December 2005
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December 21, 2005
What's in store for hedge funds in the coming year?
What's in store for hedge funds in the coming year? How about more money ... and more scrutiny from regulators and investors.
Such funds - private investment pools catering to wealthy investors and employing a variety of non-traditional investment strategies - are coming off a so-so year. Nevertheless they remain attractive to investors and institutions looking for better returns amid the uninspiring investment landscape. And with those investors will come the feds.
"You are going to see a lot more SEC investigations of hedge funds and money management organizations in the upcoming year for trading improprieties and things that aren't kosher," said Daniel Strachman, principal of New York-based financial services firm Answers & Company Group and the author of "Getting Started in Hedge Funds."
Strachman believes that the frauds at Bayou Group, KL Financial and others as well as the newly imposed registration rule, set to take effect in February, will spur increased SEC investigative action. He also feels the SEC will commit a significant amount of resources to hedge funds in 2006 to prove a point to people who objected to registration on the grounds that the SEC doesn't have the manpower to enforce it.
The Securities and Exchange Commission filed more than 20 enforcement actions against hedge funds or purported hedge funds in 2005. In the most notable case, Bayou Group, investors lost $450 million to outright fraud.
'Pension money to keep flowing in'
More and more pension funds are finding it difficult to meet payout obligations as their traditional investments in stock and bond markets have disappointed. As a result these institutional investors have begun to turn to alternative asset classes, such as hedge funds, to boost their coffers. Such moves are likely to multiply in 2006.
"I just don't know what they are going to do otherwise to catch up. If people start to see how bad of shape they're in - and you can't just invest in bonds to catch up - investing in hedge funds (will be viewed) as a real strategy," said Randy Shain, executive vice president of investigative due diligence firm First Advantage CoreFacts, which publishes BackTrack Reports.
Fred Dopfel, managing director of the client advisory group at Barclays Global Investors, said his firm has seen a marked increase in pensions investing in hedge funds. He thinks pensions will keep investing in hedge funds to get performance above regular market returns.
Dopfel added that hedge funds have historically been financial products for the private wealth market, but as the number of institutional investors continues to climb, hedge funds will start looking and acting more like institutional-quality investments. This means increased attention to controlling risk, increased transparency about their trading strategies, and producing returns in excess of the average hedge fund.
'Wave of consolidation'
Many industry experts think that the industry will see consolidation in 2006 meaning that some existing funds will fold, and those assets will flow into others.
People in the business say one prime area for consolidation is the fund of funds segment. Funds of funds, in which a manager invests in hedge funds on behalf of clients and charges an additional layer of fees, have come under fire this year for underperforming, as the managers they invest in have also had a tough time putting up strong numbers.
There is hard evidence that the industry is taking a hit: A recent survey from Chicago hedge fund tracker Hedge Fund Research found that during the third quarter, funds of funds lost $1.2 billion in assets.
"It's an elegant concept, but it's not working," said Jim Melcher, founder and principal of Balestra Capital, a New York-based firm that operates both a hedge fund as well as a fund of funds. "It's tough when you layer a bunch of fees on top of a bunch of fees. You're basically strapping a car battery around your ankle when you try to go swimming."
Strachman of Answers & Company Group said tough times for funds of funds this year means that chances of survival lie with the largest, most established funds of funds, who already have access to the industry's top managers.
Regardless of whether consolidation takes place, Robert Schulman, chief executive officer of Tremont Capital Management, a hedge fund investment and advisory firm, said he thinks that the number of hedge fund start-ups will decline in 2006.
"There will be fewer hedge fund launches; it's much more expensive and requires more capital and infrastructure" than it used to, he said. "It's harder to wake up and say, 'I'm starting a hedge fund.'"
-CNN Money-
Posted by su at 11:59 AM | Comments (1)
December 20, 2005
Hilton foundation eyes maiden alts foray
The $2.5 billion Conrad N. Hilton Foundation in Los Angeles will conduct a rare asset allocation review that could result in a maiden investment in alternatives and manager changes. "We really want to take a step back and look at the big picture and that includes seriously looking at alternatives," Steven Hilton, the foundation's chairman and ceo, told AIN sister publication Foundation & Endowment Money Management. Not investing in alternatives is "almost unheard of for a foundation our size."
