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Mr Money - Unemployed

A Slice of Real Estate Pie

            Investors know that building a solid portfolio involves striking a balance between producing high returns and protecting the portfolio’s assets. The underlying factor in both of these is risk. However, our desire to manage risk does not mean we need to sacrifice high returns, and that is the beauty and strategy behind having a well-diversified portfolio.

            The idea backing proper asset allocation is to have investments divided among different asset classes, such as cash, stocks, bonds and real estate. Returns from different asset classes do not regularly move up and down together, which is the reason diversification is so important and valuable. One asset class that has started to be widely considered as a necessary slice for a balanced investment portfolio is that of alternative investments.          

            Alternative investments include any investments that are not considered traditional or of the “main stream.” While traditional investments include stocks, bonds, treasuries and certificates of deposit (CDs); alternative investments include private equity, hedge funds, commodities and real estate. Alternative investments are typically most productive when they are treated as long-term investments. On their own, alternative investments can carry high risks, but as part of a diversified portfolio, they tend to reduce risk. This is because alternative investments often times have lower correlation with publicly traded securities, causing them to add much-needed balance when traditional markets are volatile.

            The size of the returns produced by a portfolio is obviously based on the types of assets included. But, the size of the returns is also largely impacted by how much capital is invested in each asset class. There is no fool-proof formula for how much money to invest in each asset class. Experts recommend that investors consider the time horizon of the investment and their tolerance for risk.

            A well-diversified portfolio can by no means guarantee a specific rate of return; that is impossible. Anyone that claims they can do this for you is lying, and I advise you to take your money and run. However, by managing a well-diversified portfolio with adequate amounts of traditional and alternative investments, you can significantly improve your chances for obtaining high returns. Long-term objectives, such as saving for retirement, can more easily be accomplished by putting your money to work in a balanced portfolio with a slot dedicated to alternative investments.

The Retirement Minefield

            The federal entitlement programs that help provide retirement security were among the many somewhat-stable programs to unravel throughout the course of this recession. Projections released May 11th by the trustees of the Social Security and Medicare trust funds indicate that both funds will run dry sooner than estimated in last year’s report.

            The Social Security trust fund’s revenues still exceed benefits by an ample amount, making it the better off of the two funds. Unfortunately, the onslaught of baby boomer retirees will certainly change that. The new report predicts the supply will continue until 2015 but quickly move into deficit thereafter. Medicare is in critical condition compared to the Social Security trust fund. The Medicare Hospital Insurance fund is already running a deficit, and the trust fund is set to run dry in 2017. However, these Medicare estimates are harder to predict because they depend on forecasts of health-care costs.

            Shrinking federal-entitlement programs coupled with a growing elderly population result in a problem that demands our attention. Plus, throw in the skyrocketing number of bankruptcy claims among the elderly and you have a complete recipe for disaster. According to the Associated Press:

The world’s 65-and-older population will triple by mid-century to make up one in six people. Census estimates released (last) Tuesday show the number of senior citizens has already increased 23 percent since 2000 to 516 million, more than double the growth rate for the general population. The fastest-growing age group, seniors now comprise just under eight percent of the world’s 6.8 billion people. By 2050, the senior group will increase to 1.53 billion.[1]

Furthermore, elderly Americans have been seeking bankruptcy-court protection at drastically faster rates than any other age group. According to the AARP, the rate of personal bankruptcy filings among those ages 65 or older jumped by 150 percent from 1991 to 2007.[2] Rising debt and health-care costs are the two main factors contributing to the spike in claims.

            With all the obstacles to negotiate within the world of obtaining a comfortable retirement, now is the time to prepare for the worst. One of the most beneficial investment vehicles for retirement planning is the Roth IRA, in which nearly all income growth and withdrawals are tax-free. Plus, new tax rules are making it easier to convert traditional IRAs and employer-sponsored retirement plans into Roth IRAs. The majority of employers are no longer offering retirement plans that are sufficient for their employees. Plus, with major government programs becoming depleted at rapid rates, it is time to become proactive in your retirement planning. Putting your money to work now will help to create substantial income flow that will allow you to enjoy your retirement. It is up to you to create an opulent nest egg in spite of all the crumbling entitlement programs that are looking to crack it.

The Skinny Behind Short Sales

            While we have all become keenly familiar with foreclosures and their impact on the real estate market, their nearly-as-popular cousin, the short sale, is somewhat less understood. With an unprecedented number of property owners upside down with their mortgages, the Obama administration has implemented incentives in its housing-rescue plan to persuade lenders and sellers to choose short sales over foreclosures. 

