Hedge Fund Reader

A new approach for the small investors...

That's what Brian Hlidek, a former investment adviser and Jay Compson from Hingham, have worked out while starting their hedge fund called Absolute Strategies Fund. The idea began as a way to bring out a mutual fund that would allow investors to benefit from a hege fund style of investing.

Their mutual fund is one of the few that works as a hedge fund of funds. It is a hedge fund that reduces risk by investing in many other hedge funds. But unlike the normal hedge fund, this does not force the investors to lock up their money for an extended period of time. And it's more transparent.

Though Absolute's Fund may not be the best fund when the stock markets rise rapidly, but it's quite a beneficial bet when the markets are down.

According to Bill Noonan, vice president at Contravisory, "What they're trying to do is bring alternatives to the broader market. They have a lot of unique managers in there that the general public could not invest in directly, mainly because of the minimum required to access these managers."

For further details Read

Bubblegum maker stuck with a hedge fund...

Pembridge Capital Management LLC,  1 percent shareholder in Topps Co.Inc.,the maker of Bazooka bubblegum and baseball cards has pulled up the Topps management for the second year in a row into a legal tangle.

The hedge fund accused Topps management for extremely poor operating performance, declining stock price and misuse of its balance sheet. To intensify the fight, Pembridge management has notified Topps Co. on the nomination of three of their members to Topps' Board.

The immediate action on cards, if these nominees are elected would be the possible consideration of sale of Topps or a large special dividend or significant share repurchase.

To get further details Read

Regulators charge Portus co-founders for misleading

Boaz Manor and Michael Mendelson, co-founders of Portus Alternative Asset Management Inc. were charged by the Canadian regulators over the Fund's collapse last year. They were charged for failing to act fairly, honestly and in good faith with clients.

Among the charges was also the charge of unregistered trading and issuing securities without filing a prospectus. Portus was founded in 2002, and attracted about $707 million from around 26,000 investors before it was placed into bankruptcy.

Since then KPMG Inc., the trustee of the fund, has been tracking down the assets and recovering investor's money.

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Massachusetts leading in hedge funds

According to new federal filings it has been determined that financial firms in Massachusetts manage approximately $150 billion in hedge funds and other private investments. This estimate implies that they manage about 10 per cent of the total amount of $1.5 trillion that is held in private funds across the nation, according to estimates made by the Securities and Exchange Commission.
Boston.com reports:

While regulators couldn't provide figures showing where Massachusetts ranks compared to other states, the filings show that Boston is a major center of private investment.

Much of the money is tied to traditional financial-services companies including Bank of America, mutual-fund giant Fidelity Investments, and money-manager Wellington Management Co.

Hedge Funds See a Bright Beginning

According to a recent study conducted by Hedge Fund Research, Inc., hedge funds have seen an inflow of $24.04 billion, or 2.17 percent, in the first quarter of the year. This follows a fall in the inflow towards the end of last year. HedgeCo.Net reports:

Total industry assets stood at $1.182 trillion dollars at the end of the period. Funds of Funds (FOFs), which had also experienced negative flows in 4Q 2005, saw inflows of $6.4 billion in 1Q 2006. Hedge funds performed well, with the average fund up 5.85 percent in the quarter, according to the HFRI Composite Index, which represents the best quarterly returns since 2Q 2003.

Creativity Required In Funds Of Hedge Funds

The competition in the hedge fund and funds of hedge funds market is increasing. As a result, fund of hedge fund firms need to be more creative in terms of the products that they offer. At the same time, these firms need to revamp their services so as to offer the best to the investors.

Also, most of the firms charge high fees and with the increasing competition, they need to justify this high fee in order to hold on to their current investors and to get new investors. The management fees in most cases are between 1 and 2 per cent of the assets. The performance fee stands at about 5 to 20 per cent over the returns that are above the promised target. At the same time the returns have been declining over the years.