The review was prompted by impending organizational changes at Pacific Financial Research, which manages about $650 million in large-cap value equity, Hilton explained. Because it needs to discuss whether to replace PFR, the fund decided to take the opportunity to review its entire portfolio. "It's an exciting time for the asset side of the foundation because we haven't had to do this in a long, long time," he said.
Cambridge Associates will educate the fund on alternatives. The foundation's first priority will be to set an asset allocation and then "specify the managers we will be looking at going forward," said Hilton. The fund's exact allocation mix could not be learned by press time.
Barrow, Hanley, Mewhinney & Strauss will assume control of Pacific Financial Research at the beginning of the year. The move follows the retirement of PFR principals James Gipson, Michael Sandler and Bruce Veaco. Hilton said the foundation will stick with BHMS "for the time being," but will assess its relationship with the firm when it reviews its assets. PFR has added approximately $80 million to its mandate through good performance over the 15 years it served as a money manager for the firm. "We had a big bet on Pacific Financial and we'll miss them," he said. Tucker Hewes, spokesman for BHMS, declined to comment.
-Institutional Investor-
Posted by su at 11:58 AM | Comments (0)
December 19, 2005
Pension legislation loosens hedge fund rules
The House pension bill passed Thursday included a string of provisions that would enable hedge funds to invest double the existing level of pension assets without being subject to the federal pension regulations. The legislation would allow hedge funds to take 50% of total assets — from 25% — from pension plans without being subject to the fiduciary provisions of the Employee Retirement Income Security Act. The provision had already passed the House Education and the Workforce Committee in June.
“It’s a relief,” said Liz Varley, a lobbyist for the Securities Industry Association, Washington, which had lobbied hard for inclusion of the provisions in the pension legislation.
- Advertisement -“If enacted, this legislation will go a long way toward modernizing our nation’s pension laws, giving pension plans access to enhanced investment tools for the benefit of plan participants,” Scott Parsons, executive vice president of the Managed Funds Association, Washington.
But officials at the AFL-CIO, Washington, hope the provision, as well as other provisions that would water down conflict-of-interest rules in ERISA, will be removed from final legislation that emerges from House-Senate negotiations. “A number of these provisions are particularly problematic because of the damage that they do to ERISA’s protections for workers’ retirement money,” said Shaun O’Brien, a senior policy analyst. “The Senate took a much more well-reasoned approach to these issues, and we certainly hope that they will prevail in conference.”
-Pensions & Investments online-
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December 15, 2005
Mutual funds in hedge funds' clothing
In perhaps another sign that hedge funds have peaked, a growing assortment of mutual funds masquerading as hedge funds are trying to appeal to the masses.
These funds, 54 of them tracked by Morningstar so far, are more expensive than typical mutual funds but far less costly than trying to get in on a top hedge fund. Managers point out that though they won't match the spectacular returns of some of the best hedge funds, these mutual funds offer more safeguards for individual investors.
Household names such as Franklin, PIMCO, Schwab and JPMorgan Chase, all run such funds, and there are even several well-known hedge fund managers with mutual fund offerings, including Gabelli, Gartmore and Calamos.
On Monday, UBS, the giant Swiss banking company, unveiled its third such mutual-fund-in-hedge-fund-clothes this year, the US Equity Alpha fund, which is supposed to target better returns than the Russell 1000 index by investing long and short-selling, or betting the price of a certain stock will fall.
In March, UBS introduced its Absolute Return Bond Fund, which has $247 million in assets and a return so far of 1.3%. It introduced the Dynamic Alpha Fund in January, with $1.1 billion of assets and a return so far of 6%.
In October, David Winters, a protégé of activist shareholder Michael Price and the former chief executive overseeing $35 billion of investments at Franklin Mutual Advisors, began trading the Wintergreen Fund, another mutual fund that acts like a hedge fund. Its prospectus outlines its plan to invest in undervalued stocks, bankrupt companies and private placements and engage in arbitrage and shareholder activism.
"Everyone's gone in one direction" setting up hedge funds, Winters says. "We thought that there was a big opportunity with a mutual fund."
