February 2007
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February 26, 2007
Hedge funds remain attractive regardless of returns
According to a number of reports, one of the Cayman Islands?leading financial products, hedge funds, is not as lucrative as many have supposed, but its popularity remains at an all time high.
Noted for the risky and exotic nature of their investments, hedge funds actually performed worse last year than the much more conservative Standard & Poor뭩 500 Index, which tracks the biggest corporations listed on the New York Stock Exchange. David Marchant, the editor of OffshoreAlert, a leading newsletter on the ins and outs of in the world of offshore finance, reported on this statistic.
Hedge funds returned some 13 percent in 2006, compared with the 15.8 percent return of the S&P 500 Index, according to industry tracker Hedge Fund research, Inc., of Chicago.
However, OffshoreAlert notes that this has not stopped money from pouring into the specialists funds assets under management for hedge funds, which were at a staggering $1.43 trillion at the end of 2006.
Approximately 80 percent of the world뭩 hedge funds are believed to be domiciled here in the Cayman Islands, with the British Virgin Islands and Bermuda also popular domiciles.
Hedge fund trading activity accounted for up to half the daily turnover on the New York and London Stock Exchanges in 2005, and hedge fund managers typically collect between one and a half and two percent of the assets under management as a management fee. In addition, 20 percent of gross returns as a performance fee if a fund returns a profit.
According to Mr Marchant, hedge funds tend to be complicated and unregulated. He said it should come as no surprise to investors to learn that fraud is one of the principal reasons they fail, as evidenced by such high-profile collapses as Long-Term Capital Management, Lancer Offshore, Beacon Hill, and Amaranth Advisors.
OffshoreAlert reports these failures amid allegations that, collectively, billions of dollars of assets were misappropriated, and that emphasis is necessary for investors and service providers to conduct thorough due diligence, before investing or entering into a business relationship with hedge funds.
Mr Marchant describes some of the nature of Hedge Funds as farcical and adds that at the forth-coming OffshoreAlert 5th Financial Due Diligence Conference, which takes place in Miami, Florida on 24-25 April, a special session on evaluating onshore and offshore hedge funds is being held.
As hedge funds grow in size and complexity, risk management and valuation practices are becoming increasingly important for hedge fund advisers, investors and regulators.
And according to another survey on the funds released this month by professional services firm Deloitte, there is further cause for concern.
Its study found that half of survey participants hold futures, swaps and derivatives without measuring off-balance sheet leverage.
Sarah Woodhouse, wealth management leader at Deloitte, noted that although the industry is not necessarily headed for disaster, there is a need for better risk management practices.
She added that accurate valuation of assets is particularly important for hedge fund investors when buying or selling units.
밃ny mismatch could mean investors either overpay or redeem at less than they should,?said Ms Woodhouse in a release about the survey뭩 findings. She pointed out that the flood of money looking for hedge funds does not mean managers should relax.
밫o attract institutional or superannuation fund assets you really need to ensure you are on top of these issues.?/P>
Regulators in Australia, the US and the UK have been taking a hands-off approach to hedge funds, with the US courts blocking attempts by the Securities and Exchange Commission to require registration.
Moreover, some reports in the international media suggest that those involved in the Hedge Funds business are not too keen on seeing tighter regulations of their product and a large number of funds have reportedly increased their donations to political groups in the US, which some suggest is a way of 멻edging?their own bets.
The Deloitte study of 60 hedge fund groups managing 244 funds between US$25 million to US$10 billion, found many are not using best-practice guidelines such as external administrators or independent valuations of their assets.
The lack of comprehensive valuation and risk management data makes it difficult for both investors and hedge fund advisers to answer basic questions.
Deloitte said its global survey showed a disparity of practices with a general finding that while many of the basics are in place, improvements are still needed.
Another survey, which was published this month, also revealed that new hedge fund launches in the US decreased in funds for the second year in a row. Last year, the 86 largest hedge fund launches raised $31 billion, down from $34 billion raised by 82 funds during 2005 and $40 billion by 81 funds in 2004.
The Absolute Return New Funds Survey for 2006, published in the February issue of Absolute Return magazine, found that most of the launches were in the first six months of the year, and the equity market meltdown last spring and summer hammered hedge funds, the report said.
Only 29 funds raising at least $50 million - the minimum required to be included in the survey - were launched during the second half of the year. These funds raised a mere $6.2 billion, or 20 percent of the total.
The report also noted that seven of the top ten launches were new funds by established players, more evidence, the survey said, that the big, established names will continue to get bigger.
