July 2007
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July 25, 2007
Hedge funds attract more than $100bn
Investors poured a record $118.7bn (€86bn) into hedge funds in the first six months of the year, almost as much as in the whole of last year, despite investor fears over the sub-prime mortgage market fallout.
Hedge funds added $58.7bn in April, May and June, according to data provider Hedge Fund Research. This was the second highest quarter on record after the first three months of this year, when funds raised $60bn.
The total amount raised in the first half of the year was only just short of the record $126bn of new assets gathered by hedge funds over the entire 12 months to December 31 last year.
The inflows and investment gains have brought overall industry assets to $1.74 trillion, according to Hedge Fund Research. Other estimates have ranged from $1.5 trillion to $3 trillion, though the most widely-used estimates are at the lower end of that range.
Relative value arbitrage, which includes taking opposing positions in pairs of closely-related securities such as shares in two US supermarket chains, gathered $16.4bn in new assets, more than any other strategy.
Ken Heinz, president of Hedge Fund Research, said: "Emerging markets continues to be a strong performer, led by Asia. The movement of assets into the event-driven strategy suggests investors are anticipating that the market for corporate transactions will continue to create a conducive operating environment for hedge funds.
"Sub-prime mortgage exposure has not yet resulted in a generalized, systemic impact on indexes of credit-focused hedge funds or on the broader hedge fund universe. Specific instances of weakness are at least partially offset by the performance of funds which have minimized their exposure to sub-prime mortgage credit or, in some instances, maintained short exposure to many of these securities."
-Financial Times-
Posted by su at 11:40 AM | Comments (0)
Hedge fund inflows hit USD58.7bn in Q2
The hedge fund industry continued to see near-record inflows of new money in the second quarter of 2007, adding USD58.7 billion in assets during the period, according to data released today by Hedge Fund Research (HFR), the leading source of hedge fund information and performance data. This follows record inflows of USD60 billion in Q1, and brings overall industry assets to USD1.74 trillion.
Hedge fund strategies that experienced the largest capital inflows in 2Q include: Relative Value Arbitrage, which gathered USD16.4 billion in new assets; Equity Hedge, USD12.6 billion; and Event-Driven,USD9.48 billion. Top-performing Emerging Markets funds saw an inflow of USD3.6 billion in the period, up from USD978 million in Q1 2007 and just USD711 million in Q2 2006. Funds of Funds (FOF) raised USD17.4 billion in new assets in 2Q 2007, more than double the USD7.9 billion collected in Q1, bringing total FOF assets to a record USD745 billion.
Performance for the period remained strong, with the average hedge fund posting gains of 4.77 per cent, according to the HFRI Fund Weighted Composite Index. Emerging Markets was again the top performer, up 8.85 per cent for the period and 14.75 per cent year-to-date. Following Emerging Markets was Equity Non-Hedge, up 7.35 percent in Q2, and Equity Hedge and Macro, both up 5.29 per cent in the period.
'We still see extremely strong flows to hedge funds, with Q2 '07 the second best quarter on record, trailing only last quarter,' said Kenneth H Heinz, president of Hedge Fund Research. 'Emerging Markets continues to be a strong performer, led by Asia. The movement of assets into Event-Driven suggests that investors are anticipating that the market for corporate transactions will continue to create a conducive operating environment for hedge funds.'
In a quarter characterized by concerns about exposure to subprime mortgage credit and increasing interest rates, indices posted strong net gains. Relative Value Arbitrage, a strategy containing many multi-strategy credit funds, gained 3.2 per cent in Q2 and 6.53 per cent year to date. Event-Driven and Distressed indices also posted gains.
'Subprime mortgage exposure has not yet resulted in a generalized, systemic impact on indexes of credit-focused hedge funds or on the broader hedge fund universe. Specific instances of weakness are at least partially offset by the performance of funds which have minimized their exposure to subprime mortgage credit or, in some instances, maintained short exposure to many of these securities,' Heinz said. 'Strong trends in both the absolute level of yields as well as favorable movements in the slope of the yield
curve contributed to the performance of both fundamental and systematic macro strategies.'