Investment advisers say there are some advantages to buying into mutual funds rather than hedge funds. Regulators won't let a mutual fund take on the same amount of leverage as a hedge fund, and mutual funds can't invest as much in thinly traded shares. Moreover, mutual fund investors have the benefit of being able to cash out whenever they want; hedge fund investors usually have 30-45 day notice periods and can only really cash out once or twice per year (assuming they've had their money in a fund through the lock-up period.)
Typical mutual funds in this category have expenses of 1.5% to 2% annually--far higher than the 1.35% for plain old funds, but far less than the 2% management fee and 20% take on profit a typical hedge fund manager demands.
And the real kicker: Mutual funds are more closely monitored than hedge funds, at least for now. That means there's less likelihood that the manager will take the money and run. "It's a safer way to go for the average person," says New York investment adviser Lew Altfest.
Wintergreen is up 2% since its birth two months ago, better than many hedge funds, which had a rough October. (The Hennessee hedge fund index was negative 1.3% in October, rebounding to positive 1.4% last month.) Winters won't say how big the fund is, but he says he is attracting interest from direct sales and expects the fund to be offered through advisers and brokers soon.
Of course, less downside risk may also mean less upside. Because they're not taking on as much leverage and engaging in riskier trades, mutual funds aren't likely to match the best-performing hedge funds. Plus, it's hard to overcome that hedge fund snob appeal.
Robert Gordon, chief executive of New York-based investment firm Twenty-First Securities, recalls his own firm's attempts to run a mutual fund with a hedge fund style. It was literally the pioneer, introducing a long-short mutual fund in 1985 under the management of now legendary money runner Robert Stovall.
The fund made it to early $70 million in assets, but Twenty-First Securities threw in the towel anyway. By the time the fund got moving, the stock market had taken off, and it was not able to match the returns of some of the more aggressive stock funds. Gordon says the fund never became profitable. People were buying it to get access to Stovall, not because they thought it was a great invention.
Gordon says he still thinks they're a good idea. "But they don't have the same cache" as a hedge fund. "You don't get the same thrill."
-Forbes-
Posted by su at 11:32 AM | Comments (0)
December 14, 2005
Retail investors big player in Japan hedge fund market
Japan's hedge fund market is growing in size and attracting not only financial institutions but retail investors likely seeking higher returns amid the nation's zero-interest rate environment, according to a report issued by the Financial Services Agency on Tuesday.
The total amount of hedge funds sold by financial institutions operating in Japan jumped to Y1.88 trillion in fiscal 2003 from Y766.2 billion the year before, and rose further to Y2.11 trillion in the fiscal year ended in March, according to the FSA's first-ever report of the nation's hedge fund market.
In the five years to March, Japanese financial institutions, including Japanese branch offices of foreign entities, sold a combined Y5.88 trillion worth of hedge funds in the country, the report showed.
About 50% of the total were sold to financial institutions, while individual players were the second-largest group of investors with a 16% share of Japan's hedge fund market, according to the report.
The FSA compiled the report based on a survey of 1,251 financial institutions operating in Japan, of which 1,171 replied. The research covered hedge fund activity in a five-year period of between April 2000 and March this year.
Individual players' investment in hedge funds grew 10-fold in the five-year survey period, according to the report, indicating their strong appetite for financial products yielding higher returns.
Financial institutions surveyed by the FSA had total hedge fund investments of around Y6.08 trillion as of March, the report showed. The FSA didn't provide on- year comparisons.
Of the total amount, 61% were denominated in yen, 38% in U.S. dollars and the remaining one percent in euros and pounds, the report showed.
When including investment by individual players, the total size of Japan's hedge fund market could reach up to Y8 trillion, accounting for 5% to 10% of the global hedge fund market, an FSA official briefing reporters on the report said in a press conference.
"It's a very rough estimate because it's hard to get a grasp of hedge fund activity," the official said. "But we need to closely watch how hedge funds' growing presence could affect financial markets," he said.
The official, however, said the FSA doesn't plan to set up new regulations targeting hedge funds for now because their activities can be regulated under existing rules.