So, as a result, it becomes even more important to relook at the offerings in terms of the products as well as the service.  Reuters UK reports:

Funds of hedge funds invest in diversified portfolios of hedge funds to reduce the chances of losing money, do due diligence and monitor business and investment risks. Analysts estimate there are around 800 firms offering more than 1,700 funds of hedge funds.

What Is Selling Short?

A strategy that is used by hedge funds quite often is selling short. Now, what exactly is selling short?

Selling short implies when you trade something that you do not own. Usually this is done when prices of a particular share are expected to fall in the future. Managers prefix a date for selling shares that they do no own, at a particular price. When the price for those shares fall, they purchase them and then deliver them to the buyer. As a result, they end up making money on this. In order to profit from this technique, managers need to have a very good understanding of the market and trends.

Basic Hedge Fund Techniques

When you invest in hedge funds, in most cases the manager would inform you about the techniques that would be used. For a basic understanding of the techniques, read on…

In case of absolute return funds, arbitrage techniques are used. These include the simultaneous sale and purchase of similar types of security. These usually assure returns of 6-8 per cent. These are usually independent of the stock market.

On the other hand, event-driven funds derive returns from temporary mis-pricing of bonds, shares or other assets.

If you are looking at investing in macro funds, it is imperative to understand that these exploit major economic or financial developments around the world. These developments can lead to big swings in asset prices.

Also, a lot of opportunities emerge during takeover bids, if you are looking at taking advantage of these, then you should invest in merger-arbitrage funds.

Are hedge funds worth the risk?

If you see the records of hedge funds, you will certainly not be impressed. Mainly due to the fact that over long periods, hedge funds tend to significantly underperform index funds. But then maybe it is not fair to judge them so, as they are not meant to be like the index funds.They are called hedge funds - because they can hedge, or sell short.

But still one should be aware of the risks it carries. To begin with, hedge funds tend to attract more tax liabilities because they trade so often and hence have a considerable short-term taxable income. And of course, one cannot overlook its high fees.

According to a study, even if hedge funds earned almost 50 percent more than other market returns, still after all the cuts, the net return to investors would be probably 20 percent less than the much safer index funds.

So when it's so risky, why is it still in demand? Because some of them do incredibly well. But if you ask me, one should take calculated risks and has to be really market savvy, for rarely do any of them do that well for a long stretch of time.

Hedge Funds bag over $24 billion

According to Hedge Fund Research (HFR), the first quarter of 2006 has seen an inflow of $24.04 billion through hedge funds. Contrary to last quarter, thay have performed well with an average fund up by 5.85 percent. And as of now the total industry assets stood at $1.182 trillion dollars.

The largest categories include Equity Hedge which has $359 billion in assets and has seen $8.1billion in new inflows. And Event-Driven with $163 billion in assets, has seen $2.1 billion in new flows. Apart from this, sector wise, Energy funds have been doing well with an average fund returning 8.52 percent in the quarter.

Another growing sector is the Healthcare/Biotechnology sector funds, though a small category with over $8.70 billion in assets, has been growing at a steady rate and has seen a gain of 8.49 percent.

According to Joshua Rosenberg, President of HFR,

The strength of the global equity markets along with dynamic movements in commodities, energy and related securities have created a favorable trading environment for a majority of hedge funds.

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Delphi's restructuring plan gets stuck by a hedge fund

Billionaire investor David Tepper, whose hedge fund, Appaloosa Management LP, is also one of Delphi's biggest shareholder has stalled the company's restructuring plan. They have approached the judge to bar the company from getting into the money-losing contract with its biggest customer, General Motors Corp. And also have appealed to protect the labor contracts.

Filing papers with the U.S. Bankruptcy Court in Manhattan, Appaloosa Management LP has accused GM of using its influence to get a big payoff in Delphi's bankruptcy reorganization plan. They also maintain that Delphi has so far not provided any evidence that these proposals are going to benefit the company.

