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General advertising of hedge funds is prohibited. So if you are planning to launch your own hedge fund, it is important to keep this in mind.
However, in case you need to set up a web page to communicate with your accredited investors, then this is a possibility as long as certain safeguards are taken. In no way should this be a form of advertising, else it would go against the regulations for hedge funds.
We keep hearing that hedge funds sell their interests only to accredited investors. Now the question is, what is the meaning of an accredited investor?
An accredited investor can be a bank or savings and loans association, any broker or dealer, an insurance company, or an investment company registered under the Investment Company Act, and so on.
Hedge funds can also be offered to non-accredited investors but in that case they have to have certain financial statements that are not required otherwise.
When you plan to invest in hedge funds, you would have to pay a fee to the manager. This is known as an Incentive Allocation or Performance Fee. Usually this fee ranges from 20 per cent to 40 per cent. It is dependent on the strategy employed by the Hedge Fund Manager.
Hedge funds usually fall into two categories. The first is determined on the basis of the managers who are usually well known entities. The second category includes small boutique-styled Hedge Funds. These are associated with a particular segment or investment strategy. In the case of the latter, the fund manager's expertise in recognizing the investment opportunity determines the funds strategy.
Investors basically look at investing in hedge funds to get higher net returns or to diversify their investment portfolio.
As an investor you need to understand that hedge funds don't necessarily guarantee higher returns. Most hedge funds invest in the same securities that are available to mutual funds. So the returns are more or less similar. High returns are possible only if you pick a superior manager or a timely strategy.
In term of diversification, hedge funds help in reducing the total portfolio risk as these are uncorrelated with broad stock market indices. As a result, it actually becomes a matter of personal choice when selecting the ideal investment tool.
Are you looking at investing in hedge funds? Well, don't be surprised if your hedge fund manager asks you if you have the money to do so. It is largely left to the discretion of the hedge fund manager to decide if you qualify as a private investor.
In most cases, rather than posing direct questions, hedge fund managers make prospective clients fill out a lengthy questionnaire. This questionnaire would require you to provide details about your holdings, including stocks, real estate, physical commodities and commodity contracts, swaps and futures.
Essentially private investors can be categorized into accredited investors and qualified purchasers. Accredited investors have to have a net worth of more than $1 million. Qualified purchasers need to have $5 million in investments and this does not include primary residence or any property that is being used for a business.
In most cases you would not need to attach any documents to support the details that you have provided in the questionnaire, but it makes sense to be truthful about your financial standing.
The UAE will be hosting the seventh annual Hedge Funds World Middle East Conference in March. The exact dates are 7-8 March. Over 600 investors and financial services experts are expected to be part of meet. Tradearabia reports:
"The past year has been an important one for the hedge funds industry in the Arab region due to the positive development in the regional financial landscape. The set up of DIFC and the measures taken by the regional capital markets to cope with their international counterparts has had a significant impact on the industry," says Antoine Massad, head of Middle East and Asia.
It is being reported that some speculative stock funds known as hedge funds are trying to push up the stock prices and boost corporate efficiency rather than takeover underperforming companies. Earlier, activists fought corporations at annual meetings, but now the attempt is to force corporations to take steps to improve their performance. Ncpa reports:
Their tactics include using the media to bolster shareholder support, win Wall Street allies and follow through on threats. Furthermore, the wealth of the hedge funds helps them endure long battles with managers. As a result, the intimidated companies now surrender faster.
SGAM Alternative Investments is reportedly establishing a dedicated team of hedge funds specialists in Hong Kong. This set up will be alongside its existing structured products group. Christophe Lalo, who has been relocated from Paris, will be taking on the role of Regional Head of Sales & Marketing, Hedge Funds, in Asia Pacific. Prior to this, he was Head of Sales & Marketing in Paris, looking after the development of hedge funds in Asia Pacific. There will also be other senior officials who would provide support to Lalo at this front. Hedgeweek reports:
“Asia is a growing part of our structured products and hedge funds businesses. These initial recruitments are the very first step to creating a strong franchise in Asia,” said Philippe Brosse, CEO of Paris-based SGAM AI. Société Générale Asset Management (SGAM) Group is also expanding its operations in the region, recruiting two Chief Marketing Officers, based respectively in Hong Kong and Singapore.
Transparency is a key issue when it comes to hedge funds. The same concern has been doing rounds even in the European Union. Although with regard to the transparency of hedge funds, some banks seemed to be quite satisfied with the information provided to them. This is despite reporting lags and the variation in existing practices.
The regular flow of information typically included net asset value and performance figures (changes in net asset value per share). This was coupled with risk management reports including some “Value at Risk” numbers in some cases. Most transparency related questions were part of the due diligence process and credit rating or scoring models. However, the relation between credit terms and transparency could probably be stronger.
Research shows that there are areas of improvements when it comes to information sharing and transparency issue:
The counterparty discipline applied by banks, was found to be under pressure due to the aggressive and highly competitive market conditions. Especially, the larger hedge funds were able to negotiate less comparatively rigorous credit terms.