-caymannetnews.com-
Posted by su at 12:53 PM | Comments (0)
February 15, 2007
Funds of funds maintain popularity with institutional investors
The growth in the assets of funds of hedge funds in 2006 and the beginning of 2007 continued unabated. This trend confounded many critics of the asset class who argue that the diversification benefits of funds of funds do not justify the double layer of management fees, particularly when viewed in the context of the modest returns they tend to deliver compared with the better performing single manager hedge funds.
If investors were dissatisfied with returns from funds of hedge funds, which did not perform particularly well last year, there was little sign of it in asset flows. Growth in the funds of funds area was particularly strong in 2006 at around 30 per cent.
The continued appeal of funds of funds is also evident from the point of view of investment managers seeking to consolidate their positions in the alternatives market. In 2005 alone just two transactions resulted in approximately USD50bn in funds of funds assets changing hands, with the acquisition in November 2005 of Permal, one of the five largest fund of hedge funds managers in the world with USD19.3bn, by Legg Mason, and the deal under which Julius Bär acquired GAM and its CHF66bn in assets under management from UBS.
All the indications are that these types of transaction are set to continue, amid a general trend toward consolidation in the asset management industry and continuing moves by large asset management groups to expand their presence in the alternative investments market through acquisition.
In addition, there is also the issue for institutions and pension funds entering the market of how to obtain capacity in some of the larger and more successful hedge funds that are closed to new investors. One option might be to seek that capacity through the acquisition of a fund management business that already has capacity with those underlying managers.
In the long run, it is possible that many institutions will opt for multi-strategy funds over funds of hedge funds, for reasons that include the desire to avoid a double management charge structure, especially as they become more familiar with the market. There is speculation that multi-strategy funds might eventually replace funds of hedge funds as the customary point of entry to the alternatives marketplace for new investors, but there is little sign that it is happening yet. Certainly the fund inflow figures for funds of hedge funds suggest that they are continuing to hold their own.
The double-charging issue is one that may in some cases be mitigated by deals that funds of hedge funds can strike with their underlying managers, but while some arrangements like this are in place, many of the most successful and sought-after underlying managers don't need to cut deals.
In fact, there is anecdotal evidence that some investors, funds of funds included, are paying managers performance fees in excess of the industry standard of 20 per cent - occasionally as much as 30 or 35 per cent. In these cases, the investor in the funds of funds may tolerate this level of performance fees provided they are receiving a satisfactory net return. Given diminished return expectations over the past couple of years, few investors would quibble with a 20 per cent return net of fees. Ultimately, managers who are ready to negotiate on fees or capacity may not be the best choice for funds of funds and their investors.
An exception, of course, is fledgling funds that have not yet had the opportunity to demonstrate sustainable strong performance. However, when funds are in their sweet spot of between USD500m and USD1bn in assets and their performance is good, it is more difficult for funds of funds to negotiate capacity and the underlying manager has more power to dictate investment terms.
Notwithstanding these issues, there is every indication that funds of hedge funds will continue to play an important role in the alternative investment strategies of institutional investors for some time to come. Only a handful of institutions today have the experience and expertise to put together a portfolio of hedge fund investments, and for many investors it will always make sense to draw on the fund selection and monitoring skills of others. For the foreseeable future, funds of hedge funds are likely to continue to be a significant part of the hedge fund industry.
In this environment, funds of hedge funds, and in turn their investors, can benefit by taking advantage of an integrated service offering. What makes Fortis unique in the market is that in addition to its traditional service offerings to funds of funds of administration and custody, in which it is a global leader in the alternative investments field, it is one of the very few banks that combines these services with the provision of leveraged finance to funds of funds.
As funds of hedge funds seek to demonstrate their competitiveness to institutions as an alternative investment solution, the opportunity to bring financing, custody and administration under the same roof may have increasing appeal.
-hedgeweek.com-
Posted by su at 10:16 AM | Comments (0)
February 13, 2007
Hedge Funds Manage 1% of Global Assets, 25-60% of Global Trading
Just a good statistic taken from a recent report on the hedge fund industry put out by Dresdner Kleinwort.
The authors point out that the roughly $1.3 trillion of assets hedge funds have under management represent over 1% of all the world's financial assets, but with leverage, the proportion may be greater than 3%, or in certain asset classes even higher. Their influence in global markets is much, much greater, thanks to their feverish activity and liberal use of leverage, whether via derivatives or margin.
