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The October edition of Hedgebay Trading Corporation’s monthly index has shown that the purchase of hedge fund assets is being driven by two prevailing sentiments among investors, creating a two-tier hedge fund market.

The Hedgebay Global Hedge Fund Secondary Market Index reveals a wide discrepancy between the highest and lowest prices at which secondary market users were willing to trade at.

The highest trade took place at Net Asset Value (NAV), the second time in the last three months that this watermark has been reached. This is symptomatic of confidence returning to some sections of the industry. However, the number of trades occurring at the lower end of the scale, the lowest of which took place at only 40% of NAV, shows that the search for liquidity and the cleaning-up of unwanted positions is still taking place.

“The trade at 100% of NAV shows that investors are increasingly willing to pay top dollar for high quality and hard to come by funds.” Elias Tueta, co-founder of Hedgebay, commented, “More and more we will see trades reaching, and maybe even exceeding, NAV as investors increasingly put their faith in these high end assets. However, in the other extreme, the trade at 40% of NAV, and the volume of trades at a similar level, still shows that riskier, less liquid assets –notably side-pockets -are increasingly overvalued. Sellers currently still have to offload these kinds of assets at whatever price they can get”

Though the disparity in the valuation of assets suggests a continuing lack of conviction among hedge fund investors, the index also provides signs of encouragement for the industry. The average price (in terms of percent of NAV) rose to 87% – the first time in five months that the average price of assets being traded has risen. While the rise in the average price is a reason for optimism, Hedgebay has indicated that hedge funds’ portfolios have not yet been fully cleaned-up:

“During a month of heavy trading volume, the average price is up almost 400 basis points from September. This, perhaps even more than the trade at 100% of NAV, is a sign of increasing optimism, but it is not yet conclusive. When we start to see a substantial amount of trades being done at around the 95% level, then we might begin to say that the hedge fund market is almost back to normal.”

The Hedgebay Global Hedge Fund Secondary Market Index, launched in September, provides hedge fund investors with statistics on the key aspects of the secondary market. Most notably it offers the average discount or premium to NAV of hedge fund shares traded during the month.

Tags: economy, hedge fund, Not Categorized

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Welcome back, today we will continue our discussion about the inflation/hyperinflation/ stagflation trade. In my last post I illustrated how the important news stories of last week clearly unveiled the footprint of the inflation trade. You may recall that I ended with the familiar refrain: “Inflation (particularly hyperinflation) is a currency event, not an economic event.”

Therefore, the investment strategy required to profit in this environment is one that begins with the close monitoring of the U.S.$ and ends with the investment in assets that appreciate in value when the U.S.$ suffers.

What is the number one asset we expect to benefit from this developing trend? I will pause here and allow long time readers, clients of RCM, and partners of the Fortune’s Favor Family of Funds the chance to shout in unison…GOLD! And as Ed McMahon used to say, “Yes, you are correct!”

With the above investment strategy in mind, I would like to continue our journey following the footprints with a recent word from a respected investment professional. One who has vast experience and in a succinct manner uses his success through the years to impart some valuable wisdom…

The Sage, Richard Russell: “…What happens next is that the cheap dollar is dumped on the market in huge quantities. When any currency or any item is created in massive quantities, that item must fall in value. And the dollar is falling. Ah, Professor Bernanke, what do you do now? To make a currency more attractive, you raise the rates that it pays. But raise the Fed Funds and you squeeze that already gasping US economy. Also, when you raise rates you raise the cost of carrying the gigantic US debt. Total public and private debt in the US is around $57 trillion. A one percent rise in interest rates would drain $500 billion each year out of the US economy….”

Well said! So what are the Fed members saying this week? Is there a will to raise rates…?