The stress tests done by the Banks’ typically only include historical scenarios. Also, these were often only applied to individual hedge funds. Industry experts opine that stress testing of collateral can be made much stronger.
One more area that needs attention is the aggregation by banks of their hedge fund exposures across the entire financial group and/ or different business areas/geographical regions.
Also the reporting on hedge fund disclosures and information on leverage still needs much to be desired. Although this aspect has made some progress in the last few years, it is yet adequate. In many cases, hedge funds still provided banks with relatively crude measures of leverage.
Well how banks in the European Union define hedge funds is very critical to understanding how they view this sector. Research suggests that EU banks define hedge funds as an unregulated vehicle of investment partnership. A vehicle that uses leverage, derivative instruments, short-selling, arbitrage and other high-risk strategies to achieve targeted levels of risk and return.
The tag ‘unregulated’ is attached since hedge funds only have to fulfill weak disclosure and regulatory requirements, especially regarding capital requirements. Also, most hedge funds are based in offshore locations. While in comparison with standard investment funds, they have longer contractual liquidation, redemption or withdrawal periods of associated certificates/shares.
Most of the EU banks have their own internal definition of a (fund of) hedge fund, which is usually formulated in their internal policy documents. Such definitions are, in general, mostly in line with the working definition floating in the EU region, which contain elements such as “loosely regulated, few restrictions etc.
The recent times have seen mutual funds employing the strategies that are usually employed by hedge funds. This largely stems from the pressure exerted by weak stock-market returns and the increasing competition in mutual funds.
A number of companies are seeking the permission of fund shareholders to diversify the strategies that have been used so far. For those mutual funds that already have the permission to use these strategies, hedging techniques are now being employed.
This trend has basically picked up as hedge funds have been giving good returns in comparison to the conventional investment tools. In fact, certain mutual funds are being launched that would only use the techniques that are employed by hedge funds.
The techniques that might prove beneficial for mutual funds have been identified as making complex derivative trades, investing with borrowed money and short selling.
Currently, according to the regulations in Korea, companies are allowed to sell hedge funds only to a select group of institutional investors. These funds cannot be sold to individual investors.
Keeping this in view and with the hope that the market would soon open up to hedge funds, a number of companies are making an effort to spread information regarding hedge funds. The need of the hour is to also remove the misconceptions that exist in the market in respect to hedge funds so as to ensure that investors recognize their benefits.
The Canadian hedge funds industry is a $30-billion industry. Regulators here have decided that the currently existing rules for investment vehicles are sufficient to regulate this burgeoning industry. This implies that no additional rules and regulations would be laid down specifically for hedge funds.
Globeandmail.com reports:
The Canadian Securities Administrators, that is the umbrella organization for Canada's provincial securities commissions, has more or less decided that hedge funds per se do not require their own separate regulatory regime. However, it has also been indicated that regulators are reviewing how some hedge fund-related products are sold to retail investors.
The techniques used for hedge funds operating out of London have been worrying the Financial Services Authority.
To check the functioning of the industry, the FSA now intends to start regulating hedge funds and their managers. The details of this have been prepared after a consultation spread over a six-month period and will be revealed soon.
In the meanwhile a special hedge-fund unit has been set up to determine how the industry can be controlled better. This is being led by Andrew Shrimpton.
The hedge fund industry operating out of London has been estimated at £500bn. The Independent reports:
Currently, London hedge fund managers are being forced to register with the US Securities and Exchange Commission after a change to American law. To avoid any confusion, the regulators have indicated that hedge funds will have to comply with the strictest rules set down by either the FSA or SEC.
According to recent research the hedge fund market in Europe is currently riding a high wave. It has been reported that European hedge- fund managers are introducing more funds. Post the fall in the market in the beginning of 2005, this comes as good news for all those associated with the industry.
The fall in the market in early 2005 has been largely attributed to automakers like General Motors and Ford.
The returns from hedge funds improved in the latter part of the year 2005 and the beginning of 2006 has also been good so far. Hedge fund managers are now making much more money than they did in the recent past. International Herald Tribune reports:
European fund managers started a record 330 new funds in 2005, almost a third more than the 250 new funds started in 2004. Thursday. Assets raised in the new funds increased 22 percent, to $27.8 billion, from $22.8 billion.
Sources have revealed that Saggezza Investment Management, LLC (SIM) is planning to launch its first fund of hedge funds. This launch is scheduled for June 2006. HedgeWeek reports:
SIM will manage a unique and nimble long/short biased fund of hedge funds for high net worth and institutional clients. The fund is targeting a return of between 10% and 15% net of fees, and an annual standard deviation of 6% to 8%.
Biovail Corp., has filed a suit in New Jersey Superior Court, seeking $4.6 billion in damages from 22 defendants, mostly hedge funds and investment researchers. Biovail is one of Canada's largest drug maker and has alleged that the company has been made a target of a fraudulent disinformation campaign. Newsday.com reports:
The Mississauga, Ontario-based pharmaceutical company claims in its suit that the defendants sought to lower its share price for their own advantage. The suit alleges that since spring 2003 to the present, the defendants orchestrated so-called "bear attacks" against Biovail that artificially drove down the price of its stock to the hedge funds' advantage.
