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.
Business Day South Africa – Examiners with the US Federal Reserve have questioned Wall Street counterparties about their exposure to debt and other holdings of Citadel Investment Group, The Wall Street Journal reported at the weekend.
Citadel denied the report.
Citing people familiar with the matter, the j ournal said the Fed questioned the counterparties in at least two instances in recent days.
But Katie Spring, a spokeswoman for Citadel, denied the rumours that the Fed had spoken to the hedge fund’s counterparties specifically about Citadel and possible problems with its debt.
Commodity Online – Steep performance losses and record investor capital redemptions reduced the size of the hedge fund industry by $210 billion in 3Q08. This represents the largest historical quarterly decline in assets, according to data released the other day by Hedge Fund Research, (HFR), a leading source of hedge fund information and performance data.
Analysis compiled using HFR Database shows investors withdrew over $31 billion in third quarter, the largest net capital redemption in the industry’s history. At the end of the third quarter, total industry capital stood at $1.72 trillion, down from $1.93 trillion at the end of second quarter..
The third quarter withdrawals entirely offset the capital inflows into hedge funds during the first half of the year, bringing year-to-date net capital flows to a decline of $2.5 billion. The decline in industry assets also exceeds the entire amount of investor capital inflow from 2007, which was a record $194 billion.
The Independent – Judy Woodruff: You write in your new book, The New Paradigm for Financial Markets, that “we are in the midst of a financial crisis the likes of which we haven’t seen since the Great Depression.” Was this crisis avoidable?
George Soros: I think it was, but it would have required recognition that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it’s generally the intervention of the authorities that saves the markets when they get into trouble.
Since 1980, we have had about five or six crises: the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, and the failure of Long-Term Capital Management in 1998, to name only three. Each time, it’s the authorities that bail out the market, or organize companies to do so. So the regulators have precedents they should be aware of. But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them. There are now, for example, complex forms of investment such as credit-default swaps that make it possible for investors to bet on the possibility that companies will default on repaying loans. Such bets on credit defaults now make up a $45 trillion market that is entirely unregulated. It amounts to more than five times the total of the US government bond market. The large potential risks of such investments are not being acknowledged.
Reuters – Hedge fund managers are facing D-day as investors demand back billions of dollars from ailing and healthy funds alike.
Funds managers around the world said they are sitting on record levels of cash to meet an expected flood of "I want my money back" notices on Sept. 30 — the end of another month of horrible industry performance and the deadline for most funds offering monthly and quarterly redemptions.
"This is not like flicking a light switch," said Timothy Mungovan, a partner who advises hedge funds at law firm Nixon Peabody LLP. "It is more like a bowling ball careening down an alley where we don’t know if it will go down the gutter or be a strike and take out several big funds."
The issue goes beyond well-paid hedge fund managers losing lucrative asset management fees: Global markets could be jolted if hedge funds are forced to dump stocks, bonds and other securities to meet redemptions.
Even industry stars such as Kenneth Griffin of Citadel Investment Group are nursing losses and the average hedge fund is down roughly 10 percent so far this year — the worst performance in more than a decade.
Boston Globe – Hedge funds usually thrive when markets turn volatile. But even these fast-money investors are struggling to cope with the wild swings in the markets, raising concern that some may not survive.
Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds – those secretive, sometimes volatile investment vehicles for the rich – were on course for their worst year on record. The average fund is down nearly 5 percent so far this year.
One major hedge fund investor said he had started to buy Morgan Stanley at $23 on Wednesday, convinced the rumors of Morgan Stanley’s demise were unfounded. But as the stock began to plummet, he canceled his trade and watched with amazement as the stock sank to a low of $12 on Thursday.
Independent – Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week’s shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch "to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use".
The group’s "imploded funds" list has hit 51 companies since the sub-prime mortgage crisis in the United States kicked off a widespread downturn. That compares with its historical list, stretching back more than a decade to the end of 2006, of just 14, including the collapse of Long-Term Capital Management and Amaranth.
Reuters – U.S. asset manager Putnam Investments said on Thursday that it had closed its $15 billion (8 billion pound) Prime Money Market Fund due to redemption pressures.
Putnam, a unit of Canada’s Great-West Lifeco, said in a statement that the board of trustees of its funds had voted to close the institutional money market fund as it faced "significant redemption pressure" on September 17.
