Hedge Fund Street

Former Hedge Fund Exec Defrauded Investors Of $10 mn.

Some really painful news here. The co-founder of Bayou Funds recently pleaded guilty to conspiring to defraud investors of more than $10 million. James G. Marquez faces up to five years in prison for this fraud. Marquez, who helped start Bayou Fund LLC and Bayou Fund Ltd., also faces fines, and restitution of $6.25 million. He will also have to forfeit any gains he got through his crimes.

Marquez admitted that he and other Bayou executives got investors to contribute more than $10 million to the funds. They made the investors believe the funds were making money when they were in fact losing money. Thejournalnews.com reports:

Marquez conspired with Bayou co-founder Samuel Israel III, who was the chief executive officer of Bayou and once lived in Mount Kisco, and Daniel E. Marino, who was the chief financial officer. Marino and Israel have both pleaded guilty to similar charges and are scheduled to be sentenced next month. Bayou funds collapsed last year after Marino and Israel sought to recover losses by investing money from the funds in fraudulent private placement accounts in other countries, prosecutors said.

Read more: Former hedge fund exec guilty

Living It Up In London

Hedge funds are not all about making money. It’s also about showing money… lots of it. This is true especially if you are working out of London. Today, quite a few hedge fund firms are paying record rents for offices in London's Mayfair district, the world's most expensive business location. And they are definitely not complaining.

According to the managers, they need to impress their clients and also the price they pay is only a small part of their management fees. They feel that the going rate of $250 per square foot or $2750 per square meter is a small amount to pay as rent for this prime property. The area has now become London's hedge fund alley as money managers look for offices here.

Understanding Hedge Fund Like Funds

You know I’m up to my eyeballs in hedge funds. It is a full time job keeping track of all the changes that occur in this market. So when I thought I’d give you guys a taste of the world outside hedge funds, I discovered hedge fund like funds. Well, let’s reduce this confusion by saying that these are mutual funds with an identity crisis. These mutual funds try to behave like hedge funds and increase their investors’ returns.

The genesis of the pseudo-hedge fund trend dates to the 2000-02 bear market. During this time, hedge funds achieved rock star-like stardom and that was when hedge fund look-alikes began making their presence felt and they’ve been gaining in strength ever since.

A word of caution here: since many of the hedge-like funds are fairly new, their performance in down markets is unproven. And not all hedge-like mutual funds have posted market-beating returns in the bull market that began in 2003.

Hedge Funds Fail The Returns V/s Fees Test

Now this is definitely not ‘news’ news. I mean if anybody actually went “Wow!” when they heard that hedge fund returns don’t justify their fees, the only reason would be that s/he’s been out in the woods for a very long time. 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.

According to industry executives there is a problem of plenty in the hedge fund industry. These hedge funds get paid outrageous amounts of money to produce mediocre returns. Most hedge fund managers don’t even clearly articulate a strategy to clients. They just expect clients to lap up whatever they offer.

Industry estimates show that there are around 9,000 hedge funds controlling up to $1.7 trillion of assets. These funds typically charge 1 to 2 percent management fees and up to 20 percent performance fees. This is much more than that charged by traditional mutual funds.

Data collected for 2005 shows that the average return for all hedge funds was about 7.6 percent. This compares unfavorably with the 10 percent rise in global stock market returns. 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.

Merely A Millionaire? Not Enough, Says SEC

Since it is stock taking time for almost everybody, I decided we’d follow tradition for once. Let’s have a look at the highs and lows of 2006. What was most characteristic about this year were the innumerable times the regulation word came up for discussion. The entire year was characterized by the undoing, redoing or modifying of regulations.

With hedge funds, you have to maintain a fine balancing between profit and greed. This is a lesson Amaranth managers and investors learned the hard way. Well, I guess I’m done with my stock taking. You cannot indulge too much in the past with something as dynamic as the hedge fund industry.

So what’s new now? Lots! Recently, the Securities and Exchange Commission, under its chairman, Christopher Cox, embraced its investor protection mandate. In simpler terms, the SEC’s just redefined who is rich and thereby severely limited the number of people who can invest in hedge funds. This rule, if passed could be the death knell for small funds who depend on rich people, and even the moderately rich, to get a start.

In simpler times, hedge funds could raise money from 100 accredited investors. The criterion for becoming investor was that you should have a net worth of $1 million (this includes the value of your home) or two consecutive years of income of $200,000 (or $300,000 for a couple’s combined income). The funds could also raise money from any number of qualified buyers who had assets of $5 million to invest.

As critics felt a change was needed to protect investors, the SEC proposed a new rule raising the standard to $2.5 million. The objective is to ensure that people investing in hedge funds had experience in the markets. This new development promises to be quite interesting… So let’s wait and watch what happens now.