The seventh annual Hedge Funds World Middle East Conference is being hosted at UAE on 7-8 March. The event would see the presence of more than 600 investors and financial services experts. The event is scheduled at the Madinat Jumeirah resort hotel, UAE.
More than 40 speakers from all parts of the industry would address the attendees and will present their views and share information regarding the hedge fund industry. The keynote would be presented by Stanley Fink, Chief Executive, Man Group. Other speakers at the event include David Knott, Chief Executive, Dubai Financial Services Authority; David Mullins, former vice-Chairman, US Federal Reserve and Chief Executive, Vega Institutional Advisers LLP, and Antoine Massad, head of Man Investments Middle East and Asian operations.
The principal sponsor of the event is Man Investments, one of the world's leading providers of alternative investments. The company has been closely associated with the even since its incubation in 1999. AME Info reports:
This year's conference will cover a range of core themes, including: Long term investments and hot money; the global economy and world markets; portable alpha and multiple alphas; sourcing and evaluating hedge funds; the best investment styles and strategies; emerging and star managers and hedge fund indices. The event also features a one-day pre-conference event, which Man Investments will host on 6 March.
As the investors are recognizing the advantages of hedge funds, the demand is burgeoning. This has led to a scramble by banks and asset managers to acquire hedge funds. As a result, banks and managers looking at capitalizing on the growing demand are now acquiring a number of these.
According to recent reports, Schroders PLC has decided to pay approximately $101 million for NewFinance Capital. It has also been indicated that an additional $41 million will be paid out if the unit meets certain revenue targets over the next four years. NewFinance Capital has $2.5 billion in fund-of-hedge-fund assets under management. MarketWatch.com reports:
At least seven similar deals have been struck since 2005 as private banks and asset managers expand their range of alternative investment products to keep up with demand from clients, particularly institutional investors such as pension funds and corporations.
Funds of hedge funds - which research, select and monitor hedge-fund managers to create diversified portfolios of hedge funds - are usually the first stop for these types of clients interested in hedge funds.
The international market for hedge funds is growing and investors world over are looking at the emerging opportunities. Keeping this in view, a hedge fund of funds that was initially launched only for South African investors, would soon be available for international investors.
Fortune Funds Ltd, a Cayman Islands-registered entity, introduced the fund, Mayibentsha Opportunities Fund. This fund was launched in April 2003 and will be available internationally from March 2006. It would offer three different classes, that would be USD Series, Euro Series and GBP Series.
Mayibentsha Fund GBP series, in the period beginning 1 April 2003 and ending on 31 December 2005, would have returned 15.24 per cent per annum. This would be with a volatility of 3.77 per cent per annum. It has also been reported that over this period the maximum drawdown was 1.15 per cent.
The decision to make the fund available internationally also stems from the on-going joint-venture between Fortune and Novare Investments. Novare is a leading investment advisor and investment manager. The group is part owned by Mvelaphanda Holdings.
The joint venture is aimed at creating a proper base for the development of investment solutions. So far, the joint venture has led to required and beneficial personnel exchanges and cross marketing initiatives, that work to the advantage of both the groups.
At the moment, Novare manages approximately USD 1 billion of assets including the Mayibentsha Fund.
The South African economy has developed over the years and offers a lot of scope for further growth. This acts as a great incentive for investors looking at expanding their portfolios in the right markets.
Most investors look at hedge funds to reduce risk and diversify their portfolio. At times, decisions go wrong, as was the case with the hedge funds managed by the Norshield Financial Group.
According to recent reports, it has been indicated that investors who had invested money in the hedge funds managed by the group would get back a maximum of 10 cents for every dollar that was invested. In the worst-case scenario, it could also be possible that investors get no more than 3 cents per dollar. And at the same time, they would get this money only after a wait of close to three years.
A number of parties have been held responsible for the situation. This list includes senior management, regulators, auditors and financial advisers. Globeandmail.com reports:
Montreal-based Norshield, considered Canada's first hedge fund, was founded in the early 1980s by John Xanthoudakis. It once boasted more than $1-billion in total assets.
According to recent reports, Scion Funds, a California-based hedge fund, has bought out more than 5 per cent of shares in Livedoor. This makes Scion the first major buyer of Livedoor since the companys shares dropped. United Press International reports:
Scion Capital's Scion Funds is the first major buyer in the Internet portal group since the company's shares tumbled to less than one-tenth of its peak value. This fall in the value followed the arrest of the companys chief executive and other key members on accounting fraud charges.
A number of new regulations and technological innovations have revolutionized the hedge fund industry. To provide hedge fund mangers with information on how to deal with these and at the same time leverage the advantages, HedgeOp Compliance, LLC and Backstop Solutions Group, LLC (BSG) are jointly hosting a series of seminars.
