November 2005
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November 30, 2005
Pension schemes take hedge funds into mainstream
Hedge fund investment is moving rapidly into the mainstream with one in five larger occupational pension funds in Britain now partly invested in the asset class, The Times has learnt.
An unpublished survey of 420 pension funds conducted by the National Association of Pension Funds has found that 20 per cent now have at least some hedge fund exposure.
Only two or three years ago, hedge fund investment was regarded as the most exotic of asset classes, pursued by only a tiny proportion of British pension funds. Chris Hitchen, chairman of the association’s investment council, said hedge fund investment by pension funds was now more readily accepted: “It’s got there in the United States; it’s getting there in the UK.”
The survey also found that while a significant minority of pension funds were expanding their hedge fund investments, none were cutting back.
The aggressive shift into hedge funds means scores of employers and millions of pension fund members are for the first time reliant on the asset class.
Mr Hitchen, who also runs the £15 billion Railways Pension Scheme, said the trend was because pension fund trustees were looking for diversification coupled with performance. It was also being encouraged by the flight of many of the most talented money managers to hedge funds, he said.
“There’s been such a flight of talent from the long-only market [traditional equity investing] to the hedge fund space that if you choose not to play there at all, you’ll tend not to outperform your benchmarks.”
Late last year Mr Hitchen’s scheme placed £600 million, 4 per cent of the total fund, with three US-based fund- of-fund managers, which put the money into more than 80 individual hedge funds. “So far it’s doing what we asked it to. We’ll keep it under review.”
RailPen’s target for hedge fund returns is a relatively undemanding Libor plus 4 per cent. The fund has about 350,000 members.
-Times Online-
Posted by su at 11:36 AM | Comments (0)
November 28, 2005
Hedge fund returns bounce in November
European hedge fund returns have risen in November, recovering along with equity prices from a slide in October, the worst month for hedge fund performance since August 1998, said EuroHedge on Friday.
The trade publication is not due to release its index of hedge fund returns for November until the end of December. But its managing editor said Novembers numbers are up so far.
For October, the EuroHedge Composite Index fell 1.17 percent, according to figures recently published on the EuroHedge Web site. That compared with a fall of 2.79 percent in August 1998 as the emerging market crisis sparked by Russian default drained liquidity.
For the 10 months to end-October, the index is still up 5.92 percent compared with 5.95 percent for all of last year. Between June and September, the index rose around 1.25 percent a month on average.
"They had a strong run between June and September, and there was a correction in October when there was an equity reversal," Neil Wilson, managing editor at EuroHedge, told Reuters. "October losses have mostly been recovered."
That is because most equity price rose in November.
Before the November rally, EuroHedge's indexes that specifically measure the performance of equity hedge funds still show returns of more than 7 percent for the year to end-October.
Data from Chicago-based Hedge Fund Research, which publishes daily returns, shows performance improved in November. Average hedge fund returns are up more than 1.5 percent so far this month, compared with losses of around 1.8 percent in October.
One of the worst performers this year has been the managed futures strategy, which makes trend bets on stocks, bonds, commodities and currencies on the basis of computer models that give out buy or sell signals.
Managed futures funds lost 1.47 percent in October and gained only 1.43 percent in the first 10 months of the year, according to EuroHedge.
Currency funds have also found it difficult to make money this year. The EuroHedge currency hedge fund index was up around 0.3 percent in October and up only 1.86 percent for the 10 months.
Hedge fund analysts say that is because currency funds have been on the wrong side of the dollar's uptrend for most of this year and that they also misjudged the timing of the revaluation of the Chinese yuan earlier this year.
-Reuters-
Posted by su at 11:56 AM | Comments (0)
Pension, hedge-fund ties a concern
Faced with growing numbers of retirees, pension plans are pouring billions into hedge funds, the secretive and lightly regulated investment partnerships that once managed money only for wealthy individuals and elite institutions.
The plans and other large institutions are expected to invest as much as $300 billion in hedge funds by 2008, up from $5 billion a decade ago, according to a study by the Bank of New York and Casey Quirk & Associates, a consulting firm.
Pension funds account for roughly 40 percent of all institutional money. While most pension plans have modest stakes in hedge funds, others have invested more than 20 percent of their assets. Weyerhaeuser, the Federal Way-based paper company, has 39 percent of its pension fund's assets in hedge funds.
In Congress, there has been a push for amendments that would make it easier for hedge funds to manage even more pension money, without having to comply with the federal law that governs company pensions.
Pension officials who have been shaken by market downturns and persistent deficits are attracted by hedge funds' promise of richer, or more consistent, returns.
But the trend has caused some consultants and academics to voice cautions. They question whether hedge funds, with risks that are hard to measure, are appropriate for pension funds, whose sole purpose, by law, is to pay out predetermined benefits to retired workers.
Source: Commodities Future Trading Commission
Those benefits are considered so crucial that they are guaranteed: Corporate pension failures are covered by the Pension Benefit Guaranty Corp., a government agency, while pension failures by governments are covered by state and local taxpayers.
Given that the benefits are paid out on a set schedule, critics wonder whether it makes sense to rely on investments whose returns are hard to predict, managed by private partnerships that disclose little about their operations and charge some of the highest fees on Wall Street.
"It's very inappropriate when the company is offering a pension plan that is guaranteed by the federal government," said Zvi Bodie, a professor of finance and economics at Boston University who writes and lectures on sophisticated investment techniques and is enthusiastic about hedge funds in other contexts.
Hedge funds make large, sophisticated investments based on the premise that by swimming outside the currents of the markets, often betting against conventional wisdom, they can outperform other investments. Hedge funds became famous in the 1990s, when managers such as Michael Steinhardt and George Soros made huge bets that sometimes produced returns of 30 percent or more.
But the surge of pension money into hedge funds is coming at a time when the returns of many hedge funds have been disappointing, raising questions about whether pensions are arriving at the party late. Hedge funds are up an average of 5.7 percent this year, according to Hedge Fund Research.
More recently, hedge funds have made headlines when they ran into trouble: Long-Term Capital Management, a hedge fund whose principals included two Nobel Prize-winning economists, nearly collapsed in 1998; and this summer, Bayou Group, a $450 million hedge fund based in Connecticut, shut down after most of its money disappeared. Its two officers have pleaded guilty to fraud charges.
Hedge funds are meant to be only for wealthy, sophisticated investors so regulators have not monitored them as they have stocks or mutual funds.
One of the first pensions to start working with hedge funds is also the nation's biggest corporate pension fund, the $90 billion General Motors fund. It started with a small test investment in 1999 and increased it to about $2 billion in 2003, said Jerry Dubrowski, a GM spokesman.