-hedgeweek.com-
Posted by su at 10:40 AM | Comments (0)
July 16, 2007
London Stock Exchange launches specialist market for alternative funds
The initiative represents a bid by the exchange to uphold London's attractiveness as a venue for the listing of alternative funds and take the competition to Euronext Amsterdam, which has already established a strong position in the market following the listing of funds last year by Kohlberg Kravis Roberts, Apollo Management and Marshall Wace.
The Specialist Fund Market aims to meet demand from both issuers and institutional and other sophisticated investors for a quotation on a regulated market in London that provides sufficient flexibility for specialist vehicles such as single-strategy hedge funds and private equity vehicles. The market will be clearly flagged as for professional investors, although this will not stop retail investors from accessing funds listed there if they insist on doing so.
'It's a very creative solution, the first market of this kind in the world,' says Jonathan Baird, a partner with law firm Freshfields Bruckhaus Deringer. 'The attempt by the UKLA to open up regulated markets in London to less run-of-the-mill investment products may have been batted back by industry groups, but there is still a lot of demand from institutional and sophisticated investors for access to complex listed investment entities.'
Last week the FSA confirmed that alternative investment funds would no longer be able to take advantage of a secondary listing regime under Chapter 14 of the UK's listing rules once a new unified regime for the listing of investment entities is in place early next year.
The new market will impose the minimum regulatory standards prescribed by the European Union's Consolidated Admissions and Reporting Directive, as does the Chapter 14 route to admission on the Main Market, which will be abolished when the FSA introduces a new unified regime for listings.
According to the exchange, the Specialist Fund Market will satisfy a market gap that will exist between the Alternative Investment Market and the Main Market once the new regime is in place early next year.
'Hedge funds and private equity are an increasingly important asset class that pension funds and other institutional investors want access to in order to diversify their overall portfolios and improve their returns,' says Martin Graham, director of markets at the London Stock Exchange.
'We already offer investors and issuers a choice of routes to market according to the types of investors that issuers wish to target and the risk premiums sought by investors. The introduction of the Specialist Fund Market enhances that choice by creating a separate, clearly labelled market for alternative assets such as single strategy hedge funds and private equity vehicles.
'It will enable the London markets to continue to meet what we know is a strong demand among issuers and investors for a regulated market quotation suitable for these more complex entities, while remaining clearly delineated as a professional market.'
The Specialist Fund Market will be open to both UK and international funds, and will complement to the FSA's proposed unitary regime for investment entities listing on the Main Market. The exchange believes the latter may well continue to appeal to funds targeting a wider audience, including retail investors, or that seek inclusion in index tracker funds. Meanwhile AIM has also been successful in attracting investment vehicles including property funds and conventional investment funds.
'The launch of a new London-based specialist fund market should help to remove any uncertainty for groups that are planning to launch closed-ended funds in London via Chapter 14,' says Mick Gilligan, a partner and director of fund research at stockbroker Killik & Co. 'Allowing greater access and liquidity to single strategy hedge funds and feeder funds should serve to further increase the range and choice of alternative investment funds and help to establish London as a global centre for such vehicles.
The Specialist Fund Market will be a regulated market operated in accordance with EU Directives. The FSA will approve issuers' prospectuses in line with the Prospectus Directive and monitor issuers' conformity on an ongoing basis with the Transparency Directive, Market Abuse Directive and other EU legislation.
Once approved by the UK Listing Authority, securities must also meet the exchange's admission and disclosure standards in order to be admitted to trading on dedicated segments of the SETS and SETSqx trading services. Specialist Fund Market securities will not be included in the FTSE UK Index Series and will therefore not be included in index tracker funds.
Baird argues that the decision to close off the Chapter 14 route for alternative funds and create a unified listing regime was a victory for those who see the Main Market as a more retail-oriented market. 'The exchange has done quite a neat move to fill the gap,' he says. 'There's a lot of demand for the listing in London of funds that are not intended for retail sale and have a different audience. To set up a different market to do it has the potential to be quite an elegant solution.
