Hedge Fund Street

VanthedgePoint offers new solution for Small Hedge funds

The Hedge Fund market is dominated by big players. The smaller funds always find themselves neglected, but not any more. VanthedgePoint Group has developed a new middleware technology that can help smaller funds in their operations.

The technology which is yet to receive a patent, provides services that can help small funds achieve better manager productivity, reduce costs and increase its marketability. With better economies of scale the smaller funds should be able to attract more investors. They will also get the attention of prime brokers and administrators, who otherwise are more focused on the bigger leaders.

This will establish a better level playing field between the large hedge funds and the small hedge funds. The solution will be launched in the second quarter of 2006. Yahoo Finance reports:

VanthedgePoint's unique technology delivers an integrated services platform that improves manager productivity, reduces operating costs and increases marketability to investors. The result is a hedge fund that has lower operational risk and a reduced cost structure, which makes it more attractive to potential investors.

EuroHedge Summit 2006 to debate on the Strategies of the Future'

Every year a conglomeration of Hedge Fund managers and experts come together at the EuroHedge Summit, an annual event to discusse the big issues facing the industry. This year's meet titled 'Strategies of Future' will be held in Paris from 15-16 March.

Some of the smartest and the biggest Industry leaders from senior and experienced executives coming from established groups like Lansdowne Partners, Tribeca Global Management to the the relatively new but equally significant players like the KDA Capital and GSA Capital will be attending the meet . The total number of participants is expected to cross 750.

The focus will be on what are the best investment opportunities available across different strategic areas. An evaluation of different strategies from the traditional ones to the more new ones like the 'Off-piste' strategies will also be made. With a rise in growth and competition, the summit seeks to find out the impact of the recent new regulatory changes in Europe and the US. The summit forms the perfect platform for Hedge Fund companies to showcase their skills and services and make new liaisons. Hedge Fund Intelligence reports:

Now in its third year, EuroHedge' annual Summit is a key date in the global hedge fund calender - a unique event where the industry's elite managers and investors come together to debate the big issues facing the industry, as well as the investment opportunities across a range of established and new strategy areas.

Prime brokers lose lead to multiple brokers as Hedge Funds grow

Hedge funds managers rely heavily on their prime brokers to keep a track of their various accounts with various companies. Most Hedge funds had one prime broker catering to their portfolio management needs. Not any more.

The recent growth in the hedge fund market is making prime brokerage an irrelevant idea. More and more fund managers are employing more than one prime broker to meet their growing business demands. Even smaller funds have more than one broker, while the bigger ones have as many as six to eight.

This has opened the market for the smaller players specializing in different aspects of portfolio management. In fact several large prime brokers have opened smaller firms servicing different areas. It has also helped Hedge funds as they are able to maintain greater confidentiality by not disclosing all of their information to one prime broker. Post Gazette reports:

"Most big funds use many prime brokers, which turns the concept on its head," says Michael Roth, a founding partner of Star Investments, which manages more than $7.5 billion in its various hedge funds. Star has a "core group" of six to eight prime brokers and relationships with as many as 20 smaller outfits.

EU market regulators disallow Hedge Fund indices

The Committee of European Securities Regulators (CESR) does not approve of the European Union funds using Hedge fund indices for making investments. UCITS is a 25 member European Union Fund that makes cross border investments.

The Industry had made a request to the regulator to allow them to invest in Hedge fund indices in order to achieve greater returns and make up for deficits faced by their pension funds. However the regulators consider the hedge fund indices to be too complex and under regulated to allow UCTIS to to trade in them. More over such funds are generally registered in offshore countries that do not have the right amount of regulation or controls necessary for such high risk assets. The Committee was however willing to review its decision in October 2006.

CESR's recommendation will be finalized only after they have been approved by the European Commission. The decision could make a big difference to the 4 trillion euros of investments that UCTIS holds for its members. borsaitaliana reuters reports:

"Given the complexities of hedge fund indices and the fact that they are still developing, CESR cannot recommend, at this stage allowing hedge funds indices to be considered as financial indices for the eligibility of UCTIS,"CER said in a statement. Such funds are seen as risky because many are registered in lightly-regulated, low-tax offshore centers such as the Cayman Islands.

New Jersey Pension fund seeks to cover its deficit from Hedge funds

New Jersey's public pension fund always trusted its money in stocks and bonds but a deficit of $30 billion has left it looking for new avenues of revenue. It has decided to commit its funds to private-equity, real estate and hedge funds in order to improve revenue and cover its shortfall.

The hedge funds chosen to work with the state pension fund are Archipelago Partners L.P., AG Super Fund L.P., BGI Multi-Strategy Fund, and OZ Domestic Partners. As a part of its strategy, the fund will also engage financial experts for advice on investments. Consultancy firms Cliffwater L.L.C. and CRA RogersCasey have been appointed as advisories.

The success of other state pension funds venturing into the hedge fund market is encouraging. New Jersey's hedge-fund assets will be managed by the State Investment Council. The fund is planning to put at least $9 billion into its new investment avenues. Philly reports:

The New Jersey fund joins public pensions, including the California Public Employees' Retirement System, the biggest U.S. public pension, and the Pennsylvania State Employee's Retirement System in turning to hedge funds to help boost returns. These investments have helped hedge-fund assets more than double since the end of 2000 to $1.1 trillion, according to Hedge Fund Research Inc. in Chicago.

