Hedge Fund Street

A Rose By Any Other Name…

A rose by any other name…? I don’t think so. There are some people who believe that hedge fund industry wouldn’t have to undergo all the trouble that it’s been through if only it changed its name. Rather engage in a major re-branding campaign.

The problem why hedge funds are so universally disliked is that most people don’t understand them. And it is natural human tendency to hate, be suspicious of or dislike something you cannot understand. So what this industry needs is an extreme makeover… so, let’s begin with the name – a misnomer if you ask me. In what sense is the industry hedged?

Hedge funds are private-investment pools that are open to a limited number of extremely rich participants. These pools invest in almost anything. This encourages creative management strategies, which are unavailable to other, more regulated funds. Coming back to my question, how can this strategy be termed as hedged in any way?

Agreed, the media too hasn’t been fair to the industry and has given it a lot of bad press. The media has made it seem as if the entire industry just wallows in wealth, exploit the market, and making life hell for the little guys. Probably what this industry needs to do is firstly, get together and create a united front. Next, they should go on a publicity blitzkrieg. They basically need to re-brand their product if they want to survive in the long term.

Hedge Fund To The Rescue of US Government

After dipping their fingers into every available pie, the hedge fund industry seems to want to fight on behalf of the US government as well. Hedge fund Greenlight Capital recently filed a lawsuit on behalf of the US government against a subsidiary of Allied Capital, Business Loan Express (BLX), which alleged submitted fraudulent loan documents to the Small Business Administration (SBA). Bobsguide.com reports:

The law suit claims that BLX "devised and executed a massive scheme" to defraud the US government by "repeatedly and systematically submitting false claims to the SBA" to guarantee payment of loans made to unqualified borrowers whom the defendants knew or should have known would default on the loans. It is claimed that more than $76 million in loans had been fraudulently originated from the BLX Detroit office.

Read more: Hedge fund sues on behalf of US government

Reliant seeks court ruling over hedge fund proposal

Reliant Energy Inc. officials recently said that the company is seeking a court judgment in response to a proposal that would allow shareholders to nominate directors. Houston-based Reliant said it regards the proposal by hedge fund Seneca Capital LP as "contrary to applicable securities laws" and has asked a U.S. District Court to rule that the company can exclude Seneca's proposal from its proxy materials. Houston.bizjournals.com reports:

This latest development is not the first time Reliant and Seneca have been at odds. In April 2006, Reliant and Seneca reached an agreement in which Seneca had agreed to halt efforts to run a slate of three director nominees for election to Reliant's board of directors at its 2006 annual meeting of stockholders.

Read more: Reliant seeks court ruling over hedge fund proposal

Fund of Funds & Returns

When choosing between a hedge fund and a fund of funds, one of the most decisive factors is the rate of returns. Just like mutual funds are for people who cannot stand the volatility of the stock markets, fund of funds help investors who don’t have a taste for risk. Since returns are assured, a fund of hedge funds is the preferred investment of choice for many pension funds, endowments, insurance companies, private banks and high-net-worth families and individuals.

What are the benefits? Well, since you get access to a broad range of investment styles, strategies and hedge fund managers, your returns are more predictable than traditional investment funds. Another big time benefit is that it allows you access to a broader spectrum of leading hedge funds that may otherwise be unavailable due to high minimum investment requirements.

The Returns Story

Long timers must’ve noticed that hedge funds are increasingly being structured more like mutual funds. Investment strategies that depend on long-only equity have allowed more institutions to expect a fixed rate of return on their investments annually. However, the downside of this effect is that despite hedge funds resembling mutual funds, their fee structure is still on the high side.

Most hedge funds employ a two-and-twenty fee structure wherein the hedge fund manager gets 2% of the investments to operate the fund for the first year plus 20 percent of the upside of anything he earns. This fee structure often leaves small investors with returns no greater than, or sometimes less than, returns on mutual funds.

Changing Markets, Changing Trends

In the past few years, the hedge fund industry has exploded in size and has gone from about $500 billion industry in 2003 to over $1 trillion now. 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.

But there is also an interesting aspect to this great growth story – a stunting of risk-taking ability. Today, hedge fund managers seem more reluctant than ever to make risky investments. Of course there are a few odd ones out there, but they only serve to underline the basic nature of hedge funds today – of toeing the line. The main reason is that their clients no longer want them to deal in risky 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.

Painful Problem Of Paying Your Hedge Fund Manager

I personally don’t do hedge funds – just cannot afford them you see. But if you can and do, then it must be pretty painful to watch your hedge fund manager buy himself yet another super luxury yacht or the nth vacation home in some exotic location. After all it’s YOUR money. Well, so they are making their billions and there’s not much you can do about it. Even if the fund hasn’t performed all too well. And that is what irks.

I mean I can understand if a fund manager can turn your money around and give you fabulous returns AND then ask for his pound of flesh. But if s/he takes his/ her pound of flesh even if the fund hasn’t done too well, I’d call that greed. What says? For instance, there was recent news of how hedge fund manager Sloane Robinson showed the top-earning partner made more than £58m in the 16 months to March 2006. and the worst part? Well these guys want to keep the whole thing hush-hush.