He notes that it may take some time for issuers and investors to gain familiarity with the new market and to gain the confidence to use it, but adds: 'Once the new market gets some traction, I think you'll get a fairly clear demarcation between investment products that are truly retail-oriented, which will go on the main list, and the others. However, there may be some managers which, for all manner of reasons, still might go for a main listing anyway. There will still be a certain cachet in having a main listing in some quarters, especially among some of the more traditional UK investment managers.'
The initiative has been welcomed by lawyers active in the alternative funds area. 'Establishing a separate market for sophisticated structures such as single strategy hedge funds and feeder funds provides the sophisticated investors who want to access these strategies with the ability to do so through London's highly liquid markets, while ensuring clarity about the regulatory standards and potential risks that does not prevail on other markets currently open to UK investors,' says Steven Whittaker, a partner with Simmons & Simmons.
Nigel Farr, a partner with Herbert Smith, says: 'We believe this is a pragmatic step forward. It recognises that there will be managers proposing to launch private equity funds, hedge funds and funds of hedge funds who wish to access the highly liquid London markets but need the regulatory flexibility that the EU standards allow, and that there will be institutional and professional investors willing to invest on this basis.'
-hedgeweek.com-
Posted by su at 2:28 PM | Comments (0)
S&P downgrades $6.4bn after sub-prime error
Standard & Poor's last night downgraded sub-prime mortgage backed securities worth $6.4bn (€4.6bn), after it was forced to restate the value of securities at risk in a credit watch announcement made earlier this week.
Last night's rating action saw 498 downgrades on securities worth $5.69bn, while 26 classes remain on credit watch and the ratings on 74 classes were affirmed. The downgrades represent 1.01% of the $565.3bn in US residential mortgage backed securities backed by first-lien sub-prime collateral rated by S&P between the fourth quarter of 2005 and the fourth quarter of last year.
S&P also downgraded another 64 sub-prime securities worth $700m, which were placed on credit watch before Tuesday. About 52% of the $6.4bn in downgraded securities were investment grade.
The downgrades follow a restatement of the value of securities at risk in Tuesday's credit watch, when it said 612 classes of residential mortgage backed securities backed by first-lien sub-prime collateral worth $12bn was at risk of a downgrade. That represented 2.1% of this type of collateral rated by the agency last year.
S&P's error comes at a challenging time for rating agencies, which many in the securities industry believe have been behind the curve in recognizing problems in sub-prime mortgages. The credit markets are highly sensitive to statements about the deteriorating state of sub-prime collateral.
The credit watch notice contributed to a 1.4% decline on the S&P 500 index in the US on Tuesday, credit markets took a beating and the ABX BBB- index of sub-prime securities fell to a new low.
On Wednesday S&P revised its credit watch to $7.35bn of securities, representing 1.3% of collateral.
S&P offered no explanation for the revision made on Tuesday, other than that the amount and percent of affected collateral had been misstated. The list of securities on credit watch did not change.
Moody's also made downgrades yesterday and Fitch Ratings said it may cut ratings on collateralized debt obligations backed by sub-prime securities.
S&P's error follows a more serious retraction by Moody's in April, when it was forced to restate the credit ratings on several banks.
-Financial Times-
Posted by su at 2:20 PM | Comments (0)
July 11, 2007
Hedge funds profit from subprime bets
Hedge funds betting on falls in bonds linked to US subprime mortgages raked in returns of almost 40 per cent last month as they profited from the crisis that has engulfed rivals.
A $2bn fund run by New York’s Paulson & Co was the single best-performing fund, rising 39.95 per cent after fees in June thanks to its dedicated bets against subprime mortgages – loans to less credit-worthy homeowners. Other hedge funds following similar strategies produced returns as high as 27.5 per cent in the month, while another manager has tripled investor money this year, according to investors.
The strong returns follow the implosion of two hedge funds run by Bear Stearns, which had borrowed heavily to invest in bonds linked to subprime; the announcement of the winding up of a London-listed fund after big subprime losses; and the suspension of redemptions at a Florida fund invested in the sector.
