assembled to work on any regulatory consultation. It was well represented by all the sectors of the alternative investment management industry in the UK and Ireland. The association prepared its comments and suggestions based on the paper earlier this month. Following are some of the observations made by the association.

The crux of the response was that one has to make sure that regulation should not weaken the UK’s competitive advantage. It acknowledged comments such as those pertaining to the benefits that hedge funds bring to financial markets and also the emergence of UK as the centre of hedge fund management in Europe. It however stated that the comments made on the possibility of hedge funds creating havoc in the financial market may be half baked. Actually, the funds are no more disastrous than any other market player. Therefore there is no need to be over cautious about their actions. It did recognize that several hedge funds have experienced a downfall, but then it is a natural phenomenon in a ‘free market’. This should not be construed as a sign of ill health of the industry. 

On the issue of increasing fraud within the industry, AIMA commented that the instances of frauds are no more than those experienced by any other industry in the financial market. Referring to the highlighted need for smaller or bigger players to have more or less supervision, the association stated that the size of the player should not have any bearing on the need for being supervised. It said that both small and large managers are likely to employ strategies that can make them ‘high impact’. 

The association also indicated that there was no need for newer permissions for hedge fund management and/or prime brokerage. Should the changes occur, it added, the same should be notified to the FSA up on commencement by the industry participants. The response also included AIMA’s opinion on the issue of valuation saying that it may not be the best way forward. It observed that the issues raised in the context in the discussion paper are not unique to the hedge funds industry alone and can be seen in other industries playing in the financial markets. It added that the usage of third party administration in the European and Asian hedge fund industry was quite a done thing.

The Alternative Investment Management Association (AIMA) has over 270 corporate members in the UK. The Hedge Week reports:

“AIMA has welcomed the establishment of the FSA’s ‘centre of hedge fund expertise’, assuming that it will be (and remain) properly and adequately resourced, and suggests that it be allowed to ‘bed down’ before any other action is considered.”

San Francisco based Hedge fund acquires major stake in Reynolds

ValueAct Capital Partners LP, a San Francisco based hedge fund has bought 9.9% stake in Reynolds and Reynolds Co. This was revealed to SEC via its recent filings of status of its stake in the company. Reynolds is a Kettering-based company that develops management software for the automotive retail industry. It has been grossly mismanaged in the last 4-5 years. Consequently it struggled to grow its revenue in that period.

It did however undertake some cost cutting measures such as cutting down in its employee strength; however the growth in revenue was not commensurate with the efforts. This year has seen several shifts particularly in the top brass. The company is now headed by Finbarr O'Neill as the chief executive officer who joined Reynolds in January. Along with him is a completely new team that is attempting to bring the company back on track.

ValueAct Capital Partners are famous for large holdings in undervalued companies and working with their management to try to boost performance. They have stakes of various sizes in almost 15 companies. Generally when a fund increases its stake in a company, it is seen as a takeover bid. However, Mr Kelly Barlow, a partner in the private fund, assured that in this particular case they were not looking at placing their man on the board.

He conveyed that the fund had faith in the new CEO and was looking at him to improve shareholder value in the near future. What brought the fund close to the company is the fact that though the company was being mismanaged, it did not go down and under. It actually posted profits, though not spectacular. Hence in the long run, ValueAct can expect the company to show enhanced profits. As of now the new CEO is attempting to reconnect the company’s ties with its customers and renew the faith they always had on them. The fund expects the company to generate shareholder wealth over the next two or three years.

ValueAct impressed up on the point that they were not looking at changing the management saying that amongst the 15 companies that they hold stakes in, only one is being faced with such a situation - Little Rock, Ark.-based Acxiom Corp. In the rest of the companies, they are partners in growth.

The fund manages funds for institutional and wealthy individual investors to the tune of $1.5 billion. Some of the note worthy names in its client list includes Kan.-based Epiq Systems Inc.; Alpharetta, Ga.-based Per-Se Technologies Inc.; Santa Ana, Calif.-based MSC.Software Corp.; and St. Petersburg, Fla.-based Catalina Marketing Corp., according to Hoover's Inc., a company that compiles business information. MSN reports:

“ValueAct is involved in a potential hostile takeover of Little Rock, Ark.-based Acxiom Corp., according to media reports there. The private equity firm is currently the largest Acxiom shareholder and has made a bid to buy the public company for $2 billion.”