Most pension funds have modest stakes of less than 5 percent, according to a recent J.P. Morgan survey. Verizon has 3 to 4 percent of its portfolio invested with hedge funds, and is considering adding to its investment, said William F. Heitmann, senior vice president for finance.
Weyerhaeuser's big position has significant benefits for the company. Accounting rules let companies factor expected pension returns into their operating income; Weyerhaeuser's hedge-fund-laden portfolio allows it to claim expected annual returns of 9.5 percent.
For Weyerhaeuser, each 0.5 percent increase in the expected rate of return is worth an additional $21 million to the company's pretax income this year, according to Securities and Exchange Commission (SEC) filings.
Weyerhaeuser said in SEC filings that its actual pension-investment returns more than justify its assumption of 9.5 percent.
Weyerhaeuser is not alone: Eli Lilly has about 20 percent in hedge funds and the Pennsylvania state employees' pension fund has 22 percent.
Some companies and governments, such as Pennsylvania, make the argument that hedge funds are not really an asset class at all but an "asset management tool" that does not have to be disclosed as part of the pension fund's allocation to stocks or bonds.
Even as Congress has been working to shore up the pension system and strengthen the Pension Benefit Guaranty Corp., a provision to relax the pension law for hedge funds has been proposed.
The provision would raise the limit on how much pension money a hedge fund can handle before it is deemed a fiduciary under the pension law, which would require it to be more prudent and careful than is required under securities law and would bar some trades entirely. The provision was added to a broad pension bill in the House shortly before the Committee on Education and the Workforce approved the legislation.
Currently a financial institution becomes a pension fiduciary when more than 25 percent of its assets consist of pension money; the bill would raise that to 50 percent. The House bill would also change the definition of "plan assets," so that only corporate pension money would be counted, not pension money from government plans or foreign plans.
These two changes are not in the counterpart Senate pension bill that was recently approved, but they could be added during efforts to reconcile the House and Senate pension bills.
-Seattle Times-
Posted by su at 11:53 AM | Comments (0)
EU banks' hedge fund exposure low but growing
European Union banks' exposure to hedge funds is low but likely to grow fast as the industry expands, the European Central Bank said on Friday.
Risk management is generally strict, though there is room for improvement in counterparty discipline and preparations for the risk of several hedge funds collapsing together, the ECB said in a report on the links between banks and hedge funds in the EU.
"The banks surveyed generally had stringent requirements for exposures to hedge funds, with a strong emphasis on collateralisation," the ECB said.
Some EU politicians have called for more regulation of hedge funds to boost transparency in the sector, though the ECB has said that any new rules would need the cooperation of the United States, where many hedge funds are managed.
In addition, the report concluded that existing guidelines developed since the near-collapse of U.S. hedge fund Long Term Capital Management in 1998 remained relevant.
The ECB does not supervise banks itself, but does monitor risks to financial stability in Europe.
-Reuters-
Posted by su at 11:47 AM | Comments (0)
Hedge funds make markets more efficient
Speaking at a press briefing in London today, Francois Barthelemy, manager of the F&C Fund of Hedge Funds, challenged some of the myths surrounding the hedge fund industry. According to Barthelemy, hedge funds are criticised for their opacity and lack of transparency when, in fact, they tend to make markets more efficient. Whilst they are perceived as risky, their diversification effects reduce the investment risks contained in a balanced portfolio.
“There is a view that hedge funds destabilise markets, but, in our opinion,” he explained, “they usually make markets more efficient. Their ability to exploit a wider range of investment techniques and instruments allow them to extract value from investment opportunities that can be overlooked by traditional investors.”
“For instance, a company going through a bankruptcy process, such as Delphi in the US, will usually be shut from accessing traditional capital markets. Hedge funds have the flexibility to step in and, after conducting in-depth analysis, they can provide the financing needed for the business to carry on. These opportunities are typically executed at advantageous terms as they are ignored by most investors. This is where hedge funds add value”.
’Hedge fund’ is a term much used and abused so it’s worthwhile trying to define exactly what it means. He continued: “Hedge funds enjoy a high level of flexibility to use a wide range of strategies involving the use of derivatives, short selling and leverage in the pursuit of enhanced absolute returns while managing risk at the same time. They usually have a low correlation to equity and bond markets, particularly in falling markets.”
Growth in the market over recent years has been fuelled by the desire for absolute returns and uncorrelated assets by investors and the desire of investment managers for more flexibility, less regulation and the ability to earn performance fees. Hedge funds are certainly not new, though. Alfred Winslow Jones, who in 1949 employed a long/short investment strategy, is generally credited with having started the first hedge fund. The sector grew rapidly from the 1960s onwards yet the investment styles, and the strategies and tools with which to implement them, have changed over the years.
Hedge funds have continued to provide good absolute returns with low volatility even as they have grown rapidly. The hedge fund industry is currently estimated at around $1 trillion invested in some 8000 funds (source: Cazenove). Strong growth over recent years - the compound rate of growth in Assets under Management is around 30% p.a. over the last 15 years (Source: Hedge Fund Research, Inc, The Barclay Group, Hennessee Group and Man Plc, as at March 2005) - shows that the model of high asset base, low margin is not the only strategy for asset managers. Clients are prepared to pay high fees for good absolute performance.
-ISIS Asset Management-
Posted by su at 9:55 AM | Comments (0)
Do hedge funds harm or help the economy?
That question was raised recently not by concerned regulators or central bankers but by one of the most famously successful hedge fund managers in the world.
Speaking at a forum on the capital markets in New York last week, David Shaw, whose D.E. Shaw firm runs about $19 billion in assets, noted that the total pool of assets run by firms described as hedge funds stands at an estimated $1.3 trillion world wide -- bigger than the gross domestic product of many countries and large enough to move markets around the world.
But could the combined capital of some funds actually swing the markets in ways that could hurt you?
"The short answer is, I don't know. Nobody knows," said Andrew Lo, direction of the MIT Laboratory for Financial Engineering and a principal at the hedge fund Alpha Simplex Group. "The reason for that is, we don't have enough data on the particular exposures we need to measure to answer that question."
In his speech last week, Shaw noted that as more and more people start hedge funds -- there are an estimated 8,000 world wide -- it becomes harder to generate so-called alpha, or big, returns.
That can lead less experienced managers to venture into areas that fall outside their realm of expertise in the hope of generating big performance-related fees, managers say.