However, some managers are warning that so many hedge funds piled money last month into bets against subprime that it had pushed up the cost too far. “It is becoming the trade du jour,” said one manager.
Investors in hedge funds say many managers profited from subprime last month by holding short positions through credit default swaps, even in funds that are supposed to focus on equities.
But some fear that undisclosed or mis-priced investments in the hard-to-value bonds and equity of structured products linked to subprime, such as collateralised debt obligations, could lead to surprise losses at some funds as they report later this month. Christian Zugel of New Jersey-based hedge fund manager Zais Group, said in a note to investors last week that losses from residential mortgage CDOs could reach $60bn-$100bn, far more than the $52bn estimated on Monday by Credit Suisse.
“We believe we are entering a severe crisis, with potentially heavy losses for many market participants,” Mr Zugel wrote.
Two other funds that had performed strongly in June were SCSF, run jointly by Texan hedge funds Hayman Capital and Corriente Advisors, which rose 27.5 per cent in the month; and San Francisco-based Passport Capital, which rose 13.8 per cent, investors said.
John Burbank, who runs Passport, said subprime would drop further: “We have a lot more to go here,” he said.
-Financial Times-
Posted by su at 5:43 PM | Comments (0)
July 9, 2007
How This Boom Differs From the Dot-Com Days: Hedge Funds Make Money
In 2005, about the time when hedge funds started sprouting like weeds, investors, money managers and the media started to question whether there might be a hedge fund bubble. With hedge funds lining up to go public, the questioning has turned up a notch.
The trends would indicate yes. A flood of money has poured into the sector, which now manages $2 trillion, money is chasing returns with little concern for risk and now a surprising number of hedge funds are rushing to do public offerings.
But the answer is more likely no.
The bubble talk derives in part from some of the startling similarities between the technology boom, circa 1999, and the current hedge fund gilded age. During both periods, top Wall Street bankers and traders abandoned their traditional confines in search of big money, casual dress and guaranteed free fresh fruit.
Each era included lots of talk about paradigm shifts, much of it from self-interested quarters like Wall Street, which always finds a way to turn the next best thing into a pile of loot.
In both instances, small groups of very young people made eye-popping sums of money. And now, add to the eerie similarities the fact that hedge funds are racing to go public. Och-Ziff Capital Management, a $27 billion hedge fund, filed to go public this week. The Fortress Investment Group and the Blackstone Group, both managers of hedge funds and private equity, went public this year. Dozens more are contemplating the option.
But Och-Ziff is no Pets.com. The latest hedge fund to go public is one of a breed of large, institutional firms that seem to be more focused on gathering assets and delivering stable but unremarkable returns with low volatility — fewer dramatic moves one way or another — than swinging from the chandeliers like George Soros taking on the Bank of England. This strategy seems to make sense, especially considering that the hedge fund party seems set to continue. JPMorgan estimates that defined-benefit plans will move 30 to 50 percent of their assets from traditional stock portfolios to alternatives, including hedge funds.
Still, some may be nostalgic for the way things used to be. The early adopters of hedge funds were rich people who liked big returns, and they often received them. But times changed. The rich people sat on the boards of their universities and suddenly endowments jumped on the hedge fund bandwagon. They did well. Then, after the market meltdown of 2000, hedge funds posted positive returns and pension funds started to flock in.
But pension funds don’t want chandelier swinging. They want good returns. Their managers do not want to lose their jobs for investing in hedge funds. So a lot of funds repositioned themselves to attract that money.
In a June note entitled “Hedge Fund Management at a Tipping Point?”, Byron R. Wein, chief investment strategist at Pequot Capital Management, wrote: “Hedge funds are today’s asset gatherers. To gather assets, hedge funds have come to believe that they need to reduce volatility, and a number of hedge funds have given up performance to achieve it.”