Hedge Funds: The past and the present!

While we discuss the ups and downs and technicalities of the hedge funds, it would be nice to revisit where the industry came from. A fresh perspective of emergence of the sector and its growth through the years can be useful. So here we are. Hedge funds emerged way back in 1940s after the catastrophic financial movements of the 1030s.

The man responsible for designing hedge funds was Alfred Winslow Jones who created the first hedge fund primarily aimed at eliminating market risk. The core idea that he worked on was to enable investors to enjoy equity upswings but ensure that they were simultaneously protected against the risk of share price falls. Thus the world saw the emergence of long/short hedge funds. He combined a stock-picking philosophy which invested in undervalued companies. This was done primarily when the share prices were expected to rise. Overvalued operations were also identified and he sold them short. He was convinced the prices of these operations would ultimately fall and hence he borrowed stock and sold it with the hope that the prices would fall and he could buy them then.

Though the industry has capitalized on the core philosophy, things are quite different today. Today the market is not only grown in size but also has several strategies that never existed earlier. The dynamism of the field is such that it seems to be evolving continuously. Newer and yet newer strategies seem to be emerging every day, further complicating the arena. Therefore even the savviest of the investors, are quite often clueless of how their money is being invested.

The secrecy in using the oft utilized but less understood strategies further adds to the chaos. So what exists today is either the crowding of existing strategies trying to profit from the very same opportunity, or use of strategies that even some of the managers are not very familiar with. The hedge fund manager never wants his client to know that he is not sure of how the strategy will work or how much it might fetch. Thus there is no dearth of funds that thrive under the shrouds of mystery. 

To top it all, the industry itself is very mildly regulated. US is now implementing some blanket rules that aim to reduce the risk to investors. FSA in Britain on the other hand seems to have a tighter control on the industry. But even that is not sufficient for funds that are based off shore. So what we have today is a lot of collapsing funds and lot of funds that are involved in big time frauds. Scotsman Business reports:

“Is the FSA being overly jumpy? Probably not, given the sector's history. These here today, gone tomorrow funds have a record of being risky and racy, and have been at the centre of a long line of headline-grabbing scandals.” 

South African hedge funds market due for strict regulation

Amidst the chaos and uncertainty that exists in the hedge funds market, here is a breather for those who seek profits but are wary of the risks involved. The Financial Services Board (FSB) is on its way to regulate a substantial part of the hedge funds industry. Though an unregulated hedge funds industry will parallely coexist, the majority of them will have to be registered.

This was made clear by Jurgen Boyd, the head of collective investment schemes at the FSB. He was speaking at the Hedge Funds World conference, in Cape Town earlier this month. He also announced the setting up a regulatory framework wherein collective investment schemes would be able to offer regulated hedge funds. This option will be made available by the first quarter of 2006 after clarification on tax related issues.

My Boyd said that more and more collective investment schemes and unit trust companies want to invest in hedge funds to boost their profits. These are primarily those Funds that invest short and make use of leverage. The current legislature prevents them from doing so due to the immense risk that they pose to the retail investors. By making investment in regulated hedge funds possible, FSB will enable the schemes to offer better returns with lesser risk.

However there are some ‘stoppers’ also placed. The law will make sure that such schemes comply with all the other requirements that unit trust funds and other collective investment schemes have to generally meet. These requirements include buying back investors' units whenever they want to sell and of course give pricing of the units on a daily basis. These requirements are easier said than can be possibly implemented. Especially with regard to hedge funds that invest in instruments that are not listed or priced daily and also in instruments that cannot be liquidated easily.

The move has the backing of Association of Collective Investment Schemes (ACI), the Alternative Investment Managers Association (AIMA) and the Investment Management Association of South Africa (Imasa) on the issue. However this big bang approach was not accepted. Therefore now a two step process is being put in place. The first is to allow functioning of collective investment schemes that comply with the regular requirements of unit trust funds, and other collective investment schemes. The second step will involve the daily pricing and liquidity factors. 

Also what is being put in place is the fit and proper requirement for hedge funds manger to follow. This is being put in to place via Financial Advisory and Intermediary Services (FAIS) Act. The act will allow some incubation period in order to implement the same in a phased manner.

