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Reuters – HSBC Holdings Plc, Europe’s biggest bank, is to unveil plans to enter into the European exchange traded fund (ETF) market with its first launch, the Financial Times said on Monday.
”We believe our future is linked to indexation and ETFs and not just active management,” Farley Thomas, global head of wholesale distribution at HSBC Global Asset Management, told the newspaper.
Bloomberg – HSBC Holdings Plc’s U.S. securities division will no longer extend structured financing to hedge- fund investors to leverage their investments, according to people familiar with the company’s plans.
The bank is halting the financing by its structured-funds products division and eliminating an unspecified number of jobs in New York, said one of the people, who asked not to be identified because the information hasn’t been made public. The group reports to Steven Phan, global head of the investment access and solutions groups in London, the person said. Phan declined to comment.
“Hedge fund-linked strategies tie up a lot of capital because of the illiquidity of the underlying hedge fund,” said Keith Styrcula, chairman of the Structured Products Association, a New York-based industry group. “Those were among the very first lines of business that firms were cutting back on.”
Wall Street Journal – Experts say hedge funds are not responsible for the wholesale selloff in U.K. financial stocks which saw shares in the four remaining major banks dive to record lows earlier this week and prompted renewed calls to the U.K. financial regulator to reintroduce a ban on the short-selling of financial stocks.
While Lloyds Banking Group (LYG), HSBC Holdings PLC and Royal Bank of Scotland Group PLC (RBS) all closed in positive territory Wednesday with Barclays PLC (BCS) only down 0.07%, all four had had massive falls Monday and Tuesday.
Globe and Mail – Hedge fund manager Eric Sprott heaps praise on his "defensive team" for helping him survive this bear market.
While some of his peers have cratered amid this year’s stock market crash, his short positions have kept him well ahead of his benchmark index.
For the first 11 months of this year, the returns of Sprott Bull/Bear RSP and Sprott Hedge LP I and II range from an 8.5-per-cent gain to a 4.5-per-cent loss compared with the S&P/TSX composite’s sharp 33-per-cent slide.
"The reason we started our first Canadian hedge fund in 2000 was because we foresaw this very, very difficult market," recalls Mr. Sprott, also chief executive officer of Toronto-based Sprott Inc.
Bloomberg – Kenneth Heebner, manager of the top-ranked U.S. stock mutual fund, is seeking as much as $5 billion for his first hedge fund.
Heebner, who has worked in the mutual-fund business almost four decades, formed a private investment partnership in June called Wayfarer Capital LP, according to Aug. 14 regulatory filings. The size of the fund, which had raised $73 million from wealthy investors and institutions, may vary from the target, Wayfarer Capital said in the filings.
A private fund would free Heebner from most regulatory oversight and allow him to buy or sell any assets, unlike mutual funds, which are more tightly controlled. Hedge funds also charge higher fees, including a cut of investment profits.
“He has wanted to do this for a long time,” said Janine Hermsdorf, who retired in December as the head trader at Heebner’s Boston-based Capital Growth Management LP after working with him for 27 years. “This was just the time to go ahead.”
Martha McGuire, a spokeswoman for Capital Growth Management, declined to comment on the filings by Wayfarer Capital with the U.S. Securities and Exchange Commission and state regulators. Stephen McShea, an attorney in the Boston office of Dechert LLP, the law firm that helped set up the partnership, also declined to comment.
Heebner’s CGM Focus Fund had the best performance among diversified U.S. stock mutual funds this year through June 30, gaining 17 percent including dividends, compared with the 12 percent decline by the Standard & Poor’s 500 Index, according to data compiled by Chicago-based Morningstar Inc. The fund has since fallen 29 percent, while the benchmark index is off 3.9 percent, illustrating the swings that often accompany Heebner’s approach to stock-picking.
West Palm Beach (HedgeCo.net) – In the April 2008, Draft Report of the Committee on Financial Sector Reforms headed by Professor Raghuram Rajan, it was proposed by the high-level committee that, “The presence of hedge funds would induce greater competitive pressure for other regulated fund management channels such as mutual funds.”
In an article by investment strategist Venkatesh, the strategist comments on the proposal, saying how hedge funds could improve asset price efficiency. "Besides," Venkatanesh says, "such funds, by virtue of their diverse investment styles, could provide investors an opportunity to enhance their risk-adjusted portfolio returns."
Included are some comments and reports on the subject;
Suppose a long-only (mutual fund) manager and a hedge fund manager both have a negative view on SBI, a positive view on HDFC Bank and a neutral view on ITC.
Long-only active managers will buy ITC in the same weight as their benchmark index, may overweight HDFC Bank and may not take any exposure in SBI. There is a reason for such a strategy. Active managers strive to beat their benchmark index. But they do not take too many active bets, lest their bets go wrong. Often, active funds tail the benchmark index with few active bets. Importantly, such managers cannot short-sell to take advantage of their negative view on a stock.
Hedge fund managers’ do not suffer from such constraint. In the above example, the hedge fund manager may overweight HDFC Bank, short-sell SBI and not take any exposure in ITC.