            On the surface, short sales are easy to comprehend. Simply put, a short sale is when a lender agrees to accept a mortgage payoff that is less than the full amount from a borrower. When an owner of a property is financially distressed, the option of foreclosing becomes more and more realistic. But, the process of foreclosing is a lengthy and costly one. Although short sales can also be very time consuming, they are often times preferred by lenders, investors, buyers and sellers for a number of reasons.

            According to the National Association of Realtors, short sales have accounted for 15 to 20 percent of sales of existing homes in 2009.[3] Sellers prefer short sales because a short sale is likely to not damage their credit as badly as a foreclosure. Buyers are attracted to short sales because they have the opportunity to purchase property for less than its current market value. If any investments are backed by the property, investors prefer short sales because they will lose less than they would in the event of a foreclosure. A short sale is a better option for banks and lenders because, typically, short sales result in about a 20 percent loan loss, whereas homes sold after foreclosures result in about a 40 percent loan loss.[4]

            Although short sales are appealing to buyers and can prove to be an incredible investment opportunity, these are not do-it-yourself projects. In a short sale you will need help from an experienced real-estate agent or attorney. Not all agents know their way around a short sale, so make sure you consult with one who has a good track record with short sales. As a seller in a short sale, the difference between the actual loan amount and the acquired amount is sometimes considered income for which the selling homeowner can be taxed. Therefore, it is important to include a tax professional in the deal.

            The Obama administration’s short sale incentives allow homeowners who agree to short sale the opportunity to receive up to $1,500 in closing costs. In May, “the government also announced it would make it simpler for borrowers to voluntarily transfer ownership of properties to mortgage companies through a “deed in lieu” of foreclosure.”[5] Lenders can also receive $1,000 for accepting a deed-in-lieu transaction, making them even more responsive to sellers wishing to avoid going into foreclosure.

            Often times, short sales can be a better option than foreclosures, but there are still many risks and stipulations that come to the buyers, sellers and lenders involved. Understanding short sales and the incentives that come with them can help sellers get out of a financial rut by avoiding foreclosure. For buyers, hunting for short sales can be time consuming, but the investment potential can prove to be worth the extra effort. For all of the investors that are sitting on the fence and looking to put their money back to work, short sales should be a considerable option.

News That Moves Markets

Demand for physical gold is increasing at a serious clip.

Supply has been declining for quite some time as new discoveries have been limited and production hampered by rising costs combined with the manipulated suppression of gold prices by Central banks.

Central banks are manufacturing copious amounts of worthless paper currencies in a desperate attempt to hold back the tide of inevitable economic hardship.

This type of reckless currency creation will lead to currency devaluation which is commonly referred to as inflation. Beware of those who try to argue this simple fact. They are part of the ‘this time it’s different’ crowd who offered the following opinions:

At the top of the tech. bubble in 2000 they recommended buying YHOO, target $400, because they were sure ‘this time is different’

When real estate values skyrocketed in 2005-2006 they forecasted continued double digit annual property value growth because they knew ‘this time is different’

When Oil hit $150 a barrel last year they called for $200 oil because obviously ‘this time is different’

Now, in their infinite wisdom they offer the sage advice ‘inflation will be contained and (wait for it…don’t laugh too hard) governments will be able to reduce the stimulus at the right time to avoid inflation because this time is different.

So I now pose the question: Should gold represent a significant portion of your portfolio?

Gold investors add 43% to holdings of bullion - Daily Telegraph
Daily Telegraph reports BullionVault, which says it looks after more gold than many of the world’s central banks, reported 43% growth in its clients’ physical holdings of the metal in the first half to more than 18 tonnes or $553 mln worth. The addition of almost 5.5 tonnes, or $166 mln worth, was almost twice the growth in BullionVault’s clients’ holdings in the same period last year and was equivalent to 70% of the growth seen over the whole of 2008. Adrian Ash of BullionVault said: “While politicians argue over ‘green shoots’ in the economy, the number of private individuals buying physical gold continues to grow. “Central banks are responding to the worst financial crisis in 70 years with an unprecedented experiment in money creation. But there’s no evidence yet that quantitative easing has sparked a self-sustaining recovery.” He added: “With global interest rates now at zero or near, cash savers are joining stock market investors in seeking a strong crisis and inflation hedge.”

While the mainstream media is busy rolling “green shoots” and smoking them, I thought I’d compose a post today to help you ‘JUST SAY NO.’

