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.
Seeking Alpha – If you happen to be in need of Vaseline and find that your local pharmacy is sold out, never fear. Chances are, the entire stock has been purchased by your friendly neighbourhood hedge fund manager. If you ask nicely, perhaps he’ll let you borrow a tub or two.
One of the signal trends of the past month or so has been the sharp decline in the oil price. Part of this is likely attributable to the China/global growth slowdown theme that Macro Man has highlighted recently, and part of it is likely a result of some sort of dollar strength feedback loop, which itself is at least partially attributable to a softening of the ECB’s rhetoric.
On the face of it, it would appear that the hedge fund world has dodged a bullet in oil. After all, the CFTC data has shown net speculative positioning to be fairly light over the past month or two, and even slightly negative for the last few weeks.
Seeking Alpha – Sailors out there will know that boats can sail down with the wind - like a leaf being blown across the water – or into the wind at an angle, zigzagging back and forth along the way. Sailing downwind is easier and since it offers a direct path from A to B, and is therefore faster. Zigzagging directly upwind, on the other hand, requires more skill and is much slower. But who would want a boat that could only sail along with the direction of the wind? This is where sailing can offer a useful lesson for hedge fund investors.
Since the beginning of the last bull market, questions have been raised about the high correlation between hedge funds and equity markets. Arguably, this relationship gave birth to the field of hedge fund “replication” (a field that now involves a wide variety of “alternative” betas as well).
But all along, hedge funds have said that when markets rise, why shouldn’t they try to capture all this upside – and then some? The value in alternative investments comes not necessarily from their consistent absolute outperformance, but in the option-like behaviour of their returns. In other words, your “2 and 20″ buys you a market put. Long-only managers, hedgies are apt to say, simply don’t have the ability to make dramatic adjustments to net exposure in response to market gyrations.
Seeking Alpha – Pop Quiz: Which are more expensive, hedge funds or mutual funds?
Sounds like a pretty dumb question, right? Well as regular readers will know, this question is actually central to our views here at AAA. Over two years ago, we told you about an academic study called “Measuring the True Cost of Active Management by Mutual Funds” by Ross Miller of the State University of New York. Miller argued that since mutual funds could be largely replicated by low-cost index funds or ETFs, the implicit fee for their active management was significantly higher than the posted expense ratios. For good reason, the paper was subsequently included in the Q1 2007 edition of the Journal of Investment Management.
The latest to make this argument is Mark Kritzman of Windham Capital. In his article “Who Charges More: Hedge Funds or Mutual Funds?” (Winter 2008 Journal of Applied Corporate Finance) Kritzman says:
Hedge funds, in principle, hedge out market returns and thereby produce a pure alpha; hence the term “hedge fund.” Alpha, in principle, is uncorrelated with market returns. Mutual funds, by contrast, generate returns that comprise a market component and an alpha component. The returns of mutual funds are typically more than 95% correlated with market returns. Taking these factors into account, it is unclear whether hedge funds or mutual funds are more expensive.
Seeking Alpha – In a recent interview, Mr. Stanley Goldstein announced the creation of an industry watchdog group, led by the New York Hedge Fund Roundtable. Its goal is to self-enforce otherwise voluntary and "weak" hedge fund practices. (As I wrote in "Doris Day, Scarlett O’Hara and Financial Market Tumult," July 19, 2008, a July 17, 2008 Financial Times editorial refers to such guidelines as cosmetic, meant to attract institutional investors and to keep regulators at bay.)
Goldstein, a CPA and founder of several hedge funds, explains that the aim is "not to start a separate organization but to use the existing one to compile and disseminate standards for hedge funds to follow," adding that "We do not see enforcement as practical or desirable but rather, hope that ‘industry usage’ will evolve along the lines which we, and others like us, deem appropriate."
Goldstein’s support of the free market to act as the ultimate enforcer is laudable, especially at a time when global regulators are far from silent about the need for more stringent rules. Will Adam Smith’s "invisible hand" really work? Let’s hope so. As this blogger has written many times before, regulations no doubt change the way market participants behave, often leading to the "Law of Unintended Consequences."
Seeking Alpha- In a 13G filing after the close Friday on Sunoco, Inc. (SUN), Philip Falcone’s Harbinger Capital disclosed a 6.6% stake (7,732,600 shares) in the company. The hedge fund did not show a stake in Sunoco at the quarter ended 03/31/08.
A 13G indicates a ‘passive investment’, but Harbinger is a known activist investor. Most recently, Harbinger called on Cleveland-Cliffs (CLF) to cancel its merger with Alpha Natural Resources Inc. (ANR), saying it was not in the best interest of shareholders.