Fed’s Lacker says he doesn’t: “think we should tighten policy today”; willing to go along with purchasing full amount of long-term securities purchases for now…Seeing rise in losses from commercial real estate lending, likely to continue for a while…

No, there is no will to raise rates and to make matters worse the bulk of the commercial real estate tragedy has yet to unfold. In fact, the tentacles of the commercial real estate problem are winding around the neck of small businesses. Without small and midsize businesses recovering, unemployment will continue to get worse further impeding the Fed’s ability to raise rates…

Credit tightens for small businesses - NY Times reports many small and midsize American businesses are still struggling to secure bank loans, impeding their expansion plans and constraining overall economic growth, even as the country tentatively rises from its recessionary depths.

Most banks expect their lending standards to remain tighter than the levels of the last decade until at least the middle of 2010, according to a survey of senior loan officers conducted by the Federal Reserve Board. The enduring credit squeeze appears to reflect an aversion to risk among lenders confronting great uncertainty about the economy rather than any lingering effects of the panic that gripped financial markets last fall, after the collapse of the investment banking giant Lehman Brothers. Bankers worry about the extent of losses on credit card businesses as high unemployment sends cardholders into trouble.

They are also reckoning with anticipated failures in commercial real estate. Until the scope of these losses is known, many lenders are inclined to hang on to their dollars rather than risk them on loans to businesses in a weak economy, say economists and financial industry executives.

These developments are all U.S.$ bearish. Central bankers around the world see the writing on the wall and are moving towards the exits…

Dollar reaches breaking point as banks shift reserves - Bloomberg.com Bloomberg.com reports central banks flush with record reserves are increasingly snubbing dollars in favor of euros and yen, further pressuring the greenback after its biggest two- quarter rout in almost two decades.

Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63% of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase… The diversification signals that the currency won’t rebound anytime soon after losing 10.3% on a trade-weighted basis the past six months, the biggest drop since 1991.

Meanwhile, the price of Gold has advanced roughly 22% since the beginning of the year. Our hedge fund, Fortune’s Favor Precious Metals, has exceeded the performance of gold year to date. You can review our investment philosophy as well as the quarterly and annual returns on our website: http://www.rosenthalcapital.com/.

I have received many questions recently about the sustainability of the precious metals move higher. As Gold took out the $1,000 level a menagerie of analysts and letter writers wrote of the impending doom of the Gold rally. As Gold moves above $1,050, I hear countless tales of certain failure, of commercial shorts winning the day. I LOVE THIS TALK! This type of bearishness is typical of continued momentum higher.

To sum up, I will simply reprint the headline from a recent Barron’s story: Gold Is Still a Lousy Investment By Dave Kansas. Need I say more?

Until next time, chew on this:

“It is not because things are difficult that we do not dare; it is because we do not dare that they are difficult.” Seneca, philosopher

Tags: barron's, credit tightens, gold, hyperinflation, Inflation, investment strategy, Not Categorized, small business, stagflation, US$

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            Documentarian Michael Moore’s latest project, Capitalism: A Love Story aimed at highlighting a number of flaws concerning the economic system upon which our country is built. In his film, Moore infiltrates Wall Street and Washington D.C. to “explore the root causes of the global economic meltdown.” In one scene, he attempts to make a citizens arrest of the AIG board of directors. In another, he drives an armored car to Merrill Lynch and attempts, kind of, to collect $10 billion on behalf of the American people. While searching for answers in high-profile places, Moore asks financial professionals to explain complex terms, such as derivatives. In an attempt to provide this answer for Mr. Moore, I thought I would revisit a scenario I created last year. The following is a fictional example. It never happened, except for in my head.

            There is and always has been stiff competition between Las Vegas casinos. Located miles from the strip, Sin and Tonic Casino relies on clever ideas from their owner, Dale, to increase profits. In the summer of 2005, Dale decided to unveil a ‘Play Now, Pay Later’ program to his loyal customers. Dale’s customers, most of whom rarely left the casino because they had no home or job to maintain, were allowed to gamble and drink while management kept tabs on how much money they were each blowing through.

            The customers told all of their friends down by the river about Sin and Tonic’s new program and soon the casino was always filled to record numbers for the property.

            Dale decided to lower the payouts on all of his table games and slot machines and also increase the price of alcoholic beverages. But, because his customers were not required to pay right away, no one seemed to complain. Dale’s sales blew through the roof and caught the attention of local banks. One bank referred to Dale’s customers’ debts as “valuable” and offered to increase Dale’s borrowing limit.

