Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
Bloomberg - Like plenty of financial players, hedge funds are taking a beating.
Many once-high-flying managers have been swamped by losses. Others have abandoned the business after discovering it wasn’t such an easy path to riches. Even some of the biggest firms — Citadel Investment Group LLC, D.E. Shaw Group and Tudor Investment Corp., among others — have had to block investors from withdrawing money.
This is great news for, well, hedge funds and their investors.
The retrenchment might force hedge funds, lightly regulated investment pools, to rediscover what they once were — small, guerrilla investors focused on returns, not artery-clogging management fees.
Globe and Mail - When Mark Bloom was arrested last week in New York for allegedly bilking clients of North Hills Fund, the case marked a new low in the hedge fund world.
Not just because Mr. Bloom had allegedly stolen $13.2-million (U.S.) from investors, sent false financial statements and lied repeatedly about the fund’s holdings. What really galled prosecutors was that Mr. Bloom had secretly invested client money in a Canadian-based hedge fund and then bitterly complained to regulators when the fund manager was charged with stealing money from investors, sending false financial statements and lying about the fund’s holdings.
Then, when a court-appointed receiver recovered the bulk of the money Mr. Bloom had invested in the Canadian fund, he managed to divert most of the money to himself.
"This action demonstrates the length to which unscrupulous individuals will go to defraud investors," said Stephen Obie, acting director of enforcement of the Commodity Futures Trading Commission (CFTC), which filed charges against Mr. Bloom along with the U.S. Attorney’s Office in New York.
UnionLeader.com - For sheer toe-curling embarrassment, it may be a while before Wall Street does better than the Bernard Madoff scandal. Here was a rogue who practically telegraphed his unreliability by hiring a tiny, no-name audit firm, by reporting monthly investment results that never fluctuated and by claiming a trading strategy that could not possibly have been implemented given the billions of dollars he managed.
And yet, despite these warnings, the rich, the famous and the supposedly sophisticated entrusted their money to Madoff, who defrauded them with the most laughably crude of methods — an old-fashioned Ponzi scam.
New York Times - Hedge funds have suffered a shakeout in 2008. The average hedge fund fell almost 20 percent, according to Hedge Fund Research. No fund has yet required a bailout. But many won’t be around in the new year, and those that have survived are battered and bruised. Hedge fund managers must accept that the industry won’t be quite the same again. Here are six changes they need to prepare for:
Liquidity is the new watchword. Like investment banks, hedge funds didn’t think much about the structure of their financing during the boom times. But a flood of redemption requests in late 2008, just as they were struggling with illiquid markets and scarce credit, caught them out. Many hedge funds annoyed their investors by blocking withdrawals. In the future, funds that invest in illiquid assets will need to lock in their investors for longer. And those wishing to give investors regular access to their money will have to focus on liquid markets.
Fees will face greater scrutiny. The archetypal hedge fund charges 2 percent of assets and skims off 20 percent of investment gains, the longstanding “2-and-20” structure. But some funds have had to offer breaks on fees lately to persuade investors not to take their money out. Investors will be more selective and are likely to put downward pressure on fees. All the same, it is probably too soon to sound a Last Post bugle call for 2 and 20.
Cayman Net News - In a landmark decision the Cayman Islands Court of Appeal has settled various questions on the suspension of redemption. The ruling (December 12, 2008) in the Strategic Turnaround Master Partnership (based in New York) versus Culross Global case specifically defined the meaning of redemption in an investment fund context and at what point a member is actually redeemed from an investment fund.
After examining the articles of association, the Court of Appeal found redemption did not take place on the redemption date but was a process which was not completed until the member’s name was removed from the register of members and the member’s shares were available for re-issue.
Given the investment climate and the rash of redemption requests, the court’s decision is important to directors, administrators, auditors, legal advisers and other third parties involved in the determination of the rights and liabilities of investment funds and investors.
Reuters - Volatility spread across stock and foreign exchange markets on Tuesday as investors eyed a Federal Reserve meeting expected to cut interest rates and hint at future unorthodox monetary policies to lift the U.S. economy.
European stocks reversed early losses to put in solid gains after better-than-expected euro zone manufacturing data. The dollar firmed against the euro after earlier hitting a two-month low.
Oil was trading below $45 but was supported by expectations that OPEC will agree its largest supply cut ever later in the week.
The Fed is widely expected to cut interest rates to just 0.5 percent or lower. Futures markets are setting a two-thirds possibility of a 75 basis points cut to 0.25 percent.
Law.com - The 8th U.S. Circuit Court of Appeals has become the first circuit in the country to rebuff efforts by a hedge fund to call in a debt based on an alleged technical violation of bond terms in a dispute over an $850 million note issued to United Health Group Inc.
The circuit noted that at least three other federal judges and a New York state court have come down the same way, rejecting the practice used to assert a default claim against United Health in United Health Group Inc. v. Wilmington Trust Co., No. 08-1904 (8th Cir.)