New Renaissance Hedge Fund May Be Plateauing Off

Too much success is a difficult thing to handle. News has it that Renaissance Technologies Corp., a top-performing hedge fund has decided to close its doors to outside investors. The hedge fund firm, which has quadrupled its assets to $16 billion this year, wants to better manage its flood of money.

The main reason for this decision is that Renaissance suddenly finds itself in a piquant situation. The returns are historically high no doubt but these incredible returns are being dampened. The reason: too much money in equity strategies at the Institutional Equities Fund. So, they found a great solution. They decided to limit capital from investors, as they don’t want to "take in too much too quickly." Reuters.com reports:

The Renaissance fund, which employs mathematical "quantitative" strategies to rapidly trade only U.S. equities, was billed at its inception last year as being able to successfully generate returns on $100 billion, which would make it by far the largest hedge fund. But few in the industry expected the new fund to reach anywhere near that amount. And while some month-to-month swings are to be expected from any hedge fund, recent returns suggest Renaissance might reach its optimal size well below $100 billion, experts said.

Read more: New Renaissance hedge fund may reach limits

Ritchie Not So Rich After All; To Sell Hedge Fund & Refund Investors

According to recent reports, Ritchie Capital Management Ltd. plans to discontinue its efforts to restructure its flagship hedge fund, the Multistrategy Global Fund. After consulting with investors, an email was sent to Ritchie's clients revealing their negotiations with an undisclosed buyer for the assets of the hedge fund, and the plan to return the cash to investors. Hedgeco.net reports:

Ritchie Capital has been struggling the past two years with returns that were below average, the fund suffered last year from losing energy bets. Thane Ritchie, the founder of the company, had previously planned to refund 80% of clients' money over the next 2 1/2 years and keep the fund open for at least three years. The fund, which invests in everything from bonds to energy, lost more than 2% through August from the start of 2005.

Read more: Ritchie sells Hedge Fund to Refund Investors

Hedge Funds Not As Strong As Equity Markets: Report

Data compiled by the Hennessee Hedge Fund Index shows that consistency in the equity markets has led stocks to outperform hedge funds through the first 50 weeks of 2006. Hedge funds have gained 10.06% thus far in 2006, compared to 14.2% for the S&P 500 Index. Banknet360.com reports:

Poor performance in May left hedge funds in the dust of stocks. The S&P is poised to have only one negative month in 2006 for the first time since 1995, according to Charles Gradante, a managing principal of the Hennessee Group LLC.

Read more: Hedge Fund Performance Trails Equity Markets

At Sowood, Hedge Fund Business And Private Equity Part Ways

Sowood Capital Management recently announced the formation of Denham Capital Management. The move will allow Sowood to divide its hedge fund and private equity fund management efforts into independent management companies. Altassets.com reports:

Denham anticipates that it will operate fully independent of Sowood as of 1 July 2007, according to a statement. Denham will manage approximately $2.3bn of invested and committed private equity funds at inception.

Read more: Sowood separates private equity from hedge fund business

Steady Returns From Stillwater's Hedge, FOFs

According to recent reports, New York-based Stillwater Capital Partners’ hedge fund and fund of funds are having another strong year. Through November, the firm’s hedge fund, The Stillwater Asset Backed Fund, is up 10.16% net, its asset-backed fund of funds, The Stillwater New Finance Fund, is up 10.41% net, and its flagship multi-strategy fund of funds, The Stillwater Advantage-20 Fund, is up 12.75% net. Finalalternatives.com reports:

“Focusing on the asset-backed lending space enables us to produce the lower volatility, steadier return pattern our clients are looking for. This is truly a market-neutral strategy that can generate absolute returns, especially with the asset-backed lending where you’re making loans and the interest from those loans end up being the returns to investors,” said Jonathan Kanterman, managing director.

Read more: Stillwater's Hedge, FOFs Make Steady Returns

Understanding Hedge Fund

Hedge fund provides investment advice through pooled investment. Hedge funds were initially designed keeping in mind the investment of equity securities, leverage and short selling in equity markets and also portfolio’s exposure to them, that is the equity market movement.

There is no legal or constitutional definition of hedge fund. Professional investment managers organize hedge fund, who on the other hand have stake in the funds they manage. They also receive a management fee that comprises a considerable share of fund performance.

The advisers are proactive in operating. They organize the hedge fund in such a way that avoids regulations as mutual funds under the Investment Company Act of 1940. And yes, one more point to note here is that they do not make any public offerings of their securities.

Hedge Fund – A Piece of Advice

The assets in US hedge funds have increased multifold since the year 1993. One point that raises the eyebrows is the fact that though hedge fund comprises a small portion in the US financial market, the rate of growth however is significantly higher than the other sectors. Moreover, it is estimated that it will grow significantly in the days to come.

If the recent reports are to be believed, then a single hedge fund manager is responsible for a daily trading volume of an average of 5% of the New York Stock Exchange. Another report says that the convertible bond market is dominated by the hedge funds.