            With Dale’s customers’ debts as collateral, the bank turned the debts into securities known as Sin-a-Bonds. Soon, the Sin-a-Bonds were being traded on security markets nationwide. Investors across the country, and soon across the entire world, never knew the AAA-rated Sin-a-Bonds were, in reality, the debts of homeless gambling addicts.

            Leading brokerage firms were selling loads of Sin-a-Bonds and their prices continued to escalate at a surprising rate. Everything was fine until pesky risk managers started poking around and demanding the gamblers to start making payments on their debts. On a busy Saturday night at Sin and Tonic, Dale informed his customers that payments needed to start being made that Monday. The remainder of Saturday night and all day Sunday, Sin and Tonic was filled to capacity.
            On Monday morning Dale and his employees were witness to the first day without customers in the casino’s history. Not one of the customers came in to make payments on their debts and the ones that stumbled around drunk in the parking lot claimed they “hadn’t got no money.” Dale told the bank he could not pay back any of the money they lent him and he quickly decided to claim bankruptcy.

            Sin-a-bonds dropped to near-worthless levels and investors lost their money. Plus, the bank that issued the Sin-a-Bonds saw its capital depleted and they were consequently unable to offer any more loans. The bank laid off all of its employees and closed.

            Dale was unable to pay any of his bills and all the companies that granted him payment extensions had to take massive losses, as Dale was their largest customer. The carpet cleaning service was forced to downsize, the vending companies were left with handfuls of damaged machines that no one else was interested in and alcohol suppliers were left with large inventories that could not possibly be consumed without Dale’s heavy-drinking clientele.

            The brokerage firms that sold the Sin-a-Bonds were in heavy distress. Eventually, the government stepped in to save them by creating a bailout package that was funded by taxpayers from states where gambling is prohibited.

            Dale retired from the casino business and is now rumored to be heavily involved in politics.

Absolute Returns Absolutely

            An increasing number of investment firms looking to capitalize on the fears of their investors have started offering “absolute return” funds that boast the ability to always produce returns. Investment advisors are pushing mutual funds that are designed to produce positive returns no matter how badly the stock market is performing. The idea has been around for decades, but now major financial companies such as Goldman Sachs, Dreyfus and Putnam have all launched similar absolute-return funds.[i] In response to the growing group of clients who want to be able to rely on their portfolio’s positive performance, investment firms have started heavily marketing absolute-return funds. But, are these funds worth all the hype?

            Similar to hedge funds, absolute-return funds focus on making money in all market conditions. By taking long positions in stocks and balancing them with short positions of similar value and in similar assets, absolute-return funds aim to produce returns slightly higher than Treasury bills.  In a dropping market, gains on the short positions are meant to offset losses on the long positions. In a rising market, the long positions are supposed to outperform the shorts; therefore producing modest returns for passive investors. If the sheer makeup of an absolute-return fund is not producing, fund managers also attempt to achieve their target by employing a number of different strategies. For instance, short-selling can help offset market falls and derivatives can shield from undesired volatility.  

            Generally, the techniques used by absolute-return fund managers to stabilize your portfolio’s ride are the sort of diversification practices you can do yourself, without having to pay hefty annual fees. In a recent Reno Gazette Journal article, Registered Investment Adviser Robert Barone recommended the following three steps in order to achieve consistent positive returns:

            First, reduce the allocation to equities in your portfolio to the 30-to-40 percent range. Remember to hold equity positions in companies with sound business practices and low levels of debt.

            Second, increase the allocation to fixed income to the 40-to-50 percent range, but keep the maturities relatively short (no more than three or four years to maturity).

            Third, because of weak dollar policies, increase the normal allocation to commodities to the 10-to-20 percent range.[ii]

            The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.  