Better still, to neutralise any market risk, the hedge fund manager may buy HDFC Bank and short-sell SBI in such a way that the market risk in HDFC Bank is offset by short-selling SBI. Often, neutralising market risk on a portfolio would mean short-selling Nifty futures.
Making the most of a range-bound market
Exploiting price inefficiency
Hedge funds identify mispriced assets and exploit any price inefficiency. One way to do this is to employ statistical arbitrage.
Suppose a hedge fund manager finds that combination of one share of HDFC Bank and two short shares of SBI (1HDFC – 2SBI) has a stable statistical distribution. If the “spread” wanders far away from its mean, a hedge fund manager would set-up this strategy with a view that the “spread” will tighten. Such relative-value strategies can help arbitrate away asset price inefficiencies in a “normal” market.
Besides, hedge funds employ strategies to arbitrage price differentials between the derivatives and the spot market. Suppose a stock is trading at Rs 1,480 in the spot market. Assume that the hedge fund manager, based on her proprietary model, believes that the futures price should be only Rs 1,470 against its current market price of Rs 1,510.
The fund manager will short the futures contract and simultaneously buy the stock in the spot market. The trade will be profitable as long as difference between the spot price and the futures price is less than Rs 40.
As more hedge funds exploit such price differentials, disconnect between the spot and derivative markets could gradually reduce. And that could attract long-term hedgers to the market.
Using options to time investments
Higher risk-adjusted returns
Hedge funds create value for investors through their diverse investment styles. Here are some examples.
Relative-value strategies such as fixed-income arbitrage and market-neutral style strive to back-out beta exposure and provide alpha returns. Such strategies typically carry lower volatility than government bonds but generate higher returns. They, hence, act as returns-enhancers when combined with a bond portfolio.
The long-short investment style (such as 130 per cent long position and 30 per cent short position in equity) is a high-risk high-return strategy. The volatility of this strategy is lower than that of the traditional equity strategy. This strategy, hence, acts as return-enhancers when combined with equity portfolios.
The managed-futures investment style primarily takes exposure in commodity futures. This style acts as a risk-diversifier for an equity portfolio.
Of course, there are risks with such investments. Hedge funds typically employ high leverage. This causes a systemic risk in the event a fund folds because of high drawdowns. Besides, monitoring such managers is important because many of them may charge alpha fees for beta exposure.
It is not surprising that the committee has recommended that hedge fund investments be offered only to those who can invest Rs 1 and above. A similar such rule exists in the US.
Conclusion
It is important to understand that arbitraging price inefficiencies does not mean that hedge funds will prevent formation of market crashes or asset price bubbles. Hedge fund managers can be as irrational as the professional long-only managers and investors.
Yet, the introduction of hedge funds will be a welcome move to the Indian markets for two reasons — such funds can provide higher risk-adjusted returns for investors and can facilitate better asset price efficiency.
enhancek@gmail.com alex@hedgeco.net
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Hedge Funds Review Magazine – Hedge funds generally are more correlated in bull market runs and more de-correlation at market downturns. A comparison of the Credit Suisse/Tremont Broad Benchmark Index (HEDG), an asset-weighted broad benchmark of the hedge fund industry, to the MSCI World Index, a broad equity index, shows that the 12-month rolling correlation between the two has dropped from its peak of 0.97 in June 2006 to 0.61 in June 2008. The findings are given in a research report* by Credit Suisse Index. The report showed that during times of market stress sharp declines from HEDG’s previous peak levels of positive correlation with MSCI World demonstrated the ability to de-correlate from broad equity market indices.
Between July 2007 and June 2008, HEDG increased by 4.09% compared with a fall of 12.5% in the MSCI World Index and a decrease of 13% in the S&P 500.
The ability of hedge funds to maintain exposure to a range of asset classes allows them to preserve capital in down markets and, if successful, offer a more balanced investment option compared to traditional equity indices. In addition, the ability of hedge funds to monetise negative views through short selling is clearly effective during market downturns.
West Palm Beach (HedgeCo.net) - Hedge funds generally are more correlated in bull market runs and more de-correlation at market downturns.
A comparison of the Credit Suisse/Tremont Broad Benchmark Index (HEDG), an asset-weighted broad benchmark of the hedge fund industry, to the MSCI World Index, a broad equity index, shows that the 12-month rolling correlation between the two has dropped from its peak of 0.97 in June 2006 to 0.61 in June 2008. The findings are given in a research report by Credit Suisse Index.
The report showed that during times of market stress sharp declines from HEDG’s previous peak levels of positive correlation with MSCI World demonstrated the ability to de-correlate from broad equity market indices.
Between July 2007 and June 2008, HEDG increased by 4.09% compared with a fall of 12.5% in the MSCI World Index and a decrease of 13% in the S&P 500.
The ability of hedge funds to maintain exposure to a range of asset classes allows them to preserve capital in down markets and, if successful, offer a more balanced investment option compared to traditional equity indices. In addition, the ability of hedge funds to monetise negative views through short selling is clearly effective during market downturns.
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