There is no denying that there are high reaps with hedge fund but this growth has also given rise to trouble mongers and troubleshooter. In recent past, there have been many cases of fraudulence, where the hedge fund advisors have cheated the hedge fund investors.

So, Beware and happy investing.

Hedge Fund On A Motoring Adventure

Now, tell me, is there any one area in which hedge funds may not have invested? Just curious you know. I mean I can stand the fact that they invest in oil, property, shares… everything but can you believe it, racing!

Yes, you got me right there. RAB Capital, one of London’s best-known hedge funds, recently acquired a majority stake in A1 Grand Prix, the so-called “world cup” of motor racing, from Sheikh Maktoum Hasher Maktoum Al Maktoum of Dubai. RAB Special Situations has taken an 80% stake worth £100m. As part of the deal, A1’s management will be restructured. According to RAB officials, their focus has always been on western-owned and western-run companies that sell successfully to Asia, and A1 fits with this. Timesonline.co.uk reports:

“We’ve made a fortune selling natural resources — copper, zinc, coal and so on — to the Chinese. This is the same: we’re selling motor racing to Asians, and with it the only event available for global brands to advertise across the continent in the context of a western company.”

Read more: Hedge fund roars into world motor racing

Hedge Fund Assets: $1.2 Trillion

Recent reports have it that hedge fund assets have reached $1.2 trillion and the industry is just beginning to flex its muscle. The 2006 Hennessee survey also found that the number of hedge funds grew 10 percent, from 8,050 to 8,900. The survey was conducted on 440 hedge funds from 97 management companies representing over $256 billion in assets. Redherring.com reports:

“Hedge funds are evolving in a manner similar to that of investment banks of old,” said Charles Gradante, managing principal of Hennessee Group. The consultancy’s 12th annual hedge fund manager survey reported that the industry’s assets grew 21 percent from $1.009 trillion as of June 30, 2005, to $1.2 trillion by Oct. 31.

Read more: Hedge Fund Assets: $1.2 Trillion

Hedge Funds On A Five-Figure Salary

Earn a five-figure salary but dream of being in the big league, buying and selling hedge funds and making your millions? Don’t despair. Agreed hedge funds are per se designed for millionaires, billionaires and the world's biggest institutional investors. Now, as market demand increases, hedge fund strategies seem to have gone retail.

There are many mutual funds in the market that mimic the "alternative" investment strategies used by hedge funds. This is done mainly to attract the 401(k) crowd. And what’s the best thing about these funds? The fact that minimum investments are as low as $500. Since 2003, the number of mutual funds that utilize hedge fund strategies has more than doubled, to 49 from 21, according to experts. Usatoday.com reports:

The proliferation of hedge-fund-like products for the masses is part of a bigger trend. "There seems to be a convergence of what was once considered non-traditional investments with the more traditional strategy" of buying stocks that you think will go up, says Phil Maisano, head of alternative investments at Mellon Asset Management.

Read more: Investors add a bit of hedge fund to portfolio mix

Goldman Sachs Takes Amaranth Traders Onboard

I really don’t know why I’m still tracking Amaranth… probably it’s some kind of morbid fascination. Well, the latest I heard was that Goldman Sachs is reportedly hiring a team of 17 traders from Amaranth Advisors to beef up its alternative-investment unit. Thestreet.com reports:

The investment bank wants the group, led by former Amaranth trader Gregg Felton, to develop credit-trading strategies, according to The Wall Street Journal, which reported the hiring, citing people familiar with the matter.

Read more: Goldman Sachs Hires Amaranth Traders

Hedge Fund IPO Raises 1.5 bn Euros

Marshall Wace LLP recently raised 1.5 billion euros ($2 billion) in the largest initial public offering of a hedge fund. This move has opened up a millionaires-only market to individual investors. Bloomberg.com reports:

Hedge funds have over the past two years become more available to individual investors, as Goldman Sachs Group Inc. and Rab Capital Plc sold shares. So-called alternative investment funds raised more than $16 billion through stock sales in Europe this year, up sevenfold from 2005, data compiled by Bloomberg show. MW Tops will invest in two Marshall Wace funds that have outpaced global stock market and hedge fund indexes this year.

Read more: Marshall Wace Raises EU1.5 Billion in Hedge Fund IPO

Managers Play Games With Hedge Funds

It is quite easy to understand why established fund managers with good track records in the retail market are enticed by the lucrative fees of hedge funds. However, now there seems to be a reverse flow of talent. Citywire.co.uk reports:

At the start of next year James Elliot will rejoin JP Morgan to run long-only Japanese money after a one-year stint at RAB Capital. This follows last year’s news that Gary West and James Inglis Jones, who also used to run money at JP Morgan, are returning to traditional fund management with Liontrust after a spell managing hedge funds at Polar Capital.

