Hedge Fund Street

Fund of Funds Entice Investors

As the number of funds in the hedge fund industry rise phenomenally (nearly 7000 now), few investors have the extensive resource capabilities to research the market. They also lack the experience and expertise to determine the optimum blend of strategies and managers that will provide the best risk return profile. Hedgeweek.com reports:

While basic due diligence on long-only funds is possible from information in the public domain, this is not an option with less regulated hedge funds where information is much more difficult to obtain. Multi-strategy funds of hedge funds are currently most popular among investors.

Read more: Investors see benefits in funds of funds approach

Some Good From Amaranth

Here’s a bit of good news from the Amaranth debacle. San Diego County pension beneficiaries apparently will get back some portion of the $175 million that was invested in their name with Amaranth.

The San Diego County Employees Retirement Association’s legal firm recently announced that Amaranth had given some of the money back. However, the exact figure is still under wraps. What is known is that the payback is only the first in a series of ‘partial distributions’. Moreover, the retirement firm is still exploring the idea of suing.

The retirement association, which manages pension funds on behalf of its nearly 35,000 beneficiaries, had initially estimated that it would lose about $45 million of its $175 million investment. However, as Amaranth went out of business, the association feared it would lose its entire $175 million. So the fact that some of its money is coming back must be the first bit of good news in months for the association.

Banks Cash In On Hedge Fund Boom

Conventional wisdom has it that the moment a big bank buys into a sector is the moment for everyone else to get out (just joking). However, now that an increasing number of banks are investing in the ever-growing hedge fund market, I guess it’s time we reinvented our jokes. Financialnews-us.com reports:

Nonetheless, banks are becoming a powerful force in the hedge fund industry. Goldman Sach’s asset management business is the second-largest single-manager hedge fund operation in the world, with $30bn under management, just behind Bridgewater Associates. The bank has developed the business organically on the back of its large proprietary trading desk and investment in quantitative systems. JP Morgan is close behind Goldman Sachs, with $29bn under management. It used the Highbridge acquisition to boost its existing single-manager hedge fund operation.

Read more: Banks place big bets on growth

Party Time For European Hedge Funds

The returns haven’t been as good as expected. But this hasn’t dampened their enthusiasm if the number of new launches is anything to go by. What am I talking about? The effervescent enthusiasm that characterizes the European hedge fund market today.

The number of new fund launches and the level of total fund assets run by European managers have set new records in the first half of 2006. And as the industry grows in size, London is soon proving to be the undisputed leader and center of the European hedge fund management industry. A recent survey EuroHedge shows that more than 170 new European hedge funds were launched in the first six months of this year, up from 150 in the same period a year earlier. Hedgeweek.com reports:

Total European industry assets reached USD401bn at the end of June this year, an increase of 44 per cent from the June 2005 total of USD280bn and of 23 per cent from the total of $325bn at the beginning of 2006. The asset growth came partly from the impact of fund performance, but mostly as a result of fresh capital inflows, especially from private sector and local authority pension funds.

Read more: London tightens grip as European hedge funds boom

December Is ‘Let’s Invest In Hedge Funds’ Month

If you are wealthy enough, now’s the best time to put your money into hedge funds if Citigroup Private Bank is to be believed. Citigroup studied nearly 16 years of returns among the popular alternative investment, and noted that December is the best month for hedge funds. Reuters.com reports:

The average monthly return for the asset class over the period has been 0.92 percent. December, however, has brought in around 1.5 percent. January has average returns of more than 1.1 percent, slightly less than March. "Average hedge fund returns during the turn of the year (December and January) are almost 1.5 times ... average returns during the rest of the year," the private bank's investment analysis and advice group said in a recent presentation.

Read more: Citigroup Sees Turn of the Year Hedge Fund Bonanza

Beware! The End’s Near

Here’s one more opponent to hedge funds, and an influential one at that. Canadian money manager Eric Sprott believes that the entire financial system could collapse thanks to hedge funds. Sprott’s firm Sprott Asset Management Inc., runs assets of about $4-billion, of which $1.5-billion is in the form of hedge funds.

Getting back to the financial system collapse scenario, Sprott argues that banks are today offering massive leverage to hedge funds in the form of loans. Hedge funds usually borrow around three or four times their invested capital as this helps them earn bigger returns on investments.

Well, there is no problem with borrowing huge amounts of money. The problem lies with the nature of business of some of the more unscrupulous hedge funds. For instance, there is now a fast growing market for credit default swaps. So, hedge funds are now betting on the likelihood of companies defaulting on bonds. And the worrying aspect here is that most of the betting takes place on borrowed money – money that we regular guys put into our banks.

