November 2007
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November 9, 2007
Smallest HFs Perform Best
Small hedge funds have outperformed their bigger brothers by 29% since January 2000, according to TrimTabs Investment Research. In its latest report on the hedge fund industry, it found that HFs with less than $100 million in assets under management returned an average 8.61% annually, compared with 6.29% for HFs with more than $2 billion AUM, concluding, the smaller they are the better they do. The study notes that the best performers -the small HFs -- also had the highest correlation to the S&P500 (67.3%), but that those with the least correlation - 29.9% for HFs determined to be large (between $1 billion and $2 billion AUM) - still produced happier returns - 7.69%-- than the mega funds did. Oddly enough, one cannot conclude that higher S&P correlation is the key to success, as mega funds had a 50.3% correlation and were still the worst performers. TrimTabs, acknowledging that its returns “almost certainly overstate” the industry performance because liquidated funds don’t report assets, also discovered that investors tend to favor small firms when allocating fresh cash.
The survey stated that there is “an almost linear relationship” between risk-adjusted returns and flows as a percentage of assets, with new flows into mega funds accounting for 33.6% of total assets, compared with small funds, with the second-highest risk-adjusted returns, attracting 71.4% of their assets. TrimTabs speculates that funds of hedge funds may have something to do with it. FoHF managers, says TrimTabs, “understand the risks and rewards of their portfolios and allocate fresh cash to smaller and better-performing hedge funds.”
-Institutional Investor-
Posted by su at 10:32 AM
Tech and emerging markets hedge funds lead in Oct
All hedge fund strategies with the exception of short sellers posted gains in October, with emerging markets and technology showing gains of more than 5 percent last month, industry figures released on Wednesday showed.
Hedge funds that invest in emerging markets in aggregate showed gains of 5.17 percent in October, with those investing in Asia in particular posting gains of 6.16 percent, according to Hedge Fund Research (HFR), which aggregates data from thousands of hedge funds.
Funds specializing in technology investment posted the second-best performance of 5.86 percent in October, HFR said.
Short sellers, however, were down 0.03 percent that month, HFR said in its monthly statistics.
While the 9,000 or so hedge funds trade myriad strategies in all securities, a large proportion of them tend to be long equities, hedged by smaller short positions. Overall, the Standard & Poor's 500 index <.SPX> was down only slightly for October, with emerging markets indices posting generally strong gains.
The robust performance for emerging markets and technology strategies in October is setting them up for solid double-digit gains for 2007. Year-to-date through October, emerging markets hedge funds were up 26.6 percent, with Asian emerging markets funds up 39.5 percent for the period, HFR said.
Similarly, hedge fund technology funds logged gains of 19.7 percent year-to-date through October, while short-sellers were down 1.75 percent in the same period, HFR said.
HFR's weighted composite hedge fund index, which aggregates performance for nearly three-dozen strategies, was up 3.21 percent in October and up 12.27 percent in the year-to-date. (Reporting by Dane Hamilton; Editing by Braden Reddall)
-Reuters-
Posted by su at 10:30 AM
November 5, 2007
A hedge fund that actually hedges
One of the truisms of the investment industry in recent years is that hedge funds decreasingly seem inclined to, well, hedge.
High profile collapses such as those of Amaranth Advisors, which essentially gambled the house on a one-way bet on natural gas futures, may be extreme examples. However, this summer's dislocation in credit markets has brought a number of hedge funds to their knees, while the wider hedge fund universe lost money in August.
Funds of hedge funds, by definition, will offer greater diversification, but few of them are likely to be able to provide the hedging offered by London-based Culross Global Fund Management.
Culross's Global H Fund, a concentrated version of its flagship global vehicle, has more than a third of its assets in two "hedging" themes; Asian "dislocation" insurance and widening subprime and credit spreads, strategies that, unsurprisingly, came into their own during the summer's market volatility.
Nigel Blanshard, founding partner of Culross, which manages a little over $300m (£145m, €208m), describes his dislocation insurance as "hedge fund managers who believe the end of the world is nigh, if not tomorrow, then this afternoon".
These managers, who might typically be short copper and Indian equities, but long gold, are in place to protect against losses in the fund's Asian consumer power theme. According to Mr Blanshard this concept has worked impeccably.
"In August, the money we lost from our Asian consumer growth theme was almost exactly made up by the insurance theme, which is surprising given the ratio of positions is four-to-one."
Furthermore, before the summer wobbles the insurance funds "made small amounts of money every quarter. That is a tremendous form of insurance, if it doesn't cost you anything".
And while the concept of playing widening credit spreads has been an obvious winner in recent months, the process by which it came to be embedded in the fund is also symptomatic of Culross' approach.