The seminars would aim at spreading awareness regarding the tools that can be used to streamline operations and support regulatory compliance. HedgeCo.net reports:
The series will begin from March 13th, at the New York offices of HedgeOp Compliance, with additional dates and cities to be announced soon. It would cover the key issues surrounding the new regulatory framework, followed by a Q&A session to enable participants to ask specific questions regarding these issues.
With the growing market for hedge funds, there is also a need for proper reporting tools. Keeping that in view, Pyxis Mobile, has launched mDashboard. This tool is a real-time reporting tool for hedge fund managers.
This tool can be used with any BlackBerry from Research In Motion (RIM). In fact, this is a mobile extension of the sophisticated systems that users rely on while in the office.
Through this tool, managers can access the latest available information including news updates, any user defined alerts, sales reports, and so on. This invariably enhances the efficiency of managers as they can take informed decisions at anytime, no matter where they are.
Pyxis is a leading provider of wireless applications for the financial services industry. Finextra.com reports:
mDashboard allows managers to access disparate data sources including industry-specific news, order management systems, and sales analysis from their handheld. By extending these enterprise and market data sources, users obtain immediate access to all of their critical data.
To further expand its overall commitment to provide brokerage services to hedge funds, Jefferies & Company, Inc, recently hired a six-person team of industry veterans that would be led by Glen C. Dailey. Jefferies is a global investment bank and an institutional securities firm. Business Wire reports:
Mr Dailey will serve as Head of Prime Brokerage Services. Before joining Jefferies, Mr. Dailey was a Managing Director and the Chief Operating Officer of Prime Brokerage Services at Banc of America Securities.
In wake of the rapidly expanding role of hedge funds as key elements in financial markets and counterparties to financial institutions, monitoring their activities and assessing the implications for financial stability has become increasingly relevant.
In a study carried out some time ago by the Banking Supervision Committee (BSC) of the European System of Central Banks (ESCB), with the help and assistance of its Working Group on Macro- Prudential Analysis, investigations were carried out into the links between large EU banks and hedge funds. This was particularly crucial, knowing the fact that the former played an important role in hedge fund operations.
The report was aimed at continuing the efforts to gain a better understanding of the implications of such rapid expansion of hedge fund activities for the European financial system.
It is well known in the financial sector that hedge funds by virtue of their active risk-taking, provision of liquidity, elimination of market inefficiencies and potential enhancements to investment diversification are in a vital position to contribute to the efficiency, integration and even stability of the global financial system.
Furthermore, hedge funds have changed the asset management industry and, according to one scenario, over time the differences between them and traditional funds may become blurred. However, the recent explosive growth of the sector has also raised concerns about possible negatives in regards to financial stability.
Hedge funds can in fact affect financial stability through their influence on financial markets or thru their largest creditors and counterparties. The two channels are pretty closely linked and a hedge fund-related triggering event associated with either could potentially snowball further with reinforced pace and cause volatile and unstable changes in the market.
The hedge funds sector, a US $1.1 trillion domain that had doubled since 2000, is reportedly undergoing a market correction phase. Well at least it seems so from the December 2005 performance of the hedge funds. Net money flows into hedge funds, which are essentially the investment pools available mainly to institutional and wealthy individual investors, were reportedly down 44% in the third quarter on a year-on-year basis, according to industry statistics. And according to industry observers and trackers, the fourth quarter growth almost stagnated.
As the money flows dried up, so did many of the hedge funds. Chicago's Hedge Fund Research reported in December 2005 that through September 30 2005, a record number of hedge funds 484, more than 6% of the total hedge funds had shut down in 2005. The situation could somewhat be termed as a recession for hedge funds sector. And a lot would depend on how the hedge fund performance picks up.
Leading hedge funds, including D.E. Shaw & Co., Eton Park Capital Management and Och-Ziff Capital Management, might get affected by PXRE Group's period of crisis. These three hedge funds were the leading investors in the re-insurer at the end of 2005, owning more than 22% of the company's shares, according Thomson Financial data. Marketwatch report:
PXRE shares lost two-thirds of their value on Friday after the reinsurer almost doubled its loss estimate from last year's record hurricane season and lost key financial-strength and credit ratings from A.M. Best, an influential industry-rating agency. The company also said it hired Lazard to explore strategic alternatives.
The average return of Europe-based hedge funds increased to its highest level in say about six years in January 2006, according to trade publication EuroHedge. The EuroHedge Composite Index increased 2.42 percent in January 2006. This was reportedly the biggest month-on-month gain ever since February 2000, the peak of the dotcom boom in equity markets, and coincided with further gains in global stock markets. The month of January was also the third consecutive month of gains, with the index gaining 1.48 percent in December 2005 and 1.28 percent in November 2005. Reuters reports:
Over the course of 2005, the EuroHedge Composite Index rose 8.86 percent. That was in spite of a 1.17 percent fall in October -- the worst month for hedge fund performance since August 1998 -- which coincided with a correction in equity markets. Hedge funds that trade global equities were the top performers in January, with returns of 4.83 percent, measured in dollars. They were also the best performers over the whole of 2005, with returns of 15.71 percent. The worst performers in January, and the only category to deliver negative returns, were currency funds, which fell 0.32 percent. They made just 2.82 percent over the whole of 2005.