US Hedge fund industry just hours away from being regulated

October 2004 was a turning point for the hedge fund industry in the US. Securities and Exchange Commission (SEC) which is an apex regulatory authority in the US decided to bring some order into the functioning of the most unregulated financial instrument. Today the hedge fund industry is worth over $1.3 trillion with more than 8000 players. Out of the, nearly 7000 hedge funds originate or offer their services in the US alone. They contribute nearly $750 billion to the kitty.

With so much at stake, it is but obvious for regulators to attempt to bring about some sense of discipline in to the market. Hedge funds trades amount to almost 20% of all US stock trading. Should something go grossly wrong with the players, the nations complete economy is at stake. 

However not everyone is ready to accept the new regulation. Most of the hedge funds are attempting to find loopholes in the system so as to escape being registered with the commission. While there are others who are downright fighting it in the court of law. One such case pending hearing has been filed by hedge fund adviser Phillip Goldstein and fund partnership Opportunity Partners. This is so since the SEC is now mandating that all the hedge funds that have a lock in period of less than 2 years have to register with them.

Registering implies that they have to not only open their books to scrutiny but also make frequent disclosures. This obviously takes a lot of time and effort, which is something that the hedge funds are not ready to do. Apart from this, it also means that the hedge funds will have to be very careful in executing trades. Hedge funds have for long been associated with impromptu and often rash trades. This can cause the investors to loose a lot of money merely because of the whim of the fund manager.

The loss of money becomes more relevant in the scenario wherein retail investors and sensitive institutional investors are joining the fray in an unprecedented way. The overall lowering of the basic requirement of seed money is one of the key contributors. Therefore institutional investors such as those relating to pension funds, retirement plans and university endowments have been increasingly pouring billions into hedge funds, lured by the prospect of high returns even in a down market.

SEC had adopted the rule in October 2004 and even at that time; the 5 key members of the commission were divided in their opinion on regulation. Therefore when Christopher Cox assumed the position of SEC Chairman the industry hoped for overturn or revision of the controversial rule. But nothing like this happened and now we are less than 48 hours away from the implementation of the rule. The Chron reports:

"Hedge funds have become increasingly sexy for the average widow, widower and orphan," says James Cox, a Duke University law professor who specializes in securities law."

Citywire report confirms retail fund manager brain drain

Some time back we had covered a story about brain drain of managers to hedge funds from traditional retail investment area. This piece adds further weight to the story. Recently Citywire conducted an in-depth analysis of its database of fund managers. The result of the analysis further confirms the mass movement.

The analysis has concluded that a significant amount of talent has left the retail fund industry over the past three years. For instance way back in 2002, Citywire’s database included 152 managers. Today it is observed that at least 43 managers have moved. This accounts for a whooping 30% of the managers of the retail segment. Many of the managers have been traced and their movement has been documented. However there are some whose whereabouts are known as they have perhaps moved out of the city or country. 

The move has been attributed to a variety of reasons primary being the incentivised pay plan offered to hedge fund managers. The massive performance fees offered bY hedge funds allow managers to take home millions of pounds a year. Lock-ins and the general growth of boutiques and hedge funds all around seem to be the other relevant factors. Apart from this, what has also come out strongly is the fact that managers feel that their creativity and innovativeness is kind of stifled when they handle retail investment products. In the hedge funds mould they are able to express themselves better and can see the results rolling in. This sense of satisfaction seems to be lacking when handling other traditional investment products. Therefore statistics reveal that at least 12 percent of the managers tracked have switched to hedge funds. 

Moves of some of the prominent names are given here. Simon Roberts, formerly Tony Willis' AAA-rated co-manager on the Lazard UK Alpha fund has moved. He is currently the director of BlueCrest Equity Master Fund since October 2005.

Another top class manager to be seen following this trend is Mark Bradshaw. He is a former AA-rated manager of the Hargreaves Lansdown (HL) UK Performance fund. Although he is still registered as a fund manager with the Financial Services Authority his main activity is the stewardship of the Victory Capital hedge fund.

Former AAA-rated Hugh Hendry left Odey Asset Management but still plan to offer their services to high net worth individuals if not the mainstream retail market. At Odey Asset Management he ran the Odey Continental European fund till March 2005. He now owns the firm Eclectica Asset Management, a hedge fund boutique. He still has plans to offer long-only funds to those who can afford them.

Another major loos for the retail industry is Bill Mott, who earned an AAA rating for his skilful management of the Credit Suisse Income fund. He retired from active service in July 2003. Reuters reports:

‘However, if received wisdom is to be believed, it is also because hedge funds offer fund managers a chance to express themselves and follow their own path. This kind of urge can often be stifled by the strictures of operating within a retail environment where responsibility to ordinary investors without great expertise holds back individuality.”

Pershing Square Capital presents Yet another plan for McDonald's

McDonald's Corp. seems to be under yet another attack by shareholder activist hedge funds. Two months back, one of its shareholders Pershing Square Capital Management L.P. and its general partner, William Ackman had put fort a proposal to the company in order to enhance the shareholders value. The proposal included spinning off 65 percent of its company-owned restaurants in a stock offering worth an estimated $3.27 billion. However the proposal was shot down by the company.

The company stated that the spinning off would not benefit shareholders and also that it would be a "distraction" from its primary business of running restaurants. Hence the proposal was shot down at that stage. However the hedge fund has again come up with yet another plan to bring about restructuring of the company’s business plans. The plan was intended to be presented at the Millennium Broadway Hotel in New York on Jan. 18, 2006.