-Dow Jones Newswires-
Posted by su at 4:31 PM | Comments (0)
December 13, 2005
Top hedge fund stories of 2005
From fines to frauds to proxy fights to rocky returns, the press-shy hedge fund industry grabbed more headlines in 2005 than it has since 1998, when the spectacular blowup of a fund called Long Term Capital made "hedge fund" a household word. Since then, strong performance and other factors have helped these funds rack up $1 trillion in assets worldwide. The industry has swelled to an estimated 8,000 funds, attracting new investors such as endowments and pension plans along the way. Here are the top hedge fund stories of the year:
Bayou blows up
Bayou Group founder Samuel Israel III, scion of a New Orleans commodity trading family, and Daniel Marino, the fund's chief financial officer, pleaded guilty to defrauding investors of $450 million over several years simply by lying to them about how much money the funds were producing and setting up a phony auditor to sign off on the cooked books.
The tale produced news reports containing sordid details such as a six-page suicide note and confession from Marino, who didn't kill himself, and allegations that Israel had a drug problem and threatened his partner with a gun. While Israel and Marino await sentencing in January, investors are trying to get their money back. Numerous class-action suits are hitting court dockets, filed by investors suing third-party firms who invested in Bayou on their behalf.
Tough October; lackluster year
October proved to bethe worst single month for hedge funds in many years, with even typically strong performing managers posting losses in the high-single digits. For some, the month wiped out the modest gains managers have made in what has proved to be a difficult year for getting strong returns. "Performance was terrible," said Daniel Strachman, managing partner of financial services firm Answers & Company Group and the author of "Getting Started in Hedge Funds."
Strachman believes the mediocre performance has also affected funds of funds, or managers who invest in a portfolio of hedge funds on behalf of clients for an additional layer of fees. But a snap-back in November, coupled with what many believe will be a strong December, could lift hedge fund returns out of their doldrums. If that happens, it would be a repeat of 2004, in which many hedge funds racked up their gains for the year during the final quarter.
Rise of "activist" managers
Whatever you call them – shareholder activists, corporate raiders, saber-rattlers – hedge fund managers who battle corporate managements in the hope of boosting target companies' stock prices generated headlines and also cash as the hedge fund style du jour. And they're taking on big targets. Famed agitator Carl Icahn, who launched his hedge fund late last year, rounded up a cartel of investors, including fellow activists Jana Partners, to take on behemoths like Time Warner. (Time Warner is the parent company of CNNMoney.com) Meanwhile, Bill Ackman's activist fund Pershing Square Partners has taken on a corporate behemoth of its own in agitating for change at McDonald's.
The race to registration
While hedge funds have known for more than a year that many of them will be required to register with the Securities and Exchange Commission, some un-registered managers are evaluating their options for not having to comply with the rule, which takes effect in February 2006. The SEC is not requiring managers who "lock up" their investors' capital for two years or more to register and is also giving a pass to firms who agree not to take in new money.
Said Jedd Wider, a partner in the private investment fund practice at law firm Orrick, Herrington & Sutcliffe, "Most of our clients who are required to register have gone through the process already; others are giving very serious thought to extending their lockup periods or looking to close their funds to new investors."
Meanwhile, hedge fund manager Phillip Goldstein, who is suing the SEC on the grounds that the SEC exceeded its regulatory authority, got a short-term boost to his case Friday when U.S. appeals court judge Harry Edwards, one of three judges hearing arguments in the suit, told an SEC attorney the agency stretched the definition of "hedge fund clients" to make the registration proposal work, according to news reports. The panel will issue a verdict in about three months – after the rule will have already gone into effect -- Goldstein's attorney told the Chicago Tribune.
Overstock, Rocker Partners, and the "Sith Lord"
What started out as a brief, straightforward civil complaint rapidly spun into a circus sideshow as Patrick Byrne, chief executive of online closeout retailer Overstock.com, accused famed short-seller David Rocker of conspiring with independent research firm Gradient Analytics to drive down Overstock.com's share price. Byrne filed suit against both firms and their principals, but his bizarre publicity junket soon overshadowed the contents of the suit.
In a conference call to investors and reporters, Byrne launched into a rambling diatribe in which he accused hedge fund managers, journalists, and a well-known Wall Street figure, whom he would not name but instead dubbed the "Sith Lord, " of conspiring to drive the company's stock price down. Rocker and Gradient filed a motion to dismiss the suit, and Rocker founder David Rocker told Fortune he is preparing to file a countersuit.