"The way we arrived at the theme came from our risk management process, not our risk-seeking process," says Mr Blanshard. "It was a counterbalance, a built-in hedge to our portfolio. We were the first investor in the Paulson credit fund [one of the most high-profile winners from the credit squeeze] when it launched, and we put as much as we could into it."
Mr Blanshard states that the decision to short the sector was driven by a belief that there was excess leverage at play in the subprime and credit fields - "a big signpost of trouble".
These insights have helped all three of Culross' funds of funds to chalk up strong gains. The H fund, established in 2005, saw its net asset value rise 29.6 per cent in 2006 and 36.5 per cent in the first nine months of 2007, making gains throughout the summer. The Global and Global Arbitrage funds returned 27.8 per cent and 13.9 per cent respectively in the year to end-September, and boast Sharpe ratios of 1.00 and 1.28. These gains have been achieved without the use of leverage.
Mr Blanshard, who founded Culross in 1992 with Christopher Keen, does not believe the credit squeeze - and its ramifications for the swathes of the global economy - is over yet.
His two main funds still have exposure of 32 per cent to the widening credit spreads theme, and Mr Blanshard adds: "I see no reason why [US and UK house prices] can't go down by 20 per cent at least.
"The price of borrowing has not changed that much, it's the removal of the availability of mortgage money that I think is potentially going to be harmful to the real estate market.
"Confidence is the magic word. If those with a balance sheet lose confidence in what they are investing in, such as leveraged real estate, then their propensity to buy anything goes down."
But Culross' world view is not all doom and gloom. As with so many fund managers at present, in both the traditional and alternative communities, Messrs Blanshard and Keen are big believers in the decoupling of emerging markets from the lower growth industrialised world. More than half of the H fund's portfolio is invested in the related themes of Asian consumer power and independent growth and industrialisation in Brazil, India and China.
There is also significant exposure to small caps, and "technology digitisation change". "There will be losers who are trapped in old technology and winners who will be providers of the new. We can make money from being both long and short, it's heaven for hedge fund investors," asserts Mr Blanchard.
As an example, he cites the digitisation of security cameras. "There are cameras everywhere capturing analogue recordings. To interrogate the data is extremely time consuming. Digitise the whole thing and the interrogation then takes seconds. When that change occurs you are able to store far more data than you could with the old technology," potentially leading to rapid growth in demand for data storage.
Get this call right, and Culross itself might see a rapid growth in demand for its services.
-Financial Times-
Posted by su at 4:37 PM
Culross Global H Fund nominated for the 2007 European Fund of Hedge Fund Awards
We are veery happy and honoured to be nominated for the
2007 European Fund of Hedge Fund Awards
'Best Performing Diversified Fund of Hedge Fund over 1 Year'
Established in August 2005, the Culross H Fund has gained 36.40% YTD (Sep) and has a rolling annual return of 49.57%.
We are most grateful to all our shareholders who have placed their trust in us and for whom we have worked hard to deliver the performance that has secured this nomination.
-Culross Global Management Team-
Posted by su at 4:30 PM
Where Have All the Hedge Funds Gone?
The hedge-fund industry is grappling with its first shakeout in a decade as investors increasingly recoil from startups considered susceptible to the toxic shocks of this year's credit markets.
New hedge funds are opening at the slowest pace since 2003 with almost all of the $164 billion of new investments going to managers with proven records, data compiled by Chicago-based Hedge Fund Research Inc. show.
``People are spooked,'' said Bill Grayson, president of 21- year-old hedge-fund company Falcon Point Capital LLC in San Francisco. ``There is no doubt that a few years ago, if you popped out of brand-name firm,'' everyone wanted to give you money. ``That game is now over.''
Confidence in the $1.8 trillion industry has been shaken by the worst decline in non-government debt markets since Russia defaulted in 1998. Losses forced the liquidation of Boston-based Sowood Capital Management LP, which managed more than $3 billion, and two Bear Stearns Cos. hedge funds with a combined $1.6 billion. Cheyne Finance Plc and Rhinebridge Plc, debt funds based in Ireland that together held about $7 billion in assets, went bust when investors refused to finance them.
Meanwhile, Edward Lampert, 45, attracted almost $4 billion this year. His Greenwich, Connecticut-based ESL Investments Inc. has gained at an annual rate of almost 30 percent since it opened in 1988. Hedge funds like ESL are private pools of capital whose managers participate substantially in the profits from their speculation whether prices rise or fall.
Fund Openings
``Long time ago,'' as Pete Seeger sang in his 1955 folk classic ``Where Have All the Flowers Gone?'', are the days when startups from Wall Street executives like Ron Beller's Peloton Partners LP and Bennett Goodman's GSO Capital Partners LP, which are still flourishing, routinely pulled in more than $1 billion in a matter of months.