"The fact that hedge funds have become so important is really the flip side of problems that could be generated," said Lo. "If they ceased to function in the way they are designed, that would create a fair amount of systemic risk."
Jim Melcher, who runs a New York-based hedge fund called Balestra Capital, said hedge funds have the potential to cause "enormous disruption."
"I'm not worried about 8,000 hedge funds," said Melcher. "I'm worried about 400 or 500 of them ?that's what could start the ball rolling down the hill. While most hedge fund managers are pretty smart and knowledgeable, it doesn't take too many to start a rout. One nervous cow and you could start a stampede."
But there are benefits too.
Mike Hennessy, managing director at North Carolina-based fund-of-funds shop Morgan Creek Capital Management, called for perspective on the role hedge funds play in the capital markets.
"They're still a much smaller part of the market than traditional equity and bond markets," he said. "There are too many players who are not skilled, and if you take the industry as a whole, returns are tepid, but like any alternative asset class, if you look at the top quartile, you are getting superior money management."
What makes a fund a hedge fund? It's usually only open to wealthy investors, worth $1 million or more, and managers charge eye-popping fees to get in. Investors typically pay a 1 percent management fee and at least 20 percent of profits.
Capturing data on hedge funds is difficult, but the funds have grown exponentially, considering that in 1990 they managed a collective $38.9 billion, according to Chicago-based hedge fund tracker Hedge Fund Research.
"One of the important aspects is to recognize what a broad universe of investment strategies hedge funds comprise," said Robert Birnbaum, president of Third Wave Global Advisers, a Greenwich, Conn., hedge fund that focuses on broad economic trends, so-called global macro trading.
Birnbaum noted that while some funds invest in hedged stock portfolios, others buy the debt of developing companies and still others invest in distressed companies.
"So many managers act in such different ways that it's almost impossible to imagine every fund that's classified as a hedge fund acting in a similar manner," he said.
Shaw noted hedge funds can and do provide benefits to financial markets worldwide.
They make capital markets more efficient by finding inefficiencies in the markets. For example, hedge funds that employ "arbitrage" strategies simultaneously buy and sell separate but related instruments to profit from the difference, helping close discrepancies in some prices, Birnbaum pointed out. And they help banks and other institutions unload some of their risk.
In addition, short sellers at hedge funds have uncovered fraudulent activity at public companies, while activist hedge fund managers have held corporate boards of directors accountable to shareholders.
Hedge funds also provide liquidity to the capital markets. Alan Greenspan has publicly supported hedge funds for this reason.
Still, some managers remain concerned.
Balestra's Melcher, whose firm manages about $150 million, says his fund has had very good gains -- about 300 percent since its start seven years ago -- but he has always made risk control the number one priority.
"That's not necessarily the way a lot of funds are managed," he said.
-CNNMoney.com-
Posted by su at 9:08 AM | Comments (0)
November 22, 2005
South African retail investors get hedge fund access
Retail investors in South Africa will soon get the opportunity to invest directly in a limited range of hedge funds. Jurgen Boyd, who is in charge of the regulation of collective investment schemes at the Financial Services Board (FSB), says the industry aims to allow the introduction of regulated retail hedge funds by the end of the first quarter of 2006.
It was widely expected that the first funds to be approved would be funds of hedge funds, which would allow investors to spread their risk between a number of funds carrying out different strategies.
But Boyd says the first stage is to regulate the underlying funds. They will be allowed to invest in the same instruments as traditional collective investment schemes (unit trusts), including all listed shares, bonds and derivatives. But over-the-counter derivatives will not be permitted, and there will not be scope to launch funds in popular categories of hedge funds such as commodities and currency trading.
Unlike markets such as the US, there will not be a special category in SA called the qualified investor. With US$1m of investable cash, these investors are considered sophisticated enough to invest in hedge funds. In SA all retail investors, whether they are investing R200/month or a R1m lump sum, will be treated equally.
"It is not appropriate, with our history, to have first- and second-class investors," says Boyd. "And it is wholly arbitrary to say that an investor with R3m or R5m is financially sophisticated. What about someone who retires with a large lump sum but has no experience at all of investments?"
Retail investors would have been exposed to hedge funds through funds of funds wrapped in a five-year endowment. This is a regulatory loophole as the FSB does not regulate life companies at product or portfolio level, but concerns itself primarily with the solvency of the life office. The only stipulation is that hedge fund products are ring-fenced so that in the event of meltdown the losses do not contaminate the rest of the policyholders. The majority of these have been a basket of offshore hedge funds: Coronation, Charter Life (now Liberty Active) and Old Mutual International have been the biggest promoters of these products.
Unfortunately these funds have not provided attractive returns recently, but this is entirely due to the strength of the rand. In the three years to August 2005, the World Absolute Return Fund, run by Ivy Asset Management and sold by Old Mutual, has provided a negative 8,9%, though in dollars it was a quite respectable positive 7,1%, substantially better than a cash investment, and at much lower volatility than the equity market - 2,4% compared with 13,1% from the equity market. Ivy's Long/Short Equity fund has given a 10,4% return.
There are also already a number of hedged funds which appear in the domestic hedge fund databases, such as Allan Gray Optimal. It hedges out the market risk with futures so that the investor earns cash returns plus the excess returns Allan Gray can generate.
But recently this fund and competitors such as RMB Absolute Focus have not provided anything like the returns available from domestic hedge funds.
Optimal is in the market-neutral category of the Nedgroup Hedge Fund Review, but with a return of 7,3% over one year and 6,9% over two years it has lagged behind all the funds in its category as well as all the major asset classes in SA.
The track record of the domestic hedge fund sector to date indicates that the local industry is capable of delivering strong risk-adjusted returns.
According to the Nedgroup survey, the long/short equity category, in which most of the new regulated hedge funds will operate, has provided a 38,4% return with a standard deviation of 10%, or about half that of the market.
The more conservative market-neutral category has provided a return of 18% within volatility of 5%.
African Harvest Alternative Investments head Simon Peile says retail investors must be realistic and not expect returns of this magnitude. "Many of the most skilled managers will not offer retail products as they can raise as much money as they need through unregulated funds which operate through private partnerships. These products should be seen as hedge funds lite and will be launched primarily by large institutions to gather assets."
Some of the hedge funds in the Nedgroup survey showed exceptionally strong returns when they started life with R50m, but as the number of hedge funds increases, the opportunities to achieve such high returns diminish as there are fewer market inefficiencies to exploit. In the long term, investors must expect SA hedge fund returns to move closer to those in international markets - in which real returns of 3%-6% after fees are considered realistic.