Read more on this at Personal Finance

DIFC head chairs Hedge Fund Conference

The 8th Annual Hedge Funds World, Asia 2005 conference was organized in Hong Kong recently. The event is considered to be one of the important gatherings of the international alternative investment community. The conference was chaired by Sandy Shipton, Head of Asset Management and Fund Registration, Dubai International Financial Centre (DIFC). Shipton has is a sound background of the financial services and asset management industry.

He stated at the conference that hedge funds have become extremely popular with money managers world wide so much so that even the most conservative asset allocator is now looking at the industry for its ability to give absolute returns. To stress up on this point he mentioned that for DIFC too Asset Management and Fund Registration is one of the six key sectors of activity. DIFC is an organization that offers asset management firms and private banks which are not based locally to conduct their services close to where their client base is. Go Wealthy reports:

“The event, which is considered one of the most important gatherings of the international alternative investment community, was chaired by Mr Shipton, who has a wealth of experience in financial services and asset management industry.”    

Amber Hedge fund moves out of the care of Societe Generale

French Bank, Societe Generale recently announced that it has spun off Amber Capital, a $1.5 billion hedge fund. This has primarily been done in order to ensure future growth of the fund. Many banks carry on this practice and frequently allow their hedge funds to be managed independently. Even BNP Paribas spun off its internal hedge funds so that their earnings from potential volatility were protected.

Amber is a hedge fund that identifies special situations such as takeovers and spin-offs and invests in them. 70% of its investment has been in European equities and the balance 30% in US equities. Societe Generale still has an investment in Amber along with 50 other institutional investors. Amber was created in 1997 and will now be run by its independent 16 member team. Reuter reports:

“This independent management structure is the best way to insure the further growth of the fund ," said Christophe Mianne, SG CIB's global head of equity derivatives, in a statement”

Experienced staff can avert hedge fund collapse

Though hedge funds industry has grown in size, the infrastructure that is required to ensure seamless operation and reporting has not grown proportionately. Most of the hedge funds have very small staff quotas and rely on accounting firms to provide risk management and financial systems expertise. As such they are more often than not prone to fraud risks. The fund managers face dearth of talent saying that they find it a difficult activity to recruit staff that is capable of coping with the demands of assurance and advisory work around the funds. This needless to say throws the doors open for inconsistencies to creep in.

Even Amin Rajan, CEO of research firm Create, confirms that as the industry is bogged down with intricate techniques it is difficult to recruit individuals with the required qualification and expertise. With the blow up of futures broker Refco last month, one thing is for sure, more such instances can happen if the industry continues to move the way it is doing currently. Financial Director reports:

“Experts have warned that firms are finding it difficult to recruit staff capable of coping with the demands of assurance and advisory work around the funds, posing a substantial risk to investors and hedge fund managers.”

Behind doors at Refco....

With the recent collapse of futures brokerage, Refco several stories of non compliance have surfaced. One such account is of a hedge fund manager, Niederhoffer. Niederhoffer was an ace trader from early 1960s to 1990s. He had developed a unique approach to making money by creating a predictive model that could give directions to analysts regarding daily and hourly movements between stocks, bonds and other markets. He made a lot of money for his investors and also for the industry lion George Soros by setting up a $100 million account. His investment styles were unique and quite often against the tide. This led him to nail biting recoveries and profit raking.

He claims that Refco had promised him that should he receive a margin call, he would be given grace time in order to generate cash to meet his obligation. This promise was not honored in a particular incident in Oct 1997 when the market was going through a turbulent phase. As he could not come up with cash at that instant, Refco suggested that he should trade his fund's positions for their own account and transform some of them into cash. Niederhoffer now states that Refco would have made a sizable profit out of this situation while he himself went out of business. The Street reports:

“An iconoclast, Niederhoffer soon spread his wings and figured out how to apply his techniques to markets as far afield as Turkish bonds, the Mexican peso and Japanese stocks. He also bought and sold private companies, made venture-capital investments and earned numerous awards en route to making his partners increasingly wealthy”

US and hedge fund frauds

US has been declared as the biggest haven for hedge fund frauds. While the hedge fund market in the US may be the largest, so is the number of instances of fraud. It might be a good idea to get into reasons behind these frauds and why they are so many when compared with say Europe.