On the latter score, U.S. hedge funds shoulder two-thirds or so of worldwide margin debt, or something in the neighborhood of $300 billion. Truly staggering, furthermore, is the Dresdner Kleinwort estimate that hedge funds account for between 25% and 60% of the trading in global major markets. And, we're reminded, it's the marginal trader that makes the market.
According to the analytical pair, transaction costs run to a not inconsiderable 4% of the assets managed by hedge funds, while manager salaries and performance fees take another 4%-5%. By any measure, that's one big nut. And it means, Stalmann and Knips reckon, that hedge funds must generate returns that average 20% a year. Which is neither a modest return nor an inevitable one.
-Yahoo! Finance-
Posted by su at 5:40 PM | Comments (0)
Fund Of Hedge Funds Flying Higher
Neither volatile markets, nor meltdowns such as Amaranth Advisors, not even average performance were able to sap the fund of hedge funds sector of its money magnetism last year, as the sector attracted more than $183 billion, way up from the $72 billion in 2005, according to the latest survey by the InvestHedge Billion Dollar Club Survey. Even though the sector gained only 8.67% in 2006, its asset growth rate of 29% was more than double the 13% of 2005, though a far cry from the 44% in 2004. "This was a surprising year as many had expected the impact of Amaranth to hit performance there asset flows in a bigger way," says editor Niki Natarajan of InvestHedge, a sister publication of Hedge Fund Daily. Natarajan noted further, "The asset outflow might be localized in a few firms in the coming months, but overall the new asset inflows from the first-time investors continues to be strong." What has changed is the rise of the boutique, as "investors start to look for something different, yet still in the fund of funds space."
-Hedge Fund Daily-
Posted by su at 5:37 PM | Comments (0)
February 5, 2007
Japanese investors increase hedge-fund exposure
Japan’s big institutional investors raised their exposure to hedge funds in 2006 and are likely to do so again in 2007, but performance is becoming a worry, according to a survey by Nomura Research Institute.
The survey was commissioned by the Tokyo chapter of the Alternative Investment Management Association, says Sadayuki Horie, senior researcher at NRI and chairman of Aima Japan’s research subcommittee. He presented the findings at an Aima conference last week.
NRI surveyed 18 institutions, including six commercial banks, five life insurers, two casualty insurers, three trading firms and two other institutions.
Last year saw a remarkable increase in hedge-fund exposure: whereas in 2005 a similar survey found a quarter of investors had allocated over Y100 billion to hedge funds, now half of the respondents do. And now every respondent says it has at least some allocation to hedge funds.
Most companies increased their hedge-fund investment by 5% or more in 2006, and the majority say they’ll do the same in 2007. The exception was among regional banks, which fled hedge funds last year in anticipation that local interpretations of Basel 2 banking accords would require prohibitive reserves. But other large financial institutions more than compensated.
Similarly, more institutions were dedicating teams to investing in hedge funds, with two-thirds reporting they have four or more staff in that role.
What hasn’t changed is expectations. Institutions in Japan say they are increasing exposure to hedge funds for absolute returns, and to a lesser extent for diversification. About a third of investors expect return targets of 5-7%, with a handful demanding 10% returns and others settling for the 3-5% range. And strategy types haven’t changed either, with most assets going to equity long/short, and large allocations also to event driven, multi-strategy and fixed-income arbitrage.
Funds of hedge funds continue to be the main access route, with only two or three respondents investing solely in single-strategy funds – but now only a fifth of institutions rely strictly on funds of funds.
So the great majority use both, and most investors will rely on six or more ‘gatekeepers’ at any time. In terms of capital structure, more than half of institutions access alternatives through special accounts, rather than in co-mingled vehicles. And most investors say they are willing to sacrifice liquidity (accepting quarterly rather than monthly lock-ups) if it can deliver higher returns.
When it comes to risk, most investors using funds of hedge funds focus on the gatekeeper’s risk-management skills, and to a lesser degree their skill at picking good underlying managers. But investors are relatively sanguine about operational risk factors.
For investors tapping individual hedge funds, their biggest concern now is investment performance, says NRI. Institutions are now focused on monitoring the investment strategy. Investors are not very interested in the broader issues of risk budgeting or stress testing; presumably they are confident about investing in hedge funds as an asset class, but realise they need to manage this exposure wisely.
Horie says that all financial institutions are concerned with the issue of declining returns. “The proportion of respondents that answered ‘very interested’ has increased dramatically,” he says. He believes that large financial institutions such as life insurance companies and mega banks conduct good due diligence, but that regional banks and pension funds need to catch up.
-Finance Asia-
Posted by su at 10:24 AM | Comments (0)