Sprott’s doomsday theory has it that if the market collapses, banks will suffer huge loan losses. Agreed, this can be quite a dangerous scenario. So what is the solution to this problem – one that allows hedge funds to grown and yet doesn’t put the entire economy in danger? Well, Sprott believes there is only one way out – regulation.

He believes that regulation will control the leverage offered to hedge funds. And, here is where he differs from other regulation theorists; it’s not the funds that need to come under scrutiny. Banks already have a set of rules in place that govern the amount of money that can be lent to managers. All Sprott wants is strict enforcement of these rules.

Window To The Future Of Hedge Funds

That the hedge fund industry is a risky proposition is something that’s been screamed from rooftops by all and sundry. Just about everyone who knows anything about the industry adds his two bits about how dangerous it is and how the industry can make you lose all your money in one felt swoop.

So it is only natural to wonder why any cautious investor would want to dally with hedge funds. Especially organizations like pension plans and nonprofit organizations. The Bank of New York seems to have found the answer to this difficult question. In a recent study, “New Frontiers of Risk: The 360° Risk Manager for Pensions and Nonprofits”, the bank found that these organizations were attracted to hedge funds because they’d been badly burnt in the equity bear market after 2000. Pension plans especially suffered huge losses. And hedge funds seem to be the perfect solution to their money woes. The industry has been growing at a steady rate for the past many years and even big losses as the one suffered in the Amaranth tragedy, haven’t made a dent in this progress.

Risk does remain a huge concern with plan sponsors, but that does not deter them from investing heavily in hedge funds. According to the study, managers are now spending nearly 40% of their risk-related time on operational and political considerations. More interesting is the fact that around 80% have shown an interest in increasing the time spent on operational risk over the next five years.

According to the report, by 2010, institutions will put half of the assets directly into a hedge fund. The other half will be invested through fund of hedge fund platforms. And that means some big changes will take place in the industry in the near future. One thing these clients will insist on is tailor-made advice and consultancy services. And given the volume of assets pension plans and other organizations will soon hold in the hedge fund industry, their wishes cannot be taken lightly.

Hollywood & Hedge Funds: Budding Romance

You know I thought the hedge fund-Hollywood dalliance was a passing trend, like all other Hollywood trends. But this thing seems more real and serious as days go by. 20th Century Fox is supposed to be announcing a hedge fund-backed film financing deal worth more than $520m very soon. And all this is thanks to the box office success of Borat and The Devil Wears Prada, films in the first Fox-Dune slate.

The agreement will see Dune Capital Management refinance a slate deal – or agreement to produce several films – it struck with Fox at the end of 2005. As per the new deal, Dune will invest in at least 15 new films. And one of the films that will come out of this new agreement will be Bruce Willis’ never-ending saga of Die Hards. (Personally, I did like the first one but then it just seemed to be well… as I said, never-ending).

Long Lockups Make Hedge Funds Unviable

While things are definitely looking up for hedge funds, there’s still one issue that’s a big matter for concern. At present, hedge funds are walking a tighter line between helping their investors remain liquid while requiring longer lockup periods to earn profits. Banknet360.com reports:

The dilemma surrounding longer lockup periods, which run up to five years in some cases, is leading some investors to opt out of the hedge fund market, according to executives at the Global Alternative Investment Conference. But tighter competition among hedge funds means that it takes longer for hedge fund investments to pay off, others countered.

Read more: Longer Lockups Raise Hedge Fund Investor Liquidity Concerns

Surprise! Hedge Funds Don’t Justify Their Fees

I really don’t know why I or for that matter anyone should want to talk about an issue that’s been known for some time now. The fact that hedge funds charge too high fees and earn modest investment returns is a well-known fact. What I’d like to know is what the industry and investors plan to do to rectify this issue. Reuters.com reports:

Pension plans and other investors have been pouring money into hedge funds, swelling the market and diluting many funds' returns. As a result, more funds are likely to disappoint investors by making only single-digit percentage returns in future years, said Larry Kochard, chief investment officer of the Georgetown University Endowment which has just under $1.0 billion in assets.

Read more: Many hedge fund returns do not justify fees -execs

Take Me Home Hedge Fund Roads, Take Me Home

One thing you’ve gotta hand these Canadians – they think up very unique ideas to maintain their equilibrium. And I mean this with all due respect. I mean, I loved the way they handled the payday loan industry – soft gloves and hands of steel approach was the perfect way to keep these guys in their place.