The key differentiator is the difficulty that a prospective hedge fund manager has to face in order to start a hedge fund in the country. In the US, there are not very many restrictions on starting a hedge fund. Almost any body can open one. This scenario may however change soon with the SEC implementing its regulations in Feb next year. Even after the regulations are put into place, the instances of fraud may not come down phenomenally. The reason for this is that the SEC will require only those fund managers to register with them who manage more than $25 million of investor money. This observation was made by Alternative Investment Management Association (AIMA), an industry group based in London.

Compare this with the scenario in UK where there are stringent entry qualifiers for a hedge fund to start operations. The industry there is regulated by Financial Services Authority (FSA). FSA requires that even before the funds start taking up clients, they are required to register with it. It also carries out a thorough back ground check on the fund managers and their ability to manage the funds. They look into the track records and history of the backers before giving a green signal. To drive home this point, Christopher Fawcett, chairman of AIMA commented that FSA makes sure that the prospective hedge fund managers’ experience has been in a similar field. He or she for instance cannot be a librarian and start a hedge fund. Mr Fawcett is also manager of Fauchier Partners,a fund of funds, based in London with about $4 billion in assets.

To drive home the key differentiator, Florence Lombard, AIMA's executive director said that in the past 15 years that AIMA has existed there has been only one registered hedge fund fraud case. Compare this with around 20 registered with SEC in US in the last one year itself. Even if you give them the benefit of being a larger market, the number of hedge fund frauds over all are simply unforgivable.

AIMA is therefore wholeheartedly supporting the process of regulation in the US. However it is demanding that the funds that are registered in Britain should not be required by US to register there as well. FSA’s process of elimination is quite stringent and if the overseas hedge funds from Britain have to necessarily register with SEC there might be quite a few drop outs. This would ultimately translate into the overall industry suffering.

Read more on the topic in a write-up on CNN Money.

Hedge Fund GLG partners being probed by FSA

GLG Partners, a reputed London based hedge fund is undergoing investigations by Financial Services Authority and regulators in France and Spain. Its senior partner Philippe Jabre is being accused for trading improperly using inside information on forthcoming deals. Sumitomo Mitsui Financial Group of Japan, and Vivendi Universal and Alcatel of France are the fore runners of the enquiry which has now been on for several months.

Philippe Jabre is considered to be one of the leading players in the convertible bonds segment. Jabre has been with the group since 1997 and his convertible bond arbitrage fund has made over 23% returns annually. He himself is known to have over £200m of personal wealth. GLG has over $11.5bn under management and is the largest London hedge fund outside the Man group.  This Is Money reports:

“The inquiry into the issue of convertible bonds by Sumitomo Mitsui Financial Group of Japan, and Vivendi Universal and Alcatel of France, has been hanging over GLG for months.” 

The changing face of Hedge funds

Change is the core truth of mankind on which ‘evolution’ or even ‘survival’ thrives on. Hedge funds can be no different from this universal truth. The number of hedge funds has increased to over 8000 today. The net asset handled by the industry has long crossed $1 trillion. And returns from the industry are not as exotic as they used to be. Hence ‘crowding’ has occurred as a direct consequence of more number of people seeking better returns that are the hallmark of the industry. In order to survive, there fore it is not surprising that the industry is on a self innovating spree. Newer strategies are emerging and so are newer markets – all leading to a change in the entire landscape of hedge funds.

Over use of several well understood strategies has led to them not producing much by way of returns. Long/short strategies, Merger arbitrages, trading in convertible bonds etc fall in this class. Returns from these strategies have been slowly diminishing. Neil Brown, managing director of Citigroup Alternative Investments whose group structures new investment funds said that just old strategies fade away, newer ones emerge – this is the beauty of the dynamic field of hedge funds. He cites the example of credit default swap (CDS) market which did not exist sometime back. It is now a healthy $1 trillion market with hedge funds as a major contributor. 

Some new evolved versions of long/short equity funds have been observed as a direct consequence of raising demand of institutional investors. The profile of investors has also changed in the recent years. Previously only rich and wealth investors could invest in the high risk category. Now with some conservative and less risky versions being available, large institutional investors account for a sizable portion of the investors. And well while we are at it, by lowering of the seed money required to enter this ‘not so transparent’ investment area, the number of retail investors has itself increased. 

