March 2007
« February 2007 | Main | April 2007 »
March 29, 2007
FSA plans more hedge fund access
The FSA is consulting on a proposal to let investors put money directly into "funds of hedge funds" based in the UK.
Private UK investors can already invest in foreign hedge funds, or buy shares in hedge funds management firms that are listed on the London stock market.
The FSA says these are not necessarily more dangerous than other investments and can help investors spread risk.
"What we are proposing is to lift a ban we have at the moment on 'funds of hedge funds' being located or authorised here in the UK," said Dan Waters of the FSA.
"It just doesn't make sense any more," he added.
Under current regulations UK-based hedge funds are not authorised to market themselves to the general public.
Bad idea?
Roger Lawson of the UK Shareholders Association said the suggested change might be a bad idea.
"Whether private investors will understand what they are getting into if they are allowed to invest in hedge funds is, in my view, rather doubtful.
"Some hedge funds simply take big gambles," he added. "They hope these are more successful than unsuccessful - and some are and some aren't."
The FSA said that if its plans go ahead then investors would have the normal safeguards for other investments, with funds being obliged to treat their customers fairly and advisors having to give suitable advice.
The funds would also be obliged to hold investors' money independently, and have the underlying assets valued independently.
Private companies
According to supporters of the plan, allowing people to invest in authorised "funds of funds" would let private investors put money into a collection of individual funds, thus spreading the risk.
The FSA regards this as the best way to allow private individuals to invest not only in hedge funds but also other forms of alternative investments.
Hedge funds, which have developed rapidly in the UK over the past few years, are mainly independent investment companies, usually investing the money of very rich individuals or professional investors such as pension schemes.
Their appeal lies in the supposed skill of the managers running the funds, and they typically levy high charges.
The conventional view of the industry is that although hedge fund investments can make a lot of money, their strategies can be complex, opaque and difficult to understand.
In the past, that has been the attitude of the FSA.
However, the regulator now acknowledges that hedge funds have become such an entrenched feature of the international investment scene that it is impossible to try to stop the public getting access to them.
-BBC News-
Posted by su at 1:55 PM | Comments (0)
Emerging hedge funds perform better than older, larger funds, says PerTrac
'The study reveals that smaller and younger hedge funds tend to generate greater monthly returns than do older and larger hedge funds, although smaller funds also appear to be more volatile,' says PerTrac managing director and author of the study Meredith Jones.
'The study is useful to investors because it provides some broad guidelines on which funds are more likely to match their desired return/risk profile. While the information from this study can help investors know where to begin their search, they need to consider a number of factors when selecting a specific fund for investment.'
To undertake the study, entitled Examination of Fund Age and Size and Its Impact on Hedge Fund Performance, data was compiled and analysed using the PerTrac Analytical Platform software application.
Two analyses were carried out based on fund asset size and fund age. In each analysis, funds were categorised each month between January 1996 and July 2006 into three size groups of up to USD100m, between USD100m and USD500m, and more than USD500m, and into three age groups of up to two years, between two and four years, and more than four years.
The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes. Various risk and return statistics were calculated on the returns of each index to evaluate historical performance while Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.
Among the size-based indexes, both the annualised return and annualised standard deviation were greatest for the smallest funds, at 15.46 per cent and 6.31 per cent respectively, and were lowest for the largest funds, at 11.93 per cent and 5.72 per cent respectively.
These results suggest that as funds get larger, monthly returns decrease in magnitude but also become steadier. Monte Carlo simulations of future returns produced a similar pattern, showing better probable long-term returns for the smallest funds but also larger probable loss-making periods.
The age-based indexes revealed a different pattern. While the index of youngest funds generated better returns over the 127-month period than either than mid-age or older funds, they also had the best risk profile of the three groups.
The index of youngest funds produced an annualised return of 17.5 per cent, compared with 11.84 per cent for the oldest index, and an annualised standard deviation of 5.97 per cent, compared with 6.39 per cent for the mid-age index, which ranked worst of the three on volatility.
Simulated future returns also showed the youngest funds outperforming on both return and risk, with the oldest funds likely to generate both the lowest long-term returns and the worst drawdowns.