Ben “Helicopter” Bernanke and his side kick Tim “Pinocchio” Geithner (honestly, watch him speak, I swear his nose looks like it grows) have been dealing some pretty potent D.C. “trip shoots.” Of course, they are not alone. A vast network of dealers have combined to create the hallucinogenic state in which the mainstream media floats.

Perhaps the most dastardly dealers in the cartel are those who manipulate the equity markets. They claim to be champions of the free markets and providers of liquidity when they are anything but. They team up with big brokerage firms who love the gravy train of fees and drive up the cost of doing business for the rest of us.

I’m going to take a leap so try and stay with me. If you would like someone to blame for the predicament we are in today look no further than Arthur Levitt. Levitt, an ex-head of the SEC and beloved blatherskite of news outlets everywhere, spearheaded the ruination of Wall Street with the move to decimalization. In his infant wisdom, he believed that the spreads between the bid and ask on equities were too large and therefore hurt the small investor. His stupidity prevented him from realizing that spreads were and are necessary to create real liquidity. As an investor I’d rather see a .25 cent spread on a stock and know I can trade real volume at the price than a .01 cent spread with no volume. In today’s market of decimalization an investor may have to bid a stock (all but the most liquid) up $1 or more to find the real volume that would have been there a 1/2 point lower in a spread environment.

The advent of decimalization murdered a major profit center for the brokers and forced them to find other means of revenue. We all know how that worked out. The profit center of spreads for brokers was not a gift. It was earned by way of creating real liquidity. Decimalization has led to a serious disease of manipulation in the markets today. The blog post below by Joe Saluzzi and the clip from CNBC should further illuminate this argument:

Joe Saluzzi Themis Trading:

Our equity market is being controlled by machines that are nothing more than two bit, SOES bandits. They cloak themselves under the mantra of liquidity providers but they are really just locusts and are feeding off the equity market until it doesn’t suit them anymore. Once their profit margins are squeezed to almost zero, they are likely just to move on to a new market. But what damage would they have done? We will be left with a shell of a market that is used to being led around by computers. Real people and real capital are a scarce resource in today’s market. Read more…

And Here It Is On CNBC: Manipulation

(I’d like to take this moment to commend Rick Santelli whose voice is a true beacon of light on this otherwise wasteland of a network.)

RCM Comment: This California story is not getting much news coverage but should be on the top your watch list. California’s slow sinking into the financial abyss could destabilize the credit markets and in turn the equity markets…

California misses budget deadline, readies “IOUs” - Reuters.com :

Reuters.com reports California’s lawmakers failed to agree on a balanced budget by the start of its new fiscal year on Wednesday morning, clearing the way to suspend payments owed to the state’s vendors and local agencies, who instead will get “IOU” notes promising payment. The notes will mark the first time in 17 years the most populous U.S. state’s government will have to resort to the unusual and dramatic measure. Democrats who control the legislature could not convince Republicans late on Tuesday night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise taxes. Democrats have pushed for new revenues while Republican lawmakers and Governor Arnold Schwarzenegger, also a Republican, have ruled out tax increases. They instead see deep spending cuts as the solution to balancing the budget, but Democrats say that would slash the state’s safety net for the needy to the bone.

Market Watch, with the help of regulatory filings has released an article which indicates that Colony Capital is raising money for an upcoming IPO:

Colony Financial Inc. will be a real estate investment trust managed by a subsidiary of Colony Capital. The new REIT plans to mainly buy, originate and manage commercial mortgage loans and other commercial real estate-related debt investments such as commercial mortgage-backed securities, the company said.

Despite it’s impressive 18-year track record, Colony capital may be best known for its 2008 purchase of the Neverland Ranch from Michael Jackson. The property was bought by Michael Jackson for a total of $22.5 Million.

In reaction to Michael Jackson’s death & the future of the Neverland Ranch, MarketWatch quotes Thomas Barrack, founder of Colony Capital saying:

“We are deeply saddened by yesterday’s tragic news about Michael Jackson,” Barrack said in a statement on Colony’s Web site after Jackson passed away last week. “Over the last year, I have had the opportunity to know and work with this gentle and talented man. We were pleased to help support his return to public life through our acquisition of Neverland Ranch.”

“Neverland itself is now a mythical sanctuary to Michael and we are doing our best to accommodate the throngs of global press and fans arriving there to express their grief,” Barrack added.

Read the full story here.

