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Globe and Mail – When Salida Capital Corp. beat all other bidders in a charity auction last month to score lunch with Warren Buffett, the $1.68-million (U.S.) win sent a signal to Bay Street: Salida is back.
Salida, the once high-flying, resource-focused hedge fund manager known for its appetite for risk, became one of Canada’s high-profile victims of last year’s market meltdown when its flagship Multi Strategy Fund plunged 67 per cent and three of its hedge funds got locked up in the Lehman Brothers Holdings Inc. bankruptcy.
That was followed by a rapid exodus of key staffers and by dwindling assets under management.
HedgeCo.net (West Palm Beach) – A new research paper by Deloitte LLC: "How Hedge Funds Are Becoming the Ultimate Networked Enterprise," focuses on how hedge fund methods of interacting with prime brokers and third-party administrators needs to be rethought in order to remain profitable as the roles of prime brokers and third-party administrators evolve.
"As investors demand increased transparency and operational risk management, hedge funds are faced with redefining their relationships with prime brokers and third-party administrators," Cary Stier, Deloitte’s U.S. Asset Management Services leader explained.
"While attraction and retention of capital remains a top priority for fund managers, in today’s market performance isn’t the only bull’s-eye a fund has to hit to accomplish these goals. Investors want assurance that the fund’s operating model has taken into consideration the events of the last year and has adjusted accordingly. At the same time, prime brokers, administrators and custodians are looking for new ways to serve managers," said Adam Broun, Deloitte’s Asset Management Services Consulting leader.
The report outlines five areas of focus for both prime brokers and third-party administrators:
Build the Middle-Office that Fits your Operating Strategy
Hedge funds need to determine their optimal operating strategy and factor in roles various service providers will play in providing necessary capabilities. Although most large firms will build their own middle-office, service offerings from fund administrators and custody players will prove to be compelling from both a cost and capability standpoint. Managing the network of service providers will require additional capabilities that the hedge funds will need to build and staff in-house.
Add Horsepower to Your Collateral Management
The multiprime model will only increase the need for improved collateral management. Some hedge funds will benefit by outsourcing to enterprise collateral management service providers or implementing vendor solutions to efficiently manage their collateral across various parties. In addition to spreading collateral across parties, independent valuation of illiquid assets, zero over-collateralization and optimal collateral composition will be the key focus areas.
Plan Risk Management
Risk management will see a balance of focus between market risk for investment strategies and counterparty risk. In a multiprime model, a single broker’s risk report will show only a partial picture of the risk profile. Risk management will need to be a central function that aggregates positions across all providers. Take this opportunity to separate risk management from investment management.
Choose the Right Mix of Prime Brokers
The choice of prime brokers should be guided by aligning the fund manager’s needs to the prime
Third-party administrators can help hedge funds outsource several middle- and back-office functions. With the increased complexity of the middle- and back-office, hedge funds should at least understand the range of services available from their administrators.
Implications for Prime Brokers
Prime brokers are experiencing a major shift in their business model. Their focus on developing deep relationships with a few hedge fund clients is no longer working in a multiprime environment, where risk diversification and access to capital is taking center stage. As lending stays constrained, prime brokers will be required to improve capabilities to deal with new clients and existing capabilities may lose favor among the hedge funds adopting the multiprime model.
Implications for Third-Party Administrators
Third-party administrators are being challenged by handling increased product complexities, technology scalability and international growth. While hedge funds outsource middle-offices and evaluate ways to reduce costs, third-party administrators will need to cut costs and potentially look into moving their back offices to cost-effective locations. Some may offer prime broker-like services to improve profitability and further increase competition in the market or go global; others will more closely align with custodians or consolidate for scale.
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HedgeCo.net (West Palm Beach) – BTIG LLC. announced that it has expanded its Prime Brokerage group to offer fixed income services, including trading and portfolio financing. The expansion into fixed income is in conjunction with the launch of BTIG’s Global Fixed Income Group in February of this year, which focuses on sales and trading of credit products across the full credit spectrum from investment grade to distressed debt.
BTIG Prime Brokerage previously covered equity and equity options and made the move to fixed income to better meet the needs of its hedge fund clients in today’s market.
“As our clients became more interested in fixed income products, we saw a huge need and opportunity to expand our services,” Justin Press, Managing Director and Co-Head of Prime Brokerage, said. “We have created a one-of-a-kind fixed income offering that will bridge the gap for hedge fund managers who have traditionally been operating in equities only.”
BTIG’s Prime Brokerage clients also benefit from the firm’s full range of expertise and services, including Outsource Trading, Market Intelligence, International Trading, and access to the Equity Derivatives team, Capital Introduction team and Commission Management services. The Prime Brokerage group was launched in January 2004 and caters to start-up and existing long/short equity hedge funds. Prime Brokerage and middle office operations have a combined 40+ professionals.