Peloton's multistrategy fund has gained at an annual rate of 16.5 percent since it was introduced in June 2005, and has risen 28 percent this year. By contrast, the average equity hedge fund gained 6.9 percent this year as of Nov. 1, compared with the 6.4 percent advance of the Standard & Poor's 500 Index, Hedge Fund Research reported.
About 1,200 funds will be introduced this year, down 20 percent from 2006, Hedge Fund Research estimates. About 600 will close.
There were about 9,900 funds worldwide at the end of September. The 20 biggest managers control one-third of the industry's assets, according to data compiled by London-based research firm Hedge Fund Intelligence Inc.
Simons and Ackman
``We got really burned by a startup,'' said Louis Morrell, vice president of investments at Wake Forest University in Winston Salem, North Carolina, declining to identify the manager. Wake Forest has about 18 percent of its $1.3 billion endowment in hedge funds. Morrell said he now won't invest in a fund unless it's been open for five years.
Managers benefiting from the flight to experience include Renaissance Technologies Corp., the East Setauket, New York- based firm that James Simons founded in 1978. Simons, 69, gathered $1.3 billion for a commodities-futures fund that he started Oct. 1, and added $1.2 billion in the next month. From 1990 through 2006, Simons's Medallion Fund returned 38.5 percent a year.
Activist investor William Ackman, 41, who runs Pershing Square Capital Management LP in New York, attracted $2 billion in nine days, telling investors only that he wanted to buy into an undisclosed company. It turned out to be Minneapolis-based Target Corp., the second-largest U.S. discount retailer.
Wild West
Investors want proof of a manager's ability to weather tough markets before giving them money, said John Griswold, executive director of the research division of Wilton, Connecticut-based Commonfund, which oversees $43 billion.
``Ideally you'd like to see a market cycle to see if the strategy and the individual can survive a downturn,'' he said.
Also driving the change is what Brad Hintz, a financial industry analyst at Sanford C. Bernstein & Co. in New York, calls the ``institutionalization of the alternative asset sector.'' Changes in the market ``will civilize the Wild West of hedge funds activities,'' he said.
As pension funds and endowments increase their hedge-fund investments, they are demanding top-flight accounting, custodial and risk-management services that only the bigger managers can afford, Hintz said.
The concentration of assets in fewer hands may reduce profit margins for the firms that provide brokerage and record- keeping services to hedge-fund managers, said Hintz. He estimates pretax margins for the prime brokers will drop to 41.9 percent in 2009 from a high of 46 percent in 2006.
Geographic Reach
Securities firms led by New York-based Morgan Stanley and Goldman Sachs Group Inc. are poised to earn a record $12 billion of revenue this year from providing so-called prime brokerage services to hedge funds, Hintz said. That may increase to $15.7 billion in 2009 as the industry's assets climb, he said.
Barry Bausano, the New York-based co-head of global prime finance at Deutsche Bank AG, said the biggest prime brokers will benefit from industry consolidation.
``It plays to the strengths of the highly rated prime brokers with the broadest geographic reach, richest product offering and largest balance sheet capacity,'' he said.
Investor reluctance to back newcomers may end defections to hedge funds by top Wall Street traders and bankers seduced by the opportunity to make millions, said Brett Barth, a partner at New York-based BBR Partners, which farms out money to hedge funds.
``If you are going to start out with $15 million, you can probably make more money staying on where you are,'' Barth said.
Tried and True
Hedge-fund inflows will remain strong as the industry attracts a greater share of institutional assets, according to a report by the Greenwich, Connecticut-based consultant Greenwich Associates. Twenty-two percent of the 1,023 institutions surveyed said they would increase hedge-fund investments by 2009.
While endowments and foundations now steer an average of about 12 percent of assets into hedge funds, public pension funds allocate just 0.5 percent.
Most hedge funds can charge management fees of 2 percent of assets and take 20 percent of investment profits, known as ``2 and 20.'' Stephen Cohen of SAC Capital Management LLC in Stamford, Connecticut, charges even more. On some funds, investors pay no management fee, but he takes 50 percent of any profits.
Grayson of Falcon Point expects the pendulum to eventually swing back toward rookie managers, and he says he sees more interest in emerging managers at pension funds and at firms that farm out money to hedge funds.
``They all want to find the next great managers.''
Until the markets stabilize, however, most investors are more interested in the comfort that comes with putting their money in the hands of tried-and-true managers.
-Bloomberg-
Posted by su at 4:28 PM
How forward thinking, thematic and focused investing can reap generous returns
Exploring the FoHFs universe - How forward thinking, thematic and focused investing can reap generous returns: London FoF up whopping 8.69% (July) and 2.26% (August) to 32.49% YTD
What makes a fund of hedge funds successful? Why should you invest in a FoHFs? What are the recent developments in the FoHFs space? These questions will be tackled in our Monday series with exclusive interviews from the best managers in the FoHFs universe.