Global Money Trends-
Also threatening to undermine the green-shoots rally is the upward surge in the 30-year fixed mortgage loan rate to an average 5.42% in June, up from 4.78% in April, dealing a fresh blow to the housing market. The surge in mortgage rates surprised the Fed, since the central bank thought it could keep mortgage rates locked below 5%, by pledging to buy $1.1-trillion of mortgage bonds from April through the end of August.

The latest 1% jump in mortgage rates comes at a time when foreclosure filings in the US surpassed 300,000 for a third straight month in May and may hit a record 1.8-million by the first half of the year, RealtyTrac said.

News That Moves Markets

RCM Comment: O.K. we have a lot to get to today, so let’s get started. First, I’ve put together a list of economic numbers recently released to offer more evidence in support of my pronouncement that “the economy is not in good shape”.

I know this proclamation is not the favored view at the moment. You are, no doubt, reading in Wall Street rags and hearing bobbleheads on CNBC decree the end of economic hardship and the beginning of a new day. There is so much spin you would think flax is turning into gold. But, alas, that is just a fairy tale. In fact, all this spinning reminds me of a favorite childhood pastime. We have all done it. Remember when you stood in the front yard, spread your arms and spun around and around in a circle until you fell down? Now, think back, what happened? You would lay on your back and look up. The world would look different as it spun. But, in reality had anything changed? And in the end when the spinning stopped you would question whether or not your nausea was a result of the spinning or the KoolAid you were drinking.

I hope the information below will help you to avoid the KoolAid stand. As for the spinning, I can only say, enjoy the feeling if you want to but don’t believe in the altered state.

Associated Press Headline: May new home sales dip 0.6 percent…

New U.S. home sales fell slightly last month, another sign that the housing market’s recovery is likely to be gradual and prolonged.”

Department Of Commerce News Release: click here.

Key Numbers: New Houses Sold Unadjusted: 32,000, Year Ago: 49,000, Year Over Year %: -34.69. Median Price Unadjusted: $221,600, Year Ago: $229,300, Year Over Year %: -3.36.
Last Month’s Numbers: New House Sold YoY=-32.65%, Median Price Yoy=-3.36%

Census Department Durable Goods Manufacturers New Orders Down 24.5%

ECONX More than Meets the Eye in Personal Income and Spending Report
The Personal Income and Spending report produced some nice headlines, with income increasing 1.4%, spending rising 0.3% and core PCE increasing just 0.1%. The pleasing nature of the headlines is based on the understanding that consensus estimates for those components were set at 0.3%, 0.3%, and 0.1%, respectively. Additionally, the personal income increase for April was revised up to 0.7% (from 0.5%) while the spending number for April was revised to unchanged from an originally reported -0.1% decline…

There was more to the May report, though, than meets the eye. Real disposable personal income was up 1.6% in May; however, when excluding the benefits of the American Recovery and Reinvestment Act (read: lower personal taxes and higher government transfers), real disposable income was up just 0.2%. That’s OK, yet it certainly doesn’t have the pleasing quality of the leading headline, especially when one also takes into account that private wage and salary disbursements fell -0.2%, marking the ninth straight monthly drop in that series.

In turn, the personal savings rate increased to 6.9% from 5.6% in April, which underscores the consumer’s bid to save more and spend less, which isn’t the best combination when contemplating the prospects of a quick and robust recovery effort…

RCM Comment: (EXTREMELY IMPORTANT) The story above about personal spending and the story you are about to read are two egregious examples of the government’s desire to spin, lie and cheat its way out of this economic crisis. The spin about personal income and spending was positive but clearly misleading as “the benefits of the American Recovery and Reinvestment Act” are the real reasons for the uptick.

NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating “indirect bids,” a category used by investors as a loose proxy for foreign demand.

Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market. At the very least, the Treasury’s shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.

Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday’s two-year note sale, and exceeding 62 percent at Wednesday’s sales of $37 billion in five-year notes. “We’re not going to make much of that, given the information we’ve gotten on the rule changes,” said John Spinello, fixed-income strategist at Jefferies, a primary dealer. “The indirect bids are now going to be higher given the change in procedures.”

Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions. Top officials in China (Wary of dollar, China wants super-sovereign currency - Reuters.com) and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures. The Treasury’s changes, contained in a June 1 entry to the Federal Register, relate to what it considers a “guaranteed bid.” Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer’s own.

The matter was technical enough to confuse even industry veterans. “We are not precisely sure what this all means,” said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey. “We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register.” The Federal Register entry can be found at http://www.gpo.gov/fdsys/pkg/FR-2009-06-01/html/E9-12787.htm

The Credit Suisse/Tremont Hedge Fund Index finished up 4.1% in May, with nine out of ten sub-strategies posting positive returns.