The Global Fixed Income Group has added 50+ professionals since its launch earlier this year.
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Reuters – Och-Ziff Capital Management Group, a U.S. hedge fund giant banged up by last year’s market turmoil, said its funds continued their 2009 revival with June gains, although assets under management slipped once again.
The New York firm estimated total assets fell by $800 million in June to $20.7 billion, continuing the contraction of a firm that managed nearly $34 billion last August.
Reuters – Many hedge fund investors burned by last year’s market meltdown will likely demand a system of checks and balances in which outsiders keep a closer watch over assets, data released on Wednesday show.
Pension funds, endowments and wealthy investors that have long funneled money into loosely regulated hedge funds will want to see more data detailing how their investments are valued and priced, researchers at State Street Corp found.
Alibaba News Channel – Aggressive government action can hurt the market, but regulators should clamp down on leverage among banks and investors to prevent another credit crisis, veteran hedge fund manager Paul Singer said at a conference.
Singer said the current "anti-capitalist" fervor, inspired by last year’s market meltdown and the ongoing recession, will likely lead to increased regulation. These measures would only prolong the problem, he told some 1,200 hedge fund executives at the Ira Sohn Investment Research Conference on Wednesday.
By the same token, he observed that highly regulated banks fueled last year’s market implosion because they ramped up their use of leverage, or borrowed money, for trading and investments. High levels of leverage in a downturn can multiply losses and throw markets into chaos.
Forbes – Aggressive government action can hurt the market, but regulators should clamp down on excessive borrowing by banks and investors to prevent another credit crisis, veteran hedge fund manager Paul Singer said at a conference.
Singer said the current ‘anti-capitalist’ fervor, inspired by last year’s market meltdown and the ongoing recession, will likely lead to increased regulation. These measures would only prolong the problem, he told some 1,200 hedge fund executives at the Ira Sohn Investment Research Conference on Wednesday.
Reuters – Aggressive government action can hurt the market, but regulators should clamp down on excessive borrowing by banks and investors to prevent another credit crisis, veteran hedge fund manager Paul Singer said at a conference.
Singer said the current "anti-capitalist" fervor, inspired by last year’s market meltdown and the ongoing recession, will likely lead to increased regulation. These measures would only prolong the problem, he told some 1,200 hedge fund executives at the Ira Sohn Investment Research Conference on Wednesday.
Reuters – Hedge fund and traditional money management firms hard hit by last year’s market meltdown are poised for a surge of mergers and acquisitions to bolster depleted assets and widen sources of revenue.
"We’re going to see a massive wave of consolidation across the entire asset management industry, over the next 12 to 24 months," Brian Reilly, Barclays Capital’s head of asset management investment banking, told a gathering of hedge fund executives at the SkyBridge Alternatives Conference.
Professional Pensions – European schemes are increasing their allocation to non-traditional asset classes in a bid to manage their risks more effectively, Mercer says.
The consultant’s European Asset Allocation Survey – which polled around 1000 schemes from 11 countries – found 35% of UK schemes and 60% of European schemes (excluding the UK) expected to introduce new investment classes into their portfolio to help manage future investment risk.
Mercer investment consulting European head Tom Geraghty said: "Despite being innately diverse in history, culture and regulatory requirements, European pension funds have all felt the effect of the last year’s market turmoil.
Northern Star Online – Media conglomerate Tribune Co., smothered by $13 billion in debt and weak prospects for generating cash through advertising, on Monday became the first major newspaper publisher to seek bankruptcy protection since the Internet began siphoning readers from traditional outlets.
Although Tribune’s next major principal payment on the debt, of $593 million, isn’t due until June, has been in danger of missing lender-imposed financial targets at year’s end. Those targets are based on the level of Tribune’s debt relative to its cash flow, and become harder to meet as revenue declines, even if the debt itself doesn’t increase.
Other newspaper companies have also struggled with their debts, but many have successfully negotiated with lenders to ease their targets in exchange for higher interest rates.
Reuters – Final bids for the Chicago Cubs will likely be due late September or early October, two sources said on Thursday, as owner Tribune Co seeks to sell the storied baseball team by the year end.
The next stage in the drawn-out sale of the team, its landmark stadium and a cable TV network stake will be management presentations starting next week to give bidders more information on the assets, the sources said.
Those will likely take about two weeks, after which final bids will be sought.
Tribune, which owns the Chicago Tribune and Los Angeles Times newspapers, put the Cubs assets on the block in April 2007 when it announced it would be bought by a group led by real estate magnate Sam Zell. It is selling the Cubs to cut debt it took on as a result of the leveraged buyout.
Zell said last month that of 10 groups that bid, five made it through the first round for the package of assets — the Cubs, Wrigley Field and an interest in SportsNet Chicago.