The study is the latest piece of original research produced for the investment community by PerTrac Financial Solutions, which seeks to advance the study of hedge funds and other investments by publishing original research as well as providing free access to the PerTrac Analytical Platform to academics, students, and selected researchers through the PerTrac Educational Use Program.
The PerTrac Analytical Platform is used by more than 1,700 clients in 45 countries, including banks, brokerage firms, consultants, plan sponsors, family offices, investment managers and funds of funds. PerTrac CMS, which was part of the firm's acquisition last year of Whittaker Garnier, is a leading contact and information management system used by more than 250 alternative investment firms worldwide. PerTrac Financial Solutions is based in New York with offices in London, Hong Kong, Reno, Memphis and Tokyo.
-Hedge Week-
Posted by su at 1:48 PM | Comments (0)
Asset managers applaud FSA plans for retail access to alternative investments
The new regime for retail alternative funds is likely to come into force early in 2008, following formal consultation with alternative asset managers and other members of the industry. The UK regulator is asking interested parties to comment on the proposals by June 27, before it finalises the draft rules toward the end of this year.
'We welcome this development,' says Gordon McAra, head of communications at the Alternative Investment Management Association. 'The FSA's proposals seem proportionate and sensible, and we are happy to see them.'
The FSA notes that retail investors in the UK are already able to obtain access to hedge funds and other alternative products in a variety of ways, including structured products and exchange-listed investment companies.
The regulator says it now believes the time is right to allow the development of retail-oriented funds of alternative investment funds within its regulatory regime, following a widespread welcome from the financial industry when the idea was first officially floated just over a year ago.
Says Peter Grimmett, head of distribution compliance at Threadneedle: 'As a manager of hedge funds, we welcome the FSA proposals to widen hedge fund availability to retail consumers in a controlled manner.
'This is a good step in the right direction, as it's important that the UK remains competitive with other countries, such as Germany, France and Spain, which have permitted similar regimes. The FSA has acknowledged that there is general international acceptance of such alternative investment funds - we concur with this.
'However, to make this work, it is critical that the right tax regime is in place and it is helpful to know that the FSA has worked closely with HM Treasury and HM Revenue & Customs on taxation issues.'
Jamie Murray, global head of institutional business development at HSBC Alternative Investments, says: 'Considering making funds of hedge funds available to retail investors is excellent news. This will bring the UK in line with a range of different European countries, including France, Ireland, Spain and Switzerland, which have already opened their markets to retail and high net worth investors.
'We firmly believe that a properly constructed and well-diversified fund of hedge funds is the most appropriate way for investors to access this sector. There are more than 9,000 hedge funds available worldwide, making it impossible for the average retail investor to research individual funds. Investing in a fund of hedge funds run by an experienced manager, with the resources to undertake extensive, ongoing research is a sensible solution to this problem.
'While fund of hedge funds are available via the London listed route already, the closed-ended nature of these types of vehicle is not suitable for all investors. The concept of funds of alternative investment funds may provide a good solution for this kind of investor.'
Noting that HSBC Private Bank has been advising private clients on hedge fund investment since 1989, Murray adds: 'We have observed the hedge fund industry evolve and acceptance for this investment approach spread very widely. The acceptance of the approach for UK retail investors will provide an additional investment tool, providing these investors with diversification benefits and access to a group of investment specialists able to generate much sought-after alpha, as well good risk-adjusted returns.'
The new FSA document reflects feedback from the publication last March of a discussion paper, Wider Range of Retail Investment Products: Consumer Protection in a Rapidly Changing World, which considered the increasing variety of retail investment products, the risks they posed to consumers, and how those risks could be addressed.
Providing a regulatory framework for alternative asset funds of funds, the FSA believes, would deliver substantial structural and operational safeguards for investors, including the requirement to have an independent depositary, strict rules on independent valuation of underlying assets, and timely redemption of investments.
Dan Waters, the FSA's director of retail policy and asset management sector leader, says: 'Asset management is a dynamic and innovative industry, and we believe it is important that consumers can get access to the latest techniques to manage their own savings and investments.
'We think the time is right to permit access to a wider range of innovative strategies through authorised onshore vehicles. This will allow investors more choice and a better opportunity for risk diversification, while maintaining investor protection through our rules on the operation of the product.'