But hedge funds will still play a useful role in most people's portfolios as their returns are uncorrelated with equities or bonds - if they are doing their job properly they should provide positive returns in all market conditions.
Kevin Shames, head of hedge funds at Alpha Asset Management, says the quality of regulated hedge funds is actually likely to be lower than unregulated funds. "Only those managers who are struggling to raise money will have an incentive to launch regulated funds. As a fund of funds manager I might consider disinvesting from a manager who decided to go the regulated route as he would have to concern himself with the added administrative burden of running a fund that is open to the public."
The FSB is not keen for regulated hedge funds to be treated that differently from mainstream unit trusts - it will allow shorting of shares and for funds to leverage (borrow money) and it will also insist that there is limited liability - because of leverage, investors in hedge funds can lose more money than they put in, but in regulated funds the fund manager will have to indemnify clients against this.
Morn Marais, CE of Tantalum Capital, a hedge fund launched on June 1, says he is unlikely to launch a regulated fund as he has been able to collect the assets he needs through the institutional market. "The only inducements would either be that our clients forced us - but it looks as though the FSB is quite comfortable for an unregulated hedge fund industry to operate in parallel with the regulated one - or if there were certainty that regulated hedge funds had the same tax treatment as unit trusts."
Many hedge fund managers, such as Marais and the colleagues he brought with him from Coronation, left the long-only investment industry to get away from the rat race of public unit trusts and to operate with a lower profile.
The development of regulated hedge fund products has been slow in the rest of the world - just 10 have been registered so far in Germany, a pioneer of the process in the EU.
The UK branch of the Alternative Investment Management Association (AIMA) recently said that the majority of its members had no interest in moving into the retail market as most did not need or want the perceived complications of dealing with retail money.
But it argues that hedge fund products nonetheless remain appropriate for the retail investor: a fund of hedge funds is far safer than a conventional fund which invests in derivatives.
Boyd says that the second phase in the development of regulated products will be the introduction of foreign and domestic funds of funds. "But we only accept funds that are domiciled in jurisdictions in which the regulator is as strong as SA's or stronger. Funds will have to be transparent and that is not negotiable. "
AIMA SA chairman Ian Hamilton says it is essential that there are fit and proper requirements on intermediaries which are more rigorous than those required to distribute conventional funds, and that hedge fund managers have special qualifications.
It is critical that all investors in hedge funds understand the nature of the risks they are taking on, and whether they are appropriate for their financial circumstances.
-Financial Mail-
Posted by su at 2:05 PM | Comments (0)
November 18, 2005
The efficiency market hypothesis and hedge funds
In 1997, after the devastation of his country’s currency and stock exchange, the Malaysian Prime Minister Mahathir Mohammed described hedge funds as the “highwaymen of the global economy”. This is because they usually have fewer than 100 investors and are not normally regulated by bodies such as the FSA and SEC. They pool the capital of high-net-worth individuals and institutional investors and invest it in a manner that they calculate will give them the best returns and at the same time manage risk. Their objective is absolute return, which is achieved by putting together a portfolio of securities uncorrelated to the benchmark index (S&P 500, FTSE 100), and this differs from the objective of other investors (e.g. mutual funds and retail investors), whose performance is normally assessed relative to an index.
Integral to this objective is their perception of the market. An investor who intends to give relative performance has consciously or unconsciously internalized the EMH (the efficiency market hypothesis of Eugene Fama). This states that it is impossible to “beat the market” because market prices are already incorporated and reflect all relevant information. At any given time, the prices of securities reflect all information available on a particular market. One investor cannot have the advantage of predicting the return on a security, since no one has access to information not already available to other people. Whereas most investors aim to mirror the performance of a stock exchange such as the Dow Jones or the S&P 500, hedge-fund managers search for investment opportunities by locating undervalued stocks or predicting trends in markets through techniques such as fundamental analysis and technical analysis.
Fundamental analysis is a way of evaluating stock by trying to assess its intrinsic value. This is also achieved by studying the economy, the financial situation, the industry sector and how the particular company is managed. The analysts would attempt to evaluate the company’s value and potential for growth by looking at the profit margins, the return on equity, the earnings, etc.
Technical analysis involves assessing securities by paying careful attention to and analyzing the data generated by market activity such as volume and past prices. The intention is not to evaluate the intrinsic value; instead, the analysts believe a security’s performance in the past is an indication of how it will perform in the future. This they work out by using charts to identify trends that would imply future performance.
After using either technical or fundamental analysis, an equity long/short fund manager would put together a portfolio of equities including some he intends to hold onto with the expectation that the price will rise. He would sell others other stocks (this is normally borrowed from a broker) with the expectation that they will fall in value (described as “shorting”). The equity long/short fund manager would use a strategy called the bottoms-up strategy, which does not emphasize the importance of economic and market cycles. It places more emphasis on the value of individual stocks. These long/short funds believe that individual companies can deliver good returns even when the sector is not yielding good returns.
The important issue for most investors is whether the market is efficient; if it is efficient, participants such as hedge-fund managers should not be able to generate returns where others are unable to do the same. Information should be made available to all participants at any given time. If the market is efficient, prices should be random, not predictable, and it should be very difficult to discern patterns. Even if information is available the critical question is whether they perceive information in the same way. Where hedge funds would distinguish themselves is in the way they value and analyze securities. Some look for stock that has growth potential, while others purchase securities perceived as underperforming and hold their positions till the market rebounds. A good example of a hedge-fund strategy like this is the convertible bond arbitrage. The fund manager seeks to profit from mispricings in the convertible bond market. They take a long position in the converting stock and short the common stock. Most convertible bonds are issued because the company is small and may have a lower credit rating. The hedge fund aims to make a profit from the equity component in a bullish market and from the bond in a bear market. The risk is hedged out by shorting the underlying stock, which locks in the mispricing and generates a return when the bond returns to fair value.
If the market is efficient, any single investor should not be able to attain greater profitability than any other when they have the same amount of invested securities in the same market. Because they possess the same amount of information they should achieve very similar returns. One investor should not be able to achieve more than the average annual returns of most investors. This implies that it is better for most investors to aim to invest wisely and at best mirror the index or invest in an index fund that would reflect the current state of the market.