Read more: Frontrunner: Hedge fund traffic no longer one way

Hedge Fund Mythbusters

Every time something drastic happens in the hedge fund world and just about everybody hits the panic button of regulation. Why does regulation have to be such a thorn in the side? Why can we just not get done with it and move on with life? Well, if things were that simple in life, we wouldn’t have any hedge funds at all to begin with. So, let’s cut out all this loose talk and try to find out why there is so much opposition to hedge funds.

Fine, I will not go into the exact whys because we’ve done that quite a few times. But what about the reasons cited by opponents of regulation? One of the most cited reasons is that hedge funds are already being indirectly supervised. Don’t get it? Well, look at it this way: Banks are not independent entities and are governed by a stringent set of rules. So the argument goes that since hedge funds have to deal with banks, which are regulated, it means the hedge funds are also regulated… partially. Well, I know it’s a bit of a stretch, but there you have it, the magic word: regulated.

The logic goes that the bank will guard against excesses by their hedge fund clients. They will not be doing this out of the goodness of their hearts (when were banks ever known to be GOOD?). Banks basically need to protect themselves from losses and regulatory problems, SO they will ensure that all dealings with hedge funds are propah.

One problem here though. This reason can be entertained only if bankers are free of conflicts that might impair their judgment. But be honest, can anybody actually sit there and look at a huge honeypot on his desk and not feel the urge to dip a teeny-weeny finger into it? And no, I’m not talking about banks cheating but about them being that wee bit reckless.

In the past few years, the hedge fund market has exploded. There’s just too much money going around and banks have benefited through increasingly larger commissions, fees and trading profits from them. Don’t you think that all this could induce some bankers to err on the side of recklessness? So, where are the naysayers now?

Regulators concerned over hedge funds

Okay I agree I’m doing the regulation thing a bit too much. But don’t blame me. If you notice the trend, every few months our regulators seem to wake up to the fact that, horror of horrors, the hedge fund market is still unregulated. So they get into this flurry of activity and announce a few meetings and decisions before they go quiet on us again. I’m just the messenger here.

So what’s up now? Well, we now have information that there’s going to be a US-UK collaboration once again. And this time, they go to war to protect the world from unregulated hedge funds. Regulators plan to meet with Wall Street securities firms to discuss whether too many loans to hedge funds leaves them overexposed to potential meltdowns.

Experts from SEC, Federal Reserve and the U.K.'s Financial Services Authority will meet with firms to discuss margin requirements and how banks can limit their credit risk to hedge funds. See, I’m not trying to be sarcastic here and definitely we do need some kind of meetings to take place before regulations can kick in – if at all they do. What I’m against is their knee-jerk reaction to this entire industry.

Agreed, they’ve been on the boil for some time now and have been threatening us with regulations for some time now. But what I don’t understand is if you do feel such an urgent need, why don’t you do something soon. You end up with endless rounds of talks while there may be another Amaranth brewing around the corner. It doesn’t help to worry once there is a meltdown. What the authorities need to do is act fast. For this they must create a consensus in the hedge fund industry and ensure that the regulations are acceptable to one and all. Then they must implement them at the earliest possible.

Hedge Funds to Gain Strength in ’07: experts

Adverse reports and performance don’t seem to have much effect on the hedge fund juggernaut if recent reports are to be believed. According to Hedge Fund Research, hedge funds have attracted $44.5 billion in the third quarter, which is the most since at least 2003. And the industry is growing phenomenally. Now hedge funds have become more institutionalized, with most of them even having proper organizational structure and hundreds of employees.

Most experts are agreed that hedge funds will continue to attract superior investment in 2007. Hedge funds are expected to make more money in stocks than in bonds, with bets on rising markets likely to be more profitable than those on declining prices. One reason for the positive outlook could be the re-opening of well-established hedge funds to new investments from their biggest clients. These hedge funds don’t mind taking new capital but they prefer to take the money from sources they trust and work well with.

Hedge Funds Venture Lands in Australia

Hedge funds are a lot like rain-laden clouds being pushed by the winds. Sorry for going off track, just that I am so amazed at this lovely spread of hedge funds. They seem to be slowly enveloping the world. Australia is slowly and steadily growing as a hedge fund market. A recent joint venture between UK-based financial services group Dawnay, Day and local investment managers Les Walden and Jonathan Ramsay aims to bridge the gap between institutional investment requirements and existing hedge fund products.

The JV, which will set up operations in Australia and New Zealand, will adopt a boutique-style approach. Dawnay, Day already has quite a bit of experience in commercial property, asset management, private equity and structured products in markets such as Poland, Russia and India.

According to a Dawnay, Day spokesperson, the current fast-moving Australian marketplace is perfect for present-day expansion because of the “consensual models adopted by large traditional managers”.