The origin of the term "hedge fund" dates back to the first such fund founded by Alfred Winslow Jones in 1949. Jones followed his instinct and came up with the innovation to sell short some stocks while buying others, thus some of the market risk was hedged. Currently, there are over 7,000 hedge funds in the United States, with an estimated US $750 billion in assets with a strong role play in the financial market. They are believed to account for as much as 20% of all US stock trading. Hindustan Times Reports:
While most of today's hedge funds still trade stocks both long and short, many do not trade stocks at all and the term hedge fund has come to mean a relatively unregulated investment fund, often a partnership rather than a corporation in form, and characterized by unconventional strategies (ie, strategies other than investing long only in bonds, equities or money markets).
With new markets emerging in respect to hedge funds, the latest opportunity that would now be available for investors is Canadian hedge funds. Scotia Capital Inc, is hosting an event in early March where the new opportunity would be discussed in detail.
The invitees would include about 75 European pension plan chiefs, private bankers and other institutional investors who would gather at the Park Hyatt hotel in Zurich, Switzerland.
Canadian hedge funds are attracting investors basically because this market is less saturated than the US and the European hedge fund market. Also Canadian managers are experts in commodities. So far this market was more or less untapped.
At the same time, there was hardly any information available regarding the exact size of hedge fund holdings or how they've performed. Keeping this in view, Scotia Capital will also unveil a measure that would help in tracking the performance of Canadian hedge funds.
According to a recent research by Credit Suisse, commodities could become more popular than hedge funds among institutional investors. This basically stems from the fact that commodities are usually cheaper than hedge funds. In fact, so far, most schemes are allocating roughly 5 per cent to commodities. As a result, the allocation to equities is usually lower. Commodities in most cases are considered as a good tool for long-term strategic diversification. Also, these are considered advantageous as they demonstrate a low correlation with financial assets in markets around the world. These act as a natural inflation hedge, and perform quite well even when conventional assets are at a low.
In the United Kingdom, a trend worth analyzing is rolling on. Leading institutional investors such as the large pension funds, local authorities and charities are showing keen interest in alternative investment vehicles.
Many studies done to track this trend outlines that following a steady yet slow start about two to three years ago, the interest in alternative investments such as hedge funds is picking up. The pension funds in the United Kingdom are reportedly allocating a certain portion of their investment to funds of hedge funds.
Through this piece we are trying to review the developments in the UK institutional investment market, with the focus on investments into hedge funds over the last two years. The attempt is to highlight the role played by funds of hedge funds within pension funds’ asset allocation mix. According to a report by a leading investment bank, about one in six continental European pension plans reportedly invests in the hedge funds. Compared to this, the figure pertaining to the UK market seems nascent at about one in 50.
However, the dynamics are changing at a frantic pace, with a number of key pension schemes in the UK recently starting allocation to hedge funds, primarily through the fund of hedge funds route. A good example is of Railpen Investments, which includes the British Railways and the British Transport Police superannuation funds. It is planning to invest over GBP 600 million or 5% of its assets in funds of hedge funds.
Further, various local authorities are investing into hedge funds. Dorset County Council is reportedly allocating about GBP 45 million ‘or’ 5% of its scheme - to two funds of hedge funds. Such examples are a clear display of the risk appetite and the proactive approach, with overture of aggression. This trend should make the pension funds dynamics more competitive and aggressive.
Latitude Capital Management recently launched two onshore single strategy hedge funds. The new hedge funds specialize in Japanese equities. These are Latitude Alpha and Latitude Japon.
Launched by the French asset manager, Latitude Alpha is a long/short market neutral fund. On the other hand, Latitude Japon is a long only fund. In case of the former, the investment portfolio consists of the 430 largest and most liquid stocks in Japan. Also, the fund is not sector neutral and has a management fee of 2 per cent.
The latter, that is, Latitude Japon can be traded weekly with no lock up and a two-day notice. The management fees for this are as low as 0.25 per cent.
Hedgeweek reports:
Onshore hedge funds are new products in France. The French market authority (Autorité des Marchés Financiers - AMF) issued a new legal framework in 2005, which allows the creation and marketing of single strategy hedge funds in France under very strict conditions.
Sources from EFG International recently indicated that the group intends to buy Capital Management Advisors, a hedge-fund firm. This comes in wake of the increasing demands of consumers for alternative investment options. MarketWatch reports:
Before the CMA acquisition, EFG had about 5 billion Swiss francs of client assets in hedge funds and related investments. CMA, brings another 2.1 billion Swiss francs in hedge-fund assets to EFG, plus research on about 2,500 managers and experience structuring different types of hedge-fund products.
To tap the advantages offered by the recent economic growth in India, Permal Group has launched a fund of hedge funds. Permal is a unit of US-based investment company Legg Mason Inc.
The Indian economy has seen a substantial growth in the recent past. It is also expected that there would be further growth of up to 8 per cent by the end of this financial year.
To capitalize on this, the group has indicated that it would invest in 20 hedge funds. A range of strategies would be adopted, including long-short funds, long-biased, special situations and macro trading funds.
