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.
Times Online – Hedge fund managers are paranoid. And they are right to be. The other day I had lunch with a senior financial official whose view of hedge funds was simple. “They were a con. The returns were all due to leverage. And now that the leverage has gone everyone will see they were a con.”
You may disagree with this analysis. You may be convinced that for some hedge funds at least the returns were down to skill. You may argue that their role in the credit crisis has been at worst neutral. But you cannot deny it is pretty worrying for hedge funds when this is the view of a top regulator.
And my lunch companion is not alone. According to an e-mail from Dick Fuld, the former chairman of Lehman Brothers, quoted by The Wall Street Journal, Hank Paulson, the US Treasury Secretary, said he wanted to “kill” the bad hedge funds and “heavily regulate the rest”. The Italian Finance Minister has promised to put the extermination of hedge funds on the international agenda when Italy takes over presidency of the G8 in January.
New York Times – Hedge funds’ annus horribilis is getting worse. The average fund, after losing nearly 5 percent in the first eight months of the year, was down an additional 7 percent in September, according to Hedge Fund Research. Many other factors are making life difficult for fund managers, too. An industry shakeout looks inevitable.
At the end of last month, many funds were expecting more than the usual level of requests from jittery investors to pull cash out. It’s hard to plan longer-term trades if your investment funds might suddenly be snatched away. And a flood of redemptions can force the sale of assets, hurting remaining investors — one reason that fund managers sometimes block withdrawals.
On top of that, hedge funds used to bolster returns with lots of borrowed money. Now that has become a scarce commodity. The ability to bet on price declines has also suffered, thanks to partial or complete bans on selling stocks short in markets around the world.
New York Times Blogs – Turns out hedge funds will not have to publicly disclose their secret strategies after all, at least not any time soon.
The reprieve for the industry came late Wednesday. The Securities and Exchange Commission quietly said it would relent on an emergency order, first issued Sept. 19, that would have required hedge funds to publicly disclose vast amounts of detail on their short positions, which are the bets they make against individual stocks.
Hedge fund managers and their lobbyists in Washington immediately attacked the order, saying it amounted to making the Coca-Cola Company disclose its top-secret formula.
Many hedge funds would simply cease to operate, the argument went. Others would go to great lengths to avoid the rule, including by setting up offshore affiliates and conducting trades through complex swap agreements.
Norwalk Advocate – Some hedge funds are reducing their management and incentive fees to keep investors for longer periods during turbulent times on Wall Street.
Typically, hedge fund managers require investors to lock their money into a hedge fund for a year while charging a 2 percent management fee and keeping 20 percent of hedge-fund profits as an incentive fee – if it reaches a pre-determined point.
Camels Capital LLC, a Greenwich-based hedge fund, and Ore Hill, a New York-based fund, among others, have restructured these terms to keep investors.
"Ourselves, Ore Hill and a few other funds have taken a step to do that in this period of liquidity to lock in investors," said Richard Brendan, chief executive officer for Camels Capital. "We’ve been able to lock in our investors for a period of time to participate in opportunities with them."
Brennan would not comment on the specifics of the agreement between the hedge fund and his investors.
Scott Baker, a principal with Greenwich-based hedge fund investment firm Cookpine Capital, said many hedge funds are coming up with innovative ways to secure investor capital for longer periods.
Conde Nast Portfolio – You think things are bad now? Just you wait: the chart above gives you a very good indication of what Christine Williamson calls the "bloodbath ahead" in the hedge-fund industry.
No one wants to be invested in an underperforming hedge fund right now — and half of the hedge funds in America are underperforming. What happens when investors decide to take their money out tomorrow, as they’re generally allowed to do on the first day of any quarter?
Sources said they expect the body count to total as many as 2,000 hedge funds and 500 hedge funds of funds between now and the end of March… Most hedge funds operate on an end-of-quarter deadline for requests from clients to have their money returned. If experts’ predictions of very large collective redemptions come true, managers will have to liquidate their holdings en masse, pushing down prices and forcing many smaller hedge funds or those with poor returns out of business. The wave of closures could span six months, likely beginning in earnest in November and December at the end of the typical 45- or 65-day waiting period when fund managers have to return investor cash.
Forbes – In an op-ed in the Financial Times on Monday , I described the unraveling and demise of the shadow banking system that started with non-bank mortgage lenders, structured investment vehicles (SIVs) and conduits, major independent monoline broker dealers and money market funds. I then argued that the next leg of this unraveling would be hedge funds and private equity firms and their reckless leveraged buyouts (LBOs).
Let me now discuss in more detail this unraveling of parts of the hedge fund industry.
First, note that too much of the shadow banking system was about "Schmalpha" rather than "Alpha" (i.e. the returns that fund managers and asset managers–with their ridiculously high management fees of 2% or more–were getting by parting investors from a good chunk of their assets, rather than by superior absolute returns). In fact, the hedge-fund math of "2/20" was, most of the time, 2% for the fund managers and not 20% (sometimes single digit returns and, this year, actual negative ones) for investors. This scam is now unraveling.
Reuters – Hedge funds are unlikely to be among financial institutions clamoring to unload their bad debts under a proposed $700 billion Wall Street bailout plan, the chief of the funds’ lobbying group said on Tuesday.