Read similar stories here

Nobel Foundation Invests In Hedge Funds

The Nobel Foundation, that funds the Nobel Prize, would now be investing in hedge funds. The amount of the investment has not been disclosed, but according to sources, the group has invested in Corbin Capital Partners, Rock Creek Potomac fund and the Carnegie Worldwide Long/Short fund.
MSNBC reports:

Although the size of the investments was not disclosed, industry officials said winning an investment mandate of any size from Nobel would be seen a seal of approval for the three funds. For Nobel, the foray into hedge funds offers the foundation greater diversification and more flexibility when it comes to investment styles.

Multi Strategy Hedge Funds Attract Attention

In the recent times, a growing trend has been to invest in multi-strategy hedge funds. These combine the benefits of diversification that are extended by funds-of-hedge funds and that too at a lower fee.
Euro Today reports:

Funds-of-funds still represent a big chunk of the market. But the advent of multi-strategies, especially when backed by the marketing might of a large financial institution, puts extra pressure on funds-of-funds to prove how they add value.

Short changed on short selling - watchout!

Hedge funds are planning a class action lawsuit against brokers who they feel short changed them in short selling operations. That's a real irony because we often hear of complaints about how hedge funds spread negative stories about companies to bring down their share prices - something that is absolutely necessary for hedge funds to make money out of short selling. Now it is the hedge funds who seem to be on the receiving end. The problem is: hedge funds say that several brokers despite being paid to borrow stocks to cover their, that is, the hedge funds', short sales did not do so forcing the hedge funds to go 'naked' in their short sales. This has often led to market distortions leaving the hedge funds out of pocket. While details are still not available as to who will be sued and by whom - just watch out on this front - a storm is brewing and big names such as Goldman Sachs and Morgan Stanley are likely to face the heat.

Well, in my view a strong enough legal action can create quite a flutter in the market and most importantly it can lead to what investors don't like at all - a high degree of uncertainty ! Be warned and watchout!

Read more: US hedge funds set to sue in short-selling row

Hedge funds post strong first quarter

Hedge funds posted a strong first quarter, thanks to the continued boom in energy and hefty gains in the metals markets. The major hedge-fund indexes, which track aggregate returns for all strategies, showed gains ranging from 3.26 percent to 5.87 percent in the first quarter. By comparison, the S&P 500 returned 3.73 percent in the quarter. Increases in January and March offset the flattish results hedge funds saw in February.

If the first quarter is any indication, investors can expect hedge funds to do very well this year!

Read more: Hedge funds post strong first quarter

Global macro hedge funds facing dearth of talent

Even as investors are raising their exposure to global macro hedge funds because of their potential to make money in volatile markets, a dearth of talent in the sector means returns could disappoint. Global macro hedge funds take directional bets in stock, bond, currency and commodity markets using economic trends. 

For these funds, opportunities to make money should be many and varied given expectations of a liquidity withdrawal, which could create volatility and trigger new trends. Volatility in commodity and emerging markets, forecasts of a declining dollar and rising U.S. Treasury bond yields are all potential opportunities for these money managers.

The problem, however, seems to be that many of the people managing global macro hedge funds seem to have a poor understanding of  the US Treasury bond market and this can hurt returns.

Read more:  Dearth of talent may hit global macro hedge funds

Hedge funds posing a threat to buyout firms in Asia

Increased activity by hedge funds in Asia is posing a threat to buyout firms operating in that continent. Assets in Asia managed by hedge funds grew 38 per cent to US$101 billion (US$1 = RM3.67) last year, according to Eurekahedge, a Singapore-based research company. The region also attracted US$17.2 billion of buyout funds, almost three times the 2004 level, the Centre for Asia Private Equity Research said. Chris Gradel, a managing partner at Pacific Alliance, which manages about US$700 million of Asian buyout investments, however, feels that while some transactions will see hedge funds competing with buyout firms, in other transactions hedge fund activity may be complimentary to private equity firms. In any case, Gradel feels, hedge fund activity will increase in Asia. Business Times Online quoting Gradel reports:

Whether private equity funds like it or not, hedge funds will be more active, particularly in Asia.