A key element in the FSA's approach is its expectation that the fund manager will operate with due diligence. The consultation paper sets out the regulator's requirements in a more principles-based way, and proposes guidance for the fund manager in areas the FSA considers necessary when making and holding significant investments into unregulated schemes.
The paper is accompanied by a case study illustrating the respective responsibilities of providers and distributors of alternative fund of funds products.
The FSA proposals would introduce retail-oriented funds of alternative investment funds into the existing FSA regulatory regime for non-Ucits retail schemes. At the same time, the existing 20 per cent restriction on investment into unregulated collective investment schemes would be listed for non-Ucits retail schemes that are funds of alternative investment funds.
Under the proposals, managers of retail funds of alternative investment funds would be subject to due diligence guidance on factors to consider in making their initial and ongoing investment decisions.
The regulatory regime would remain essentially unchanged for existing non-Ucits retail schemes, subject to various amendments required to ensure overall consistency for the regime as a whole. The changes would also ensure that the regime for qualified investor schemes was in line with the revised approach for non-Ucits retail schemes.
Aima views the proposals as an endorsement of the long-held view of members that retail investors should be able to benefit from access to new opportunities for risk diversification and portfolio growth. The association also welcomes the operational safeguards that the FSA will require to ensure that investor protection is on a par with other authorised investments.
Matthew Jones, manager of Aima's regulatory department, says: 'There is a common goal shared by the industry and the FSA to optimise the investment environment for investors, and we believe this is a positive step forward.
'The FSA is right to conclude that retail investors should be given the opportunity to invest in market-leading investment products that can deliver absolute return performance in all markets, giving a better opportunity for risk diversification.
'However, as the FSA found with its QIS regime some time ago, the be all and end all for these products is the question of how they will be taxed. We are pleased to read that the FSA is confident that an appropriate taxation regime will be developed by HM Treasury, in discussion with the FSA.'
The FSA says that following the closure of the consultation period on June 27, it will finalise the draft rules in light of the responses it has received and publish a policy statement toward the end of the year, giving feedback, setting out the rule changes and announcing the date on which they will come into effect.
-Hedge Week-
Posted by su at 1:28 PM | Comments (0)
March 26, 2007
Study Shows Institutional Investors are Comfortable With Hedge Fund Investing
State Street Corporation released its third institutional investor hedge fund study, the study was conducted late last year in conjunction with the 2006 Global Absolute Return Congress.
According to the study, more than half of respondents indicated that their governing bodies are more comfortable investing in hedge funds today than they were 12 months ago. Reinforcing this interest, more than half of boards also spend 15% or more of their time on the subject. Asset owners participating in the study included representatives from global pensions with investable assets totaling more than $1 trillion.
"The findings of our study reinforce the industry trend we've been witnessing among our client base − investment boards are overwhelmingly accepting that hedge funds are a viable option for their investment allocations," said Gary Enos, executive vice president and head of State Street's alternative investment servicing business. "They are also discovering the various ways hedge funds can be incorporated into portfolios based upon investors' risk appetite, return targets and overall investment objectives."
Results also show that the percentage of asset owners investing in alternatives increased significantly over last year. This year, only 4% of asset owners indicated they have no hedge fund investments, down from 16% last year.
Nearly half cited a need for additional reporting and analysis on the part of hedge fund managers and more rigorous due diligence practices. In addition, the same number also agreed that obtaining an accurate valuation of hedge fund holdings can be problematic.
"The tools, methods and best practices for managing risk will further develop as hedge funds become a tried and true staple of institutional portfolios," said Enos. "Particularly in light of regulatory pressure and changes in accounting practices, asset owners will continue to push hedge fund managers and third-party service providers, such as administrators, to develop and deliver enhanced risk and transparency solutions."
-HedgeCo.Net-
Posted by su at 2:50 PM | Comments (0)
March 6, 2007
Alternative goes mainstream as long-only dies
The move to more sophisticated investment strategies and the wide adoption of so-called alternative strategies as standard fare will result in the continued decline of traditional low-risk long-only mandates, according to investment consultants Watson Wyatt.
The new race for funds under management is instead being fought among unconstrained and absolute return investing, hedge funds and short-selling. The growth of private equity and alpha-hunting just drives the trends harder.
