Hedge Fund Street

Goldman Sachs: Now the world's biggest hedge fund!

Alpha magazine's annual list of the world's largest hedge funds has declared Goldman Sachs Asset Management as the biggest hedge fund. New York-based Goldman Sachs Asset Management has over $21 billion in assets. The magazine puts the hedge fund’s name on top of the 100 hedge funds that were covered under the survey. In the past few years, Goldman has emerged as one of the industry's most preferred prime brokers. It helps finance and clear trades for hedge funds and often helps find them investors.

In 2005, Goldman was at number 3 and has managed to dethrone San Francisco-based Farallon Capital Management Group this year to be on the top. Farallon Capital Management Group was ranked as No. 1 in 2005 and currently stands at No. 4 with $16.4 billion in assets.

Cayman hedge fund industry: Breaking all records!

The hedge fund industry haven has more than established its credibility time and time again. At the end of 2005, the number of hedge funds registered in the Cayman Islands was 7,106. In the first five months of 2006, the number has moved up by 665. Cayman Islands Monetary Authority (CIMA) stated recently that the phenomenal growth in the number of hedge funds in the Cayman Islands has long surpassed other offshore tax havens like British Virgin Islands and Bermuda.

International investors who want to avoid being taxed in their home country as well as in the country, into which they invest, are understandably quite attracted to Cayman Islands due to the prevailing investor friendly tax laws in place.

The industry’s growth can be attributed to an extensive infrastructure of legal and financial service providers, along with stringent government oversight. It may be noted that quite a few U.S. pension funds have been seen investing in U.S. hedge fund managers through their offshore shell structures to legally avoid U.S. taxes. This has added volumes to the industry that is over $1.3 trillion in size.

Hedge fund Pequot being probed by SEC: report

U.S. regulators are investigating Pequot Capital Management, a $7 billion hedge fund, for possible insider trading. Pequot Capital Management is one of the nation's most prominent hedge funds.

The SEC has declined to confirm if it was investigating Pequot. However, a lawyer who once led the agency's investigation has told Congress that the fund's trading had repeatedly aroused suspicion among stock exchange officials. Records show that on 18 occasions, these officials referred the cases to SEC for further investigation. The investigation has not resulted in any charges against Pequot, and as of now, the hedge fund has denied any wrongdoing. Nytimes.com reports:

In one instance, Pequot made $18 million by investing in companies that soon after announced a major corporate merger, in July 2001, the lawyer told Congress.

Read more: S.E.C. Is Reported to Be Examining a Big Hedge Fund

The changing face of the hedge fund market

In the past three years, the hedge fund industry has literally exploded in size and has gone from about $500 billion U.S. just back in 2003 to over a $1 trillion U.S. last year. The most interesting aspect about this spectacular growth is the increase in the number and types of investors who have begun putting their money into hedge funds. As a result, hedge funds, which have traditionally been short-term investors in public stocks, have undergone a sea change. They have now become players in the buyout, real estate and even venture capital market. All this growth is to sustain returns in an increasingly competitive space.

This trend has been accelerated by the introduction of new Securities and Exchange Commission rules requiring hedge fund managers to register for the first time. Managers that prohibit investors from redeeming capital within two years are exempt from the rule and a number of hedge funds are using the lock-up process to escape registration. As a result, many hedge funds have carved illiquid assets out of existing funds. This has in turn, tied up investors' money for a period of several years in the process.

Domesticating the hedge fund market

They were supposed to be the type of people who love to take risks and indulge in edge-of-the-seat pursuits. Sounds cool doesn’t it? Sadly, that is no longer the reality about hedge funds. It’s something like the Wild West. It used to be a place where the bravest of the brave dared to go and succeed. In a way, hedge funds were out there in their own wild west until recently. Now, civilization has finally caught up with them, and they no longer want to take too many risks. Don’t believe me? Check out the recent study, which was conducted by consultants Mercer Oliver Wyman that shows that hedge funds have substantially improved their risk management practices in recent years to reduce threats to the financial system and investor losses from fund failure.

Sounds like they’ve let go of the fun to make consistent returns. However, they still have a long way to go and still more needs to be done to allay risk in the fast-growing and evolving industry, where funds invest across an increasing array of asset classes in trades that are often backed by leverage, or debt.