Highlights of the same will be brought to you shortly. The fund states that the plan has been prepared after extensive consultations and discussions with the franchisees and shareholders in the last two months. The well known fast-food chain has been plagued by the hedge fund for quite some time. However the company claims that they are quite satisfied with their existing business plan and has no intention to bring about changes immediately.

Pershing Square Capital Management L.P controls 4.9% stake in McDonald's. Most of this stake is in the form of options. When last contacted, spokeswoman for McDonald's, Anna Rozenich stated that they would wait for the proposal to be presented before making any comments. She also made it clear that the company continues to stand by its existing business strategy. Chicago Tribune reports:

"It remains to be seen whether Mr. Ackman has come up with anything new," Rozenich said, adding that McDonald's was committed to its current business strategy.”

Hedge fund manager sees potential in downtrodden stocks!

With the hedge funds market having more than 8000 players, it is but natural to see many managers opt for the same way. Several hedge funds seem to be emulating each other by using similar strategies and investing in similar companies. Those who swim against the tide sometimes do strike gold. They may also face disappointment however. But the real skill is in finding the unpolished or undervalued companies with potential. Manny Weintraub seems to be quite confident of his identification skills. He is the head of Integre Advisors, a New York-based long-only hedge fund. The fund was founded two Years back and invests about $140 million for high-net-worth and institutional clients.

Weintraub believes that the name of the game is ‘patience’. Those who are ready to wait till the cloud passes over the selected company can be rewarded with good profits. He has a well entrenched experience running funds for respected value-fund shops Neuberger Berman and the Davis funds. Weintraub fund charges 1% management fee and a 20% performance fee on profits that beat the benchmark. Integre's diversified hedge has so far performed well and has outperformed the S&P 500's 2.8% return by almost 9% points.

The fund has three favorable companies that they truly believe in. Cooper Companies Inc., which is a maker of contact lenses and competes with giants like Bausch & Lomb and Johnson & Johnson, is one of them. The other company which has sure shot potential is Platinum Underwriters Holdings Ltd, which is a former reinsurance division of giant St. Paul Travelers Companies. Another company that holds the funds interest is Reliant Energy. New York Daily news reports:

"I like the business because it's got a trend as big as a barn," he said. "You have people staring at computers and needing eye correction more than they used to."

Hedge funds likely to have another rough Year as the dollar slides versus yen

Industry analysts feel that 2006 may also be as lack luster for hedge funds as 2005. This apprehension was voiced after the recent sliding of the dollar against the Japanese Yen. They have made this prediction primarily for global macro funds, which make directional bets on currency, bond, commodities and stock markets, generally on the basis of economic trends. What has also happened is that even euro has slipped a little against the yen. The trigger for this might have been that Japanese investors took home European bond coupon payments. This apparently has also contributed to the dollar going down. 

analysts also feel that the reason for this may be linked to  Japan's reluctance to let the yen strengthen to a level where it feels economic growth might be damaged. Even Reuters has confirmed the trend by showing in its survey of 56 currencies that the Yen has raised to 108 per dollar by the end of 2005. Reuters reports:

"For much of last year and earlier in January, macro funds played the carry trade -- borrowing yen and selling it to buy higher-yielding currencies such as the dollar, New Zealand dollar, Australian dollar and South African rand.”

ForstmannLeff Associates to be bought by Angelo, Gordon

ForstmannLeff is soon to be purchased by Angelo, Gordon & Co., a hedge fund manager for almost $60 million. ForstmannLeff Associates LLC is a firm owned by the now bankrupt Refco Group. The company manages assets in the tune of $3 billion of assets whereas Angelo Gordon manages about $10 billion in assets. ForstmannLeff had been previously offered a price by Old Mutual Asset Management lat Year. The company withdrew its bid in November owing to the uncertain future of Refco Group.

Refco collapsed in the last quarter of 2005. It had filed for bankruptcy protection after it was discovered that the company had been hiding millions of dollars of debt. Since then, several mangers of the firm have moved out expecting closure of this shop as well. Banknet 360 reports:

"There has been a steady exodus of money managers from ForstmannLeff since November, when the Refco crisis first became public. It is unclear which managers remain at ForstmannLeff today.”

SEC gives further proof for implementation of regulation

Hedge fund industry seemed to be blooming and growing in an era which lacked any enforceable regulation. They have for long know for their lack of transparency that often leaded to uninformed investors loosing millions. The loss could have been a result of a bad investment decision or due to wrong intention on the part of the fund manager.

Whatever be the case, the funds thrived in an unregulated environment. Therefore when SEC gave a directive to hedge fund mangers to register with it, all hell broke loose. No one wanted to be held accountable for losses to investor money.

Apart from the denial of letting themselves be tied down by regulation, what also has been the concern is the tediously long process of registration. And they know for a fact that this is not the end but just the beginning of difficult things to be expected in the future. SEC wants all the hedge fund managers to continuously report their performance.

What it therefore implies is that they have to keep on filling and submitting reports after reports. This obviously can put any one off. And hedge funds are making it a point to be heard. For example, Phillip Goldstein at the $85 million New York hedge fund Opportunity Partners is suing the SEC to get the rule overturned.