For example, Mellon HBV Alternative Strategies is buying Chinese non-performing loans today. This is a market that has seen phenomenal growth in recent years in Germany and in parts of Asia. And then there are some other funds that are developing long-short strategies in real estate, reinsurance, shipping and other less liquid asset classes today.

Though one cannot deny the relative illiquidity and riskiness of new investment strategies the pluses of possible creation of new markets is more important than it ever was. With hedge funds becoming more informed and hence picker hedge funds are doing what they have to do in order to survive.

Read more on this in a report by Reuters.

Hedge Funds experienced severe October blues this year

With the results of October in, one thing is clear – Hedge funds faced they toughest time in recent times. October generally is known for struggling times but this year was particularly bad, industry observers feel. In fact what is being said is that apart from Japan, there is no other market that can boast of an even market condition. The environment was tough even on the stock and bonds market. Every one was badly hit, irrespective of the strategy they used.

Traditional long/short stock funds were the worst hit with some funds experiencing a decline of 8 to 10 % in the month. For example, The Cantillon World Ltd. was down about 3%. Cantillon is a consistently top performing global long/short equity fund with offices in New York and London and is run by former Lazard Asset Management star William von Mueffling. Atticus Capital's Atticus Global Ltd. fund lost more than 10 %.  $1.5 billion AlphaGen Capella fund, a known strong performer again, was down 3.5 % for the first three weeks of October. Therefore, funds that held long positions in energy stocks in particular got hit badly while the broader market struggled. Industry experts feel that US hedge funds were the worse hit in the category primarily because of short-term interest rates have been rising for more than a year now.

Even Arbitrage funds took a beating in October. Arbitrage funds attempt to rake in profits by selling and buying separate but related instruments and profit from a difference in price. Some arbitrages felt the pressure of low volatility in the market. They went ahead and ramped up their exposure to the credit markets and got hurt due to bad timing on their part.

Another factor that brought down the performance of the hedge funds was the meltdown of commodities brokerage Refco. Refco filed for bankruptcy after it its chief executive Phillip Bennett was charged with securities fraud. This led to customers withdrawing their assets and hence the current situation. Several hedge funds bore the brunt of the situation.

But however grim this may sound but industry gurus feel that the worst for the year may be over. With two more months for the year to end, the fund will jump back. In fact they are even suggesting a rally in December which is expected to carry on till about the second quarter of 2006. CNN reports:

“According to Chicago-based hedge fund tracker Hedge Fund Research, its index of 1,600 funds gained 5.6 percent in the third quarter, most of the 7.3 percent it estimates hedge funds have returned this year through September.”

Consortium of Hedge funds to take over first British company, The Peacock Group

Finally it is happening. A consortium of hedge funds has managed to strike a management buy out deal worth £404.4 million. The company in question is Discount clothing retailer Peacock Group and the hedge funds are Och-Ziff and Perry Capital. Och-Ziff is not new to the concept of takeover bids or spear heading shareholder activism. In the recent past it has been instrumental in Malcolm Glazer's takeover of Manchester United.

The shareholders are being offered 340.5p a share for the company. The amount being offered by the management includes a premium of 29.2% on the closing price of August 15, 2005 that was 263.5p. The deal on approval will give the existing management will own 43.3 % of the Peacock Group.

Management is led by Richard Kirk, the chief executive of Peacocks and joined by Keith Bryant and Neil Burns. The move is being co-coordinated by Goldman Sachs, Wall Street banking adviser. For this a special company by the name of Henson No 1 has been formed.

Gavin Simonds who is the chairman of Peacock stated that the price being offered has been decided after great deal of thinking and evaluation and as such represents the fair value for the business. The take over will be funded through a combination of both debt and equity. The equity component will come from the executives, Echelon and the two hedge funds. Echelon is the investment vehicle of former Peacock chairman John Lovering.

The debt component however will be raised by Goldman Sachs. Goldman Sachs is also extending a revolving credit facility worth a further £110 million. The Times of India reports:

“The 340.5p a share offer by management represents a premium of 29.2 per cent to the 263.5p closing price on August 15. This was the day before Goldman officially made its approach to Peacock on behalf of the executives.”

New Hedge Fund which has its origin at Microsoft

Hedge fund investing offers its managers a steady high. The power to handle big assets is like playing God. The thrill of taking risks and generating returns cannot be equated with any of the other investment vehicles. No wonder, more and more talented money managers are moving towards the coveted arena in an attempt to run their own hedge fund.