As per the Mercer study, hedge fund managers and banks that service the industry have made substantive strides in many dimensions of their risk management practices. The study also found an interesting aspect in the working method of hedge funds. According to the study, large established hedge funds make extensive use of sophisticated stress-tests and scenario planning. This is done to offset the likelihood of being forced to liquidate positions in an unplanned or untimely manner. Such an event could threaten market stability and lead to a structural collapse.

Hedge fund risk practices improving: Study

Hedge funds have managed to greatly improve their risk management practices in recent years to reduce threats to the financial system and investor losses from fund failure, a new study released recently concluded. However, still more needs to be done to allay risk in this fast-growing and evolving industry, where funds invest across an increasing array of asset classes in trades that are often backed by leverage, or debt, the study said. Reuters.com reports:

Still, the study, culled from interviews of more than 100 risk executives and managers at 35 top hedge funds and 15 global broker-dealers, concluded that improvements need to be made, particularly in the area of independent valuation of thinly traded securities, an increasing area of hedge fund focus.

Read more: Hedge funds have improved risk practices - study

Is there no difference between hedge funds & mutual funds?

As hedge funds grow and become too big for their boots, they need to diversify and grow. Geographic diversification is hence a natural progression. For a growing number of hedge funds this is the next step in their evolution from relatively simple vehicles into complex organizations. Iht.com reports:

There will be an industrywide scandal. This may seem a bit silly to say. Blowups and scandals have been a part of the hedge-fund saga since its first chapters after World War II. What is meant by this prediction is a broad industrywide scandal complete with multiple oustings of chief executive officers, congressional hearings, and studies by academics proving that the whole concept has gone wrong.

Read more: Funds: Hedge funds on road already taken

Illiquid assets cause valuation problems for hedge funds

Private equity has become the next big thing for hedge funds; only problem is that they are facing problems over the valuation of these new investments. The problem lies with a new Securities and Exchange Commission rules that requires hedge fund managers to register for the first time. Marketwatch.com reports:

Managers that prohibit investors from redeeming capital within two years are exempt from the rule and a number of hedge funds have used the lock-up process to escape registration. As a result, the number of hedge funds carving an illiquid asset out of an existing fund tying up investors' money for a period of several years - referred to as a side-pocket - has risen dramatically over the last few years.

Read more: Hedge fund hybrids face valuation snag on illiquid assets

Hedge fund managers unhappy with governance

U.S. securities regulations restrict hedge fund managers from publicly discussing their fund performance, fund-raising or other matters that may be interpreted as advertising to the general public. These hassles, they believe, restrain their ability to respond to articles that may be inaccurate. Washingtonpost.com reports:

A media focus on a handful of frauds such as that involving Bayou Management, a collapsed Connecticut hedge fund, along with reports of hedge fund managers' lavish lifestyles, has given the industry a negative image that isn't being offset by positive comment, industry officials said.

Read more: Hedge fund executives want publicity rules changed

Understanding hedge fund language

If you are an outsider trying to understand the hedge fund industry, the whole thing may seem very confusing and difficult. The language sounds alien and most of the time you are lost when hedge fund managers begin to speak. It isn't easy to keep track of what they are saying thanks to the professional jargon they use. So what's the best option available to you? You can either interrupt them every few minutes to ask them what a particular term means, or you can learn these terms so you can speak to them in their own language. Here’s a quick crash course for those who want to understand the market and the language of hedge funds. Since the subject is vast, we will go alphabetically:

