Hedge Fund Reader

Decline in Hedge Fund Returns Due to Market Turmoil

The recent market turmoil has negative impact on a number of hedge funds. Most of them have had their gains wiped out in the past few weeks. Although almost all the hedge funds worldwide suffered due to the market turmoil, Japan-focused hedge funds have been worst affected due to the fall in the Nikkei. Seven of the 10 worst-affected hedge funds belong to Japan. Emerging markets and European funds are also affected. The month of June witnessed heavy losses for many hedge funds, as managers were overly bullish and took on too much advantage. Some British hedge funds also registered net losses in the past couple of months.

According to The Australian -

Big hedge fund investors cautioned against reading too much into a poor month or two. Some participants surveyed blamed the weakness on excessive bullishness and complacency about risks in a volatile period. US market indices have fallen more than 2 per cent in June, European stocks are off between 3 per cent and 6 per cent, and Japanese indices are down 7 per cent.

S&P; Suspends Hedge Fund Index

Standard & Poor's said that it would no longer publish its managed account-based Hedge Fund Index from July 1, 2006. The decision may come as a surprise for the industry watchers. However, there are several factors attached to S&P;'s decision. In the recent moths, there have been diminishing numbers of managed accounts and their distribution in the index. That forced S&P; HFI not to become representative of the broad range of strategies employed by hedge funds. It finally took the decision of not publishing the index. The fallout from the meltdown of commodity broker Refco Inc. has also been cited as one of the reasons behind the unprecedented decision.

According to CNN Money -

The Hedge Fund Index, which launched in October 2002, tracked the daily performance of nine different hedging strategies, measured by results from about 40 hedge funds. The index has seen more than a dozen deletions of constituent funds since the start of this year, according to the paper.

Hedge Fund Mangan & McColl to Close

According to reports, Mangan & McColl will be closed at the end of July 2006. Mangan & McColl is the local hedge fund run by John Mangan Jr. and Hugh McColl III. The Charlotte-based firm said that the decision was based on a reduced number of attractive investment opportunities. Mangan & McColl always focused on merger and arbitrage. It was involved in several merger decision taken by companies in the past. Mangan ran into trouble in December 2005, when it was fined $125,000 and was barred from the brokerage industry for alleged improprities. Then industry experts predicted a untimely demise for the company. The firm's assets under management have been decline for some time now.

According to Charlotte Business Journal -

In 2005, according to a performance update sent to investors, Mangan & McColl reported a loss of 2.10% compared to a gain of 5.69% for the Hedge Fund Research merger arbitrage index. In the update, Mangan & McColl told its investors that it expected its investment opportunities to be "plentiful" in 2006.

Fraud Case Reported with Hedge Fund Trader

In recent months, there have been several instances of fraud cases related to hedge fund. On Friday, hedge fund trader Bret Grebow was arrested for operating a fake scheme, called as "Ponzi Scheme". The fake scheme robbed investors of $5.8 million. Grebow and another co-manager allegedly used new investor funds to pay distributions and redemptions to existing investors in the HMC International LLC fund of Montvale, New Jersey. According to Manhattan Disrict Attorney, the fund gained no substantial returns since Grebow and his aide established the fund five years ago.

According to Chron -

No trading took place in the fund's main brokerage account since March 2003, Garcia said. The Securities and Exchange Commission brought similar civil charges in December against Grebow, a 30-year-old resident of New Rochelle, N.Y., as well as HMC manager Robert Massimi.

US Congress Considers Hedge Fund Regulation

The Security and Exchange Commission is still fighting its war to regulate hedge fund despite the fact that it lost a battle last week. Now it has received the support of some members of the Congress. Three Congressmen introduced a bill in the House that would authorize the SEC to require registration of hedge funds as investment advisers. The bill would serve as an amendment to the Investment Advisors Act of 1940. It would also re-establish the authority of the SEC to regulate hedge funds. The three Congressmen who introduced the bill were Rep. Barney Frank, Rep. Michael Capuano and Rep. Paul Kanjorski.