Latest on the block is this team which comes fresh from Microsoft. They have jumped tracks from managing money at Corporate treasury department at Microsoft to managing a hedge fund of their own. The new hedge fund is christened ‘Tahoma Capital’ and is led by Jeffrey Scott, who was assistant treasurer at Microsoft for 10 years. Out of these 10 years, he spent the last five leading the software company's portfolio team. Apart from him one former managing director in the Microsoft portfolio unit and four other senior directors and directors have made the move.

The team apparently managed an average of $56 billion in assets in the five year duration. With this they were able to produced as much as one-fifth of Microsoft's earnings. Though the quantum of money handled was enormous, the industry is a bit apprehensive about their future performance. For one they are uncomfortable with conservative corporate treasury controller being able to generate positive returns in a rash and risky business like hedge funds. They feel that hedge fund managers do not emerge from places like these.

The founders of the fund however are very positive about their ability to handle funds sensible and create value for the investors. Mr Scott has even been quoted as saying that he has managed more money as compared to most other hedge fund managers. The Street reports:

“Tahoma's literature claims that between July 2000 and July 2005, Scott's team produced an average annual return of 7.07% at Microsoft, making it the third-largest profit generator at the company.”

A new shipping hedge fund to be launched by Clarkson

Did you know that more than 90 % of the world's traded goods and commodities are carried by sea? Perhaps you did. But what you perhaps didn’t know is that the freight derivatives market has grown rapidly in recent years. So much so that over $30 billion of all shipping freight business is now covered by derivatives. With so much happening in this sector, can hedge funds be far behind?

Hedge funds have started investing in freight derivatives in search of better returns that the industry so desperately wants right now. The equity market is not as volatile as it used to be. And the opportunities arising out of mispricing are getting fewer by the day. With several hedge funds using the same strategies in the same market it is normal for a slowdown of returns to happen.

Investors are always hungry for returns and when someone offers them returns in double digits, they will be more than happy to take their chances. Shortly Clarkson, a ship services company is bringing out a hedge fund that will be investing in freight derivatives. The fund will start trading next year and promises to produce returns in the range of 15 to 20%. The clinch is the seed money. Investors have to shell out a minimum of $200 million to be a part of this innovative fund. 

Pierre Aury, managing director of Clarkson Capital states that people are willing to look at alternative classes of asset in these times of dismal returns and hence the fund should do well. He added that the freight derivatives market has grown rapidly in recent years. Freight derivatives enable investors to hedge the risks of volatile prices in shipping costs. Reuters reports:

“British broker Collins Stewart earlier this month announced that it had formed a joint venture with three shipbrokers to serve the freight derivatives market. While a new market, the issue of how to mitigate risks of transferring goods by sea dates back centuries. Britain's Clarkson itself was founded in 1852.”

Another hedge fund ventures into Silicon Valley financing

After ‘Pay by Touch’ it is now the turn of NanoOpto to clinch a loan from the hedge funds industry. NanoOpto, an optical manufacturer has been able to get a loan of $5 million from Ritchie Capital’s $200-million venture debt fund. The debt fund focuses on high-growth companies with defensible intellectual property and provides them loans between $1 million and $5 million. Ritchie Capital was launched in September this year.

This is yet another instance of hedge funds venturing into the territory of venture capitalists. Venture capitalists traditionally back startups with innovative ideas and in return get a pert of the equity. Hedge funds on the other hand, loan the amount to the company and are in it for the interest. Both the parties seem to be satisfied currently. The start ups are happy that they do not have to part with their equity and hedge funds are not complaining either as they see a lot of growth in the Silicon Valley finance. Venture Capitalist are obviously not happy with the development. A division manager at Silicon Valley Bank, Tom Vertin voiced his concern that with more and more hedge funds jumping into the arena, there is quite a likelihood that poor investment decisions will be made. The continued growth in the segment is ‘unsustainable’

NanoOpto has the expertise to build nanoscale optical elements that someday may be an integral part of next-generation communications networks. It is an offshoot off Steve Chou’s research lab at Princeton University. Ed Zschau, chairman of NanoOpto was formerly a California Congressman and then turned to being a  Princeton professor.

