March 13, 2008
Why bigger HFs not always better
While investors flock to bigger and better established hedge funds because of the imagined sense of security, they may be taking risks of which they are unaware.
In an interview with Thomson Investment Management News, Max Ferri, a senior analyst at Laven Partners, points out that because the big funds tend to attract more money, they are also more tempted to find lucrative ways of spending their cash load that may not be in line with their business plan. “Some funds set themselves reasonable targets when they start off,” Ferri says.
“However, with growth also comes greed and when people start knocking at the door like crazy, funds can start to overexpand.”
He says funds that experience exponential growth may find their capacity point is 100 times more than when they started and at that new level, “the strategy can no longer be run without carrying some sort of major risk, or is simply too big to be profitable.” That’s when such funds may suffer from style drift, and suddenly the fund becomes more correlated to the markets and less of a hedge fund.
Ferri, who is also in charge of hedge fund selection at Laven, says his firm sticks to early-stage managers, since “best returns are found within the first three years of a manager’s strategies,” while the assets are still manageable. And he says the “sweet spot” in terms of HF size is between $50-$100 million and $300-$400 million.
-emii.com-
Posted by su at 3:56 PM
March 12, 2008
How to avoid HF hiring mistakes
There’s more to hiring a hedge fund manager than just the right experience or an impressive track record. According to consultant SpencerStuart, problems arise especially when a professional is making the move from a traditional fund to a hedge fund.
So to avoid making costly and painful staff errors, SpencerStuart recommends "clearly defining the role and agreeing on a set of shared expectations." Both the potential employee and the heads of the HF should consider whether the person represents "a good culture and personality fit."
To begin with, hedge funds are structured differently.
"The resources available in a startup or small hedge funds are going to be less than what many successful executives are used to. A senior leader in a hedge fund won’t have a v.p., an associate and analyst working for him or her. They need to be willing to roll up their sleeves." one HF leader told SpencerStuart.
Best, he adds, is to "recruit people who have proven ability to do this and who will not complain about it."
There are also differences between hedge funds themselves. One firm may have an open investment committee with a lot of "honest, back and forth dialogue," reports SS, quoting a HF manager. "Some people can’t handle that." And it’s hard to tell from just a few meetings.
As one hedgie put it: "When considering whether to bring on talent, we constantly balance internal talent development with the need to bring in outside perspectives." He said they have had trouble with people who "bring the big firm personality with them - they are too political, too rigid or don’t work out well with peers."
Posted by su at 2:32 PM
Hedge funds attracting pensions, college endowments
Hedge funds globally are attracting more pension funds, foundations and college endowments that seek to diversify assets and boost returns, said Masa Yanagisawa, director at Merrill Lynch & Co. in Tokyo.
U.S. pension funds investing in hedge funds increased by 51 percent in 2007 from a year earlier, while in Japan their number rose by a third, said Masashi Toshino, a senior researcher on the industry at Daiwa Fund Consulting Co. in Tokyo, citing data from Pension & Investments, a New York-based provider of financial industry data, and Japan's Pension Fund Association.
``We're continuing to see strong needs from investors seeking to invest in hedge funds,'' Yanagisawa, 30, who heads Merrill Lynch Japan Securities Co.'s Financing Sales division, which provides brokerage services to hedge funds, said in an interview in Tokyo. ``The investor base is clearly changing and long-term money is starting to flow into hedge funds.''
Faced with increased pressure to boost returns as U.S. subprime loan problems rattle global financial markets, institutional investors, including pension funds and colleges, are putting more money into hedge funds because they take bigger bets and aim to make money in rising and falling markets.
Global Industry
The capital going into hedge funds from global institutional investors is expected to reach $1 trillion in 2010 from about $360 billion, the latest study published by the Bank of New York Mellon Corp. and Casey, Quirk & Associates in October 2006 shows.
Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.
The number of non-traditional hedge fund investors, such as pension funds and university foundations, increased this year at Merrill's sixth Global Hedge Fund Conference in West Palm Beach, Florida, Yanagisawa said, declining to specify the numbers.