It has also been reported that a number of foreign investors have moved substantial funds into Indian equities and even the mutual funds have seen substantial growth. The Financial Express reports:
The Permal fund was launched with in-house money last month. The group expects to raise around $200 million for the fund. The minimum investment is $100,000.
In spite of the growing popularity of hedge funds, there are certain loopholes that exist in the disclosure rules in Hong Kong. As a result, hedge funds in Hong Kong are in a position to disguise their voting intentions. Business times reports:
Investors don't have to reveal any such "short" positions as long as they hold less than 5 per cent of a company's stock. Minority shareholders of Henderson Investment Ltd vetoed a privatisation plan by its parent on January 20. The move triggered the biggest one-day drop in Henderson's shares in eight years, benefiting hedge funds and other investors that had sold borrowed stock in the expectation the shares would fall and they could buy it back at a lower price.
The performance of hedge funds has been drawing the interest of investors, and not so without a valid reason. In fact, according to a recent report by EuroHedge, the average return of hedge funds based in Europe rose to its highest level in nearly six years in January.
Reuters reports:
The EuroHedge Composite Index rose 2.42 percent in January, according to figures released by the group. This was the biggest monthly gain since February 2000, the peak of the dotcom boom in equity markets, and coincided with further gains in global stock markets.
Dispelling the common notion that all hedge funds strategies are adept to hedge against market downturns, we are trying to spread the right word around. In fact many, but not all, hedge fund strategies ‘hedge’ against downturns in the markets being traded.
The idea is to draw in attention to the different strategies that hedge funds often use or are capable of using. These funds are flexible in their investment options as they can use short selling, leverage, and derivatives such as puts, calls, options and futures. Hedge funds are known to benefit from heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment sector.
The fledging industry, which is growing at a rate of over 20% per year, has over 8350 active hedge funds. To draw outline of what hedge funds are all about and how they go about their business, we have listed some key indicators that you might find worth looking at:
•Hedge funds include a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage.
•Some hedge fund strategies seek to reduce market risk specifically by shorting equities or derivatives.
•These are specialized, relying on the specific expertise of the manager or management team.
•Performance of some of the funds, particularly relative value strategies, does not dependent on the direction of the bond or equity markets.
•Hedge fund strategies such as arbitrage strategies are limited as to how much capital they can successfully employ before returns diminish.
•Some of the truly outstanding performers have clearly outperformed the average.
Investments into hedge funds tend to be favored by more sophisticated of investors, which includes many Swiss and private banks. The reason why it is favored by the top end investors is that they have understood the consequences of, major stock market corrections.
One of the most popular misconceptions about hedge funds is that all of these funds are volatile. The misconception connects that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using a too much of leverage. However, a close study in to the fledging sector brings to front the general level, wherein fewer than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all, and many use no leverage.
People also are wary of, as much as they are attracted, to the aggressive growth strategies of the hedge funds. Investments in equities are expected to experience acceleration in growth of earnings per share. In general high P/E ratios, low or no dividends; often smaller and micro-cap stocks, are expected to experience rapid growth.
Although, in the current context New Mexico doesn't come to mind as a hedge fund hub, there is a strong possibility that it might in the times to come. The state Senate has unanimously passed a bill to eliminate the gross-receipts tax imposed on wholesale broker transactions and management fees used to operate a fund. Alternative Investments reports:
And this could be a big deal, as the tax rate ranges from 5.125% to 7.8125%., depending on the county and municipality. Sponsored by state Sen. Sue Wilson Beffort (R-Albuquerque) the bill – part of a tax-reduction plan proposed by Gov.
It is being reported that hedge funds, which trade stocks and those that bet on financial market trends have started the year with strong returns. The average returns have been in the range of about 4 percent, over the gains witnessed on equity markets.
Long/short equity hedge funds, those that buy and short sell usually bet on a lower price for a security in the futures. These funds returned on average 3.93 percent in January compared with 3.16 percent for the MSCI index of world stocks. Hedge funds reportedly did better because they picked the right ones to be in and managed to beat the average stock market rise. Reuters reports:
"Some of that was in currencies, but most of that return was probably in commodities," the analyst said. Equity market neutral strategies, which should not have any exposure to overall market trends returned 2.25 percent and event driven strategies which include trading the shares of firms involved in takeover battles returned 2.21 percent. The worst performers with returns of 1.7 percent were hedge funds which trade the different components of convertible bonds -- equity, debt and volatility -- against each other.
Reports are rife that PENDRAGON’s GBP506 million bid for rival car dealer Reg Vardy could be obstructed and slowed down by a number of hedge funds and proprietary trading desks that have acquired a big stake in the group. Timesonline reports:
Despite having triumphed in a two-way fight for Reg Vardy with a 900p-a-share offer — outbidding rival Lookers — it could turn out to be a pyrrhic victory for Trevor Finn, the chief executive of Pendragon. Finn now controls more than 50% of the shares in Pendragon. However, with a combined holding of nearly 25% the hedge funds and traders could still frustrate his plans to merge the two businesses.