This can be described as relative return (the investor’s performance versus the benchmark), while hedge funds aim for absolute return (returns uncorrelated with the market benchmark). A hedge-fund manager would develop a strategy for investing that would aim to generate returns under several conditions. A hedge-fund manager with an event-driven strategy would look for acquisitions, management changes, balance sheet restructuring and changes in the dynamics of the market which would generate returns. Some would have a portfolio with securities that generate profits in the short term and others that (owing superior research) would be profitable in the long term (the market overreacts to securities when there are changes in its structure). Event-driven hedge-fund managers have a strategy called distressed investing. Here they invest in securities of companies with low credit quality, companies that have filed for Chapter 11 or those that have a coupon default. They are able to make money out of these situations because mispricings occur owing to the irrational actions of creditors who respond to their distressed situation. They panic and sell because the creditors would rather recoup a small amount of capital than wait for the restructuring to take place. The hedge fund would research and identify the chances of the company paying debtors; they would meet the managers of the company, and they would point out the assets and debts (evaluate their worth if there is liquidation). They would choose the area to purchase, watch the different stages of recovery and sell their securities at a time when the company has improved. Many hedge-fund managers have a bias towards small-cap securities because they can make a lot more profit from this sector, which is less efficient than the large cap stocks.
At this juncture we need some clarity on the notion of efficiency in the market. Eugene Fama did not imply that the market would always be efficient. It would take some time for new information that was released to investors to begin to affect stock prices. The time it would take is not something he stressed. It takes time before there is an equilibrium in the market (this is the price at which the supply of goods matches the demand). In efficient markets, incidental events occur but are ironed out as prices return to the norm. Making profit from the market before securities return to their mean value would result in beating the market, but this is not a regular phenomenon. The laws of probability will not allow that. The probability laws state that at any given time in the market with several investors there will be those that overperform, those that maintain an average and then those that underperform. The hedge-fund strategy called global macro is one that aims to overperform. Their investments are based on macro-economic political views of several countries as well as on short-term opportunities to make profit. They have unrestrained global mandates and could trade across several markets in an effort to profit from global trends. The Malaysian Prime Minister Mahathir Mohammed was referring to macro funds like George Soros’ Quantum Fund. They would purchase stocks, currencies and bonds in one market after carrying out research. A global macro hedge-fund manager would short the FTSE 100 if he felt the British economy was bound to fall and go long on the Japanese Yen if he felt the Japanese economy was in recovery. They are able to influence the value of currencies and move indexes because they borrow money to buy and sell futures contract, which is in essence taking a bet (on the currency or index). This is similar to what Soros’ Quantum Fund did in 1992, when they earned $1 billion in profit by betting against the pound, which led to its departure from the single exchange rate mechanism.
A sceptical person would ask if Eugene Fama’s theory is weakened by its allowance of random incidences. Stock prices should react immediately to new information. If this is not the case, then outright market efficiency is impossible. Burton Malkiel in his book Random Walk down Wall Street emphasized that stocks take a random and unpredictable path. In spite of the fact that stocks maintain an upward trend with time, it is impossible to outperform the market without additional risk. Another counter-argument is that there are consistent patterns in financial markets, such as the January effect, which describes higher returns in the first month of the year. This is just one among several anomalies that go against EMH. Nassim Taleb in his book Fooled by Randomness stressed the importance of comprehending the structure of randomness. As investors, we are trained to recognize patterns and trends in financial markets. This allows us to suggest a cause and effect, which confirms our rationality (or makes sense of data). This does not mean that markets do not have large random factors that can surprise us.
Investors now use computerized systems to analyze their stock investments, trades and other activities. Some even use automated systems to take positions based on mathematical models. These computers are able to process new information and carry out trade executions. In spite of this, most decisions are still made by human beings who could make mistakes. Behavioural finance examines the effects of investor psychology on the price of securities. Investors tend to have a mass mentality. They would buy and sell the latest and most trendy security. This “herd mentality” results in distortions in the market prices as they seek to make a profit and avoid loss. In some other cases, overconfidence leads investors to not react adequately to new information concerning rewarding decisions they may have taken in the past. They may have the illusion that they have control in an uncertain market. At best they may react slowly instead of spontaneously.
CTA (commodity trading advisor) is a strategy of hedge funds that aims to reduce possible human error by trading in a systematic and directional manner. It is systematic because they use a trading system that is made up of a set of algorithms (rules) which is coded as a computer program. They trade using futures contract. We could describe them as trend followers, as they try to identify long- and short-term trends. They take up more positions as trends continue, which is called “leg into”, and exit positions when their objective is achieved, which is called “leg out”. An investment approach typical to CTAs is the top-down method of investing. With this method they evaluate the country’s economy and the sector giving the best returns due to the economic state of affairs and then decide which securities are the most attractive within the sector.
Stronger efficiency will occur when there are universally accepted systems of analysis for pricing stocks; there is very little trace of human emotion in investment decision-making and internationally there is access to high-speed and advanced systems of pricing stocks.
It is also important that we ask ourselves what makes markets move, what enables markets to gain points or shrink, and what makes them go through cycles or waves. The state of the market at any time is driven by the activities or the overall effect of many individuals trying to serve their interests by making profit through trade (Adam Smith’s invisible hand). These individuals have little impact; hedge funds, institutional accounts, arbitrage firms and mutual funds have the greatest impact on the market. In their attempt to beat the market index they develop highly sophisticated algorithms to discover the overbought and oversold conditions in the market. These tools enable them to determine when to take and exit positions. A strategy called equity market neutral is one where the hedge-fund manager takes long and short positions of equal amounts so his or her total net exposure is zero. They do this to generate consistent returns in an up and down market. Investors like hedge funds that intend to take advantage of the anomalies indirectly help to keep the market efficient. Markets are not entirely efficient or inefficient. They are normally a mixture of the two states of affairs.
Hedge funds in particular carry out superior analysis to determine these conditions and make profits from them while minimizing the risk. Before making investments they discern the Alpha, which is the risk attached to buying a particular security. The alpha is positive when there is extra return awarded to the fund manager for taking the risk instead of accepting the market returns. The Beta is the measure of a portfolio or security’s volatility in comparison to a market or an index. These two concepts enable the fund manager to focus on generating profit while at the same time assessing how much risk he is taking. The hedge fund would also allow the evaluation of the level of volatility of the portfolio, which could affect the ability to give clients the promised absolute return.
Hedge funds also keep well diversified and unconcentrated portfolios. This is best achieved with multi-strategy funds and fund of funds. The multi-strategy funds are single managers investing across a number of other hedge funds. In some cases the managers have some funds of their own that they run. They then allocate funds to other funds that may have similar strategies or a variety of them. This means that their investments are diversified across several sources of returns and thus less susceptible to Nassim Taleb’s random factor. The fund of fund strategy is one in which a single management company invests across a range of hedge funds without managing a fund themselves. Their skill is in the ability to pick the right funds after research and due diligence. They tend to give investors access to the best hedge funds in the market and the minimum investment is not as high as in single-strategy hedge funds.