Simulated financial meltdown in the US

Europe seems to be a hotbed of activity when it comes to hedge funds. Strange how hedge funds have swept the collective conscience of Europe and now consumes even its financial regulators. These regulators, who simulate a continent-wide financial crisis, fear that they are ill prepared to stop a problem.

So what does this simulation involve and why does it make these doomsday predictions? In the exercise, a collapse is simulated in a big bank with operations in several large countries. This was done to check if the European Central Bank, national central banks and finance ministries could work together to contain the crisis. According to experts, this exercise can be equated with checking if a nuclear power plant can survive a plane crashing into it.

EU Financial Stability Dependent On Hedge Funds

In a recent report, the Economic and Financial Committee of deputy finance ministers and central bankers indicated that the financial stability of the European Union is becoming increasingly dependent on hedge funds. At the same time, it expressed a dire need for regulators to make extra efforts to understand the risks that this creates.

In the recent years, the investment in hedge funds has steadily increased. The figure now stands at 8,000 or more funds now with more than $1 trillion under management. This increases the concerns as the increased exposure of banks to the risk posed by hedge funds can lead to a major collapse in the eventuality of a disaster.

According to the report, special attention is required to monitor hedge funds in order to ensure financial stability. And this need is felt more strongly for hedge funds that are located in offshore centers as these are usually difficult to monitor. Reuters Italia reports:

According to the report, hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systemic risks. Action should be targeted to ensure efficient monitoring of hedge fund risks by banks... and the prudence... and transparency of regulated financial institutions' involvement in hedge fund activities.

Increase In Copper Prices Beneficial For Hedge Funds

The steady increase in copper prices in the past few years has been extremely beneficial for hedge funds. A number of hedge funds have capitalized on this trend. FT.com reports:

US hedge fund Touradji Capital is believed to hold a sizeable copper bet, along with Armajaro Holdings in the UK. Geologic, a smaller US hedge fund with a copper bet, climbed 12.3 per cent in March alone. In recent months, other funds that have made winning bets on copper include Ospraie Management, Moore Capital and Vega Asset Management in the US and Winton Capital and Red Kite Management in the UK.

Fund Of Hedge Funds

A Fund of Hedge Funds is an investment portfolio that is made up of a number of hedge funds. These hedge funds employ different strategies and as a result the risk is lower than that in the case of independent hedge funds. Also, in most case these deliver more consistent and steady returns than individual hedge funds or mutual funds. For investors looking at diversifying their investment portfolio, these serve as the best possible investment tool.

Insure Hedge Funds

With the risks that come along with hedge funds, a dire need has been seen for insurance coverage in the sector. The main reasons why coverage is required include the fact that this provides a greater degree of security to investors and service providers. As a result a number of insurance companies are now offering policies. 

Hedge funds can buy different coverage based on their need and requirements. These could include coverage to protect the decision makes of the funds. This is known as Directors and Officers or General Partnership Insurance. In order to protect hedge fund managers, Professional Liability or Errors and Omissions Insurance coverage can be considered. For those funds that are dealing with pension funds, Fiduciary and Trustee Insurance coverage can be purchased. To protect the fund from the risk of being sued by employees, Employment Practices Insurance can be purchased. There are a number of other insurance policies that are available as well.

Heavy hedge fund buying pushes up bullion prices

Bullion prices are all set to hit the roof thanks to heavy buying by hedge funds. Traders are looking at gold prices hitting the $600 an ounce mark while silver prices may top $12 an ounce very soon. While hedge fund investors have nothing to worry about with bullion investments being always a 'safe haven', gold and silver traders across the world, especially those in India are making hay while the sun shines. While gold prices rose by 20 per cent last week, silver too posted massive gains, rising almost 14 per cent. business-standard.com reports:

Traders said hedge funds are attracted to precious metals largely because they offer higher rates of return compared with other forms of investment – such as currency or bonds.