And now, the provincial government in Nova Scotia has found a unique way of keeping business graduates from moving out. The province plans to give $9.1 million in payroll rebates to Bermuda-based hedge fund management firm, Butterfield Fund Services, if it creates and maintains up to 400 jobs over the next seven years. Butterfield’s investment in Nova Scotia is expected to attract more like-minded financial service businesses. This would eventually create even more opportunity to retain talented graduates and even bring seasoned accounting professionals back home to Nova Scotia. Big plans indeed. Thechronicleherald.ca reports:

Frank Sebestyen, senior vice-president and group head of Butterfield Fund Services, said the company will be looking for local employees with accounting training and experience. "What funds need. . . is a broad range of service providers," he said, including investment managers, technology service providers and administrators, whom he said would be paid competitively. "You really have to have an accounting background."

Read more: Hedge fund firm setting up in N.S.

Hedge Fund Saves The Day For New Orleans Pensioners

Finally, someone has something good to say about hedge funds. New Orleans' $400 million employee pension plan is using increased gains from hedge funds to relieve the financial strain caused by Hurricane Katrina in August 2005. Philly.com reports:

In the year following Katrina, monthly pension-plan payments almost doubled to $3.2 million as the city fired more than 3,000 workers and others took early retirement, according to Jerome Davis, chairman of the board of trustees of the New Orleans Employees' Retirement System.

Read more: Hedge-fund aid for New Orleans

Know Your Hedge Funds

Knowing hedge fund strategies help you differentiate between various hedge funds. Investment returns, volatility, and risk vary largely among the different hedge fund strategies. There are some strategies, which are not correlated to equity markets and are yet capable of delivering consistent returns with extremely low risk of loss. And then, there are others that may be as or more volatile than mutual funds. If you want to have a successful run in the industry, you should be able to recognize these differences and blend various strategies and asset classes together to create a more stable long-term investment return.

Most hedge funds primarily aim to reduce volatility and risk while at the same time preserving capital. And irrespective of the market conditions, they want to consistently deliver positive returns. This is quite a tall order and hence it makes it doubly interesting to know how you can manage the volatile with the stable to ensure consistent returns.

Are Our Pension Funds Safe?

I guess we all really need to get a grip on this regulation issue. One time you have just about everyone hankering for regulation, then you have U.S. regulators asserting that there isn't a need for further regulation of hedge funds at this time. And then the SEC gets fidgety and is wondering if it can strengthen the regulation drive and make it more effective.

The SEC now plans to propose rules at a meeting next month raising asset requirements for investing in hedge funds. This can be seen mainly as a reaction to the Amaranth collapse. SEC Chairman Christopher Cox still hasn’t specified how the agency plans to fulfill its pledge. However, he did seem clear about the fact that he wanted the mom-and-pop kind of investors to stay away these ‘highly risky’ forms of investment.

While the Amaranth collapse was big, most hedge fund investors escaped unharmed from this tragedy. But this was just a case of plain luck and lawmakers fear that a hedge fund meltdown could put pension fund investments at risk. Investments in the unregulated hedge fund industry could put the retirement security of American workers in jeopardy. To protect investors, the SEC also plans to propose a new hedge-fund antifraud rule.

However, the SEC’s track record with regulating the hedge fund industry hasn’t been too good. In June, a federal appeals court shot down rules requiring hedge funds to register with the SEC. The agency wanted funds to report their size, number of employees, and types of clients, and submit to random inspections.

Probably, these increased calls for regulation stem from the fear that given the large amount of money in the business – around $1.5 trillion world-wide – there is a very high scope of indiscretion and even unethical business practices.

Energy Is Too Volatile For Hedge Funds

The energy sector doesn’t seem too good for the hedge fund industry. Ritchie Capital, a Geneva, Ill.-based adviser with $2.8 billion under management in several funds, is telling investors it is shutting its Ritchie Energy Trading fund.

This new development follows the over $6 billion in losses suffered by Amaranth Advisors, which was forced to shut down. Not much information is available on the size of the fund Ritchie is closing or whether it had lost money. According to Ritchie officials, the move is part of a broader plan to take the business forward. They want to focus on spaces where they have a definable edge and can capture alpha. Forbes.com reports:

Natural gas and other power trading strategies have certainly tripped up experts before. Last year after Hurricanes Katrina and Rita hit the Gulf Coast, Ritchie had losses of some $100 million from energy trading. Citadel Investment Group lost $150 million and the head of its energy trading desk, who resigned.

Read more: Energy Hedge Fund Bites The Dust

Funds With A Heart

And you thought hedge funds were all about making money and more money. Did you know that the Children’s Investment Fund, better known as TCI, has a charitable arm that distributed more than $2.3 million to international health and development causes, according to its 2005 United States tax returns? Nytimes.com reports:

Mr. Hohn and his wife, Jamie Cooper-Hohn, who runs TCI’s foundation, took a different tack: they are using a portion of the fees generated by the hedge fund to finance the foundation and thus donate to charity.