However the SEC is taking its order very seriously. It recently brought to light the case of Michael Tom who is the manager and part owner of the Burlington, Mass., hedge fund GTC Growth Fund. He was charged with five counts of insider trading. They are citing this and various such examples at various forums to make a point about the necessity for a regulatory framework. Financial Planning reports:

"According to the U.S. Attorney's office, Tom allegedly aggressively traded in common stock and options in Charter One Financial in 2004 after a former colleague tipped him that the bank was about to be bought by Citizen's Financial Group, a unit of Royal Bank of Scotland Group.”

Hedge Funds – progress report for 2005

With the year 2005 already behind us, experts have finished tabulating how they fared over all in the year. One clear cut feature of the year was that the returns were abysmally low. The year recorded an average return rate of less than 7%.

Another startling fact was the overall lowering of the quantum of money that was invested in hedge funds. Research suggests that the amount has almost halved in comparison to the inflow of 2004. This year the total inflow was in the range of $60 billion-$65 billion as compared with $120 billion in 2004.

It was observed that all over the world, those investors who invested in equities were better off. This phenomenon was the same globally except in the US. CSFB's Tremont index is soon going to be out and is expected to give evidence to confirm that London-based funds fared better than their US counterparts. CSFB's Tremont index tracks more than $800billion worth of assets worldwide.

It is generally thought that the hedge funds are uncorrelated to the market. However in the last 12 to 18 months, it has been observed that correlation to the US equity market has risen quite a bit. All these observations were made by Oliver Schupp, the head of investment bank Credit Suisse's hedge fund index. 

Mr Schupp added that hedge fund managers who had a heavy equity focus and were by and large aligned European and Asian markets have fared well. However it was noted that Funds with assets coming from the US did not do quite well. Telegraph reports:
    

"Anthony Culligan, head of investments for F&C Partners, said hedge funds which performed well during the year included those which capitalised on an increasing taste for "realising shareholder value" in Japan”

Hedge Funds have become more transparent!

Strategic Financial Solutions, LLC, (SFS) recently made public its survey of the hedge fund industry for 2005. What is commendable is the extent to which the company has studied databases from across various sources. When compared to the last one year alone, there has been an increase of more than 16,000 hedge fund entries.

Also the team has closely examined hedge fund listings from twelve of the major hedge fund databases. The list includes Alternative Asset Center, InvestorForce, Barclay’s Global HedgeSource, CISDM, Cogenthedge, Eurekahedge Asian Hedge Fund Database, etc. The study was able to remove duplicates, tag CTAs, funds of funds etc by using sophisticated analytical and statistical procedures. This helped them to get somewhat more reliable information about the hedge fund universe.

The study found that there were approximately 12,250 hedge funds and funds of hedge funds in the various hedge fund databases. Out of this almost 10,500 of these funds reported performance data in 2005. What was also found is that 3,500 fund managers were part of the database and hence the study. This volume is a substantial component of the list of 4,300 registered Investment Advisors who have indicated to the SEC that they or an affiliate manage a private investment fund.

The study observed that the database showed that there were at least 8,100 single manager hedge funds and approximately 4,150 funds of hedge funds. The data also revealed that over 85% of the single manager hedge funds have reported their performance. Out of the total number of onshore hedge and offshore funds at least 82% and 87% have reported their performance in 2005. Even amongst funds of hedge funds the performance reporting was over 86%.

The study also showed that nearly $1.35 trillion is being managed by single manager hedge funds. What was an eye opener is the fact that more than 250 funds have surpassed the $1 billion mark. However the study did also conclude that the majority of the funds are still managing less than $25 million of assets. The survey also indicated that funds of hedge fund vehicles have invested around $700 billion in single manager hedge funds. But again the maximum number of funds of hedge funds still manages less than $25 million.

What the study is primarily hinting at is the fact that more and more hedge funds are getting transparent. As the database was collected from 12 sources that collect and compile information from the hedge fund managers, it is quite robust. The funds which form part of the data pool gave their performance report to at least one of the 12 sources of databases selected for the purpose and as such reflect the general trend in the hedge fund industry.

The observation that the hedge funds are becoming more transparent comes as no major surprise. Much has been said and debated in financial circles about the need and the viability of introducing transparency in the industry. More and more investors are today demanding some level of transparency in their dealings.

Of late quite a few hedge funds have either collapsed, filed for bankruptcy or have closed shop and run away. Any which way the general hedge fund investor is becoming more conscious of the need for transparency. Add to this is the fact that large institutional investors like pension funds are looking at hedge funds to pour in obnoxious amount of money. But their prime demand is some transparency. By making their progress public, the hedge funds are already on their path of garnering more funds for the now $1.35 trillion industry. Emedia Wire reports:

"In fact, general databases (covering all geographic areas and all strategies), averaged more than 550 “exclusive” funds each. Specialty databases, covering only funds of hedge funds, Asian or European hedge funds, each contained an average of nearly 100 “exclusive” funds.”    

Hedge Funds feed on tiny cash strapped companies

Financing tiny cash strapped companies is proving to be quite a bargain for some hedge funds. The market for this type of investment is currently worth more than $ 17 billion a year. Those who are playing in it are making are there with the intent of buying shares of these companies at a discounted price. These small companies who are looking at financers are sometimes referred to as Pipes – Private Investment in Public Equity.

One of the key players in the market is Laurus Family of Funds. In about 5 years their investment capital has increased from $5 million to $1 billion. The fund had been established in 2001 by Israeli émigré brothers David and Eugene Grin. Their funds have single mindedly focused on this strategy and has returned an average of 20% annually. The Street reports:

"The secret to Laurus' rapid success has been its single-minded strategy of investing in collateralized convertible bonds, a financing transaction Laurus pioneered and has peddled to scores of struggling micro-cap companies that trade on the OTC Bulletin Board and unregulated Pink Sheets.”