Automaker downgrades lead to losses
When two bond-rating agencies this summer cut General Motors' corporate bonds to junk, some hedge funds, as well as some investment banks, suffered heavy losses. Particularly hard hit were funds that were shorting the common stock of GM and holding long positions in the underlying bonds. When the bonds got downgraded, investors were forced to try to sell into a market with no buyers; meanwhile, investor Kirk Kerkorian announced he would acquire a large stake in GM, causing a price spike in the stock. While the debacle did not force any large funds to unwind, the events sent jitters throughout the markets.
A once-dependable strategy falters
Once considered a safe, conservative strategy, convertible bond arbitrage, in which managers buy convertible bonds and short the underlying stock, proved to be the worst performing hedge fund strategy this year, and the plunge caused some large convertible arbitrage hedge funds to close, including Marin Capital Partners, which had $2.2 billion in assets at its peak, and Alta Partners, run by Creedon Keller & Partners, which had about $1.2 billion at its peak. The rout began late last year, when investors in these funds, unimpressed with a streak of lackluster returns, began asking for their money back. The redemption requests forced managers to sell into a market with no buyers, which drove returns even lower. Convertible arbitrage funds are down 2.69 percent for the year to date through November, according to Chicago-based hedge fund tracker Hedge Fund Research.
-CNNMoney.com-
Posted by su at 9:40 AM | Comments (0)
December 12, 2005
Funds of HFs growing hot on Japan
Japan is where the action is going to be in the first part of 2006, according to a Reuters survey of funds of hedge funds. The poll found that FoFs predict that with Japan’s economy booming, its stock will likely outperform their U.S. and European counterparts with above-average returns through the first two quarters of next year.
“Everyone is scrambling to get into that asset class (equities),” Tim Gascoigne of HSBC Republic Investments told Reuters, adding that the possibility of deflation ending next year in the Land of the Rising Sun should let asset prices shine.
The survey also found FoFs will allocate 38.5% of their assets in long/short equity strategies in the first quarter of 2006 and 13% in global macros.
-Institutional Investors-
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Standard & Poors: hedge funds return to positive territory in November
Hedge funds returns, as measured by the S&P Hedge Fund Index (S&P HFI), gained 0.07% in November returning back to positive territory after a poor October showing, Standard & Poor's reported today. Year-to-date, the S&P HFI has returned 2.01% through the end of November.
"After the sharp sell-off in October, most markets not only recouped their losses but also reached all-time highs on the heels of supportive economic and corporate data," says Charles Davidson, Senior Hedge Fund Specialist at Standard & Poor's. "As corporate earnings continued to be strong and positive economic data continued to emerge, the risk tolerance of investors returned - and with that the performance of hedge funds."
Equity Long/Short managers were among the main beneficiaries of the market reversal in November, as the S&P Equity Long/Short Index gained 2.48% for the month. By increasing their net exposure, which had been taken down during the sharp correction in October, managers were able to benefit from the equity rebound in November.
The S&P Managed Futures Index returned a sturdy 4.19% return during November, as the Managed Futures strategy turned in a very strong month. Large gains were made in currencies, primarily from long positions in the U.S. dollar versus European and Asian currencies. Long metals exposure was also a major contributor to performance, particularly positions in copper and gold. Long equity index positions benefited from the global rally.
The S&P Event-Driven Index gained 0.45% during November, with continued high levels of activity in mergers & acquisitions, buyouts and restructurings continuing to provide attractive opportunities. Many managers took gains in November as spreads began to tighten over news that an agreement had been reached between Guidant and Johnson & Johnson with respect to a deal repricing.
"M&A managers used October's correction as an opportunity to add to high conviction trades - those deals that they feel have the best chance for high returns," says Davidson. "Managers now feel comfortable that there is sufficient liquidity in the marketplace to improve financing risk despite the increasing size and number of deals being completed."
Special Situations also had a strong November, as positive equity market momentum allowed these managers to exit long held positions. Distressed managers were down slightly during the month despite spreads that generally remained stable. For some managers, mark-to-market losses in energy related holdings offset gains in other areas such as consumer cyclicals. However, many managers still hold relatively high cash levels in anticipation of a more favorable risk-reward environment in 2006.