Merrill's Financing Sales division provides hedge funds with prime brokerage services such as clearing, custody, securities lending, financing for assets and introducing fund managers to potential investors.
California Public Employees Retirement System, the largest U.S. public pension fund, last June announced plans to double its allocation to activist and hedge funds to more than $10 billion each. The top 200 U.S. pension funds invested a total of $76.3 billion in hedge funds as of the end of September, compared with $50.5 billion the year before, Daiwa Consulting's Toshino said.
Pension and Colleges
Meanwhile, Pension Fund Association, Japan's largest private- sector pension fund manager, allocated 4 trillion yen ($39 billion) to hedge funds as of the end of March 2007, compared with 3 trillion yen a year earlier, according to Toshino.
The best-performing U.S. college and university endowment funds in the year ended June 30, 2007, had more than half of their assets in so-called alternative investments, such as private equity and hedge funds, a Jan. 17 survey by the Commonfund Institute in Wilton, Connecticut, showed. The Commonfund is an investment manager for non-profit organizations in the U.S.
Even so, not all hedge funds are completely shielded from subprime problems and investors must be aware of taking risks, said Toyomi Kusano at Kusano Global Frontier in Tokyo.
`Headwinds'
``Hedge funds are facing one of the strongest headwinds in a decade now,'' said Kusano, president of the research firm that specializes in hedge funds. ``Financial firms are getting tighter with their loans amid the subprime problem and that's inevitably affecting hedge funds.''
Since Feb. 15, at least six hedge funds, with more than $5.4 billion in assets, have been forced to liquidate or sell holdings because their lenders -- staggered by almost $190 billion of asset writedowns and credit losses caused by the collapse of the subprime-mortgage market -- raised borrowing rates by as much as 10-fold with new claims for extra collateral.
Hedge funds ``sell themselves on the idea that they can do well in both up and down markets, but this has not been true in many cases,'' said Edwin Merner, who oversees $2 billion as president of Atlantis Investment Research Corp. in Tokyo.
Still, an increase in demand for hedge funds is heightening competition and consolidation among existing funds globally, Yanagisawa said.
Citadel Investment Group LLC, the Chicago-based investment firm founded by Kenneth Griffin, hired Kaveh Alamouti from Moore Capital Management LLC to run a hedge fund portfolio that will trade stocks, bonds, currencies and commodities.
New York-based Millennium Capital Management, the hedge-fund firm run by Israel Englander, bought the assets of London-based Castlegrove Capital to add more investors in Europe. An undisclosed number of Castlegrove's fund managers and employees will join Millennium's affiliate in London.
``We're starting to see bigger hedge funds buying out talents at smaller funds as consolidation accelerates within the industry,'' Yanagisawa said.
-Bloomberg-
Posted by su at 2:02 PM
March 11, 2008
HFs do more of their own research
Hedge funds are depending less on investment banks and independent researchers and relying more on their in-house version.
"The amount of research that the buy-side purchases from investment banks has absolutely decreased in the past 12 months and is likely to fall further in the future," Michael Mayhew, chairman of Integrity Research Associates, told Financial News.
This is painful news for hedge funds represent 40% investment-banking clients (with traditional fund managers making up the rest), but account for 70% of the total fees. Then there are the fringe benefits the banks lose out on: fees from prime services. The prediction seems to jibe with research conducted last year by Greenwich Associates, which found that 30% of hedge funds polled said they expect to rely less on sell-side research by the beginning of this year.
Mayhew says the trend doesn’t necessarily spell doom for investment banks as they still offer a wider range of research coverage than hedge funds, and self-research may not be an option for every HF. He says only the biggest HFs with the most resources can afford to create their own in-house research teams and absorb the associated expenses.
-emii.com-
Posted by su at 2:11 PM
March 6, 2008
Hedge funds face bigger 'haircuts'
Banks are forcing hedge funds to reduce their leverage by demanding they make larger cash downpayments to trade across a range of asset classes compared to 12 months ago, as lenders become more conservative and hedge fund failures increase.
Prime brokers, which finance hedge fund trades, demand a downpayment, also known as a "haircut," to cushion their losses if the fund's portfolio declines in value.