Hedge funds have a slightly different perception of the market from most investors. With sophisticated methods of analysis they are able to search for investment opportunities before there is equilibrium in the market. This is where the technique of shorting is very useful. Although Eugene Fama is correct in claiming that information is available to everyone, hedge funds process the information faster, with more computerized systems, which enables them to minimize human error and not move with the herd (thereby identifying the 20% of securities that have been mis-priced). They are able to beat the market on several occasions because they are able to gather enough capital (which they can keep for longer periods called lock-ups) and invest in the most proficient way while reducing risk and remaining diversified. The activities of Warren Buffet and John Templeton provide enough evidence of this.
-HedgeCo.net-
Posted by su at 10:41 AM | Comments (0)
Hedge funds look for bounce back
Hedge funds were hurt last month by the poor performance of global equity and bond markets, but they are already anticipating a bounce back. The hardest-hit strategies, including long/short equity and special situations, are among those expected to rally.
Widening spreads will benefit relative value and event-driven investments, said Max Gottschalk, senior managing director at Gottex Fund Management. "There should be some good opportunities in the next couple of months," he ventured, adding that November has also started strongly for equities.
Long/short equity funds are thought to have suffered most in October, and the FTSE Hedge Global Index suggests an average drop of 3.5% for long/short managers. Many had increased their gross and net exposure to get more directionality, which paid off in previous months, said Scott MacDonald, director at Mellon Global Alternative Investments. "I think they got more long-biased than they ideally wanted to be." By reining in their long exposure once again, managers will likely gain back some of their October losses in the next couple of months, he said.
According to the FTSE index, event-driven strategies lost an average 2.2% in October. But such funds should bounce back in the near-term, said MacDonald. "Special situations took a hard hit, and I think some of that was mark-to-market," he explained. "A lot of positions were getting hurt more from association: the whole strategy suffers because spreads widen a bit. It has a knock-on effect." Investors rushing to exit positions will create new opportunities in the coming months, added MacDonald.
Bill Maldonado, ceo at HSBC Alternative Investments Limited in London, agreed, but warned that nothing is certain. "These things tend to go in cycles...but there's no guarantee that [a large-scale bounce back] will happen and, indeed, many that were affected in October have removed risk," he said.
-Alternative Investment News-
Posted by su at 10:13 AM | Comments (0)
November 17, 2005
Hedge funds a positive force in markets
Federal Reserve Chairman nominee Ben Bernanke said on Tuesday that hedge funds were "a positive force" in the nation's financial system but the U.S. central bank needed to monitor their activities.
Responding to questions from Democratic Sen. Paul Sarbanes of Maryland before the Senate Banking Committee, Bernanke said that hedge funds were far more sophisticated now than was the case when Long-Term Capital Management collapsed in 1998.
"I think it's important not to be complacent. It's important for the Federal Reserve to be aware of what's going on in the market," Bernanke said. "Nevertheless....the hedge fund industry has become more sophisticated, more diverse, less leveraged and more flexible in the years since LTCM."
He added that while the Fed, which has a bank regulatory role in addition to setting monetary policy, must be aware of banks' involvement with hedge funds, "my sense is that, on net, they are a positive force in the American financial system."
-Reuters-
Posted by su at 9:41 AM | Comments (0)
November 15, 2005
Hedge funds outraged at 50-pound breakfast
The trillion dollar hedge fund industry was aghast on Monday at having to fork out 50 pounds a head for a buffet breakfast briefing on how to do their job correctly with the Financial Services Authority.
"It's outrageous," said one hedge fund manager who declined to be named.
"We are paying the FSA 50,000 pounds a year to be able to trade and they are now asking for 50 pounds more so we can hear how they are going to regulate us," he said.
The audience with Andrew Shrimpton, the head of the FSA's new hedge fund supervisory unit, is in early December and the regulator said it will give hedge fund managers a chance to talk over industry issues.
But the multi-millionaire traders shouldn't come hungry.
"It tends to be croissants, pastries and coffee. It's a buffet breakfast not a slap-up eggs and bacon affair," an FSA spokesman said.
He said a fee was always charged for such industry events and the regulator did get "the odd complaint" about the cost.
Hedge funds managers, which include some of the highest earners in the financial sector, said a charge was justified in cases where the FSA offers training, but 50 pounds for a breakfast was wrong.
Europe's most powerful markets enforcer warned in the invitation that 'bookings will not be accepted without payment' and 'early booking is advised.' A tea cup is pictured on the invitation.
Earlier this week, the FSA said it was working to ensure that the "very high rewards" paid to hedge fund managers do not encourage bad market conduct.
Some hedge funds now fear the 50 pound breakfast charge could be the regulator's opening salvo.
The once-secretive hedge funds have come under the scrutiny of regulators worldwide as the industry expands and begins to attract investors beyond the wealthy and institutions.
-Reuters-
Posted by su at 10:57 AM | Comments (0)
EU pensions committee eyes hedge fund role
The European pensions supervisory committee CEIOPS wants to serve as a focus for debating issues that impact occupational pension supervision from other sectors, such as hedge funds.
“CEIOPS should serve as the lead forum for discussing any issue that might directly or indirectly affect the supervision of insurance, reinsurance or occupational pensions within the EU,” the Committee of European Insurance and Occupational Pensions Supervisors said.
“This also includes supervisory issues that spill over from other financial sectors, having an effect on insurance and occupational pension supervision (e.g. hedge funds, credit risk transfer etc.).”
CEIOPS is already undertaking a survey on the use of hedge funds in structuring unit-linked life insurance products.
CEIOPS, in its draft medium term work plan, also said it plans to assume the function of a “thinktank” in the area of insurance and pensions supervision. It plans a chat room on its website.
It said the increased use of derivatives and private equity by pension funds and insurances were examples in this context.
The Committee is already in contact with the International Association of Insurance Supervisors and the International Organisation of Pensions Supervisors.
It also has close relations with US and Swiss supervisors – and plans to contact supervisors in China.
-IPE.com-
Posted by su at 10:56 AM | Comments (0)
Hedge fund rout comprises an opportunity
This year's slip-up for convertible arbitrage hedge funds has brought an opportunity in its wake. John Calamos, founder and chief executive of Calamos Asset Management, long one of the world's biggest investors in convertibles, says that the rout for hedge funds this year, after the funds misjudged a few big calls, has created the biggest buying opportunity in a decade.