The S&P Arbitrage Index declined 1.26% during November, led lower by the underperformance of convertible and fixed income strategies. Convertible Arbitrage managers, particularly those in the U.S., had a difficult month as negative sentiment - reflected in widening spreads on some credits - returned to the strategy after a short rally during the past few months. A factor in the sell-off may be the efforts of some funds to raise cash, based on year-end redemption requests, after experiencing a difficult 2005. Fixed Income Arbitrage managers were hurt as falling energy prices assuaged investor concerns over inflation in the U.S., while also seeing the yield curve invert, albeit briefly. Comments by ECB President Trichet also added volatility to fixed income markets as traders tried to determine whether a series of rate hikes would follow.
See www.sp-hedgefundindex.com for daily updates of returns, as well as finalized monthly values, methodology, index change announcements, and constituents.
-SriMedia-
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December 9, 2005
Asian investors' mindset dovetails with trend
Family offices in Hong Kong and pensions in Tokyo are no strangers to hedge funds, but Asia has not been an easy market for American fund managers. The trend toward institutional-quality hedge fund businesses, however, fits in with Asian investors' requirements.
Any notion that Asian investors are backward is misplaced, argues Richard Horodeck, managing director at Drake Management LLC and head of the firm's Asian product development. As he sees it, Asians were ahead in imposing standards that appeal to institutions around the world.
If you succeed in Asia, you can succeed in other places as well, he says. To borrow from the song: If you can make it there, you can make it anywhere.
From this perspective, the key is to develop not only an investment strategy and operations but also a business model and a brand. Asian investors have always wanted a viable business with a recognizable brand, said Mr. Horodeck.
In his experience, the penalty a decision maker faces for committing a mistake in investing is higher in Asia than in the West. Investing in an established brand reduces the risk of a mistake.
But many hedge funds focus only on portfolio management, and put off staffing and financial controls. Formulating a business plan is not a priority. The result: When returns disappoint, there is nothing left to hold clients. Typically smaller funds are in this predicament.
A few managers have developed the personnel, the controls, business strategy and name recognition—they fit the Asian model. These tend to get institutional money and run multi-billion dollar funds. The model has validity across the industry, Mr. Horodeck said.
Before joining Drake, he ran a consulting firm in Japan. Drake manages close to US$3 billion in assets in fixed-income strategies.
In the past American managers could ignore Asian markets—wooing clients required too much work and was too difficult. But it's no longer easy to raise money in the West, and Asia beckons.
Asia is, of course, many places, each with its own idiosyncratic features and different types of investors. The large institutional money is in Japan, but Chinese family offices are another potential source of capital.
Hong Kong and Singapore attract managers that invest in Asian markets. Hong Kong is the gateway to mainland China, but it can be buffeted by Chinese political winds. Singapore has tax and regulatory advantages, but it's relatively new to hedge funds. Figuring out where to go is only the first step.
-HedgeWorld.com-
Posted by su at 11:13 AM | Comments (0)
Funds of hedge funds eye Japanese stocks
Funds of hedge funds expect to make steady returns in the first half of next year and remain upbeat on the outlook for Japanese stocks, a Reuters poll shows.
The Reuters survey of 11 funds of hedge funds, which together manage some $73.9 billion (42.3 billion pounds), forecast average returns in the first and second quarters of next year.
Expectations of returns for a range of strategies and asset allocations were broadly unchanged from the previous poll in September.
Funds of hedge funds spread their money between hedge fund strategies to minimise risk, investing in a range of different assets, and should in theory make money even in a falling market as they can borrow assets they don't own to sell short.
The survey showed them allocating the biggest chunk of their money -- an average of 38.5 percent in the first three months of 2006 -- to the long/short equity strategy, which buy stocks seen as cheap and short sells those that are expensive.
On a regional basis, the survey showed funds expect Japanese stocks to outperform U.S. and European markets and to make above average returns in both the first and second quarters as the Japanese economy strengthens further.
"The possibility of an end to deflation next year should be generally supportive for asset prices, particularly equities," said Tim Gascoigne at HSBC Republic Investments in London.
"The (Japanese) economy is finally turning around ... everyone is scrambling to get into that asset class (equities)," he added, saying that potential reforms could further boost the Nikkei average from around five-year highs currently.