The company has raised $43.3 million from three rounds of venture investment. Its key backers include Draper Fisher Jurvetson, Bessemer Venture Partners, New Enterprise Associates, and Morgenthaler Ventures. Red Herring reports:

“But Ritchie Capital’s new fund, and a growing trend of hedge funds lending to startups, has drawn criticism from traditional venture debt investors in Silicon Valley. “

Moscow based hedge fund will contest Refco bankruptcy

Refco, the largest independent U.S. futures brokerage filed for bankruptcy in October. It’s crash really started off on 10th October when Philip Bennett, the company’s Chief Executive was suspended by the company. He was subsequently arrested and charged with securities fraud amounting to $430 million. He had allegedly hidden away the mentioned amount debt to the company.

This initiated a cascade effect which got in a lot of people in it’s fold. Refco's bankruptcy filing has included Moscow-based hedge fund VR Group as its major creditor. Its total exposure is currently valued at $472 million. The other creditors named in the list include Austrian bank BAWAG and U.S. Wells Fargo. This information was revealed at the New York Southern District bankruptcy court show.

Further to the filing, VR Group has taken strong objection to their name being included in the creditors list. The group claims that the money was being held in custody by Refco on VR's behalf and therefore should not be included in the bankruptcy process. Though no figures have been shared by the company, financial sources in Moscow indicate that close to $600 million of the groups assets were at risk.

Founder and president of distressed debt specialist VR Group, Richard Deitz, stated that they would fight tooth and nail on the case. He informed the press that they will do every thing within their means to protect their assets and as such none of the funds under the group are in any sort of ‘jeopardy’. 
    
Deitz has gone a step ahead and assured its investors and clients that the company will go all out to contain the crisis. Its client list includes the who’s who in Moscow, London, Geneva and New York. The Washington Post reports:

“The sources said VR's mainly-Russian team had regularly scored well in hedge fund performance surveys, while the outfit was shortlisted for an award this year by industry journal Hedge Funds Review”

Now Hedge funds fight Malaria!

This seems to a year that is going to see a lot of philanthropic activity by the Hedge Fund activity. “Hedge Funds vs. Malaria” was launched on 20th September 2005 as a drive to help eradicate malaria from the world. The inaugural event took place at the New York Marriott Marquis. Now the First Annual Atlanta “Hedge Funds vs. Malaria” Business Leadership Conference in partnership with the Malaria Foundation International is being scheduled for December 6th 2005. The level of commitment to the project is conveyed by the sense of urgency being displayed by the industry. It is felt that the global toll of over 500 million estimated cases annually and several million deaths each year is very high by any scope of imagination. Immediate steps have to be taken therefore in order to make a sizable difference.

The Atlanta conference will be held on December 6th at the Emory University’s Law School. The conference promises an ensemble of distinguished group of business, medical, advocacy and theological leaders who would be presenting their insights on Africa, business, leadership and malaria.
   
It is strongly felt that the issue of malaria is huge and need to be given individual attention. By teaming up with Malaria Foundation International (MFI), one thing is clear, the hedge funds are attempting to genuinely help in taking control of the situation. Malaria Foundation International is a grass roots organization founded in 1992 by Dr. Mary R. Galinski. Dr Galinski still leads the organization and conducts malaria research as a member of the faculty at the Emory University’s School of Medicine in Atlanta, G.

Dr Galinski feels that the hedge funds industry has the means to help them with their goals as they bring with them strong business, investing and marketing skills. MFI’s main goals are to support awareness, education, training, research and leadership programs to facilitate immediate and long term development and application of tools to fight malaria.

The inaugural event saw a total of $200,000 being raised. These funds are being used to establish Malaria Free Zones (MFZs) with ongoing pilot projects in Ghana, Kenya and Nigeria. PRleap reports:

“A goal of the conference will also be to involve large U.S. corporations in the logistical planning of the fight against malaria. The Atlanta conference will immediately lead to the announcement and planning of a subsequent “Hedge Funds vs. Malaria” conference.”

Hedge Funds: An industry with a heart!

If you thought that the financial community and more specifically the hedge funds industry, is self centered and ruthless, Think again! The hedge fund community has come up to support the cause of abused children in a big way. They established a charitable organization by the name of Hedge Fund Care way back in 1988. The ogranisation today has several chapters including New York, San Francisco, Dallas, Chicago, Atlanta and Toronto. July this year saw the opening of yet another chapter. This time around it is the jurisdiction of choice for offshore hedge funds – the Cayman Islands.