"We see convertibles as being about getting the upside of the market at bond market risk," he says. "The market is undervalued right now. The last time we saw convertibles this cheap was in 1994. In fact it's cheaper now. We are buying as much as we can. As interest rates went up, the hedge funds leveraged up too much, and there were a lot of forced sellers, creating an opportunity for us." He also believes the European market is undervalued.
-FT.com-
Posted by su at 10:35 AM | Comments (0)
Study relates risk climate and returns
A recent study indicates that most hedge fund strategies fare better within risk-seeking market conditions than they do in risk-averse conditions, and that this sensitivity to the surrounding "risk regime" explains the recent run of hedge fund success.
The converse proposition, then, is that an increase in risk aversion, one which would manifest itself in wider spreads and more expensive options, would bring that run of success to an end.
The new paper by Conquest Capital Group LLC, New York, distinguishes five different sorts of risk, each of which generates a premium—i.e., an extra level of compensation for its assumption. The five sorts of risk are: illiquidity, credit, emerging market events, currency exchange volatility, and equity volatility. Since these premia are of variable quantities, each has its own market measurement ("metric"). Respectively, the five corresponding metrics are swap spreads, corporate bond spreads, emerging market bond spreads, FX implied volatility, and the Chicago Board Options Exchange volatility index (VIX).
The Conquest risk aversion index is a binary one, based on these five metrics, taken day by day. If at least two of the five indicated a heightened risk premium on a particular day, the environment is said to have been risk-averse. If four or five showed low risk premia, the environment was risk-seeking. Considering all the days since the index began in January 1997, the percentage of risk-averse days so defined is 30.9%. Considering only the period from Oct. 1, 2002, to Sept. 14, 2005, though, the percentage of risk-averse days is much lower, 10.1%.
For convenience, Conquest then clustered days into months, treating as risk-averse any month in which more than half of the days were risk-averse. It then discovered that the only hedge fund index that performs better in risk-averse months than in risk-seeking months is the CSFB Tremont dedicated short index, which also is the only index with a negative "information ratio" (return divided by volatility) overall.
Managed futures, likewise, do better in risk-averse conditions than in risk-seeking conditions. Managed futures are also "robust," meaning they can yield positive returns under both risk regimes.
What follows from all this in practical terms is that investors might be wise to guard against a change in risk regimes by allocating some portion of their portfolios to managed futures.
-HedgeWorld.com-
Posted by su at 10:04 AM | Comments (0)
November 10, 2005
AIMA lukewarm on retail access to hedge funds
The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association, has issued its response to the UK Financial Services Authority discussion paper exploring options for allowing the spread of hedge fund products to retail investors.
Published by the FSA in June 2005, the paper, entitled “Wider-range Retail Investment Products” deals with the issue of an appropriate regulatory regime which would allow retail investors access to hedge funds, or investments modelled along similar lines to hedge fund strategies.
In its response, AIMA stated that the majority of its members have no interest in retail access as most "do not need or want the perceived complications of dealing with retail money."
"In AIMA’s view, there are still misunderstandings regarding the risk inherent in certain hedge fund products or strategies," the response paper stated.
The paper went on to observe that:
"Funds of hedge funds, for example, would be a far ‘safer’ investment for a retail consumer than a UCITS III fund which invests in derivatives, particularly where the UCITS manager does not have the same depth of experience in these markets as some hedge fund managers.
"Having regard to the FSA’s statutory objective of consumer protection, and the possibility of confusion and mis-selling, AIMA believes that disclosure is the key. Such disclosure should be full, accurate and plain. Both the industry (distributors) and the regulator should share the role of educating investors about the aims or outcome of a product, rather than have regulation applied to the product itself.
"AIMA also believes it essential that intermediaries who may sell products to retail consumers fully understand the products they are selling."
Nonetheless, some of AIMA's members, mainly the large traditional fund management groups with experience in the retail market, have been developing more alternative strategies and are interested in further developments in the retail end of the spectrum.
"They have the necessary infrastructure and the interest in opening the market to certain hedge fund products, provided of course that the regime under which they would operate is appropriate," AIMA said.
-Investors Offshore.com-
Posted by su at 3:35 PM | Comments (0)
Spain lets local asset managers invests in hedge funds
Spain's government is allowing mutual funds to buy hedge funds, clearing the way for asset managers to catch up with peers in countries such as the U.K. and Germany, reports Bloomberg.
Individual investors won't be able to buy hedge funds directly, though they will be permitted to invest indirectly through mutual funds.
Spain is letting domestic firms enter the USD1 trillion business after discussing the measures for about two years. Spanish regulators have been cautious about allowing new funds aimed at small investors after a Madrid-based brokerage collapsed in 2001 with more than EUR100 million euros missing. The delay forced asset managers who want to sell hedge funds to face extra costs of setting up foreign units to market the investments.
The government have also implemented a measure that recognises prospectuses for share sales and bond sales from other countries in the European Union. The measures also regulate maximum commissions that funds may charge, and allow mutual funds to invest as much as 10% of their assets in venture capital.
Posted by su at 3:18 PM | Comments (0)
October a washout for Europe funds
Hedge funds in Europe had a rough October, with most strategies posting negative numbers, according to two leading indexes.
The FTSE Hedge Index was down 1.5% last month and is up just 1.5% for the year through Oct. 31. Meanwhile, all the strategies in the Edhec Investable Hedge Fund Indexes reported losses except convertible arbitrage, which has had a less than stellar year overall, with a drop of 3.1% so far in 2005.
The best performance in the FTSE index came in the non-directional arena, where fixed-income relative value managers gained 0.6% in October and are up 2.9% for the 12 months ending Oct. 31. Rising interest rates, inflation and tough talk from the U.S. Federal Reserve contributed to the woes of directional and event-driven managers, FTSE indexers said in their monthly report.
Equity hedge funds were down 3.5% last month and were hit hard due to their long bias to equity markets. Commodity trading advisers (down 0.2%) and global macro managers (negative 0.4%) also were hit hard by long positions in equities, bonds and energy, according to FTSE.
In the tally kept by Edhec, CTAs fared even worse, with a negative return of 1.49% last month. The worst-performing strategy in the investable indexes in October was long/short equity, which gave up 2.41% and is up a meager 2.13% for the year to date.
Equity market neutral managers lived up to their name and avoided market-related losses for the most part. Last month their strategy was down 0.53%, but Edhec reports for the year through Oct. 31 the category gained 5.2%.
"The returns for the month of October confirm the general trend over the last year, where hedge funds have performed below their historical average," Edhec officials wrote in their monthly report. "Convertible arbitrage is the only strategy that maintained positive returns this month and actually stayed close to its historical mean return in posting a positive return for a fifth month in a row."