Six of the funds in the Reuters poll picked long/short equity -- or some form of it -- as their hot strategy over the next three to six months.
-Reuters-
Posted by su at 11:03 AM | Comments (0)
December market sentiment indicators
The majority of US hedge fund managers remain bullish in their outlook towards US equities according to Greenwich-Van’s latest market sentiment indicators.
Some 56 per cent of those surveyed said they expect the November rally in stock stocks to continue into December. Meanwhile, the US dollar may have mounted a strong rally in November, but the managers hold a divided view for the coming month with 39 per cent anticipating the dollar will continue higher verses 44 per cent lower. And finally, the outlook for the US Treasury 10-year note is evenly divided with 39 per cent expecting it to continue its advance with the same number predicting the 10-yearto end the month unchanged.
The Greenwich-Van Macro Sentiment Indicators are based on the outlook of hedge fund managers employing a macro view and who manage, in aggregate, in excess of USD 30 billion in assets. The purpose of the indicators is to reveal how these managers believe the S&P 500, the US Dollar and the US Treasury 10-year Note will perform over the current month.
-HedgeWeek-
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December 7, 2005
Hedge funds back on their feet in Nov
For the second straight year, November appears to be helping salvage hedge fund returns. After a disastrous October, last month saw healthy growth in most strategies – just like Nov. 2004 – except convertible arbitrage, according to Merrill Lynch. The average overall return for the month was only slightly above 1%, but some individual strategies sparkled. Merrill reports managed futures up 5.83%, while French business school Edhec posted 6.43% for the strategy. Sol Waksman of The Barclay Group told CNN that the strengthening dollar and soaring prices for precious and industrial metals propelled managed futures. Equity long/short funds – thanks to a big boost in the S&P500 – and macros were also well in the 2% range. Robert Schulman, ceo of Tremont Capital Management said in a Financial Times interview that greater volatility and higher interest rates saved the day.
-Institutional Investor Daily-
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Edhec study compares FoFs, mutual funds
A new study from the Edhec Risk and Asset Management Research Centre finds that funds of funds add value through strategic allocation, but then destroy some of that value through their efforts at active management.
As study authors Noël Amenc and Mathieu Vaissié observe, this means that funds of funds have greater similarity with mutual funds than many investors (or managers) realize.
Mutual funds commonly follow a buy and hold strategy. Funds of funds, on the other hand, regularly make and review their picks of underlying funds and rotate their styles' representation in the over-all portfolio. The greater activism of funds of funds might suggest that the impact of beta drivers, i.e. strategic allocation, in the FoFs' results would be lower than in the mutual funds' results, and the impact of alpha, i.e. active management, would be higher.
Yet a regression analysis on a sample of 97 funds of funds in the period 1997-2004 didn't support this hypothesis. It indicated that 86 (89%) of the funds of funds in the sample added value at the allocation level but only 30 (31%) added value at the active management level.
Furthermore, the analysis indicates that for both mutual funds and FoFs, active management may destroy value. Strategy benchmarks account on average for 104% of mutual funds' total return, and 129% of FoFs total return.
"This seriously challenges the rationale behind investing in active funds since it seems that the more active the funds are, the more value they destroy," the authors wrote.
Noël Amenc is professor of finance, Edhec Business School, and director of the research center. Mathieu Vaissié is senior research engineer at the research center. An article detailing their findings will appear in the Journal of Investing in 2006.
Also, Edhec has just published the latest performance figures for the Edhec Investable Hedge Fund Indices, which indicate that the CTA Global Index outperformed all of the others for November, benefiting from favorable bond market conditions, and in spite of unfavorable commodity prices. That index was up 6.43%.
Most hedge fund strategies posted positive returns for November, Edhec's figures show. The convertible arbitrage index is the exception, down .20% for the month.
-HedgeWorld.com-
Posted by su at 10:46 AM | Comments (0)
December 6, 2005
Use of hedge funds by wealthy is seen growing
Hedge funds and other alternative investments are an important tool for wealthy investors provided there is sufficient due diligence over the money managers, chief investment officer Leo Grohowski of United States Trust Corp. said on Monday.
Some of the biggest U.S. Trust clients, such as family offices, are putting as much as 50 percent of their money into alternative investments, Grohowski said.
