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New York (HedgeCo.net) – Despite rich equity market multiples and uncertainty surrounding the upcoming 3rd quarter earnings reports, Hennessee Group said that hedge fund investors continued to pile into stocks due to an uptick in merger activity during September.
The Hennessee Long/Short Equity Index gained +3.13% in September (+18.75% YTD), while the S&P 500 index finished September up +3.6%, faring much better than the average loss of -1.2% the S&P has historically posted during the month of September dating back to 1929.
Hedge funds have also taken on additional directional risk in order to participate in the ongoing equity market rally and Hennessee believes they remain cautious and aware that the market could turn sharply to the downside.
“Little of the bail out money given to banks seems to have been passed on to businesses or consumers. It must have gone somewhere, and it is possible that is has gone to the proprietary desks of the banks, which are putting it to work in the markets,” Charles Gradante Co-Founder of Hennessee Group, said. “That could lead to a potential problem if the public and institutions do not join the rally, and the banks eventually have to sell equities into a vacuum.”
“The current debate among hedge fund managers is ‘Deflation versus Inflation’,” Gradante said, “The weak dollar and deficits are inflationary, but the 30 year treasury below 4% (80 bps over the 10 year) points to deflation expectations. Hennessee research is noticing a growing propensity of hedge funds to short 20 and 30 year treasuries as yields break 4%. The U.S. Treasury is currently funding its long term debt with 3 to 10 year Treasuries. The need to finance America ’s debt on the long end of the curve with attractive yields is increasingly obvious.”
Bloomberg – Former Bear Stearns Cos. hedge fund managers Ralph Cioffi and Matthew Tannin are either responsible for triggering a $1.4 billion hedge fund implosion or are scapegoats for a government eager to affix blame for it.
Jurors selected for a trial beginning tomorrow in Brooklyn, New York, federal court must decide whether the two men misled investors about the health of two hedge funds that collapsed in 2007. The debacle was followed a year later by the failure of Bear Stearns and its purchase by JPMorgan Chase & Co., the bankruptcy of Lehman Brothers Holdings Inc., the U.S. takeover of Fannie Mae and Freddie Mac and the rescue of AIG Inc.
CNN Money – Ralph Cioffi and Matthew Tannin, both former hedge fund managers at Bear Stearns, are accused of painting a rosy picture of their portfolios, even though “the defendants believed that the funds were in grave condition and at risk of collapse,” according to the prosecution.
Prosecutors blamed Cioffi and Tannin for causing Bear Stearns investors to lose more than $1 billion, alleging that their fraudulent behavior led to the collapse of their hedge funds and, subsequently, Bear Stearns. They have both pleaded not guilty and are out on bail: $4 million for Cioffi and $1.5 million for Tannin.
The trial is scheduled to begin Oct. 13 in U.S. District Court in Brooklyn, New York. Cioffi and Tannin could each face 20 years if convicted of securities fraud.
New York (HedgeCo.net) – A new whitepaper published by Pershing LLC, a BNY Mellon company, and Aite Group LLC examines critical hedge fund operations, entitled, Fueling Growth: Outsourcing Solutions for Hedge Funds, reports that an increase in client redemption requests is threatening the viability of even the most well-managed hedge funds.
Key findings from the whitepaper include:
* Choosing the Proper Outsourcing Model
* Smaller Hedge Funds Challenged by Resource Restrictions
* The Role of the Prime Broker
* Consider Disaster and Recovery Planning in Vendor Selection
“It is important for hedge funds to develop a thoughtful, long-term outsourcing strategy to ensure that its needs for support during various stages of the fund’s lifecycle are closely aligned with its goals and objectives to serve investors well.” Craig Messinger, managing director of Pershing Prime Services, said, “Employing this type of approach will enable hedge fund managers to focus on generating profitable returns for their clients and help them grow their businesses in a more productive manner.”
To help hedge fund managers better understand business continuity and disaster recovery planning processes and principles, Pershing Prime Services, in collaboration with Eze Castle Integration and its colleagues across BNY Mellon, has developed a guidebook entitled, Establishing Business Continuity and Disaster Recovery Plans: A Hedge Fund Manager’s Guide.
Connecticut Post – Fixed-income trading by hedge funds slid 40 percent in 2009 as the credit-market crisis forced adjustments in their trading practices, according to a study by consulting firm Greenwich Associates.
Hedge funds are more likely than other types of firms to say they’ve cut back on the total number of securities firm used for fixed-income trading, shifted trades to dealers with the least counterparty risk and reduced the concentration of trading business held by any single dealer, according to Greenwich Associates 2009 North American Fixed Income Investors Survey.