A Broken CIT Will Trip up Small Businesses

            On October 1^st CIT announced the launch of a plan which will aim to enhance its capital and improve its liquidity. According to the official press release, the restructuring plan is designed to “ensure continued financing support for small business and middle market clients.” After being denied financial support from the Treasury in July, CIT was forced to create a restructuring plan in order to attempt to sidestep bankruptcy court. But, because of concerns with CIT’s financial stability, the FDIC has forbidden the company from increasing its deposits, which severely limits the restructuring tools in its belt.

            The target of the restructuring plan is to slice CIT’s $31 billion dollar debt load down to about $25 billion. But, some experts have argued that the amount is not nearly enough to persuade the FDIC to again allow CIT to accept deposits. CIT is offering voluntary exchange offers for certain unsecured notes. Current holders of an “existing debt security would receive a pro rata portion of each of five series of newly issued secured notes, with maturities ranging from four to eight years, and/or shares of newly issued voting preferred stock.”[iii]

            The future success of CIT relies on a significant increase in capital. The restrictions imposed by regulators and the troubling credit freeze have created enormous obstacles for CIT. Financial companies, like CIT, without direct access to Federal Reserve emergency loans rely on funding from short-term debt markets. But, with these markets already shriveled, the possibility of finding new debt buyers has all but disappeared.

            With CIT operating in more than 50 countries, it is peculiar that the government did not deem CIT “too big too fail,” as it has a number of other institutions. The last company of this size that was denied a bailout was Lehman Brothers and its resulting bankruptcy filing tore the financial market to ribbons.

            For over a century CIT has been a huge player in providing loans to small and medium-sized businesses. The company has more than one million corporate borrowers; including popular businesses such as Dunkin’ Donuts and Dillards. If (or when) CIT collapses, the biggest problem will be the scores of small businesses that will find it even more difficult to find capital to fuel their ventures. As constantly noted, small businesses are crucial to our recovery. The credit freeze has already built a wall between businesses and available capital. The crumbling of CIT will only exacerbate the problem and highlight the importance of private capital in the marketplace. Without capital, our financial system cannot begin to encourage economic growth, and without growth a recovery is out of reach.

All My Best,

Thomas J. Powell

Tags: absolute return, absolute return funds, AIG, capital, Capitalism: A Love Story, CIT, credit freeze, derivatives, Dillards, Dreyfus, ELP Capital, FDIC, Goldman Sachs, growth, investment advisors, Merrill Lynch, Michael Moore, Not Categorized, powell perspective, Putnam, Recovery, T bills, Thomas J. Powell, tom powell, Treasury Bills, Wall Street

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Evan Rapoport, founder and managing partner of HedgeCo Networks, is an expert on marketing hedge funds to investors. On his blog, he has been doing a series on using the internet to market hedge funds to investors.

In the first piece of the series, he discussed creating websites that draw investors in without stepping in to the area of generally soliciting clients. Basically, it’s important to have a website that is well put together and discusses the key aspects of the fund company and absolutely nothing about the actual hedge fund.

In the next article, he talks about the benefits of listing hedge funds on a hedge fund database. These hedge fund databases have access to thousands of accredited investors, and as such, your hedge fund can be viewed by many more potential clients at one time than anywhere else.

Over the next week, he is going to dole out advice on using blogs and social networking sites to increase visibility and making your new visibility effective as a marketing tool.

Tags: Blog, Databases, hedge fund, Hedge Fund Marketing, Internet Marketing Strategies, Internet Strategies, Marketing Strategies, Not Categorized, social networking, Web 2.0 Strategies, websites

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Lost in the shuffle of the recent economic crisis, American financial institutions now have the opportunity to service clients of their now-failed counterparts. No where has this been more evident than the world of hedge fund prime brokerage. When Lehman Brothers and Bear Stearns failed, the rest of the banking industry went into defense mode and began to cut servicing to riskier or less profitable hedge fund clientèle. Hedge funds were losing money anyway, and prime brokerage departments couldn’t fathom spending time, effort, or money to service these smaller, less-conspicuous hedge funds.