Hedge funds in Egypt

Egypt and the Middle East are on the brink of a hedge fund revolution and all eyes are on them. What was a success in America and is so in Europe and the Far East, is now going to happen in the Middle East and in Egypt. For long the market has been neglected by hedge funds because of lack of regulations that would allow the trading tool as short selling is still not a very acceptable strategy.

The financial market is full of mutual funds that invest with the expectation that the value will increase – long positions. Market neutral strategies are still not the norm in the region. However the region is still attracting international attention because of the excellent bull phase experienced by the region. For instance, the Cairo and Alexandria Stock Exchange (CASE) 30 Index skyrocketed 130% last year thereby making it the top performing bourse in the region.

The first hedge fund to enter the market is from Beltone Financial Chairman Alaadin Saba and Khaled Abdel Majeed. The duo were friend and colleagues at EFG-Hermes. The hedge fund is called Mena Capital. It is registered in Bahrain and managed out of London. Also the promoters have made sure that the fund is not being marketed to the retail investors of Egypt. By making this arrangement, the hedge fund is ensuring that it does not fall into the purview of Capital Market Authority (CMA). CMA is the Egyptian equivalent of American SEC.

Mena capital is an exclusively regional fund with a modest asset base of $25 million. The fund is expected to be similar to many local mutual funds in the region by having investments in markets from North Africa to the Levant and the Gulf. Another fact that makes it similar to mutual funds is that it will only invest in equity. However, the fund will go long and short on interrelated equities so as to maintain a neutral exposure to the market. Mena capital is upbeat about the long-short strategy in the middle eastern markets as they foresee a bull bubble ready to slow down if not explode. A rapid correction may well be on its way.

The fund managers at Mena capital believe that the real estate and textile markets are overpriced. They have also observed that some individual stocks are overheating because their earnings power and their growth do not justify those valuations. At the same time they also feel that the Egyptian market has come from an extremely undervalued position and is not due for a downturn anY time in the near future.

The fund to modest in its asset base has a lock in period of 2 years. However, investors will be able to invest with only a nine-month early redemption fee of 3%. The fund managers propose to reinvest the dividends arising out of the investments. The fees charged by the fund will be as per industry norms that are 2% management fees and 20% performance fee. The 20% of the ‘high water mark’ uplift of net asset value (NAV) per share will be collected. This means that total increase from last year’s high will be calculated and not just the year’s low to the year’s high. For investors this is quite beneficial as the company is registered in Bahrain where gains are essentially tax-exempt.

Saba is an MS in biomedical engineering, he also enrolled at the University of Pennsylvania’s Wharton School of Business which is one of the top programs in the world. He wanted to launch a biomedical engineering firm in Egypt. However some where down the way he changed course and drifted to finance. Khaled Abdel Majeed is an ex associate of Saba from EFG-Hermes. Business Today Egypt reports:

"Saba says Beltone is also developing 401(k)-style retirement savings accounts for many of its clients; these types of accounts have been slow to develop despite growing demand from the private sector.”

Hedge Funds: Bermuda’s loss is Jersey’s gain.

The unanticipated outcomes from the European Union Directive on the taxation of savings income has lead several hedge funds to redomicile in Jersey. Two of the latest movers are hedge funds belonging to the Liberty Ermitage group.

First is it’s flagship hedge fund Liberty Ermitage Asset Selection Fund Limited, which has $700 million of assets under management. Liberty Ermitage Resources Fund Limited, which is the other hedge fund, has also moved with its asset base of $30 million. The law firm that helped then redomicile is Bedell Cristin.

The two funds are among the 24 or so other hedge funds that have made a similar move. The move is also due to the fact that Jersey has set up an Expert Fund Guide regime which is very healthy for hedge funds to operate. The regime streamlines the authorization process thereby enabling more sophisticated investment products to start operations. However it may be duly noted that they aim to maintain rigorous compliance criteria for all the funds. The Royal Gazette reports:

"According to the Jersey Financial Services Commission, it is possible to establish Expert Funds in a matter of days. The regime is particularly suited to hedge funds and other more sophisticated investment products aimed at the more experienced investor.”

Appaloosa Management wants separate committee on Delphi's board to safeguard its interest

GM still seems to have a big role to play in the functioning of Delphi. It has now reached a stage wherein Delphi is running into problems with its stake holders. Chief amongst them is Appaloosa Management, a New Jersey hedge fund. The fund has 9.3% of Delphi’s stocks. It may be recalled that the company had filed for Chapter 11 protection on October 8, 2005.

The hedge fund is accusing Delphi of putting their interest at risk and also that the parts maker is playing partial. According to them, Delphi is keeping the interests of General Motors and the United Auto Workers union ahead of shareholders of the bankrupt US car parts maker. They also feel that General Motors and the United Auto Workers union are literally running the company. Therefore the hedge fund is demanding bankruptcy trustee to approve the formation of a separate equity holders' committee which would effectively monitor Delphi's restructuring.

Delphi obviously has opposed this request. The company feels that the 12 directors on its board will be able to do the job just as well. They have added that the parent company is completely insolvent and as such the common shares are completely worthless.