But how can you be so secretive when pension funds start investing in hedge funds. These funds are answerable to their investors so they have every right to know where their money goes. So it is in the hedge fund managers’ best interests to begin earning those grotesque figures.

The Idiot’s Guide To Starting A Hedge Fund

This is one article that just begs to be repeated. If you are in need of big money – say something like $140 million, what do you do? Start a hedge fund of course. Nowadays there are two kinds of people in the financial world - those who want to run a hedge fund, and those who want to invest in one. Dailyreckoning.com.au reports:

Oh, if only we had had this helpful information two years ago. We could have begun a hedge fund based on our Anti-Liquidity Variable Evolutionary Model Portfolio Theory. Which is to say, we could have taken in $1 billion…made a single call to place the money in gold bullion…and then taken a two-year vacation in the tropics.

Read more: Need $135 Million? Just Start a Hedge Fund

Hedge Fund Awards – Middle East

Man Investments, a leading provider of hedge fund products, and business media group Terrapinn have launched the Hedge Fund World Awards which recognizes and honors excellence in the Middle East hedge fund industry. The winners of the Hedge Fund World Awards will be announced on March 6, 2007 at a ceremony at the Jumeirah Beach Hotel, Dubai. Tradearabia.com reports:

The event will be one of the highlights of the Hedge Funds World Middle East conference which runs from March 5 to 8. The conference, entering its eighth year, is firmly established as the premier meeting place of regional investors and fund managers… For more information about the awards, including the link to the application form, contact Matthew Wallhead directly on tel +44 20 7092 1269 or email matthew.wallhead@terrapinn.com.

Read more: Mideast Hedge Fund World Awards launched

Barclays Fund of Funds Sims For $1bn

Barclays Global Investors (BGI) recently announced the launch of its fund of hedge funds. The AlpEx fund will be exclusively aimed at institutional investors and within the first 18 months the intention is to bring together $1 billion of managed assets. Bobsguide.com reports:

AlpEx will be headed by Stan Beckers, formerly of Barra International, while the US division will be led by Jonathan Morgan, formerly of Julius Baer alternatives.

Read more: BGI's fund of hedge funds aims for $1bn

Understanding The Connect Between Private Equity and Hedge Funds

There is a recent trend that is worrying investors no end. Well, we can hardly call it recent, but the phenomenon of the convergence of private equity firms and hedge funds is getting quite a bit of attention nowadays. Affected investors now want a broader and better idea of this convergence and how it will shape things in the future.

A recent survey by Grant Thornton and the Association for Corporate Growth shows that the blurring line between private equity and hedge funds was driven primarily by hedge funds. These hedge funds seek higher returns and hence more capital to manage and the diversification of risk. At the same time, private equity firms are looking for ways to generate capital faster rather than waiting for portfolios to mature. Americanventuremagazine.com reports:

Additionally, the survey revealed that 83 percent of the private equity professionals pointed to hedge funds as the drivers of this trend. Hedge funds concur, with 52 percent saying that they are behind the convergence, and only three percent believe it is a private-equity driven phenomenon. Further, 39 percent of private equity respondents say the trend is having an effect on private equity investing, while only 23 percent of hedge funds say it is affecting their industry.

Read more: Blurring of the Line: Private Equity and Hedge Funds are Converging

Hedge Funds To Have A Good Year

If your hedge fund manager offered you a 10% return for 2007 right now, would you take it? If Citigroup Alternative Investments is right, it might not be such a bad bet. Finalternatives.com reports:

In a note, the group predicts that hedge funds will average 10% returns after fees, Reuters reports, better than most indices did last year, but trailing the Standard & Poor’s 500’s 13.6% return.

Read more: Citigroup Crystal Ball: Steady Year For Hedge Funds

Calpine Rejects Harbinger Takeover Bid

This is a rather painful rebuff if you ask me. Calpine Power Income Fund recently urged its unitholders to reject a hostile $831-million takeover bid from U.S. hedge fund Harbinger Capital Partners. Calpine felt the offer was too low and that it could get better offers from other potential suitors.

Harbinger, part of Harbert Management Corp, went public with its unsolicited bid of $12.25 per unit on Dec. 19 saying it represented a 17 per cent premium to the pre-offer price. But Harbinger seems to have miscalculated the figures. How else do you explain the fact that since the initial offer, Calpine units have traded consistently higher than the Harbinger offer? Oilweek.com reports:

The Calpine fund said Harbinger is a major creditor to Calpine Corp. and was being opportunistic in using inside information to make its hostile offer. And it also said Harbinger was overstating the risks and uncertainties that the fund faces as a result of Calpine Corp.‘s insolvency and reorganization.