• Abandon: To elect not to exercise or offset a long option position.
• Actuals: The physical or cash commodity, as distinguished from a futures contract.
• Agency Bond: A debt security issued by a government-sponsored enterprise such as Fannie Mae or Freddie Mac, designed to resemble a US Treasury bond.
• Aggregation: The principle under which all futures positions owned or controlled by one trader (or group of traders acting in concert) are combined to determine reporting status and compliance with speculative position limits.
• Arbitrage: A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across two or more markets in order to benefit from a discrepancy in their price relationship. In a theoretical efficient market, there is a lack of opportunity for profitable arbitrage.
• Arbitration: A process for settling disputes between parties that is less structured than court proceedings. NFA ’s arbitration program provides a forum for resolving futures-related disputes between NFA members or between NFA members and customers. Other forums for customer complaints include the American Arbitration Association.
• Artificial Price: A futures price that has been affected by a manipulation and is thus higher or lower than it would have been if it reflected the forces of supply and demand.
• At-the-Market: An order to buy or sell a futures contract at whatever price is obtainable when the order reaches the trading facility.
• At-the-Money: When an option's strike price is the same as the current trading price of the underlying commodity, the option is at-the-money.
• Auction Rate Security: A debt security, typically issued by a municipality, in which the yield is reset on each payment date via a Dutch auction.

Caution is the new byword for hedge funds

Are hedge fund managers reluctant to make risky investments? Agreed hedge funds are supposed to make money the risky way but then they argue that their customers don’t want them to deal in such investments. So, for fear of losing these customers and more importantly, their fees, which can only be called exorbitant, hedge fund firms are now learning to play safe.

As fund managers realized that they were making a killing by raising money from pension funds, endowments, insurance companies and other institutional investors, their taste for the dangerous diminished. And the decisive factor was the 2 percent per annum management fees from large amounts of assets. With all these benefits, it didn’t take long for caution to become the new byword for hedge fund managers. However, any which way you look at it, hedge fund firms seem to be the gainers. Their strategy of caution allows their investors to repose more faith into these firms, which then translates to more business and more money.

Hedge Funds: Big gains, bigger losses

The hedge fund industry has literally exploded in size in the past three years; going from about $500 billion U.S. just back in 2003 to over a $1 trillion U.S. last year. And the most interesting aspect is the increase in the number and types of investors who have begun putting their money into hedge funds. Hedgefundcenter.com reports:

Welcome to the world of extreme leverage and to the world of hedge funds where performance numbers tend to be eye popping whether the numbers are positive or negative ones.

Read more: Hedge Fund Follies

Banks want a share of hedge fund pie too

Custodian banks and hedge funds are so natural a fit that you wonder why these two haven’t thought of joining hands. I mean hedge funds need money, lots of it to make even more of it. And banks have lots of money to lend and want to make even more. So how did Wall Street firms like Morgan Stanley and Citibank get in between these two natural allies?

Despite safeguarding almost $30 trillion in stocks and bonds, these big banks have kept hedge fund managers at a distance and dealt with them through other firms that have happily split annual fees of nearly $6 billion from lending stock. This is almost as much as Bank of New York’s revenue in some years! So, have these banks missed the great hedge fund race or have they finally woken up to the immense possibilities?

While the banks focused on catering to mutual funds and pension plans, hedge fund assets doubled in the past six years. Now, banks are trying to play catch up by offering record-keeping services to hedge funds. However, if the present scenario is anything to go by, they still have a lot of catching up to do. Even now, they are missing the largest share of fees because their strict lending policies don’t allow them to provide what hedge fund managers want most: financing for trades. According to experts, banks are still to learn that hedge funds are a different level of customer than the pension fund that just buys and holds securities.

And now for those great figures: According to estimates, Goldman Sachs has earned about $1.5 billion of revenue in the past four quarters from securities lending. Meanwhile, Morgan Stanley is supposed to be getting over $2 billion a year in revenue from providing ‘prime brokerage services’ to hedge funds. And let’s look at what one custodian bank earned in the corresponding financial year -- State Street earned a $300 million fee from lending securities. This is the general trend across most custodian banks!

Post Hedgestock

Please excuse me if you feel I'm exxagerating but I cannot miss the opportunity to say this: The hedge fund world is now divided into two distinct types -- of those who attended Hedgestock 2006 and those who did not! And there were more than 4,000 hedge fund managers and investors from across the wrold who paid £500 a ticket to rock up to this event, where peace and love met wealth and ambition. BBC.co.uk reports:

While the wristbands at the entry gate and the beer in plastic cups gave Hedgestock an authentic festival feel, that was where the similarities ended. Instead of smoking substances more commonly associated with festivals, chunky Cuban cigars were being handed out - rather than passed around - to those perched on bean bags outside the chill-out tent.