In 1999, GM had spun off Delphi, however Delphi remains the biggest supplier. The workers who were transferred to Delphi had been guaranteed billions of dollars in benefits. As the workers threaten to strike, the parent is hand holding Delphi for the time being. It is therefore playing a major role in settling the problem. MSNBC reports:

"The hedge fund maintains that Delphi sought court protection because of pending changes in US bankruptcy law that took effect later in October, and to gain a strategic advantage in negotiations with its unions.”

Sprott Asset Management Inc. (SAM) has a new Investment Strategist

Sprott Asset Management Inc. recently announced the joining of Peter Hodson as an investment strategist. Peter Hodson has an experience of over 18 years in the investment industry. He was till recently the Vice-President Portfolio Management for CI Investments. He was also the Lead Portfolio Manager of the CI Signature Canadian Small Cap Class Fund and the CI Explorer Fund.

Both the funds put together manage an asset base of over $275 million. Prior to CI, he also had a stint at Toronto-based hedge fund Waterfall Investments Inc. and also at Synergy Funds. The management is quite excited by the appointment. They feel that Peter will be able to infuse his dynamism in to their Investment Management team.

The company also recently announced the launching of Sprott Growth Fund in Jan 2006. Investors can invest in the fund with as little as $5,000 and will also be eligible for registered tax plans. The new fund will be investing in growth-orientated equities. By investing in equity and equity-related securities of North American companies, the fund aims to achieve long-term capital growth for the investors. At this stage however their investment interests in international companies cannot be ruled out. The fund plans to have a bottom-up approach to securities selection with less emphasis on macro-economic indicators. CCN Matthews reports:

” To achieve the Fund's investment objective, the Portfolio Adviser will employ fundamental analysis to seek to identify superior investment opportunities with the potential for above average capital appreciation over the long-term”   

Hedge funds: Third Party Vs Own technology platform

The Hedge Fund industry has grown by leaps and bounds. Operational and administrative processes have been set up for better running of the funds. However what is missing right now is the proficiency to take care of the technology associated with the processes. Till now hedge fund mangers have been relying heavily on third party technology infrastructure to carry on their activities.

Their prime focus is on asset management and they leave no stone unturned in order to get the best investment talent in the industry. But the technology that they use is generally an extension of the one offered by Prime Brokers. Prime Brokers are business units of major investment banks. They source transaction flow through these units. Despite the mammoth size if the industry, the reliance of hedge funds on outsourced technology is surprising.

While most of the hedge funds are small to mid level and cannot afford maintaining an in-house technology, some hedge funds are reaching the scale of growth and complexity where they perhaps would consider recruiting their own CTO. More so because of the inability of Prime Brokers to offer such diversity. For Prime Brokers hedge funds are a big chunk of their business, something they just cannot ignore. For example, Hedge Funds are estimated to be providing an average of 35% of daily transactions volumes through the major exchanges in Europe.

No surprise then to see these brokers bending backwards to provide what ever the hedge funds demand. They have been known to provided a variety of services in the securities transaction services including research, secured lending, trade execution, risk management, transaction processing, clearing, settlement and custody services to its ‘prime clients’. For this they charge an individually structured and agreed fee.

But the question still remains, should the hedge funds invest on their own technology setup. The question becomes more relevant for those fund managers who manager several funds at one time. For them the additional responsibility of making the third party technology work seamlessly is an additional burden.

For Prime Brokers, this is good business. Not only are the volumes large, hedge funds come with minimal financial regulations. Hence the ‘soft commissions’ are definitely permitted. Also to be noted is the fact that the disclosure of commercial, reciprocal arrangements with the Prime Brokerage Units are at the complete discretion of the Hedge Fund manager. What it means is that if the fund does not want to disclose their dealings with the Prime Broker to their investors, they are free to do so. I T Director reports:

“New financial products are the lifeblood and success ingredients for some funds. Technology is required to ensure that fund managers can deliver them efficiently and at the necessary scale for commercial success.”

Hedge Fund fees see a downward trend

For years, the hedge funds have been the centre of envy of traditional investment vehicles. Reason: the 20% fees performance fees that the hedge funds charge their investors. This is something that neither the mutual funds nor any other traditional investment company has ever been able to emulate. The hedge funds charge a 2% asset management fees from their investors. Over and above this they are entitled to charge up to 20% of what ever profits that they earn for the investor. This is the profit which the assets amass over and above the benchmark or ‘watermark’ laid down by the fund in agreement with the investor.

This situation is gradually changing. The funds are struggling to justify their share of the profit. Most of this is due to the fact that the hedge fund industry is experiencing overcrowding. Due to this the funds are fighting for the limited opportunities that exist in the market.

On top of this, the institutional investors who are still pouring in a substantial amount of the money are demanding a better deal. Competition is so stiff that the competing hedge funds are even resorting to reducing their performance cut. Approximate average that the funds seem to be charging now a days is around 17.5%.

A research report from BNP Paribas shows that only 60% to 70% of the entire hedge fund market (8000) is charging a 20% performance fee. Another reason for the pulling down of the fees is the over all low performance of the hedge fund industry. Figures are still not out but some experts peg the average return of the industry around 7%. The Telegraph reports:

“Anthony Culligan, at F&C Partners, the fund of hedge funds, said not only were new funds being forced to charge less than 12 months ago, but "funds which have previously been closed have been calling and asking if people want to put more money in".

Endesa’s SA hedge fund shareholders want the 'poison pill' clause to be removed

La Gaceta de los Negocios recently reported that three stake holders of the utility have put forward the suggestion to remove the ‘poison pill’ clause from the statutes of Endesa. There are in all three shareholders responsible for this move. The three hedge funds have a combined stake of 5.5%. However the utility’s statutes state that the voting rights of shareholders exists only if they have more than 10% shares.