Read more: Calpine Power Income Fund rejects Harbinger hedge fund‘s takeover as `inadequate'

Chapman Capital calls for sale Of Sunpower

Activist hedge fund Chapman Capital LLC recently announced that it had notified the Board of Directors of Cypress Semiconductor Corporation of its recommendation that Cypress reorganize via a split-off and subsequent going-private LBO transaction. The company has been accused of under performing. A letter from Robert L. Chapman, Jr., Managing Member of Chapman Capital called for the launch of a large-scale "corporate reorganization". The reorganization plan would involve splitting from Sunpower Corp, in which Cypress has held a major stake in since 2002. Hedgeco.net reports:

The letter, calling for the sale of SunPower, says "Our long term investment in Cypress was made following passive participation in over a dozen recent conference calls and presentations, on top of countless inquiries to semiconductor and solar cell industry experts. In fact, it is our view that Cypress may be experiencing a slight, short-term order shortfall in line with others in its industry, a condition with which we are comfortable given our long term perspective."

Read more: Activist Hedge Fund calls for sale Of Sunpower

Your Hedge Fund Is Withholding Information From You!

Secretary of State William F. Galvin’s probe of the relationship between Swiss bank UBS AG and certain hedge funds is still on. Galvin seems pretty worried about the practices of this lightly regulated industry. Trying to stem any problems that may arise from earlier incorrect reports, Galvin emphatically claimed that he had not issued subpoenas to UBS. According to him, bank officials have agreed to provide testimony about the firm's relationship with hedge fund traders who operate out of UBS's Boston office.

One of the things Galvin is interested in finding out is if the hedge funds are paying for the office space through higher-than-normal trading fees to UBS. These funds may not be disclosing these arrangements to their investors. UBS leases space in its Boston and New York offices to the hedge fund traders to entice them into becoming significant clients sometime in the future. Boston.com reports:

Galvin said his regulatory oversight over securities operations registered in the state gives him jurisdiction over UBS's local operations. Moreover, as is the case in other states, Galvin's office said that local anti fraud statutes give him power to sue hedge funds if he determines they have cheated or misrepresented themselves to investors.

Read more: Galvin sees wider hedge fund worries

New Hedge Fund Update

U.K.–based Montanaro Fund Managers recently launched its first hedge fund, the Montanaro Absolute Return Fund, with EUR10 million (US$13.2 million) in assets. The Irish Stock Exchange-listed vehicle is an equity long/short fund that will invest in European small-cap companies and is aimed at retail investors. Finalternatives.com reports:

Riitta Hujanen, fund manager, said the new offering employs bottom-up analysis of European small-cap stocks with a futures-based hedging overlay component, which is not focused on individual stocks but on European equity futures market indices.

Read more: Montanaro Launches Maiden Hedge Fund, Targets Retail Investors

Read This Before You Invest

Are you wealthy enough to put aside a sizeable amount to ride the hedge fund wave? Well, then you probably want to invest in hedge funds. Before you take the decision to invest, there are a few things you need to know.

For instance, it is very important to know about the manager of the hedge fund you want to invest in. You must learn about the credentials and experience of the fund’s founders and principals. You don’t want to get stuck with a fund that sinks thanks to the inexperience or greed of your fund manager do you?

Next, try to understand the level of risk involved in the fund’s investment strategy. There are a wide variety of investment strategies available to hedge funds today. The risks corresponding to each strategy vary greatly and hence it is important for you to understand the aggressive or conservative nature of your fund’s strategy. This will help you determine if it meets your investing goals and tolerance for risk. Find out if your hedge fund manager follows any set of standards and a code of conduct.

Next, check the fee structure and how much of the money goes to the manager. Most hedge funds charge a management fee of around two percent and a performance-based fee of 20 percent. The fee structure for fund-of-funds is different.

One thing you must realize is that unlike mutual funds, hedge funds are more of illiquid assets. This means that while mutual funds can be bought and sold with relative ease, hedge funds limit the opportunities to cash in shares. They may also impose a lockout period during which time you may not be allowed to redeem your shares after an initial investment.

And the most important thing you must determine is if hedge funds fit in with your investment strategy and long-term growth plans. This means you must fully understand the structure and attributes of the vehicle in which you plan to invest.

Whose Money Is It Anyway?

Let me be honest here. I’ve always liked the idea of hedge funds – investing a truckload of money in the hope of getting multiple truckloads back. That’s what I call being rich. Only problem is… it’s a bit difficult to determine who actually gets rich. Is it the investors or their hedge fund managers? While I’d like to believe that both parties profit from this arrangement, the truth lies elsewhere.

Hedge funds are popular not only for the huge sums of money they make. They have been known to be extremely good spenders as well. That is to say hedge fund managers know how to show the money they earn. Rather too well, if you ask me.

Now, they seem to have found a way to curb the excessive spending. The latest in-thing for hedge fund managers are "hedge fund hotels". These posh plug-and-play suites are situated in posh places like Boston's financial district, or downtown London. In Singapore, these suites are even said to come complete with executive secretaries! There's a problem, though: banks back these luxury suites.

This means the hotels are often used as enticements to get hedge fund managers to invest in these banks. This means our ‘hard working’ hedge fund managers are using shareholder money to pad their heavy bottoms in luxurious suites. That’s not to say all hedge funds are in the same boat as these greedy few. But still it makes one wonder if regulation is not a bad thing after all. Regulation will make these guys accountable for every penny they spend, so they’ll think twice before stepping into that ultra-luxurious suite. What sezs?