Stabilize returns with merger arbitrage

Hedge funds by their inherent nature involve risks. If you are dealing in the market, you are expected to make a few profits and losses. However, there is one tool that is designed to ensure profits regardless of the direction the equity market takes. Sounds intriguing? Called merger arbitrage, this strategy takes advantage of the expected price movements or arbitrage opportunities that occur after the announcement of a merger or acquisition offer.

Now that you know what a merger arbitrage is, let’s examine how it works. Once a company makes an announcement of its intent to acquire another firm, the price of the target company's stock will go up. If you notice carefully, it does rise but usually not to the full offering price. And since there is a risk of the deal not closing on time or at all, the target company's stock may sell at a discount to its value at the merger's closing. This discount usually increases with the expected length of time until closing and the perceived risk of the deal. Now if you want to use the merger arbitrage strategy, you will try to lock in this spread. If the merger involves a cash offer, you will only have to buy the stock of the target company. But if the deal involves a trade of securities, you may also have to hedge against the possibility of the acquirer's stock falling. To do this, you can sell the acquirer's stock short.

You will notice that when compared to the uncertainty of playing the volatile equity markets, merger arbitrage investments can give you quite consistent returns. There is of course the risk of a merger or acquisition falling through. However, a good fund manager is expected to foresee such circumstances since they are quite predictable.

Hedge fund investors get aggressive

Tired of sluggish fund managers, an increasing number of wealthy Americans are now taking bigger risks with hedge funds. They put up their hedge fund stakes as collateral for loans and use the proceeds to expand their portfolios. Forbes.com reports:

It's all about the returns: A few years ago, most hedge fund investors were realizing returns of 15% or better without extensive borrowing. But a flooded marketplace that now includes an estimated 9,000 funds with more than $1 trillion in assets—from $25 billion in 1990—has slowed down the pace. Hedge funds returned 8% last year, according to industry consultant Hennessee Group. That's actually a tad below the average mutual fund performance.

Read more: Borrowed Time?

Cool’s the word for hedge funds

I never thought I’d say this, but the British could actually give us a few tips on how to make something as stodgy as hedge funds cool. Yes, you heard me right. Hedge funds have suddenly decided to jazz themselves up. And the British companies seem to be the guiding light here.

One is tempted to ask was it that drove this industry, which was associated with the uber-rich to remodel itself into a fun thing? It seems the industry is no longer satisfied with hobnobbing with billionaire financiers and wants to move out into the world. And it has done this in style. So, you have Hedgestock 2006, a rollicking fun event that will kick off the metamorphosis of the industry. Sponsors hope to make the event, which will be held soon, the premier hedge-fund-industry trade show of Europe. Guess it won’t be long before we have our own cool hedge fund event.

Federal regulators to supervise hedge funds

As per the new rules from the Securities and Exchange Commission, hedge funds with more than $30 million in assets, 15 or more investors and a lock-up period of less than two years have to register as investment advisors under the Investment Advisors Act of 1940. Thanks to the mandate, there are new requirements that need to be addressed immediately. These include appointing a chief compliance officer, improving record-keeping practices and submitting to periodic audits from the SEC.

Secrecy of investments is still of prime importance to the industry. So, though hedge funds must register with the SEC, they do not have to disclose their investments or investment methods, unlike mutual funds managers. And the hedge fund industry is not going to let go of this privilege. They are committed to fighting further regulation because according to them, maintaining the secrecy of investments and strategies allows it to exploit market anomalies. Charlotte.bizjournals.com reports:

Though long viewed as shadowy, high-risk investments, the number of hedge funds has risen from 600 to more than 8,000 in the last 15 years. Likewise, assets have soared from $38 billion to more than $1 trillion, and according to the SEC, hedge funds account for 10 percent to 20 percent of trading volume in the U.S. markets.