The downpayment required to buy certain types of structured credit on a leveraged basis started to rise last summer following the collapse of two hedge funds managed by Bear Stearns in August.
Since then, downpayments on almost all asset classes have increased, according to data from Citigroup.
For leveraged investors buying AA-rated corporate bonds, the average downpayment demanded by prime brokers, has increased from 0% to 3% of the value of the leveraged portfolio in March last year to 8% to 12% this month, according to Citigroup data, based on the bank's best estimates.
That means the maximum leverage has fallen from over 30 times last March to 8.3 times this month.
Similarly, the haircut on high-yield bonds rated BB has increased from between 10% and 15% to between 25% and 40%, reducing leverage from 6.7 times to 2.5 times.
On equities, the haircut has increased from 15% to 20%, which means leverage has fallen from 6.7 times last year to five times.
Some hedge funds have come under pressure to secure financing from prime brokers.
Last week, UK hedge fund Peloton Partners liquidated its $2bn (€1.3bn) fund that was invested in asset-backed securities. Banks were unwilling to continue extending credit in the face of losses accumulated by the fund.
Hans Peter Lorenzen, senior credit strategist at Citigroup in London said: "If banks face constraints because they have lots of assets coming back onto their balance sheets, it becomes harder for them to provide funding for leveraged transactions.”
He said there was also an issue for banks that have become more risk averse.
Banks will require higher haircuts to protect them against potential losses in a climate of increased volatility, but in so doing they are also making it more difficult for hedge funds to buy assets from them because the higher haircuts constrain the volume hedge funds can buy, compared to 12 months ago.
-Financial News-
Posted by su at 4:53 PM
March 4, 2008
Institutional investors make hedge funds a priority
Institutional investors are increasingly making hedge funds, especially funds of hedge funds, a top priority in their portfolios, according to a new survey.
In Preqin Hedge’s latest survey of 50 hedge fund managers, 55% said that the number of institutional investors in their hedge funds has increased over the last three years. And it is not just new investors that account for the increasing institutional client base of hedge funds: Existing investors, buoyed by the success of their existing hedge fund investments, are also increasing their allocation to the asset class to boost returns and add further diversity to their portfolio.
On the contrary, just 14% of hedge fund managers reported that their institutional investor client base had decreased over the same time period.
“With over half of managers reporting that their institutional client base has grown over the past three years, we predict that this trend will continue and that within a hedge fund the average proportion of investors coming from an institutional background will only increase in the forthcoming years,” Prequin wrote.
The study also found that institutional investors now make up 75% of funds with $25 billion or more in assets. Hedge funds established before 1995 have between 67% and 75% institutional clients while, on average, 60% of fund of hedge funds capital comes from institutional coffers. Global macro (58% institutional), long/short equity (57%) and multi-strategy (49%) funds are also popular with institutional investors.
“It is clear that fund of funds are a common choice for institutional investors with no less than 60% of fund of funds capital, on average, coming from institutional means,” said the firm. “Funds of funds are seen as an excellent route to gain knowledge about hedge funds whilst reducing an investors overall exposure to risky strategies.”
-FIN alternatives-
Posted by su at 9:55 AM
March 3, 2008
Furniture company - or hedge fund?
If you lose money selling couches and chairs, how can you pay your investors a hefty dividend? You play the markets.
Everybody's heard of mattresses stuffed with cash, or coins lodged beneath the cushions of a couch. But one venerable Virgina company seems genuinely confused about whether it's in the furniture business or the money business.
Bassett Furniture Industries (BSET), a 106-year-old furniture company founded by a traveling lumber salesman, has seen better days in the furniture business. It lost $19.9 million from continuing operations last year. Its revenues dropped 10% year-over-year - and three of the last four years. So how can it afford to pay any dividend, let alone an impressive 80 cents per share?
A quick peek at Bassett's 10-K however reveals the answer: The company has $51.7 million invested across a spectrum of hedge funds, which kicked in just over $5.92 million in loss-defraying cash last year. With an additional $25.1 million invested in marketable securities (80% equities), just under 25 percent of Bassett's $310.7 million balance sheet is now at work in the capital markets.