Read more: Hedge fund hippies have trip out

Are hedge funds going the mutual fund route?

As hedge funds grow and become too big for their boots, they need to diversify and grow. Geographic diversification is hence a natural progression. For a growing number of hedge funds this is the next step in their evolution from relatively simple vehicles into complex organizations.

However, with diversification come problems associated with growth. Now as hedge funds begin to get money from traditionalists like pension funds, foundations, college endowments and the like, the pressure on them increases. They will now be forced to measure up against index benchmarks. And, very soon, we may even see them bidding goodbye to their ‘high costs’. So can we make predictions about the future of hedge funds since they seem to be following a well-beaten track – that of hedge funds? Iht.com reports:

There will be an industrywide scandal. This may seem a bit silly to say. Blowups and scandals have been a part of the hedge-fund saga since its first chapters after World War II. What is meant by this prediction is a broad industrywide scandal complete with multiple oustings of chief executive officers, congressional hearings, and studies by academics proving that the whole concept has gone wrong.

Read more: Funds: Hedge funds on road already taken

$7 mn hedge fund scam uncovered

This piece of news will give all the doubters a chance to say "I told you so". Recently, a former New York University student pleaded guilty to bank and wire fraud, admitting he used his student ID and expertly forged documents to pose as the heir to a billionaire Turkish family and trick investors into pouring millions into a nonexistent hedge fund.

Hakan Yalincak's fund, the Daedalus Capital Relative Fund I, wasn't a legitimate investment and prosecutors said investors lost more than $7 million -- a figure Yalincak said is overstated. Prosecutors say the money was spent on a Porsche, a Tiffany diamond and a $1.25 million donation to NYU.

Read more: NYU whiz kid pleads guilty in $7 million hedge fund scam

HedgeStock’s Here!

Hedgestock’s finally here. I’ve been reading about it for so long that I’ve almost conjured up an image of how much fun all those hedge fund managers are going to have. Think hedge fund manager and the first image that comes to mind is of a person whose eyes are glued to the screen 14 hours at a time. There is probably not enough time for lunch breaks, and they have to be on call 24 hours, buying, selling and setting new trends. But get ready to rethink this image in June. Just a few days from now (June 7 & 8), you will see how these workaholics chill and play as hard as they work – at HedgeStock.

Polo, cricket, parachute jumping, laser shooting and watching The Who, one of the world's most famous music bands, while sipping Pimms – this is a different face of your harried hedge fund manager that you will get to see. HedgeStock is a charity event – at Knebworth a country estate North of London -- organized by hedge fund advisory company Albourne Partners. The event is expected to get people together from banks, other institutions, big corporates and hedge funds.

Banks wake up to hedge fund potential

Banks seem to have finally woken up to the immense potential offered by hedge funds. While the banks focused on catering to mutual funds and pension plans, hedge fund assets doubled in the past six years. Now, executives are trying catch up by offering record-keeping services to hedge funds. Iht.com reports:

But they are still missing the largest share of fees because strict lending policies keep them from providing what hedge fund managers want most: financing for trades.

Read more: Banks scramble to catch up on hedge fund fees

HedgeStock’s Here!

Think hedge fund manager and the first image that comes to mind is of a person whose eyes are glued to the screen 14 hours at a time. There is probably not enough time for lunch breaks, and they have to be on call 24 hours, buying, selling and setting new trends. But get ready to rethink this image in June. Just a few days from now (June 7 & 8), you will see how these workaholics chill and play as hard as they work – at HedgeStock.

Polo, cricket, parachute jumping, laser shooting and watching The Who, one of the world's most famous music bands, while sipping Pimms – this is a different face of your harried hedge fund manager that you will get to see. HedgeStock is a charity event – at Knebworth a country estate North of London -- organized by hedge fund advisory company Albourne Partners. The event is expected to get people together from banks, other institutions, big corporates and hedge funds. Reuters.com reports:

HedgeStock is expected to attract more than 4,000 hedge fund managers, investors and bankers from around the world, making it one of the world's biggest hedge fund events.

Read more: Hedge fund managers to play and work at HedgeStock