Now, hedge funds are roaring back, and many new prime brokerage departments are opening to take advantage of the availability of new or formerly-undesirable prime brokerage clients. According to Jenny Strasburg of the Wall Street Journal, FBR Capital Markets and Cantor Fitzgerald &Co. have both added prime brokerage units in the past few months. Conifer Securities began servicing prime brokerage clients in January, Merlin Securities opened its prime brokerage department in 2004, and Jeffries & Co. launched prime brokerage in 2007.

While these new prime brokerage departments are operating in relative obscurity, they are doing big business with hedge funds with less than $500 million in AUM. In 2007, analyst estimated the prime brokerage market to be worth more than $10 billion, and these new firms are poised to take in clients that can’t find servicing from the major brokerage houses like Goldman Sachs, Morgan Stanley, and JP Morgan. At the end of the day, Wall Street is an eat-what-you-kill industry, and the big boys are leaving a lot more than scraps for the smaller brokerage houses to fight over.

Tags: Bank Failure, Bank Failures, Brokerage, Capital Introduction, hedge fund, Mini Prime Brokerage, Not Categorized, prime brokerage, Wall Street

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 HedgeFund Intelligence’s Press Release from today states that the fund of funds industry shrank by $95 billion in the first half of 2009 but still manages $735 billion.  This represents a decline of 11.4 percent in assets under management (AUM).  Firms with more than $1 billion in AUM manage a combined $613 billion.  According to HedgeFund Intelligence, 18 fund of hedge funds companies have been removed from the InvestHedge Billion Dollar Club (list of firms with $1 billion or more in AUM).  Recently, we listed the top 50 fund of hedge funds firms and found that the top 50 firms manage $489 billion.

While the fund of hedge fund industry has shrank over the past year, investors are looking at the decline as a culling of the herd.  The better funds of funds have survived the economic turmoil and are ready to take on new investors and identify promising hedge funds. 

Many economic analysts and pundits don’t believe we are going to see prolonged aggressive bull financial markets going forward.  Rather, investors will be dealing with volatile conditions and unstable markets domestically and abroad.  The superior fund of funds managers will have to shrewdly identify hedge fund managers using strategies that capture positive returns while reducing downside deviations in volatile markets. 

Furthermore, fund of hedge fund managers will have to be judiciously observant of the infrastructure of fund managers to avoid fraudulent situations that have recently plagued the hedge fund industry and avoid the Bernie Madoff’s of the world.  Perhaps, the steady fund of hedge funds managers can be the stabilizing force that returns respectability to the hedge fund industry.

Tags: Fund of Funds, Fund of Hedge Funds, hedge fund, Investment Strategies, Not Categorized

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At ICFA’s Global Awards 2009 gala dinner the Bank of New York Mellon took home 7 awards:
* Custodian of The Year: Americas – BNY Mellon Asset Servicing
* Hedge Fund Administrator – The Bank of New York Mellon AIS
* Transition Management Provider – Mellon Transition Management
* Transfer Agent – BNY Mellon Asset Servicing
* Broker/Dealer Custody & Clearing Provider – The Bank of New York Mellon BDS
* Derivatives Valuation Services Provider – BNY Mellon Asset Servicing
* White Paper of the Year* – BNY Mellon Asset Servicing

JPMorgan won four awards including the Global Custodian of the Year, and the Most Innovative Project of the Year went to ValueLink Information Services

This year the awards judging panel included Dr Werner Frey, CEO of the European Securities Forum, Angela Knight, CEO the British Banker’s Association, Dr Chris Sier, a director at Alpha Financial Markets Consulting and Margie Lindsay, editor of Hedge Funds Review.

Full list of Awards here at; The Best Of The Best

Tags: alternative, awards, mellon, Not Categorized

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Yesterday I blogged about cosmetic changes that the HedgeCo team is making on the HedgeCo.Net home page, today we’re going to take it a step farther and solicit your input for future feature additions & the general direction of the site.

As many of you know, HedgeCo Networks has been working with Hedge Funds for the last 7 years. Our website was one of the first Hedge Fund database portals and remains the largest and most trafficked independent Hedge Fund site on the web.

