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 – Britain’s Financial Services Authority (FSA) recently found that hedge fund leverage was nearly extinct (for now). In what is billed by the FT as the “only authoritative data on the opaque industry”, the FSA found that the average hedge fund had leverage of 1.15x, down from about 2x a year ago and 1.44x as late as last spring. According to the FT, the FSA defined leverage as long positions over NAV, “ignoring short positions.”
But what happens when you account for shorts? Regular readers may remember the chart below left from a recent European Central Bank report.
Financial Times – Hedge funds cut their borrowing to almost nothing in the wake of the collapse of Lehman Brothers, according to research by the City watchdog.
Data compiled by the Financial Services Authority show that leverage fell to just 1.15 times hedge fund net assets in October, down from almost twice a year earlier.
The survey, the only authoritative data on the opaque industry, also found that hedge funds had their highest level of "dry powder", or ability to borrow, since the research started in 2005.
However, prime brokers, the bankers who service hedge funds, say borrowing has fallen even further since the survey was carried out, and many hedge funds now have more assets than debt, or less than one times leverage.
"People are still holding quite a lot of cash," said Daniel Caplan, co-head of European prime brokerage at Deutsche Bank. "They are certainly not using the leverage that’s available to them."
The FSA carries out its survey of hedge fund exposure twice a year, and found leverage – measured as the proportion of total long positions to net assets, ignoring short positions – dropped from 1.44 times in April to 1.15 times in October.
Guardian Unlimited – European hedge funds believe capping the amount banks can lend them will be more effective in preventing systemic risks than direct regulation, but this is unlikely to satisfy politicians eager for tougher rules.
The funds are often based in far-away and loosely regulated off-shore centres, so a U.S.-style system to limit lending by prime brokers may be more effective to hem in any systemic risk from the opaque industry.
"Instead of targeting hedge funds themselves it would be more effective to target the providers of leverage," said John Donohoe, chief executive of hedge fund consultant Carne Consulting.
Reuters – The hedge fund industry can survive the credit crisis despite the recent damage to the sector, the chairman of the Hedge Funds Standards Body told the CESR conference on Monday.
"These people (hedge funds) will possibly prove to be more resilient than people thought," said Antonio Borges, chairman of the Hedge Funds Standards Board.
"Looking forward, we have to conclude that the hedge fund model will remain quite powerful, in my view. It has a very low leverage," he added.
Reuters – Global assets of hedge funds may drop to $1.2 trillion by the end of the first quarter, down 35 percent from 2007 as the number of managers decline and funds rely less on strategies that use leverage, a UBS executive said on Tuesday.
"We are gonna see a reduction in hedge fund assets, we are gonna see decline in the number of hedge funds, we are gonna see some strategies that will not work in this environment," Timothy Bell, global head of hedge funds advisory at UBS Wealth Management, told reporters in Singapore.
Hedge funds had assets worth $1.9 trillion at the end of 2007, which peaked at $1.93 trillion in the middle of 2008, according to data from Chicago-based Hedge Fund Research. These assets dropped to $1.4 trillion at the end of 2008.
Bloomberg - Jean-Marie Eveillard, who beat 99 percent of rival equity fund managers last year by hoarding cash instead of borrowing it, is loading up on Japanese insurers and Hong Kong developers.
“Leverage eliminates your staying power,” said Eveillard, whose $16.8 billion First Eagle Global Fund beat the Standard & Poor’s 500 Index every year this decade. “If things go well, you look even better, but if things go badly, you end up doing worse,” he said in an interview from his office at Arnhold & S. Bleichroeder Advisers LLC overlooking Central Park in New York. “You could blow up if big leverage is being used.”
Markets Media News – The New Year is likely to see several important shifts in alternative investing, according to Don Steinbrugge, managing partner of Agecroft Partners, a global consulting and third-party marketing firm for hedge funds.
Steinbrugge said during the fourth quarter of 2008, investor demand started to shift toward market neutral strategies, as well as toward strategies that used little leverage and provided investors with transparency and liquidity. That shift will likely continue throughout 2009, he said.
Short-biased funds, which have always been a small percentage of the marketplace, surged ahead in 2008, delivering double-digit returns and capturing a larger market share of alternative investments. Steinbrugge said investors are likely to continue to invest in short-biased funds, but their growth will be at a slower pace than last year.
Commodity Trading Advisors (CTAs) are likely to see a lot of demand as well, as they also delivered double-digit returns last year and proved they are not correlated with other hedge fund strategies. Steinbrugge said, however, that does not mean traditional long-short equity funds are on their way out.
"Long-short equity funds have actually done pretty well in comparison to the S&P 500," Steinbrugge said. "I don’t think you’ll see a huge shift out of long-short equity."
Minneapolis Star Tribune – Like most market watchers, last year’s participants in the Star Tribune Investor Roundtable failed to predict that 2008 would be a year of stomach-churning stock market declines, failed financial institutions, multibillion-dollar bailouts and credit markets as frozen as a Minnesota lake in January.
"I think everybody in the room knew there was more leverage, more speculation, more betting on the economy, but it amazes me that it got to this level," said Phil Dow, director of equity strategy at RBC Wealth Management.
But what the group of Twin Cities investment professionals did foresee a year ago was a period of unprecedented stock market volatility. The VIX index, a gauge of market swings, reached a record high this fall.
MarketWatch – For the first time in 17 months, hedge funds in July made more bets on oil prices falling than rising, according to the latest government data.
Short positions from noncommercial investors, hedge funds and other large investors that don’t actually take delivery of oil, surpassed long positions in July for the first month since February 2007, data from the U.S. Commodity Futures Trading Commission showed. Short positions are bets on falling prices while long positions bet on rising prices.
"We are seeing a significant retrenchment of bullish appetite among funds," said Edward Meir, an analyst at futures brokerage MF Global. "The price bias still favors the downside."
FINalternatives- London-based VCM Fund Management is prepping a trio of hedge funds to invest in alternative energy, macro futures and emerging hedge fund managers.
The firm next month will launch two hedge funds in partnership with K2 Capital, the alternative energy hedge fund shop founded by former Vantage Derivatives head trader Andrew Swaine. First up, the firm will offer the VCM K2 Alternative Energy Segregated Portfolio, a thematic, global equity long/short and derivatives trading strategy investing in companies positively affected by climate change with a specific focus on the energy sector. It uses a bottom-up approach to stock selection focusing on value companies in the long book, with an emphasis on large cap stocks.
“The portfolio’s large cap bias naturally creates a low volatility, which is further enhanced through protective hedging,” said the firm.