Tim Unger, senior investment consultant at Watson Wyatt, said, “Creating value through advanced investment strategies and the implementation of sophisticated risk-management programs are now top priorities for many institutional investment funds.
“This has resulted in funds moving some of their assets away from benchmark-sensitive approaches to make meaningful allocations to alternative assets and absolute-return products. In addition, a growing number of defined benefit and insurance funds are turning to the bond and derivatives markets to implement Liability Driven Investment (LDI) strategies.”
The investment management industry will continue to adapt to this new market environment and become even more focused on specialisation, he said.
Andrew Keevers, associate director of research at Rainmaker said a sting in the tail with these approaches however is that investment fees can often be much higher and easy consumer-friendly comparisons of funds becomes much harder.
“But to put this new style of investment into perspective, superannuation funds on average are currently only allocating around 6 per cent of the assets into these new strategies. Fund trustees still need to focus their attention on the main game.”
-Financial Standard-
Posted by su at 2:01 PM | Comments (0)
March 5, 2007
Bernanke warns against hedge fund over-regulation
Ben Bernanke, chairman of the US federal reserve, has warned against over regulation of the hedge fund industry. Bernanke said that U.S. authorities must take care not to stifle financial innovation by over-regulating the derivatives and hedge fund industries.
"I would be very reluctant to get involved in heavy-handed, direct regulation of hedge funds," Bernanke told the Senate Banking Committee in response to a question during semi-annual testimony on monetary policy.
"One of their key characteristics is that they are very nimble," Bernanke said. "That is good for the economy, because they help create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits."
U.S Treasury Secretary Henry Paulson called for market discipline, rather than government regulation, to address risks of the rising global hedge fund business at the G7 meeting. "Market discipline, focusing on risk management of regulated counter parties, is the most effective way to address potential systemic risk concerns."
Paulson and Bernanke work together as heads of the President's Working Group on Financial Markets, working with the Securities and Exchange Commission and the Commodities Futures Trading Commission to study the hedge fund industry. "The group continues to assess developments in markets, disclosure and counterpart risk management," Paulson said.
Paulson also said he's convinced "hedge funds provide considerable benefits to financial markets and our economies," but they also can present potential challenges and risks.
"It is in the U.S. interest to promote a thriving, competitive global hedge fund industry that facilitates price discovery and promotes liquidity in financial markets, while maintaining investor protection and promoting financial stability," Paulson said.
-Hedge Fund News-
Posted by su at 11:18 AM | Comments (0)
March 2, 2007
February might yet be good month for hedge funds
Ironically, this week's sharp market declines may have been good for hedge funds.
While no final performance numbers for February have been released, consultants and investors who track hedge fund returns said the loosely regulated portfolios would likely post small gains. Mutual funds, however, will likely nurse losses.
Preliminary data from the Barclay Group show the average hedge fund slipped 0.27 percent last month, said Sol Waksman, the group's president. But with data from only about 100 funds recorded, Waksman expects the overall number to be positive soon.
"People were definitely not universally affected," said Andrew Fisch, a portfolio manager for funds of funds at SSARIS Advisors after polling dozens of managers.
Certain arbitrage strategies that bet stocks would fall but bonds would rise did well as equities tumbled and investors preferred the safety of bonds.
Similarly, some global macro managers were said to have made money on having bet the dollar would decline and a few players who put on contrarian bets that equities would fall, also fared well, the industry trackers said.
HFR's Heinz said merger arbitrage funds, on average, were up 4 percent last month, while equity market neutral funds were up about 3 percent.
Even funds that played in the distressed debt markets did not lose as much money as some investors thought they would, several people said, noting they expect credit spreads to widen gradually and see no systemic risk in the market.
Indeed for some hedge funds, Tuesday's decline was a blessing because it finally delivered a chance for these funds, which use trading techniques such as selling stocks short, to differentiate themselves from mutual fund.
"When the market is going up, hedge funds can't outperform, but when you have corrections like this one, that is where the rubber hits the road and hedge fund can do better than mutual funds," Hennessee's Gradante said.
-Reuters-
Posted by su at 4:45 PM | Comments (0)