Key findings from the report include:

Emerging Markets managers, up almost 7% in May, benefited from increased optimism about global growth and rising commodity prices, with Eastern European-focused managers outperforming other regions for the third month in a row.

Convertible Arbitrage funds continue to make a comeback, finishing up 5.8% for the month. In the US, the nearly $6 billion in new convertible bond issuances were met with healthy demand from a spectrum of investors.

Many Long/Short Equity managers increased their net long exposures resulting in a 5.2% return for the month, the highest monthly return for the strategy since June 2000. Some remain cautious that a switch from a government-led recovery to a consumer-led recovery may face hurdles.

The Global Macro sector generated positive returns for a seventh consecutive positive month, finishing up 1.5%. The strategy’s flexibility and tactical trading ability may have helped managers to post positive returns during both up and down equity market environments in 2009.

Full report here (Download), which also includes an overview of May hedge fund performance, in-depth commentary on individual hedge fund sectors and hedge fund return dispersion statistics for each strategy.

The Internal Revenue Service issued another notice this week regarding the procedure for late filing of the 2008 Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (FBAR).

Taxpayers should make every attempt to file timely, as reports filed late need to be filed in duplicate. The original is to be filed according to the instructions on the form, along with a statement explaining why the FBAR is late.  A second copy must be sent to a different IRS Offshore Identification Unit (noted below), which is affiliated with the current IRS voluntary disclosure program. A copy of the taxpayer’s 2008 tax return needs to accompany duplicate FBARs filed with the Offshore Identification Unit.

Both filings must be submitted on or before September 23, 2009, to ensure the minimization of penalties. For income tax returns due after September 23, 2009, a copy of the 2008 return need not accompany the FBAR.  Please note: Though acceptable, this alternative process — involving the Offshore Identification Unit and filing the form with a copy of the return — could result in a higher level of scrutiny.

Read the rest of this entry »

Last week, Freddie Mac reported that the 30-year fixed-rate mortgage rate was 5.38 percent, down from the prior week’s 5.59 percent tally. In June alone, the rates have fluctuated an average of one quarter of a percent each week. The news is grim for anyone trying their luck at purchasing when rates hit their absolute lowest. But, many buyers are bringing more money to the table in an effort to recapture the lower rates of weeks past. As the saying goes, money talks.

Buyers are now openly asking their loan representatives what they would have to pay to bring the rates back down to a level they were too slow to capture. While it may not be an option for every potential home buyer, those with upfront cash do have the opportunity to pay their way into a lower mortgage rate.

The process is not unique to this recession. Buyers, historically, have been interested in doing so when rates are already low. The reason for this is because the price for buying points to lower rates is based on the price of the mortgage, and the costs must be paid at closing. It typically takes about four years of payments for borrowers to make up the cost of one point. Therefore, when interest rates are higher, borrowers tend to avoid additional upfront costs and aim to take their chances of gaining a lower rate by refinancing years later.

Paying upfront requires a borrower to buy one point for the price of one percent of your mortgage. Generally, that one point can lower your rate by one quarter of a percent. It may not seem like a huge amount, but the change could save you hundreds of dollars a month. So, if you plan to live in your home and keep the loan longer than the four years it will take to make up the cost of one point, then it could be the right move.

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June 26, 2009

By Gerelyn Terzo

Fund of hedge fund managers, investing across many hedge funds to provide diversification to clients, are changing the way they allocate capital. These managers, many of whom never thought they would see the day when high-flying funds run by the industry’s best-of-breed talent were torpedoed, have in the worst cases been forced to liquidate their own funds.

Now those that remain are increasingly being scrutinized by investors. So it’s no longer just the brand-name hedge funds that win out. Indeed, it’s the emerging hedge fund manager talent that shows promise of greater returns, while hedge funds with fewer assets under management offer something else fund of fund managers long for — the ability to adapt quickly.

The herd mentality that is often subscribed to by investors once led the fund of hedge fund manager pack to the largest of investment firms run by household name managers. The reason, says Brad Balter, managing partner at hedge fund advisory Balter Capital Management, is twofold. “Use the biggest names and if something goes wrong you can point to the fact that there are other smart investors in there. Secondly, the largest allocators feel that if they are going to allocate $50 million to $100 million at a clip, only the bigger hedge funds can absorb it. The reality is, that argument is flawed and creates a negative selection bias,” Balter says.