With the underlying current of the Internet changing from traditional websites towards the use of social media platforms, we wanted to touch base with our community and ask you what features attract you the most when you’re looking for your Hedge Fund related data.

The unique goals of HedgeCo.Net have always been two-pronged:

1. Create a portal which would create a new level of transparency between Hedge Funds and investors. This information is meant for accredited investors only.
2. Provide breaking news and other educational (or “Hedgeducational“) resources for the general public.

Because of our two-pronged approach we have 2 distinct sets of users. Our Hedge Fund database users include Accredited Investors, Hedge Fund Managers, and other Industry Professionals. The general public, which use the open areas of our site consist of: Journalists, Researchers, Service Providers, Students, and other interested parties.

Our team has worked continually to enhance the database section of the website by introducing enhanced fund profiles, robust searching, watch lists, etc. However, the general public has not seen as many enhancements to the outside portions of the websites.

Regardless of whether you use our Database section or our News & Educational sections we would appreciate your feedback on what you would like to see more of on HedgeCo.Net.

SOCIAL INTERACTION
HedgeCo currently has a presence on LinkedIn, Facebook (fan page and group), and Twitter. We understand that a lot is currently going on in this realm, please let us know if you think of any new features we can add or new ways we can bring our content to the social network.

BLOGGING and COLUMNISTS
The HedgeCo Hedge Fund Blog currently features authors who represent various segments of the hedge fund industry. We are open to accepting new columnists, if anyone wants to contribute to our blogs please contact me, Aaron Wormus at (561) 835 8690 and we can discuss.

NEWS
We have been publishing hedge fund news on HedgeCo.net since our inception. Our news section is one of the most trafficked portions of the site. We are currently working on new ways to display our news, but are open to new ideas and suggestions.

We have a weekly & daily newsletter which members of HedgeCo.Net can subscribe to. We also publish our news via Twitter, and various Facebook and LinkedIn groups.

If you have news you would like to see published, please send it to news@hedgeco.net

NETWORKING EVENTS
At the end of 2008 we started hosting monthly hedge fund social networking events in NYC. Networking events require more planning and resources than the other items in this list, but if you are in an area which has potential for a networking event. Please let us know and we will be happy to discuss it with you.

OTHER HEDGECO PRODUCTS
Apart from the HedgeCo.Net database portal, HedgeCo offers many other services, such as Hedge Fund Startup Consulting (HedgeFundTools.com), Hedge Fund & Corporate Website Creation (HedgeCoWebsites.com), Hedge Fund Reporting and Analytics (HedgeFundCalculator.com), Hedge Fund Employment (HedgeFundEmployment.com), Hedge Fund Administration (GSFundServices.com) and much more.

Please feel free to comment on this post, or pass it around to your friends. Most importantly know that we are VERY INTERESTED in your suggestions or comments! We appreciate your time!

Tags: administration, blogging, hedgeco website, Not Categorized, social networking, websites

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The Cayman Islands Government today announced that it will provide access to comprehensive tax information assistance to 20 countries, including the majority of Cayman’s major trading partners.

Ireland, Japan, the Netherlands and South Africa now join eight other countries afforded tax information assistance to OECD standards, with a “unilateral mechanism, which does not require a bilateral treaty.”

“The Cayman Islands took the proactive step of introducing the unilateral mechanism for the provision of information in tax matters, as a complement to our bilateral negotiation programme,” Cayman Islands Leader of Government Business, the Honourable Kurt Tibbetts said. “We recognised the need to increase the pace at which we could enter into tax information arrangements, while offering a phased approach to our negotiating partners under our bilateral programme in appropriate circumstances. We look forward to continuing this progressive approach.”

In combination, the arrangements noted above cover four of the seven G-7 states and 17 of the 30 OECD member states.

Based on its current negotiating programme – which reflects OECD countries (including significant trading partners) that have indicated interest in tax cooperation arrangements – the Cayman Islands aims in the following months to enter into arrangements with a number of additional countries, including the remaining G-7 and five other OECD member states.

Tags: Cayman Islands, Not Categorized, tax

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