“Perhaps the fact that hedge funds have taken these steps explains why only 12 percent of hedge fund managers say counterparty risk remains a significant concern, compared to 18 percent of institutions overall,” Greenwich Associates consultant Tim Sangston said.
Forbes – Hedge fund managers (and would-be hedge fund managers) may finally have reason to celebrate this year — new fund launches are on the rise. If they keep up at this pace, it could be the first year since 2005 to show some annual growth in new fund formations.
This is on the heels of 2,100 hedge fund failures since the credit crisis. That some managers are dusting off and trying again could be a sign that the smart money sees some opportunity in the markets. It might also be that funds that had posted huge losses closed down so that the managers could start with fresh records, resetting high-water marks so that they can collect performance bonuses without making up the money lost in 2008.
Forbes – U.S. prosecutors said on Tuesday that two former Bear Stearns Cos hedge fund managers facing trial on fraud charges are trying to impede the government’s access to documentary evidence.
Lawyers for one of the accused, Ralph Cioffi, described the allegations as ‘false and inflammatory’ as the government asked a judge for a hearing to review Cioffi’s pre-trial release on $4 million bond and travel restrictions.
Bloomberg – The European Union’s proposed rules for hedge funds and private equity firms may cost as much as 1.9 billion euros ($2.8 billion) in the first year and 985 million euros annually thereafter, an industry survey says.
The Directive on Alternative Investment Fund Managers would regulate and place capital requirements on any funds managing more than 100 million euros. The proposed measure would boost compliance costs by about a third, according to the survey of 121 hedge-fund managers and 41 private-equity managers managing a combined $550 billion, according to Open Europe, a London- based research organization.
MarketWatch – A rally last month in bank stocks such as Bank of America Corp. boosted returns of some hedge funds, including funds run by Paulson & Co.
Managers focused on financial-services stocks returned 4.29% on average in August, according to industry consultant Hennessee Group LLC. That was the best performance of any strategy last month. These types of hedge funds are now up 22.77%, on average, so far this year, the fifth-best strategy, Hennessee’s data show.
CityWire.co.uk – The Italian regulator, Consob, has issued guidance to fund of hedge fund managers on the selection of target funds for their portfolios.
Over the last few months hedge funds have been subject to constant redemption requests in order to satisfy investors’ needs for liquidity and to accomodate a repositioning of their portfolio risk levels.
The presence of illiquid financial instruments in these hedge portfolios has frequently made it difficult for hedge funds to satisfy redemption requests. In many cases redemption gates were adopted, which limit the amount of redemptions permissible in a certain period. Many hedge fund managers also set up so-called ‘side pockets’ in which to manage the illiquid elements of their portfolios.
West Palm Beach (HedgeCo.net) – Long/Short Equity hedge funds returned positive performance in August mainly as a result of the continued uptrend in equity markets, according to Jordan Drachman, Head of Research for Alternative Beta Strategies at Credit Suisse.
“Following a strong rally in July, equity markets continued their upward trend in August, reaching highs not achieved since October 2008.” Dr. Drachman noted, “Long/Short Equity hedge fund managers continued to increase their overall net exposures in order to benefit from market gains. Despite brief corrections due to a mid-month weak consumer sentiment report, managers were able to finish up for the month. The Credit Suisse Long/Short Equity Replication Index (“AIR Long/Short Equity Index”) was up 1.55% (net) for the month, while the Credit Suisse Global Macro Replication Index (“AIR Global Macro Index”) finished up 0.08% (net) over the same period.”
AIR Indices seek to replicate the performance of major hedge fund strategies and enable investors to gain liquid, transparent insight into the Global Macro and Long/Short Equity sectors of the Credit Suisse/Tremont Hedge Fund Index. The AIR platform also offers inverse indices that seek to approximate short exposure to the aggregate returns of the universe of Long/Short Equity and Global Macro hedge fund managers.
Performances for the AIR Global Macro and Long/Short Equity Indices are calculated daily and shown net of a 1.15% per annum calculation fee.
Alex Akesson
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Forbes – Three hedge-fund heads discuss funds’ performance over the last year and debate potential tax code changes.
Funds Lost Their Hedge? David Serchuk: OK, everybody, thank you for meeting with us today on the Forbes.com Intelligent Investing Team. It’s a panel of hedge fund managers, so we are going to get rolling. Question one, something that should be very near and dear to your hearts: Have hedge funds lost their hedge? Why not just go for a cheaper, traditional money manager instead of your lot?