Are you new to the baffling world of hedge funds? Or just starting / planning to invest into one? First get a basic feel of what hedge funds are all about. A hedge fund is a pool of invested capital, used mainly by wealthy/financially experienced individuals and institutions. The capital pool is allowed to be traded through aggressive investment strategies that are unavailable to mutual funds and unit trusts, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.
In usual cases, hedge funds are restricted by law to just about 50-100 investors per fund. This is in sharp contrast to the hugely popular mutual funds or unit trusts, which don’t have any such restrictions. Therefore, most hedge funds set extremely high minimum investment amounts to make up for the limited number of investors. The minimum entry amount could range anywhere from US$ 250,000 to over US$ 1 million.
Mittal Steels €18.6bn offer for Arcelor has drawn intense interest from UK hedge funds such as Marshall Wace and GLG Partners and US hedge funds such as Och-Ziff, Duquesne and Perry Capital. In fact, it has been reported that some funds bought Arcelor shares before the bid. MSNBC reports:
Mittal's bid is worth €28.21 per share. But some deal-watchers believe Arcelor could fetch €35 a share. Largely on these hopes, the stock has risen to €30.53.
AIG Financial Products Corp. (AIGFP) recently announced that it has purchased 4.3 per cent of Aspect capital Ltd., a London based hedge fund firm. AIGFP is the derivatives unit of American International Group. The group might also consider buying an addition stake of up to 8 per cent in the firm. The terms of the acquisition have not been disclosed so far. Sources have indicated that this acquisition move might be followed by the company buying a stake in other firms as well. This stems from the fact that AIGFP has a strong stand in the hedge fund sector and can be a strategic partner for alternative investment firms. Investors.com reports:
The division indicated that it has invested $75 million in Aspect funds. It could allocate another $125 million in seed capital for Aspect programs in future.
While the interest of investors in hedge funds is growing with the changing times, there are still certain myths that are dampening the spirit.
The most commonly heard myth states that these funds are unethical and speculative. This arises basically from the fact that in case of certain hedge funds, the strategies employed are speculative. Yet, what investors need to take into consideration is that not all hedge funds are speculative, in fact there is a large number of hedge funds that employ extremely conservative strategies. At the end of it, labeling all hedge funds as speculative would be wrong.
Another myth that might turn away investors is that hedge funds are risky. Once again, this is just a myth, if you know what you are doing, you cannot call it risky. Now the point it, if an investor holds a single stock portfolio, then this could be considered risky. Then again, that is hardly ever the case. So while planning your portfolio, you should ideally insure that the role of volatile assets is limited. This would largely negate the risk factor and would ensure positive returns.
So as an investor, if you were looking at adding hedge funds to your portfolio, but decided not to because of these myths, it is time to think again. In fact, hedge funds can be a good investment tool as long as you undertake proper planning that is well researched and is based on a well founded analysis of the market.
Should a hedge fund manager administer the fund himself or should the administration be outsourced? The decision is tough, yet it has to be taken. With an administrator in place, the manager would be relieved of the basic administrative tasks and can concentrate on the actual investment of the assets. If a manager decides not to have an administrator, then he would be keeping the partnership accounts, reports and statements. This would add to the workload, but is definitely a model that has been quite successful in the past years.
An administrator also carries out the calculation of the net asset value independently and this can add to the comfort and the convenience of investors. At times it has been seen that the appointment of an administrator can help in retaining existing investors and even in attracting new investors. In case of a new fund manager, this can definitely be the key to making it big. At the same time for an existing and seasoned manager, who so far handled the administrative tasks himself, the appointment of an administrator would entail increasing the cost of day to day operation.
This decision might have to be taken by a manger due to investor pressure. The decision to outsource the process would imply that whatever investment that the manager has made so far for administering the funds would be wasted. Added to this he would have to bear the burden of paying administrative fees. In this case, usually hedge fund managers continue carrying out the administrative tasks themselves, including keeping the funds accounts and calculating the NAVs, and they appoint an administrator at a nominal cost to verify the figures. As a result, this saves money while at the same time satisfies investors.
With the introduction of the Expert Funds regime, Jersey is all set for a new era in the hedge fund business. In fact, this has served as a clear signal to the industry that Jersey is open to hedge fund business.
The past year has also seen substantial changes in the way that business is conducted here and has therefore increased the attractiveness of the island. So far, setting up a hedge fund in Jersey was a struggle, with the increased flexibility and the new regime, the process has become much easier. Also, there are no restrictions on borrowing or investment anymore. So far, non institutional fund managers were discouraged in Jersey, again the new regime has changed this.
A number of other changes introduced in the regime have remodeled the entire market and created a better platform for hedge funds. Hedge Week reports:
The new regime, which took around a year to draw up from conception to implementation and which involved extensive discussions between industry practitioners, the regulator and the island’s political authorities, represents a big change for Jersey in terms of regulatory mindset. Also, till now it was required that funds use a Jersey custodian, whereas the Expert Funds rules have removed that stipulation provided that the fund has appointed a prime broker.