The ‘poison pill’ clause also states that representatives of competing cannot sit on Endesa’s board. The three hedge funds will be proposing the move in the next AGM due shortly. However it may be noted that the funds can also call for an EGM as they have more than 5% combined stake. Forbes reports:

“According to La Gaceta, the funds will also question the attitude of Endesa's management towards the Catalan gas group's bid. Separately, Cinco Dias said that if the government finally approves Gas Natural's move, Endesa will take the matter to the Supreme Court.”

Oil prices continue to soar: thanks to hedge funds and speculators

The oil market is showing no signs of returning even near its acceptable prices. Several factors have been cited for this phenomenon. Chief amongst them is the continued interest of the hedge funds and speculators. Even the beginning of 2006 saw several new contracts suggesting that the hedge funds and speculators are still bullish about the oil market.

Traditionally oil had been trading around $20 per barrel as recently as in 2002. However some inevitable factors like disparity between demand and supply coupled with hurricanes and labor unrest have pushed the prices steadily. Today the prices rest at near $62 per barrel. Little surprise then, that the prices are not even attempting to come back to near normal levels. Taipei Times reports:

“Strong global demand and a thin supply cushion are the underlying reasons, analysts say, and because of these conditions every output disruption -- or potential threat to disruption -- feeds into a bullish outlook, sending prices higher.”

Hedge Fund Tontine increases it’s stake in Duratek

Tontine Capital Partners LP a Connecticut-based hedge fund has bought up a major stake in Columbia-based Duratek Inc. Duratec is a radioactive and hazardous waste management company. Tontine has been progressively buying the outstanding shares of the company. In March 2005 for instance the hedge fund had about 6% of the company’s shares. As on date the fund controls over 13% of the company’s outstanding shares. It bought 342,500 shares in less than one month.

Tontine went on a buying spree in the month of November 2005 when the company had a poor 3rd quarter earning report. The shares of the company fell by around 30% in one single day, which triggered off purchase of shares by Tontine. Duratek officials blame the drop in share prices to losses on federal contracts and a lack of new commercial contracts.

Tontine has not disclosed their true intent of purchasing the shares in such high volumes. They maintain that the investments are being done as an investment and in anticipation that the share value will go up. But industry experts have a different view of the situation. They have noticed that the hedge fund has been involved in such game plans where it buys larger stake in a company and then bullies the company to buy the same at a higher price. They have repeatedly done this with companies such as Beazer Homes, Cleveland-Cliffs etc.

Tontine has often asked the companies to repurchase the shares irrespective of whether they have the cash to pay for it or not. Al Kaschalk, an analyst with Wedbush Morgan states that Tontine is looking seriously at investment. He adds that the fund expects the companies that it invests in to show results. They want the returns to be either put back into the business or given back to the investor as earnings on the shares.

Al Kaschalk goes on to state that Tontine works like an inner conscience for the company. When it knows that the company can perform better, the fund lets them know that they should and they can. It helps them re-define their boundaries. Therefore in that context, it is not a fund that will take things lying down.

Though Duratek's stock has fallen about 40 percent this year, the industry is still upbeat about the future of the company. However they do admit that it will not be easy to get back considering that still have to win Department of Energy contracts which is tough and also time consuming. Baltimore Sun reports:

“But, as one online financial advisory service noted, Tontine has bought up blocks of other companies' stock and then pressured them to repurchase shares whether or not they had the cash.”

Yet another case of insider trading by a fund manager comes to light

Another hedge fund manager caught indulging in insider trading. Michael Tom, of Waltham, Massachusetts has pleaded guilty to insider trading charges. He has been charged with five counts of insider trading related to the May 2004 purchase of Charter One Financial Inc by Citizens Financial Group Inc. Citizens is a unit of Royal Bank of Scotland Plc. The acquisition was worth $10.5 billion. Tom has apparently made $743,505 of illegal profits from the deal.

According to Tom’s lawyer, Tom will be entering a formal plea in January. If convicted, he faces up to 10 years in prison and a $1 million fine.

Tom used to work for Citizens unit as a senior analyst till December 2003. He was responsible for examining the banks that Citizens wanted to acquire. He later established a hedge fund as a general partner of GTC Growth Fund LP. The new fund was called Global Time Capital Management LLC. The fund was based in Burlington, Massachusetts.

Tom came to know about Citizens plans to possibly acquire a Cleveland-based bank from an analyst of Citizens who paid him a visit in April 2004. What followed was a buying spree in each of the three Cleveland based banks. This was followed by 52 purchases of stock and options in Charter One in the following days. In early may when the Citizens group announced its intentions to buy Charter One at a premium of 23.7%, the shares of Charter One went up by 22%. Tom lost no time in selling off the securities thereby netting a huge profit.

Now apart from Michael Tom, the analyst who leaked the news of possible acquisition is also awaiting a sentence. Reuters reports:

“Prosecutors said Shengnan Wang, a Citizens analyst and investor in the hedge fund, called Tom on April 29, 2004 and told him that Citizens was conducting due diligence on a Cleveland-based bank that Citizens was about to buy.”   