-HedgeWorld.com-
Posted by su at 3:07 PM | Comments (0)
November 8, 2005
Funds of hedge funds enhance due diligence procedures
Funds of hedge funds are beefing up due diligence procedures, reacting to the scandal around the collapses of Bayou Management and Wood River Capital Management, reports AIN sister publication Compliance Reporter. The firms increasingly use third parties to screen backgrounds of the personnel, said George Mazin, partner at Dechert in New York. Mazin said funds of hedge funds are probing more carefully by, for example, verifying valuations.
Funds of hedge funds owe a fiduciary duty to investors to carry out due diligence and the obligation heightens if it is a registered investment adviser. George Zornada, partner at Kirkpatrick & Lockhart Nicholson Graham in Boston, said his firm recommends visiting the manager's administrator on site.
Rules, however, do not specify what due diligence procedures should entail. Some are adding outside auditor verification to check whether the financial statements the auditor has are the same as those the hedge fund manager gives them.
The Securities and Exchange Commission in September charged Bayou's managers with overstating their hedge funds' performance, pilfering investor funds and creating a sham accounting firm. Anthony Artabane, partner at PricewaterhouseCoopers in New York, said he has started receiving calls from investors seeking to verify that PwC is the hedge fund's auditor, but he is legally prohibited from speaking to investors. Artabane said auditors need to devise a means of confirmation, acknowledging it is a hurdle.
Suzanne Murphy, managing director of due diligence for Acorn Partners, a fund of hedge fund and registered IA in New York, said her firm has procedures in place that would have detected the problems at Bayou and Wood River. Firms should have been beefing up their procedures all along, she said.
Acorn Partners conducts due diligence of the auditor and does not invest in a hedge fund that fails to provide audited financials. "We don't only need to see the audited financials, we read the footnotes," Murphy said. Acorn also routinely conducts background checks if the manager is an unknown quantity, she said, adding Lexis-Nexis searches are one method. Acorn Partners prefers managers who take liquid positions because it is easier to monitor valuations. "We tend to favor strategies with easily marked positions," Murphy said.
-Alternative Investment News-
Posted by su at 9:55 AM | Comments (0)
November 7, 2005
Culross Global Management Ltd. visits Asia
Chris Keen, one of the partners, is planning to be in Asia during the 14th Nov - 23rd Nov. His time and geographical allocations are as follows:
Nov 14-16 : Kuala Rumpur
Nov 17-18 : Singapore
Nov 21-23 : Hong Kong
These allocations will change depending on the clients' needs. Chris is also considering visiting Mainland China, Taiwan, Thailand and Indonesia depending on the clients' need.
Chris will update investors on our existing fund, Culross Global Fund, Culross Global Arbitrage Fund and a new fund, Class 'H', which we launched in September to premarily focus on high returns with higher volatility.
Posted by su at 10:34 AM | Comments (0)
November 3, 2005
Net inflows into hedge funds stabilizes; Industry grows at 1.6% for the third quarter
Third quarter hedge fund asset flows were announced by Tremont Capital Management, Inc. in its Asset Flows Report for the Third Quarter of 2005.
According to the Report, Emerging Market hedge funds gained assets at a 7.8% rate as investors increased allocations to this top performing sector.
Convertible Arbitrage, although continuing to trail with outflows of 5.5% of assets during the quarter, showed improvement over the 9.2% outflow it suffered during the previous quarter, as fundamental factors improved and some funds in the strategy saw net inflows.
"The third quarter of 2005 showed the stabilization of net inflows to the industry as a result of improved performance in the third quarter. While investors' overall interest in hedge funds is regaining momentum, it's growing at a slower rate than the long term average quarterly growth rate of 2.7%," said Robert Schulman, CEO of Tremont Capital Management.
The Asset Flows Report showed that, for the third quarter, the strategies that attracted the greatest amount of net assets in absolute terms were Long/Short Equity, Event Driven and Emerging Markets strategies, showing inflows of $5.6 billion, $3.9 billion and $2.9 billion, respectively.
Style Asset Flows as a % of AUM Q3 2005
Emerging Markets 7.8%
Event Driven 2.6%
Long/Short Equity 2.4%
Multi Strategy 2.1%
Fixed Income Arbitrage 1.5%
Dedicated Short Bias 0.7%
Managed Futures -0.4%
Global Macro -1.4%
Equity Market Neutral -2.0%
Convertible Arbitrage -5.5%
All Styles 1.6%
The researchers believes that the expertise and flexibility of the Long/Short Equity manager is attractive to investors concerned about the instability of the current markets.
Likewise, that sense of caution has led investors back to strategies usually shown to work in challenging markets such as Event Driven and Multi-Strategy.
As far as the gains in Emerging Markets, the researchers attribute them to the success of markets in Eastern Europe and parts of Asia and Latin America -- including China and Brazil.
The quarterly Tremont Asset Flows Report is based on an asset base of approximately $800 billion in hedge fund assets.
The universe represents a broad array of managers and funds located in the U.S. and overseas. Tremont currently estimates the global industry's assets to be at approximately $1.05 trillion.
Posted by su at 5:21 PM | Comments (0)
November 1, 2005
Hedge funds headed to a high street near you
Consumers will be able to invest in hedge funds through their high-street banks under proposals being considered by the Financial Services Authority (FSA).
Currently, hedge funds, which are estimated to manage about $1 trillion (£560bn, E830bn), are regarded as an investment option open to institutions or rich individuals. Such a move could allow individuals to invest in hedge funds through their high-street bank and to have hedge fund holdings through their ISAs or Sipps.
After consultation, which closed on Friday, the FSA, Britain’s financial watchdog, has created a specialist unit that will supervise hedge-fund managers more closely. It wants to bring regulations up-to-date with those associated with traditional fund managers and open up the lucrative market to a wider base of potential investors. A source close to the process said: “Expectations are high. The FSA could truly swing the door open for hedge funds.”
Britain has the largest hedge-fund investment in Europe and the FSA is increasingly recognising the importance of hedge funds to financial markets. But at the same time the regulator is concerned about the apparent regulatory vacuum in which they operate and wants to create a safer market.
The watchdog views the high commissions paid by hedge funds to counterparties, together with light regulatory oversight, as an environment ripe for market abuse. Hector Sants, an FSA official. recently said: “Some hedge funds are testing the boundaries of acceptable practice.”
-The Business Online-
Posted by su at 1:40 PM | Comments (0)