Culross Global Management Ltd was founded in 1992 as an independent boutique investment manager specialising in hedge fund investment. Based in London, it is 100% owned by the two founding partners, Nigel Blanshard and Christopher Keen, each of whom has over 25yrs experience in institutional investment management and banking.
The Culross Global ‘H’ Fund ($) is a high conviction FoHFs with a concentrated number of managers, no leverage and a moderate volatility target. It was incepted in August 2005 and its AUM is just under US$60 mil. The fund returned 8.69% in July and 2.26% in August (YTD 32.49%). The themes are:
Widening sub-prime and credit spreads
BIC independent growth & industrialisation
Japan recovery extension an structural change
Dislocation insurance
Asia consumer power
Small cap opportunities
Technology digitalisation change
Nigel Blanshard and Christopher Keen explained their methodology to Opalesque.
Tight focus on investment opportunities
“What we try to do with our portfolios is construct them around our investment themes because it helps us to much more tightly focus the investment opportunity and therefore the risks in the portfolio,” said Mr. Blanshard. “Consider hedge fund styles; if you say an equity long/short fund is very interesting… there is no real information in there. It does not tell anyone what the opportunity is, it is far too vague, no matter what geographical or sector constraints it has. “
A theme is a change that has not yet been fully recognised
“We are investment managers and we try to define where we think the change in the world of financial markets is occurring,” said Mr. Blanshard. “For us a theme is - this is quite common in the investment world - a change that as yet has not been fully recognised by the wider community of investors, but a change that we can still definitively point to as evidence supporting the change. By definition it means that we are likely to be early in those stories of change. That is the strength that we have always had as fund managers. We are bad at joining the consensus late on and subscribing to it happily.”
Portfolio with internal counter-balance
“If you look at the ‘Asia consumer power’ theme, we are trying to describe what the real change in Asia has been in the last two years; a domestic demand-driven economy, also driven by exports. Simultaneously we want to create a portfolio that has internal counter-balance. We thought through the things that can go wrong for Asia; one of them was higher-interest rate economies with the central banks’ monetary tightening. One of the first consequences we thought would stem from this was leverage. And we are particularly concerned about global leverage at the moment because it is not only in the financial asset sector (that is affected), it is also hugely prevalent in the real estate sector, both residential and commercial. That whole story has depended on the increasing or sustained willingness of lenders to lend. What we believe was beginning to change at the beginning of this year was that… it will also eventually have a negative impact on global GDP, economic activity and Asia.”
Hedging with dislocation insurance
“Coming back to the counterbalance in our portfolio, the ‘dislocation insurance’ theme is again a hedging theme. Both managers in that theme are pathologically bearish and they are both expecting the happy story of economic expansion to come to an end very soon. They are prepared to short copper and other commodities, go a little bit long gold, short on the more sensitive equity markets in Asia (Korea, Hong Kong, India).”
“In August the fund had a fully weighted exposure to the ‘sub-prime and credit market spread widening’ theme (37%), as the managers expected it to characterise credit market behaviour for the foreseeable future.”
The credit issues are distinct from the liquidity issues
“We see two components to the problem we have lived through for the last couple of months; one of them has to do with the process the central banks are going through coping with the liquidity difficulties,” Mr. Keen said. “But the credit issues we think are separate and distinct from the liquidity issues that are some way towards being resolved … We think it would be a mistake for the market to come to the conclusion that it is the end of the story… We think that there is an early stage of cyclical downturn in real estate values in the U.S. and quite likely in some highly leveraged economies in Europe. One should expect that it would take some time before the underlying asset markets adjust to reduced demand and reduced availability of credit and before the securities collateralised on those assets to be more realistically valued.”
“It is the central bank who leads the way in assessing the price and the banking system decides on the availability,” Mr. Blanshard added “… What we think will be very interesting is the way the central bank plays its role interacting with the lending institutions. The central bank and the banking system are not working in harmony at the moment.”
Forward (not backward) thinking investment process
“One should not give money to an investment manager who invests on the basis of what happened yesterday,” Mr. Blanshard said. “It should be done on the basis of what is going to happen tomorrow. That is where investment opportunities lie. Right in the heart of that is the outlook for interest rates, inflation, global growth, different-country growth, etc. Chris and I are very happy fish when swimming in that pond; that is our background and that is something we both do well.”
No CTA, no black-box
“We think that most CTAs are trend followers… and a lot of them do not have a process rooted on research and homework, it is rooted in following chart patterns - which I think is very interesting but I would not bet anybody’s money on them… Obviously some people doing these things are terribly good at it.”
-By Benedicte Gravrand, Geneva-
Opalesque Exclusive
Posted by su at 4:25 PM