The long awaited new rule has finally become a reality for United States hedge funds sector. It is reported that many leading players in the once loosely regulated US $1 trillion industry would face scrutiny from US financial regulators. Reuters reports:
But Feb. 1, the day the new rule becomes effective, will likely not go down in history as the date when everything changed, according to managers, investors, consultants and lawyers. Instead the shifts will likely be felt more gradually in the weeks ahead by investors as many fund managers have already completed their adjustments in the last months.
The European Commission has reportedly appointed several hedge fund experts to a group which is to look at potentially improving the EU framework for alternative investment funds. The Expert Group on Alternative Investment Funds will look at analyzing the current organization of the alternative investments business.
The expert panes shall be examining whether operators in these asset classes are confronted with significant difficulties in organizing and driving their activities in the European marketplace. Further, these panels would explore the possibility of these issues requiring attention of EU policy-makers. Hedgeweek reports:
The hedge fund experts on this group include Segun Aganga (Goldman Sachs), Antonio Ary dos Santos Freire (Santander), Odette Cesari (Axa-IM), Neil Donnely (Pioneer), Alain Dubois (Lyxor), Horst Eich (Allianz), Paul Feeny (Gartmore), Holger Hartenfels (Deutsche Bank), Gay Huey Evans (Citigroup-Tribeca), Alain Reinhold (ADI), Rupert Rossander (Man Group), Lindsay Tomlinson (Barclays Global Investors), Jack Tracy (Morgan Stanley), Luc de Vet (Citco Luxembourg), Neil Warrender (RAB Capital).
Good News! Well at least we can expect it to be so. Driven by the new hedge funds sector rule, leading hedge funds are likely to pay more in 2006 than they did in 2005 to comply with a new US government registration rule. Reuters reports:
"Roughly 95 percent of the hedge funds that we contacted said their costs had risen in 2005, and nearly half of the respondents expect their compliance costs to rise yet again," said Karan Sampson, director of hedge funds at financial services consulting firm Greenwich Associates.
With the new registration rule introduced by the Securities and Exchange Commission, US, the cost of hedge funds is expected to rise. The rule has been introduced by the SEC to reduce fraud cases in this highly unregulated industry.
The expenses are expected to rise because of the staff that would have to be recruited and the technological upgrade that would be required. Hedge funds that have not opted out of registration have to now employ a chief compliance officer.
Currently hedge funds charge a 1 per cent management fee and 20 per cent performance fee, but the figures are expected to change soon. The exact figures are not yet known, as a number of hedge funds are still preparing to get the infrastructure in place to comply with the regulation.
As a result, this regulation would affect the investors in terms of the increase in fees, but in the longer run would work to their advantage. So in my advice, investors look at the larger picture.
In the case of hedge funds the term ‘administration’ implies the management of the Fund pertaining to all the day to day operations. An administrator is responsible for ensuring that the operations of the fund are efficient and effective.
The administrator does not have to carry out the actual investment of the assets. This is the responsibility of the investment manager. At the same time, the administrator is accountable to the Board of Directors or trustees of the Fund. This clearly implies that the administrator does not have any management control.
He basically acts as a support system for an investment manager by relieving him from the basic administrative tasks that need to be carried out.
Besides carrying out these functions, the administrator also acts as the link between the investor and the manager of the funds.
Jack Meyer, the founder of Convexity Capital , Boston, would be launching his own hedge fund in the near future with approximately $5 billion in assets. Meyer was previously working with Ivy League university's in house money management arm Harvard Management Co. and had helped to quadruple Harvard University's endowment to $26 billion. Reuters reports:
According to investors, the fund has already caused a stir in the industry and might become the biggest ever launched in the $1.1 trillion industry. Meyer has been known so far for his low key style and superlative returns.
In order to improve the EU framework for alternative investment funds, the European Commission has created a group with hedge fund experts. This group will analyze the current organisation of the funds and will examine the difficulties that the operators in this field face. The HedgeWeek reports:
The experts will produce reports on their findings, which will be discussed with regulatory bodies and other stakeholders in order to test the implications of any recommendations from a broader public interest perspective. In compliance with the Commission decisions on the composition of these groups, experts have been selected on the basis of nominations received from 13 European-level associations.
According to an investor newsletter from Vega Asset Management Partners LP, the hedge fund manager posted marginal gains for most of its funds in December after suffering losses during the last year. Vega is a New York based $7.5 billion hedge fund manager. Reuters reports:
Vega suffered investor withdrawals in 2005 as its returns suffered. The newsletter indicated that the firm has apparently steadied itself and now is mostly returning positive, if not stellar returns.
The interest of investors in hedge funds over the past few years has been increasing. Yet according to a recent study, the pace of investment in hedge funds slowed dramatically last year as compared to the past few years. Newyorkbusiness.com reports:
Net inflows into hedge funds grew by only 4 per cent in 2005 as compared to 19 per cent in 2004. Approximately $1.12 trillion is invested in the hedge funds, which are private investment companies that the Securities and Exchange Commission will begin regulating more closely soon.
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