The alternative investments include hedge funds, private equity and venture capital.
The typical high net worth clients of U.S. Trust are currently putting about 10 to 15 percent of their money into alternative investments. Grohowski said he sees that moving tup to the 20-30 percent area.
That allocation would be roughly a mid-point between the 10-15 percent allocation and the 30-50 percent allocation that ultra high net worth investors counseled by U.S. Trust subsidiary CTC Consulting are using.
U.S Trust advocates a fund of funds approach to alternative investing, with money allocated to six to eight managers who are constantly monitored.
Grohowski sounded a note of caution, saying that some managers who had mediocre records running long-only funds under tight constraints have moved into the hedge fund arena where there are fewer restrictions.
But he said that with the proper due diligence alternative investments can deliver the kinds of returns investors want.
"We're true believers that it's not a fad," he said.
Grohowski spoke at a meeting with journalists where he discussed the 2006 investment outlook.
He said the environment appears "equity friendly" with U.S. gross domestic product likely to be in the area of 3.5 percent next year.
He also said the recent outperformance of growth-style equities over the value-style is likely to continue.
U.S. Trust, a subsidiary of Charles Schwab Corp. (SCH.N: Quote, Profile, Research). had $107 billion under management at the end of September.
-Reuters-
Posted by su at 8:59 AM | Comments (0)
December 1, 2005
Individuals shy away from hedge funds
The world's super-rich will soon become marginal financiers in the hedge fund industry as the business they invented is increasingly dominated by large institutional investors, fund managers say.
Billionaires and other individuals rich enough to spend most of their time nurturing their bank accounts are still pouring more money into the industry, which uses sophisticated financial strategies to aim for high and sustained returns.
But inflows from pension funds, endowments and companies are rising faster, reducing private investors to a minority now that the industry, at an estimated $1 trillion of assets, has become sizable enough to swallow institutional investments.
Just five years ago, the overwhelming majority of the then-$500 million of assets managed by hedge funds were from wealthy individuals, said Tanya Styblo Beder, who runs a hedge fund called Tribeca Global Management LLC.
"If we go forward to the year 2010, it's estimated that 80 percent of the assets under management in the hedge fund will be from institutions. So it's a big switch that's happening," she said. Tribeca manages $1.5 billion for Citigroup.
Hedge funds first became popular as early as the 1960's, when wealthy individuals used innovative financial tactics like short-selling and leverage to create returns they could not match in conventional trading.
Research confirms that such investors are no longer in the majority, with data provided by IFS, a U.K. financial lobby, showing 44 percent of the assets in the industry came from wealthy people in 2004, down from more than 60 percent in 1996.
The difference is even more telling when looking at inflows into hedge funds -- a more precise measure of investor appetite. In 2004, institutions signed up for roughly 30 percent of inlows, a number expected to rise to 50 percent by 2008.
Less sophisticated private investors may have lost interest in hedge funds, however, as the sector has shown meager returns in the last two years, with bullish equity markets pre-empting the need to hedge against bear markets.
Such high net worth individuals typically still have millions to look after and were often lured into buying alternative investment products by their banks in the heyday of the industry just a few years ago.
"You've seen some sub-optimal returns in 2004, some hiccups in 2005. Those clients are now thinking, hold on, that's not what I was told about hedge funds," said Jonathan Wauton, who leads Liberty Ermitage, a New Jersey-based hedge fund.
Private investors are typically more fickle than institutions, fund managers say, shifting assets rapidly in search of higher returns.
"Interest in hedge funds certainly from a private client perspective is waning, because they see that there are again decent returns to be made in equity markets," says Stan Beckers, a hedge fund manager at Barclays Global Investors.
October was the worst month for hedge fund performance since August 1998, Eurohedge said recently, and analysts say funds' returns in the first half of the year were nearly flat. Last year, the industry failed to match 2003's solid returns.
Hedge funds ask for hefty fees in return for beating stock market indices on a sustained basis, often charging 2 percent of assets under management a year plus 20 percent of the actual investment result. Sometimes they ask for more.
Institutions will use their financial clout to strong-arm fund managers into charging lower prices, but private investors may well choose to return to equity markets instead, where returns may be similar and fees are much lower.
-Reuters-
Posted by su at 10:45 AM | Comments (0)