The prime focus of Hedge Fund Care is to provide financial assistance to local, community-based, non-profit organizations providing various services pertaining to preventing and containing child abuse. The services being provided by these non-profit organizations include prevention services including awareness training; treatment; support services; research on best practices; and legal advocacy.

The team leaders of the Cayman Island chapter are ecstatic about being able to contribute to the noble cause. They regard it as a way to give back something to the community. Glen Wigney, partner at Deloitte (Cayman) who is actively involved in this project stated that this is very important for them because a number of accountancy firms, law firms and banks make money by way of hefty fees from providing professional services to the industry which is very much a part of the same community. 3

The key members of this organization are chiefly money managers, investors, prime brokers, attorneys, accountants, administrators and information providers. From among them there is a chosen group referred to as “Committee of Hearts” which is instrumental in keeping the movement alive and well greased.

The charitable organization raises funds from the hedge funds industry and then route it to the charitable institutions that are working hard to prevent child abuse as well as provide care and rehabilitation for abused children. As most of the funds raised are put generally for the development of the local region, money from this chapter will also be used for locals of Cayman Islands. Cayman Islands chapter prides in being the first offshore chapter of Hedge Funds Care. Cayman Net News reports:

“The main focus of this committee is to organize a major fund raising benefit in Cayman and to distribute those funds to non-profit organisations and programmes whose mission it is to prevent and treat child abuse.” 

Why are there so few ‘Women’ hedge fund managers?

This one is in for a massive debate both in the board room as well as on dinner tables. The question we are attempting to answer is ‘why is the number of women in the hedge fund industry so low?’ A key question indeed, when one sees women at par with men in almost every thing around us – Doctors, lawyers, scientists, engineers, VJs, academicians and the likes. Why is it that the hedge fund industry is so blue and with such few pink dots to liven it up?

It is incorrect to say that women lack the talent or the intelligence to manage a hedge fund. They have oodles of that – not talking the feminist way!! ‘Propensity to take Risk’ – perhaps this might be a small part of the puzzle. Women are more process oriented, methodical and good at picking up all the strings. The last point in particular is of critical importance since in the process of finding out ‘what is amiss?’ or ‘what is the downside of a particular action?’, some degree of spontaneity may be lost. And hedge funds are to a great extent a game of ‘quick reflexes’. But then one might argue, even surgeons need to take quick actions in order to revive a ‘sinking’ patient and there are a large number of top class surgeons in the world. Does this argument still hold good?

One argument is with respect to the demand and supply. According to some surveys, only a third of the students pursuing management in any B-school are women. Out of these, not many take up finance as their major. On top of this, the number of women who survive the pressures of investment bank, particularly in areas like trading, quantitative work, or fixed income are relatively low. This essentially is a launch pad for several hedge fund managers and the reality I that if you are not here you can very rarely be part of the hedge funds industry. This observation was made by Patricia Young, chief investment officer of NewMarket Capital Partners, a fund of funds.

There is another explanation which has it’s origin from study of ‘buyer behavior’. People tend to buy from a person they are generally comfortable with. This point is highly relevant when one is making a big item purchase which requires a sizable part of his earnings to flow into the purchase. This is something that marketers call ‘High Involvement Product purchase’. Hedge funds, one would agree fall in the same category. Men and women alike have showed apprehension (in varying degrees) when asked if they are fine with a woman money manager, managing their money in a hedge fund. So you see that even the women are uncomfortable of trusting their own lot when decisions like investing money is concerned. 

Then there is this point about women being ‘attracted’ to the field. Fund managers have repeatedly said that even if they were specifically looking out for women to hire, the number of women applicants is just a fraction of the résumés that come up for consideration. So perhaps the key lies in the ‘attractiveness’ of the field!

And then there is this feminist approach that is likely to get the ‘women-lib’ in action. There are some who say that you cannot manage a fund and raise children. What is thereby being suggested is that demands made by the industry are not compatible with family life. This might sound like a week accusation of why women are unsuited for the job. People in favor of the ‘skirt brigade’ say that actually they might it may perhaps be more compatible with family demands than investment banking or consulting, where you might have to fly off to say Japan at the drop of a hat. While some key pointers form part of this write-up, the debate continues.

For more read article on this issue on Fortune.com