Having shut almost 60% of its U.S. manufacturing facilities in the past five years, management told Fortune that the investment portfolio is helping Bassett's balance sheet "stay flexible" without having to borrow money.
There's nothing wrong, of course, or even inappropriate about Bassett's surprisingly large hedge fund and real-estate investments, and they've no doubt helped keep the firm afloat. Without the annual $10 million-$12 million in returns thrown off from these investments, the profits of 2006 and 2005 would have gone up in smoke.
Bassett has come to rely on the returns generated by its investment portfolio because the U.S. furniture industry is in something of a collapse. Asian imports are now not only much cheaper, but of increasingly high quality. The effects of this competition have been devastating: tens of thousands of furniture-making jobs have been lost and a sharp decline in the fortunes of many publicly-held furniture makers.
So why not dump the furniture business and concentrate on the parts of Bassett that make money? Bassett's chief executive Robert Spilman told Fortune that his company is determined to stay in the furniture game. It has launched a series of initiatives designed to improve the performance of its retail stores, including rolling out a new store prototype and offering a series of do-it-yourself interior design options, which appear to be bearing some fruit. He predicted that revenues will likely stabilize, putting them on a $290-$300 million run-rate for this year.
The hedge fund stake isn't the only non-furniture lifeline the Basset, Va.-based company has, however. Last year, Bassett's 46.9% stake in High Point, N.C.'s International Home Furnishings Center - long home to the world's premier furniture trade shows, but which is seeing increasing competition from Las Vegas - provided $6.3 million in earnings and almost $6.1 million in dividends.
For 2006, a year when it reported a $5.4 million profit, over $11.7 million in income was recognized from the IHFC and hedge fund investments, keeping Bassett solidly in the black.
There is at least one high-profile dissenter from Bassett's strategy: activist shareholder Seth Hamot of Boston-based hedge fund Roark, Reardon and Hamot, who owns 5.1% of the company and is seeking to replace current board members with a hand-picked list of his own nominees. In an interview, Hamot told Fortune that neither the hedge funds nor the IHFC should be supporting the Bassett business anymore.
"This subsidy business should end and without any chance of continuance in the future," said Hamot. "Without the [hedge fund investments], management would have to face tough decisions to rationalize the business. The hedge funds and IHFC have no supported no job preservation for employees and have only served to delay decision making." Hamot argued that a management that did not have this hedge fund cushion would have sought a merger partner, and that regardless of the [hedge fund/IHFC] short-term performance, the investments are taking up valuable capital. "Investors who want to own furniture companies should own furniture companies; investors who want to invest in hedge funds should invest in hedge funds," Hamot said.
A Bassett spokesman asked to comment on Hamot's charges told Fortune: "The Company obviously disagrees with Hamot's position. These assets have been very important in supporting our retail transition, and in allowing us to pay out more than $48 million in dividends over the past five years. They have also allowed us to keep our debt relatively low and incur lease commitments and contingencies key to our retail growth strategies."
Who handles Bassett's money? Private Advisors LLC, a Richmond, Va.-based investment advisor, has overseen Bassett's investments in hedge funds since 1998, according to chief financial officer Barry Safrit. He told Fortune that the board picked the firm based on the recommendations of a former board member - he declined to specify which one - who had what Safrit described as "a relationship" with Private Advisors at the time. Safrit said that the hedge fund strategy is geared toward capital preservation. The hedge fund investments have been solid performers in the past three years, clocking in just below 11% each year, and beating the Standard & Poor's 500 index return last year and in 2005.
But Bassett faces a possible future headache: its $5.7 million investment in the D.B. Zwirn Special Opportunity Fund L.P. As Fortune.com reported last week, the fund is shutting this $4 billion portfolio down amidst a wave of investor redemptions. Further complicating matters is the fact that the Zwirn fund has a number of investments in private investments and loans, which are illiquid and difficult to value. The fund has stated that it might take up to two years to return client capital.
-Fortune-
Posted by su at 1:02 PM