Read more: A Hedge Fund With High Returns and High-Reaching Goals

Hedge Fund Listing Size: $562 Million!

Now this is what I call MONEY. Recently, two former Goldman Sachs executives beat a record set by their old firm, by raising a mammoth $562 million in a listed hedge fund vehicle. Timesonline.co.uk reports:

Emmanuel Gavaudan and Emmanuel Boussard, who quit Goldman in 2002 to set up their own hedge fund firm, Boussard and Gavaudan (B&G), were inundated with interest from investors. Dealings begin today on Amsterdam’s Euronext market in shares of Boussard and Gavaudan Holding (B&GH), a special purpose investment vehicle to be invested in B&G’s flagship Sark Fund.

Read more: Hedge fund duo break record on listing size

Hedge Fund Activism: Good Or Bad?

Here’s some good news. Hedge funds increasingly are pressuring executives to either shape things up or ship out. However, a new study suggests their demands aren't doing much to improve the financial health of the companies they target. Forbes.com reports:

Researchers at New York University concluded that when hedge funds get involved, businesses often see their profits drop, debt levels rise and assets remain around the same size. The stock prices tend to increase, however, which is just what hedge funds want - even if it does mean business prospects falter.

Read more: Hedge Fund Hindrance

Do We Need Jugglers Or Managers?

Is your money manager ignoring you? It is a possibility if your manager is one of those guys who are today juggling multiple roles. These managers handle everything from plain-vanilla mutual funds for small-time investors to hedge funds for wealthy individuals and institutional investors.

There is a fear that such a trend could lead managers to favor hedge fund investors. It is obvious isn’t it? These are the guys with the deep pockets and they pay much more than a mutual fund investor can or should. While some experts believe that there is no harm in such management, I personally have my doubts. I mean how can anybody be impartial when there is such a huge difference in the fee structure?

Hedge funds usually charge a certain percentage as management fees. This comes to around 1 2 percent. In addition to this, there is a 20 percent performance-based fee. In contrast to this, an average domestic stock mutual fund charges a management fee of roughly 1.5 percent. For any of those juggling managers, paying more attention to the hedge funds would be natural. The hefty performance-based fees are definitely a great incentive. So what exactly could they do to increase hedge fund returns? They could allocate their best investment opportunities to hedge funds.

The flip side of this argument is that good managers need an incentive to stick on with mutual funds. It is definitely a fact that in the recent past, many managers left mutual-fund firms for the bigger paychecks and lighter regulation of the hedge fund world. So, if you have a good manager then it makes sense to hand over the carrot of hedge fund fees so they manage mutual funds also. Not a bad argument.

But I think we are kidding ourselves if we say these managers are gonna be fair to mutual funds. They left the mutual fund industry because of low fees. So what’s stopping them from ignoring their mutual fund portfolio while juggling as well? And you know what all this makes me think? If such managers got something better than hedge funds, wouldn’t they ignore us hedge fund investors as well? I don’t know if I’m gonna be comfortable with such a guy. How about you?

Hedge Funds Grow By Leaps & Bounds In Kangaroo Land

Now these are the kind of guys I just love. Here we have a certain group called the SEC, which just cannot help but breathe down the necks of hedge fund managers. Just about every time somebody makes some money, they are out there checking for frauds. And if there is a hefty loss as in the case of Amaranth, they have the ‘I-told-you-so’ smug look. Now they should learn from the Australians.

They are not only happy about the growth of the hedge fund industry, they are thinking in terms of hedge fund exports! Way to go boys! As of June 2005, the Australian hedge fund industry was valued at $35 billion, with $22 billion invested directly with hedge funds, and a further $13 billion invested in funds of hedge funds.

All Rise! Here Comes The IPO

They are threatening to do it again. I wonder when the hedge fund industry is going to stop fiddling and come out with that IPO they’ve been threatening us with for some time now. The latest news is that Fortress Investment Group, a US-based alternative investment firm is set to file next week for an initial public offering that could value it at up to $8bn.

The Fortress IPO will be the first public listing of its kind in the US. The float will provide the first test of investor appetite for publicly traded hedge funds in the US. This event is supposed to represent a tipping-point for the rapidly growing hedge fund market. Why the need for an IPO now? For some time now, hedge funds have been looking for ways to sustain their businesses. You could also call it the influence of Wall Street investment banks, which have been increasing their exposure to the sector. Msnbc.msn.com reports:

Analysts said a successful float by the company could pave the way for other large hedge funds looking to form publicly traded asset management companies and lead a rush to the public market.

Read more: Fortress plans first hedge-fund IPO in US