"I think it’s unlikely that they would include us and I think it’s unlikely that we would ask to be included," said Richard Baker, president of the Managed Funds Association.
In an interview with Reuters, Baker said it was still unclear whether hedge funds are among financial institutions that would be allowed to participate in the massive Bush administration plan now being debated by Congress.
The former Louisiana congressman said one thing is crystal clear to hedge fund managers: "We understand that if you ask for benefits from the government, you generally get regulation, whether you like it or not."
CFO.com – At 12:01 a.m. this morning, the Securities and Exchange Commission pushed out a new "emergency" disclosure rule that requires hedge funds and other large investors to disclose their short positions. The mandate is one of three new SEC investor protection rules that went into effect early this morning in response to widespread drops in stock prices in the wake of a liquidity crisis exacerbated by this week’s Lehman Brothers bankruptcy and sale of Merrill Lynch.
In a joint statement, SEC chairman Christopher Cox and SEC Enforcement Division director Linda Chatman Thomsen said that the rule, which is designed "to ensure transparency in short selling," will affect funds with more than $100 million invested in securities. Those fund managers, who are currently reporting their long positions, will now be required to "promptly begin public reporting of their daily short positions."
Reuters – Fidelity Investments’ Harry Lange, manager of its one-time star Magellan fund, made what now looks like a poorly timed move in June: he nearly doubled his holdings of AIG.
Lange, who has already seen other financial bets sour, driving the $35.2 billion (19.6 billion pound) fund down 17.3 percent since July, may be just one of several fund managers to get burned by American International Group Inc’s meltdown.
Though it’s unclear where Magellan’s holding stood when the government launched its $85 billion government bailout of the giant insurer on Tuesday, Lange in June boosted the fund’s holdings of AIG to $865.1 million from $475 million in May.
And that was just a piece of the substantial 5.81 percent stake, or 156 million shares, held by Fidelity, the world’s biggest mutual fund company, as of the end of June, according to Reuters data.
Cayman Net News – Despite the ongoing housing crisis in the US, the credit crunch, and the general slowing of the American economy the number of hedge fund terminations in the most recent financial year has been only slightly higher than last year.
Caroline Williams, a partner at Walkers told Cayman Net News: “It is interesting that the number of hedge fund terminations in the last financial year is only slightly higher than in the previous 12 months.
“In some cases where funds have run into difficulties, the hedge fund manager has employed certain techniques to try and weather the storm and continue trading, such as imposing gates, which limit the amount of redemptions that can be made, or by creating side pockets in which the illiquid or hard-to-value securities are placed.
“Overall, for both investors and hedge fund managers, the winding up and dissolution of a hedge fund is very much a last resort and as such these situations are quite rare. Investors prefer to avoid having the fund wound up and dissolved, because they realise that there is less chance that they will have their benefits maximised.”
BusinessWeek – Some participants in South Korea’s nascent alternative-investment market have grown pessimistic over the ability of incoming legislation to support the development of an onshore hedge funds industry.
The Capital Markets Consolidation Act will become effective in February. It is a sweeping attempt to give Korea a securities law akin to those in the United Kingdom or Australia, in which financial services are regulated by function rather than by business license, and in which most types of businesses will be thrown open to all kinds of financial institutions. It will allow the development of a universal bank and plenty of cross-selling.
As part of this, the Financial Supervisory Service has been keen to encourage the development of an onshore hedge funds industry. There are a growing number of Korea-focused hedge funds, but nearly all of them operate offshore, in Singapore, Hong Kong or the United States. The government wants to position Seoul as a financial hub for northeast Asia, and has seen how hedge funds have become a vital and welcome part of the milieu in places like Singapore.
The Consolidation Act makes no mention of hedge funds, however, and industry players have lobbied the Ministry of Strategy and Planning (what they call the Ministry of Economy and Finance these days) to address this. The government has responded by floating an amendment to the Consolidation Act that is expected to go before the National Assembly, probably in October. This amendment specifically addresses the ability of onshore fund managers to employ leverage.
West Palm Beach (HedgeCo.net) – New investments in hedge funds for the first six months of 2008 was below $30 billion, according to Hedge Fund Research, way below the $118 billion raised for the same period the year before, making 2008 is the worst year on record for the industry as the average hedge fund dropped off more than 4%.
According to research, the unexpected downturn will lead investors to rethink their investments or ask fund managers to lower their fees from the current rate of 2% and reduce their 20& cut on profits. Problems at hedge funds may also invite a government probe.
Dan McAllister, treasurer and tax collector of San Diego County, attributed the hedge fund’s popularity to it being seen as a panacea and a sure way to earn big money fast. "But maybe it’s time to be a little cautious, and it’s time to look at things with a more discreet eye," McAllister told the New York Times.
In anticipation of harder times ahead, fund managers are cutting employee Christmas bonuses, said a study slated to be released this week by Glocap, a hedge fund recruitment company. Recruiting firms like Heidrick and Struggle are maintaining a watch list of problematic hedge funds. Tim Holt, a partner in Heidrick who supervises the company’s Wall Street recruitment task, has 100 hedge funds on its watch list and expects 50 to 80 to be added in the next few months.
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