Och-Ziff’s recent returns would hardly amaze you. But its assets have grown at a compound annual growth rate of 42 percent, more than double the recent rate for the industry. Investors in the funds like the solid, steady returns (17 percent annualized since inception compared with 11.6 percent for the S. & P. 500), they love the low volatility (almost one-third the market’s) and they are comforted by the fact that Och-Ziff often makes money when the market tanks.
But by becoming a public company, Och-Ziff and others that follow the same route are agreeing to try to maximize returns to those who buy the stock. That means gathering more assets. More assets mean more management fees — which Wall Street likes, because they are predictable — and less risk, which potentially means lower returns, which more aggressive investors don’t like. It is unclear whether Och-Ziff can manage $50 billion as well as it manages $27 billion, but it’s clear that they have satisfied their investors as they have grown from almost $6 billion in 2003.
Which brings us back to the bubble. Bubbles occur when assets are bought and sold for more than they are worth. With hedge funds going public, we can see how they make money and then guess if they can make more every year. They will do this by attracting a lot more money and ideally, by investing that money well.
But unlike Internet companies seeking eyeballs to justify lofty valuations, hedge funds make money. A lot of money. They charge huge fees, make big profits and take huge payouts. And as public companies, they may or may not meet the future expectations of the market.
The real question should be how they manage their investments in areas that may themselves be bubbles — like the credit market, which still does not properly reflect risk. Then there’s the mortgage-backed securities market, which has been fueled by a dangerous lowering of loan standards and the practice of packaging high risk, calling it low risk and dumping it on the market. And there’s the private equity boom, fueled by the issuance of gigantic amounts of debt, much of which has been gobbled up by hedge funds. Investors are hoping they haven’t swallowed a bubble.
-The New York Times-
Posted by su at 10:37 AM | Comments (0)
FSA confirms ending of London secondary listing route for alternative funds
A surge of so-called directive-minimum listings under Chapter 14 has bolstered the London Stock Exchange's position as a market for listed hedge funds, funds of hedge funds and private equity vehicles, business for which its main competitor is Euronext Amsterdam.
However, the FSA is perceived to have bowed to pressure from market players such as the domestic investment trust industry, which argue that foreign-domiciled funds should not be permitted to enjoy the lighter-touch regime offered by the minimum standards set out by the European Union's Consolidated Admissions and Reporting Directive, while domestic funds must meet the higher requirements of the 'super-equivalent' regime under Chapter 15 of the listing rules.
Investment companies listed under Chapter 14 of the listing rules are not required to comply with the diversification limits on investment portfolios, board independence rules or the limits on cross-holdings set out in Chapter 15.
Following consultation with members of the industry, the FSA is now proposing to bring in a unified regime for investment vehicles in the first quarter of next year. In the meantime some changes to the existing Chapter 15 rules prompted by the consultation exercise will be implemented under an interim region starting in September.
Once the unified regime comes into force, alternative funds will no longer be able to opt for the directive-minimum regulatory regime when they list in London, but it will still be available in Amsterdam. Existing funds that have already listed in London under Chapter 14 will not have to switch to the new rules.
Some London lawyers believe that the FSA's decision to bar access to the lighter-touch regime is likely to prompt some alternative fund sponsors to opt for the Amsterdam exchange instead. 'I think it's a bit of a shame that they've ditched that route,' says Gray Smith, a London-based partner with international law firm Ogier. 'The regulations seemed to be working pretty well. I thought this would be quite a decent competitor to Euronext and something we could have marketed.
'I understand the reasons for wanting a single regime. The reputation of the regulator is paramount, and after the split caps and other scandals there's a certain nervousness. However, I didn't see a problem with the secondary listing route as it stood. It was a good response to everything that was happening in the listing market, and the funds that have been using this route are all big companies. It's a very different proposition from AIM.'
Inevitably, Smith believes, the change will leave London somewhat on the back foot for the listing of alternative funds. 'The argument will probably be that the biggest companies will still come to London, but some very big permanent capital vehicles have already gone to Euronext. The whole nature of the hedge fund industry is that while it's perfectly happy to be regulated, it doesn't actually seek extra regulation, so if there's a perfectly good stock exchange that may be more accessible, they are more likely to go down that route.'
