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.
Financial Times – It is becoming clear that the hedge fund universe is set to shrink. The most obvious casualties will be highly levered funds, in particular the strategies that cannot justify their fees without that level of leverage, such as a number of arbitrage strategies.
In addition, depending on what further regulation is put in place, some of the more specialist funds could find themselves at risk (for example sector funds, or short only funds). Diversification could prove to be the key to providing protection from legislative changes, and in this regard, multi-strategy funds could become a more interesting prospect as they have the ability to allocate capital away from strategies that could be adversely affected by regulatory change.
New York (HedgeCo.Net) – Hedge fund investor Thomas H. Lee may downsize or shut the door to two of his funds after posting losses of about 40 percent this year, according to the Wall Street Journal.
The funds, which together manage about $1.5 billion, suffered losses that were multiplied by Lee’s heavy use of leverage, according to the sources who estimated he sustained losses of as much as $3.2 billion.
The funds were actually set up as funds-of funds, meaning Lee distributed investor’s money to approximately 110 other funds. When investors moved to withdraw cash from the hedge fund, it sparked a wave of redemption requests from the original funds, creating a domino effect of losses.
Funds that Lee invested in include SAC Capital Advisors and D.E. Shaw Group, according to the report.
Lee’s private equity firm was launched in 1974 and has grown to be one of the largest in the country. Lee now heads up his hedge fund business, Thomas H. Lee Capital Management LLC and his new private equity firm, Lee Equity Partners. Lee currently manages about $2.7 billion in capital.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
Reuters – British hedge fund manager Man Group Plc said on Tuesday banks were more highly geared than hedge funds and bank deleveraging had been the main driver of asset-price declines.
"Hedge fund deleveraging has put pressure on asset prices as clients have redeemed. But the main point is banks are deleveraging and they are many times more leveraged than hedge funds," said Man Group Chief Executive Peter Clarke.
Speaking at the Hedge Funds World conference in Zurich, Clarke also said leverage across the hedge fund industry is now at around a third of leverage levels in 2007.
Money Morning – Hedge funds looking to slash their use of borrowed money may have to unload another $200 billion in assets to reach their objectives, a new study found, though a Money Morning expert believes the exit door could get pretty narrow should the holiday shopping season get off to a rocky start later this week.
Investors yanked $40 billion from the $1.5 trillion hedge fund industry in October, a month in which market losses slashed industry assets by an additional $115 billion, Hedge Fund Research Inc., reported. A new survey of hedge fund managers conducted by Sanford C. Bernstein & Co. LLC found that 63% said the sale of assets to cut leverage was at least half completed. Another 23% said the process was three-quarters complete.
Times Online – Hedge fund managers are spivs and speculators, directly responsible for creating carnage in the world’s financial markets and threatening the future of high street banks. At least, that’s what some argue.
But it is, emphatically, not true, according to Christopher Fawcett, the hedge fund executive who has taken on the role of de facto cheerleader for Britain’s embattled alternative investment industry.
Such criticism is misplaced, he argues. Investment banks, rather than hedge funds, were behind the surge in gearing, or leverage, that pushed markets to breaking point in the middle of last year. Hedge funds were actually more conservative and only moderately geared.
As hedge fund titans face an intense grilling by congressional committees and thousands of hedge funds around the world close their doors, perhaps it is time to consider a new approach.
A hedge fund structure offers investors many advantages such as maximum flexibility, but the model is sure to change under all the heightened scrutiny.
After specializing in country-specific exchange-traded funds since 2002, I am convinced that there would be strong demand funds with new structures that address some of the current drawbacks of hedge funds, namely liquidity, transparency, leverage, risk management and fees.
Reuters UK – Robust returns for a group of powerful hedge funds that thrived for years using sophisticated trading programs may be a thing of the past after a "Black Swan" event hit global markets this year.
The carnage in financial markets worldwide, what many viewed as a so-called Black Swan event because it was out of the ordinary and had severe repercussions, has scorched returns for most of these funds. That forced them to embrace new models that place less capital at risk and employ little or no leverage.
With the failure of many investment systems that ran on algorithms created by mathematicians-turned-traders, quantitative funds, also known as "quants" are also veering away from models with longer-term horizons. They have instead focused on high-frequency strategies, or very short-term trades that often are executed in seconds.
The Money Times – A U.S. House committee Thursday reviewed hedge funds, which the panel’s chair called "virtually unregulated."
Because they aren’t required to report on their holdings, leverage or strategies, "hedge funds are virtually unregulated," said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. "Regulators aren’t even certain how many hedge funds exist or how much money they control."
That segment of the financial industry is "growing rapidly," Waxman said, adding he was concerned that hedge funds, as other financial sectors, could collapse.
International Herald Tribune – Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.
The money managers — Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.
The topics are likely to range from the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down; their funds’ bets in the markets; and the managers’ pay.
Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.
Times Online – Hedge funds are supposed to like risk and to love leverage. However, in the current markets, it has all got too much for Man Group.
The world’s biggest quoted hedge fund manager – and historically one of the most successful – shocked investors yesterday by announcing plans to unwind all the leverage in its $8.6 billion (£5.5 billion) Man Global Strategies fund. It also surprised shareholders by a sharper than expected fall in assets under management which slipped to $67.6 billion, compared with a forecast $70.3 billion.
That was enough to knock almost a third off its share price.
Many hedge funds are being forced to cut leverage by their lenders, but in Man’s case the move is voluntary. Because markets are so difficult, it has decided to pay back its lenders and put MGS’s holdings in cash.
Times of India – Often-touted as manipulative, hedge funds have been time and again blamed for indiscriminate selling and thereby pulling down the domestic stock prices even in India. But India-focused hedge funds have also been affected by the meltdown.
The big and secretive India-focused funds have booked losses to the tune of 46% in 2008 — in the process effectively wiping out the 50% returns clocked by the posted by them in 2007. Hedge funds have an aggressively managed portfolio of investments which use advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.
Seeking Alpha – Risk management Rule No.1: if it can happen then it will happen. Hope for the best but plan for the worst. Recent events have provided good returns for some hedge funds, hard times for other hedge funds but harsher times for long only. Skilled absolute return managers don’t make money every month but they do have milder and shorter duration drawdowns than index funds.
I wrote back in January that the Dow and Nikkei would likely fall below 10,000 this year as a result of the credit crisis and owning stock index option puts has indeed been the top performing strategy this year. But those were just lucky guesses. I can’t time markets so personally I’ll be focusing on funds that can preserve capital, control drawdowns and generate alpha no matter what happens.
Flight to quality? Some real hedge funds are positive for the year even when the aggregate returns for the industry are negative. Performance dispersion is enormous in such a diverse universe. Several strategies have not been affected by prime brokers imploding, changes in short selling rules or the leverage lockdown. The best managed futures CTAs, global macro and options traders have been generating absolute returns throughout the equity and credit mayhem. Strategy diversification is so important since forecasting is difficult. Transitions from one market regime to another often requires a financial revolution. Read Complete Article