"The trustees’ action was not related to the portfolio’s credit quality, but was instead a reaction to marketwide liquidity issues," the fund company said.
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.
Reuters – A Citadel Investment Group LLC executive who ran an unprofitable credit investment group for the large hedge fund company has resigned, a person familiar with the matter said on Friday.
Joe Russell, who was instrumental in making Citadel’s investments in E*Trade Financial this year and in failed hedge fund Sowood Capital last year, left the Chicago-based firm this week, said the source, who requested anonymity in order to speak freely about the matter.
Russell ran the smallest of Citadel’s three credit groups, and it was the only one that was not profitable.
He resigned amid disagreements over how to manage the group, which like all of Citadel’s credit groups invested in highly leveraged companies, the source said. The group that Russell ran will now be folded into the two other credit groups that concentrate on convertible and structured debt.
West Palm Beach (HedgeCo.net) – Privately owned asset manager, Unigestion, has appointed Konstantinos Iordanidis as Managing Director and Head of Hedge Funds. Unigestion has $11 billion invested in hedge funds, private equity funds and quantitative equity strategies.
Iordanidis is a co-founder of Z.I. Investment, LLC, a global macro hedge fund in Chicago and former Head of Asset Allocation at Julius Baer Asset Management in Zurich from 2003 to 2005. He joins from Olympia Capital Management in Paris where he has been Co-Chief Investment Officer since 2005.
Based in Geneva, his role will be to lead the development of Unigestion’s fund of hedge funds business which comprises 43 investment professionals based in Geneva, London, New York, Paris, Singapore and Guernsey.
The arrival of Iordanidis will provide the opportunity for Bernard Sabrier, Chairman of Unigestion, and Patrick Fenal, CEO, to devote more time to the overall management of the Group focusing on the strategic direction of Unigestion over the next decade. Both will continue to have a key involvement in the fund of hedge fund business, including close relationships with hedge fund managers and Unigestion’s clients.
"It is a natural move for us to reinforce our management structure as we continue to build a multi-disciplinary, multi-cultural and multi-geographic hedge fund team delivering superior quality products to our clients in a consistent and disciplined way." Patrick Fenal, CEO of Unigestion said.
"We are proud to have attracted such a talented individual to strengthen our team." Chairman of Unigestion Bernard Sabrier added, "No doubt he and the team will build on our existing expertise and continue to provide our clients with a combination of products and client service at the leading edge of the fund of hedge fund industry."
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Bloomberg – Balyasny Asset Management LP recruited more than 30 money managers and analysts from competing hedge funds in the first eight months of the year, exceeding its total for all of 2007.
“We have been aggressively looking for talent, and in a year like this, there are a lot more candidates out there,” said Barry Colvin, vice chairman of the Chicago-based firm, which oversees $2.5 billion. Hires came from New York-based Satellite Asset Management LP and Magnetar Capital LLC in Chicago, which have both lost money this year.
While more than 200 hedge funds shut down this year, Balyasny, SAC Capital Advisors LLC and Citadel Investment Group LLC are taking advantage of the industry’s worst performance in a decade to go on a hiring spree. Hedge funds, diminished by a scarcity of credit and enfeebled stock markets, fell by an average 4.7 percent as of Aug. 28, according to data compiled by Hedge Fund Research Inc. in Chicago.
Chicago Tribune – The leader of an activist hedge fund with a significant stake in Sara Lee Corp. has been added to the foodmaker’s board of directors.
Downers Grove-based Sara Lee said Thursday that it is expanding its 10-member board by one, naming Jeffrey Ubben, founder and chief executive of ValueAct Capital, to the new spot. Last winter, San Francisco-based ValueAct bought a 5 percent stake in Sara Lee, maker of bread, hot dogs and meat products sold under such brands as Hillshire Farms and Jimmy Dean.
Activist investors often buy into what they perceive as undervalued companies and then urge significant changes. But ValueAct is considered less strident than some other activist funds, saying at the time of its purchase that it had no plans to push for strategic change at Sara Lee and was comfortable with the firm’s direction.
Neither Sara Lee, which is in the midst of a multiyear turnaround effort, nor ValueAct could be reached.