Hedge funds, private investment vehicles that manage pools of capital for wealthy investors, tend to follow a life cycle that is defined early.

For instance, Paul Tudor Jones, who runs a $7 billion global hedge fund, delivered 70% returns nearly a decade ago. Jones has yet to repeat that performance (although his funds are up this year), but his investors remain fixated on that one-time event. “The establishment likes to believe that just because someone is managing $10 billion it must be the right place to invest your money, and if someone is managing $100 million it isn’t the right place to invest your money. As a methodology for hedge fund investing, that type of thinking is flawed,” Balter says

Anthony Scaramucci, managing partner at SkyBridge Capital, provides seed capital to emerging hedge fund talent. He says once successful, the market tends to reward fund managers with an increase in assets, and that’s when priorities begin to change. The general partner in a fund that oversees $50 million to $200 million is very focused on growing assets and performance. But once the fund reaches $10 billion in AUM and the GP is collecting 1.5% in management fees, they tend to start “hugging the index,” or maintaining performance so as to not over-promise on returns Scaramucci says.

“You’ve got a bigger asset base now and you don’t want to do anything to upset the apple cart that could lead to dramatically negative performance,” he says.

And according to Balter, asset size “kills” and can constrain a hedge fund strategy. “When hedge funds get too large, they are no longer a hedge fund. They’re not nimble enough and the incentives for the portfolio manager are just not there,” he says.

Balter points to Raptor Global, Cantillon Capital and Pequot Capital, all of which have either closed down, transferred funds or liquidated. “For whatever reason, all of these were placed on the top allocation list for big allocators time and time again,” Balter says.

In addition to the large fund blowups, there are other factors driving fund of fund managers into the arms of new talent. For instance, fund managers have become “very concerned” about investing in large hedge fund firms with legacy positions, Scaramucci says. “If you’re invested in a fixed-income fund, oftentimes you’re worried about what illiquid securities the manager is holding and where they’re marking the security,” he says. “They must rely on third-party brokers to determine whether or not it’s an accurate price.”

Secondly, fund of hedge fund performance was certainly not unscathed by the financial market tremors, and with plenty of cash sidelined, fund managers are asking their clients for another chance. “They are saying, ‘I know we hurt you last year, but we have a new and improved group of smaller managers. We have a research team dedicated to uncovering new gems and funds off the beaten path. I can find smaller emerging managers to bring into the portfolio, where there is no index hugging,’” Scaramucci says.

Andrew Schneider, managing partner at HedgeCo, says the firm has assisted in various hedge fund startups recently in multiple strategies ranging from options and futures to distressed real estate and exchange traded funds.

For instance, HedgeCo helped emerging fund manager Stephen Hinel and treasurer Stephen Cutler launch an equity fund dubbed the StrongCap Fund, which seeks to raise $15 million by year’s end, and Gary Chandler to start the 12% Distressed Realty Fund, which will refrain from collecting management fees until the fund reaches its 12% hurdle rate for returns.

Schneider says in addition to investing in emerging talent, fund of hedge funds are beginning to join in the separately managed account (SMA) movement. “I don’t think strategies are changing as much as the way fund of hedge funds are investing,” Schneider says. “They used to put money into single-strategy funds and not worry about lock-up periods. Now, for example, we’re doing a launch of a $1.5 billion fund of hedge funds that is made up entirely of SMAs, which in essence gives them daily transparency and liquidity.” Schneider says.

Cogo Wolf Asset Management, a multi-asset alternative investment firm, launched a new fund of hedge funds in June.

The fund, dubbed the Cogo Wolf Trimaran Liquidity Fund, is named after the three-hulled sailboat. The fund’s three-pronged investment “hulls” comprise investing in: ultra-liquid strategies, such as managed futures; debt-related instruments, including distressed debt; and ETFs. The fund is void of any lock-up periods and offers monthly liquidity with 10 days notice. “The goal is to create something that as a whole is less correlated to the underlying equity markets and also within each hull to have low or no correlation to each other,” says Christopher Wolf, co-CIO and managing partner at Cogo Wolf. “We’re certainly looking for nimble, prudent and hungry managers. That said, you often find them in the smaller category of emerging managers.” Wolf adds that the firm plays close attention to infrastructure risk.

“Do they have people on board who know how to run and operate a business? They don’t need to have a five-year history running their own fund, but at the same time there needs to be sufficient evidence they know what they’re doing and can make money,” he says.

(c) 2009 Investment Dealers’ Digest and SourceMedia, Inc. All Rights Reserved.