Claims similar to Wilmington Trust’s have cropped up in other cases as an investment strategy derided by attorney Robert Giuffra, as a "shakedown strategy" that takes from shareholders and gives to bondholders. Giuffra of Sullivan & Cromwell in New York represented United Health in the case. "We are pleased with the 8th Circuit’s decision holding that United fully complied with the terms of its indenture, the relevant federal statute and acted in good faith," he said.
Reuters - Hedge funds in the European Union will be regulated following a public consultation that is currently underway, a senior EU official said on Wednesday.
"On hedge funds, we have used as our basis that they must be regulated," EU Economic and Monetary Affairs Commissioner, Joaquin Almunia told the European Parliament.
On Monday the bloc’s internal market commissioner, Charlie McCreevy, launched a public consultation on whether hedge funds needed more oversight but stopped short of saying if there will be regulation or a softer approach, such as an industry code.
West Palm Beach (HedgeCo.net) - The Central Bank of Bahrain will be participating in the Hedge Funds Review, Middle East Summit in Bahrain on November 11-12, 2008.
"As the funds industry continues to gather pace in the global arena, the CBB is determined to maintain its regulatory precedence in setting up the necessary initiatives to enable this development," said Abdul Rahman Al Baker, executive director, Financial Institutions Supervision, at the CBB who will be presenting an overview of the Hedge Funds Market and regulation in Bahrain on the first day of the event.
The two-day summit organised by Incisive Media will be addressed by Shaikh Ahmed bin Mohammed Al Khalifa, Minister of Finance and Tarek Sakka, CEO of Ajeej Capital.
This will be the second time the event will be held in Bahrain. More than 250 major investors from across the region are likely to attend the summit, along side leading fund managers from Mena, Europe and the US discussing innovative alternative investment strategies.
The sessions will highlight opinions from expert investment managers, and views from academics on the global credit crisis.
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West Palm Beach (HedgeCo.Net)- The SEC has clarified its position on the "Cash Solicitation Rule" saying that a registered investment adviser may compensate a person for soliciting investors for, or referring investors to his or her investment fund.
Usually, under the rule, it is illegal for an investment adviser to pay a cash fee, directly or indirectly, as the "Cash Solicitation Rule" only applies to solicitations of “clients.”
But the SEC has taken the position that solicitations of investors for investment funds should not fall ito that category. The determination of whether the cash payment is being made solely to compensate that person for soliciting or referring investors will depend on the facts and circumstances of each particular case.
The SEC also warned that "Despite the additional guidance provided by the interpretative letter, investment advisers will need to continue to be mindful of potential traps for the unwary when entering into solicitation agreements."
West Palm Beach (HedgeCo.Net)- The Managed Funds Association (MFA) and the Coalition of Private Investment Companies (CPIC) called on SEC Chairman Christopher Cox in a letter to not extend the emergency order on short selling beyond the announced expiration date.
"While we recognize that the financial sector is undergoing an extraordinarily difficult period," Richard H. Baker, MFA President and CEO, said, "we believe that these difficulties are the result of poor fundamental conditions and not a mysterious conspiracy or, more to the point, the inadequacy of current rules related to short selling."
"Such action would severely burden short selling activity, which the SEC itself repeatedly has acknowledged plays a vital role in the stability of securities markets." James S. Chanos, CPIC Chairman said, "Restrictions on short sales distort the fundamentals that drive market prices and are, in the long run, counter-productive because they remove liquidity and healthy skepticism from the marketplace."
The current expiration date is 11:59 pm on July 29, 2008.
CPIC is a coalition of private investment companies whose members and associates are diverse in both size and investment strategies managing or advising an aggregate of over $100 billion in assets.
MFA members represent the majority of the largest hedge fund groups in the world who manage a substantial portion of the approximately $2 trillion invested in absolute return strategies. MFA is headquartered in Washington, DC, with an office in New York.
West Palm Beach (HedgeCo.net)- In a recent IRS Revenue Ruling addressing the tax treatment of management fees incurred in a “fund of funds” structure, the IRS’s has severely restricted UPTs (upper tier partnerships) from obtaining tax benefits from management fees.
In a typical fund of funds structure, an investment is made by a limited partner into an UTP which in turn invests in several lower teir partnerships (LTPs). Both groups pay an annual management fee to an investment manager based on assets under management. Since each LTP was, on the facts assumed by the IRS, engaged in the trading of securities, the management fee is an ordinary and necessary business expense and can still recieve tax benefits.
However, the UTP’s sole activity consisted of acquiring, holding, and disposing of interests in the LTPs while receiving a share of income, gain, loss, deduction and credit, therefore ruling these fees non-deductable in most cases.
In the ruling, the IRS examined prior cases of entitlement to deductions and these cases also viewed the partner, even a limited partner, as engaged in the trade or business of the partnership.
Editing by Alex Akesson Editor for HedgeCo LLC Email: alex@hedgeco.net
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