Read more: Hedge funds brought under supervision of federal regulators

SEC commissioner unhappy with new hedge fund rule

Paul S. Atkins a Securities and Exchange Commission commissioner recently criticized the new hedge fund registration rule. According to the commissioner, the new rule has created extra burdens for the Securities and Exchange Commission without protecting investors. Boston.com reports:

Atkins said the rule carries too many costs, such as making it too burdensome for some hedge funds to do business or forcing them not to use technologies such as instant messaging because of bookkeeping requirements. The agency would do better to rely on its traditional sources of spotting fraud, such as suspicious employees or business partners of crooked funds, he said.

Read more: SEC commissioner criticizes hedge fund rule

Hedge Fund Insurance

The hedge fund industry was quite unregulated till a while back, but things are undergoing a changeover now. The recent past has seen a number of regulations being imposed to ensure that there is more transparency and answerability as far as the sector is concerned.

With this, another trend that has kicked off is hedge fund insurance. A number of hedge fund managers are now purchasing insurance as a risk management strategy. This is basically because now, with the regulations, hedge funds are more vulnerable to lawsuits.

Now, before an insurance company agrees to sell a policy to hedge funds there is certain basic information that would be taken into consideration. This would include the business plan of the hedge fund, the investment strategies and information about the hedge fund manager including past records of the manager.

It has been noticed that insurers usually refuse to or are reluctant to offer coverage to start-up funds with less than $150 million in assets. So if your hedge fund falls into this category, you would need to have a very promising business plan in place to get insurance coverage. Also, if an insurer does not get the requisite information about the hedge fund or if the hedge fund manager does not have a good record, it might be difficult to get insurance coverage. Also, to negate their own risk, insurance companies might offer limited coverage.

So, when you look at getting an insurance policy for your hedge fund, make sure that all the required documents are in place. Also, study the policy and clarify any doubts that you have before taking a final decision.

Proposed Rule Change For Hedge Funds

With a ‘proposed’ rule change, it might become easier for hedge funds in London to list their shares. This is essentially applicable in case of hedge funds that are transparent about the risks that they take and also publish regular accounts.

This change, if it takes effect, would also lead to greater flexibility in terms of the strategies used. At the same time, it would remove the restrictions on short selling and would allow greater use of derivatives.

Further, in an effort to protect investors, companies would have to ensure that they have sufficient working capital for 12 months. They would also need to elaborate on how investment risks are being spread.
Reuters reports:

The Financial Services Authority (FSA) said the move was consistent with its recent statement that it would consult next year on allowing retail investors direct access to hedge funds. The proposed changes would enable those employing a wider range of investment strategies, including those currently pursued by some hedge funds, to list in the UK for the first time.

Loans From Hedge Funds

Are you looking for funds to bail your company out of trouble? Try turning to hedge funds as now this sector is offering loans for all sizes and scales of companies including small operators, like payday lenders and technology firms, to large automotive companies, retailers, and so on.
US News reports:

With banks shedding some of their corporate loans and becoming tighter in their lending, yield-hungry hedge funds have rushed in to exploit other areas of the debt market. Hedge funds are attracted to such loans because they help diversify their investments, have had low default rates, and offer double digit yields.

Getting The Ideal Hedge Fund Index

Are you looking for the ideal hedge fund index? Well, you can call a hedge fund index complete only if it meets certain basic criteria. First and foremost, the index should be comprehensive and should include details of all major fund strategies. Further, it should offer an analytical comparison of the different strategies. It should provide an insight into funds that can be invested in.

Minimum Investment Required For Hedge Funds

What is the minimum investment required to invest in hedge funds? Well, the minimum investment varies from one fund to the other and is determined by the General Partner.

In case of hedge funds, the general partner overlooks the day to day functioning of the fund and is responsible for the investment activities of the fund.

Most new hedge funds have a minimum investment of $250,000 or $500,000. In case of established funds, the investment is usually higher. This could even be $10,000,000. Also, the general has the authority to negotiate and reduce the minimum investment if he feels the need.