Clareville hedge fund has a downpour of new stakeholders

What happens when four high profile investors buy a significant minority stake in a hedge fund company? A coup! Such is the feeling of Mr David Yarrow, founder of London based hedge Fund Clareville Capital. The four stakeholders in question are Carphone Warehouse founder Charles Dunstone, Carphone Warehouse deputy chairman David Ross, entrepreneur Hugh Osmond and Alan McIntosh, one of Mr Osmond's business partners.

Mr Dunstone is likely to become the director and a major shareholder in the hedge fund company. And about 20% shares are likely to be owned between the four. Mr Yarrow still is the majority shareholder in the company. There is expectation that the fund will have more outside shareholders soon.

The hedge fund company was set up in 1996. It currently runs three successful funds. They are Pegasus, a UK equity fund, Pegasus Leveraged and Temple, a fund which invests in emerging Europe, the Middle East and Africa. Total assets under the management of three funds is close to $700 million and they have returned upwards of 10% year to date. Pegasus has returned 10.4%, Pegasus Leveraged has achieved 19.4% and Temple has returned 27.5%.

Little wonder then, that Mr Dunstone and Mr Ross have been investing in them for some time where as Mr Osmond and Mr McIntosh are likely to invest in them in the near future. The funds boast of a rich combination of institutional investors and private individuals as its investor base. There are in all over 45 city institutions and around 250 private individuals who have invested in the three products from Mr Yarrow. His is now preparing for a move into India and is launching two funds. Telegraph reports:

“Mr Yarrow will remain the majority shareholder in Clareville. Accountancy firm Oury Clarke is the other major investor, although more outside shareholders could come in over the next few months.”
   

Stocks attracting Hedge fund investors

It is no secret now that the overall performance of hedge funds has been by far the lowest in the last three years. This no doubt is not appealing the investors one bit. An overall shift in investment strategy of institutional investors and wealthy individuals is being witnessed. They are now looking at stocks with renewed vigor. They are now willing to invest their money with managers who bet on stocks and economic trends.

Luis Rodriguez who is the head of risk management at Manhattan Family Office in New York, predicts that Global macro will produce the highest returns. This will be followed by equity hedge funds. Luis Rodriguez invests more than a $1billion for a wealthy family. His feels that by following this strategy, he will be able to give a return of 8%.

In the first 11 months of 2005, Equity based hedge funds were able to garner a return of 8.2% where as Macro Funds returned 5.9% according to data compiled by Chicago-based Hedge Fund Research. Macro funds managers evaluate global economies to decide what stocks, bonds, currencies and commodities to buy.

The two strategies have also pulled a sizable part of the total money inflow in 2005. Long-short equity funds have raked in 20% where as macro funds attracted around 16% of the $47.7 billion that flowed into the market.

Till the end of November, hedge funds were able to give average returns around 7.5%. This is a sharp decline from the annual average return of the previous 10 years which is around 12.6%. IHT reports:

“It has been a difficult year to make money because stock and bond prices have barely moved and the Federal Reserve has raised interest rates 13 times since June 2004.”

Want to be a hedge fund manager?

If you thought that hedge fund managers have it easy, think again! The highly secretive world of hedge funds is marred with anxiousness, uncertainty and a lot of fluctuation of blood pressure. No we are not talking only about the investors who have to battle with their fears of not knowing what is happening to their money. We are referring to the racing pulses and midnight sweats that a lot of hedge fund managers suffer from.

Till now we have only seen the money flowing into their bank accounts. We have assumed that their rich and lavish lifestyles will remain no matter what. We think that their limousines, condos and high profile parties are the only life they have seen. Their rich and exotic holidays, and fancy globe trotting, that is so much a hallmark of their existence will remain whether or not the ordinary investor makes profit or not. We may now see that a hedge fund manager’s position may not be that enviable after all.

Barton Biggs is coming out with a book which helps the reader to look beyond the silver curtain. It helps the investor to appreciate the trials and tribulations that this affluent class suffers from. The book which is titled ‘Hedgehogging’ gives a straight situation analysis of hedge fund manager’s problems from a former Morgan Stanley strategist. Biggs who is 71 now is also a burnt veteran player of the hedge fund market.

This book has references to several hedge fund managers who have suffered heavy losses and have shut operations in less than two years. The roller coaster ride was just too much for these managers with who have undergone teeth-grinding existence. You may well ask how this is possible with the kind of high fees that they charge. In fact a lot of references are continuously made by the industry to the fees that they charge. They generally charge 2% management fees and 20% of the profits. This may look like a lot. But remember that the 2% becomes a decent amount only if the hedge funds have a lot of funds under management. We are talking of those hedge funds that have more than a $1 billion under management.

For an average hedge fund startup that has less than $200 million under management, the overheads can take a big bite out of their earnings. They have to pay salaries for analysts and traders, as well as computers and rent. So what they are left with as surplus (if any) is very little.

And if we are talking about the 20% of the profits, please look at how these managers are able to really make any money out of it. In the end of the year, all the profits after expenses are laid on the table and the managers take their share of 20%. Given the recent bleak performance of the industry altogether, how much profit are these managers really making? We are far away from the double digit profits of the yesteryears. Today the hedge funds are merely trying to stay afloat with meager returns. In such a situation, can you think of these managers making a lot of profit?

Having said all this, there is still no dearth of managers who still want to be just here. The pumping adrenalin and the joy of making money keeps them charged up despite all odds. IHT reports:

“A mystique has developed around hedge fund managers, who have become Wall Street's biggest clients and challenge some of the biggest companies - witness Carl Icahn and Time Warner.”