The FSA's latest consultation paper as part of the Investment Entities Listing Review puts flesh on its previous paper issued in April, which announced an about-turn on the future of the listing rules. Previous the regulator had envisaged making the directive-minimum regime, which had been opened up a few months earlier to foreign funds that did not have a primary listing elsewhere, a permanent option for alternative funds seeking a London listing.
The FSA says its goal is to create a modern, flexible unitary regime, with changes to the current Chapter 15 rules that will for example give issuers more flexibility in the way that they spread the investment risk in their funds. These changes will take place from September.
'This is an important reform, and part of ensuring the UK continues to be Europe's recognised centre of financial innovation,' says Hector Sants, the FSA's managing director in charge of wholesale and institutional business.
'Respondents to our second consultation agreed with our basic objective - making UK-listed markets more attractive to a wider range of investment strategies while maintaining appropriate standards of investor protection. We now plan to pursue this goal through a single regime, based on the high standards of our existing super equivalent regime, modified through further deregulation.
'Underpinning our proposed unitary regime is the key principle that shareholders of investment entities can look to an independent board to represent their interests, particularly in relation to overseeing any external fund manager. The amendments are intended to ensure the detail in the rulebook delivers on the principle without undue additional prescription.'
The changes that are proposed to take effect next year are designed to remove some of the constraints that led many fund sponsors to prefer the less onerous Chapter 14 route. For example, board independence rules will stipulate that a simple majority of independent directors plus an independent chairman will be sufficient for a board to be considered independent of its manager. Currently an investment manager is limited to one representative on a board.
The new unified rules will also make it easier for feeder funds to list, provided that they can still demonstrate a spread of investment risk. Quarterly portfolio disclosure will no longer be required, with the existing FSA disclosure and transparency rules sufficing instead, along with a new overriding requirement to disclose on a quarterly basis details of significant holdings representing 10 per cent or more by value of an issuer's overall portfolio.
The FSA also proposes to remove the requirement that, as a condition for listing, a listed investment fund must have sufficient investment management experience, and will offer a new exemption to the related party rules designed to facilitate co-investment by listed investment funds alongside other funds managed by the same manager. The consultation exercise will solicit views on whether the listing rules should deem an investment manager a related party.
The measures to be introduced to the Chapter 15 regime in September are intended to implement immediately changes on which the FSA sees a broad consensus of support, without waiting until 2008. These include permitting a flexible, more principles-based approach to investment strategies, allow firms to follow a wider range of strategies to spread their investment risk including long/short strategies used by hedge funds and the taking of controlling stakes.
The transitional regime will remove prescriptive additional rules for property funds, thus making UK real estate investment trusts structured as closed-ended funds subject to the same investment restrictions and governance requirements as other funds, and the removal of most super-equivalent rules for regulated open-ended funds. The FSA says this group, which includes most exchange-traded funds, are already subject to detailed authorisation requirements, so the imposition of extra listing rules is unnecessary.
-Hedgeweek.com-
Posted by su at 10:28 AM | Comments (0)
July 3, 2007
AIMA Responds on UK FSA
The Alternative Investment Management Association (AIMA), the leading global hedge fund and alternative investment industry association has welcomed the Financial Services Authority’s (FSA) proposal to allow authorised onshore Funds of Alternative Investment Funds (FAIF’s).
AIMA strongly believes that retail investors should be in a position to take advantage of the opportunities afforded by alternative investments - provided investor protection provisions are adequate.
AIMA also believes that the FSA’s high-level approach - concentrating on appropriate due diligence by the FAIF manager as the most effective form of consumer protection - is the correct and sensible one.
Matthew Jones, Manager in AIMA’s Regulation Department, said: “It is important to remember that the FAIF concept will not take off unless and until the underlying tax regime is resolved appropriately.
We feel that the FSA understands this and is working with HMT on this issue. AIMA supports the FSA’s work and will continue to do so as the post-consultation process proceeds.”
-Hedgeco.net-
Posted by su at 4:36 PM | Comments (0)