According to The Street -

With the SEC registration rule overturned by the court, the question remains: Will hedge funds remain largely unregulated as they are now? Will Congress or the states step in? The bill is unlikely to be embraced by the hedge fund community. What is clear is that efforts to regulate hedge funds are far from dead, as reported here?

Hedge Fund Managers Sitting Pretty

It doesn’t take a genius to figure out that hedge fund managers are among the topmost earners in the world today. But just how much do the cream of the crop make?

Well, according to the Fifth Annual List of Top Hedge Fund Earners released by Institutional Investors’ Alpha Magazine, prizes for leading the list go to James Simons of Renaissance Technologies who took home a whopping $1.5 billion in 2005. His Medallion Fund earned a 30 percent return of $5.3 billion under his management. Close on his heels is BP Capital Commodity Fund’s with a pay packet of $1.4 billion. Other high earners include George Soros with $840 million, Steven A. Cohen of S.A.C. Advisors with $550 million, and Eddie Lampert with $425 million. 

Managers make so much money because they normally charge investors 2 percent of the assets under management and 20 percent of performance gains. But if your hedge fund is large enough, your performance does not matter; you can still go home with a significantly large pay packet, as demonstrated by Bruce Kovner of Caxton Yet. The fund has posted nothing but single digit returns over the past three years, but Kovner still earns $400 million annually. That’s the life!

SEC Probes Use of Independent Analysts

The relationship between hedge funds and independent analysts is under scrutiny by the Securities Exchange Commission (SEC) and the Department of Justice after two companies lodged complaints against hedge funds for selling shares that they did not own, in the hope of buying them back at lower prices. Online discount store Overstock has sought legal action against Rocker Partners, while Canadian pharma company Biovail has railed against the Connecticut-based fund SAC. Both companies claim the funds paid research company Gradient Analytics to propagate false rumors on the declining values of their stock. Even as SAC, Gradient, and Rocker Partners deny any instance of foul play, the issue is under investigation by a Senate Judiciary Committee. MSNBC reports:

The allegations about independent researchers have centered on short sellers. Companies targeted by short sellers often complain that their share prices are pushed down by aggressive shorting. The allegations about fraudulent reports by analysts lend a new dimension to the conflict.

SEC to Probe Side Letters

The issue of “side letters,” the practice of favoring certain investors over others, is rearing its ugly head in the world of hedge funds. Following allegations that most hedge funds indulge in the exercise, the US Securities and Exchange Commission (SEC) is contemplating punitive action against the perpetrators. While side letters are not totally illegal, hedge funds are duty-bound to be fair to all their investors, said Marco Masotti, a partner at the law firm Paul, Weiss. MSNBC reports:

Side letters might give an investor exclusive information about the fund's portfolio, a fee reduction, or more flexible redemption terms. In the UK, the Financial Services Association recently warned hedge funds about the use of side letters, saying if they were used at all, they should be disclosed to all investors.

Major Hedge Funds Corner Energy Market

Bleak futures are driving hedge funds to buy and sell crude oil, in order to show some figures of profit to their investors. With energy being the most sought-after commodity, hedge funds are scrambling to get their fingers deep in the money-spinning oil wells. But the going is not as smooth as oil, with major players like Goldman Sachs and Morgan Stanley cornering a large part of the market. A key deciding factor in oil trading is the ability of hedge funds to have the necessary storage space, especially in the physical crude markets.

Newcomers are not too welcome, going by the attempts of the hedge fund MotherRock LP to sell crude to Taiwan’s state oil firm, Chinese Petroleum Corporation (CPC) that fell short of expectations. Inside information from CPC alleges that the company was not in favor of the deal because of the fund's relative inexperience in oil sales. This, in spite of the fact that MotherRock is among the top five market makers in terms of volume traded, on the NYMEX natural gas market. NYMEX is the world’s largest energy futures market.

Meanwhile, the industry bigwigs are consolidating their positions through various acquisitions. Goldman Sachs’ private equity arm and Kelso & Co. jointly bought out Coffeyville Resources LLC, a refiner based in Kansas City last year. Morgan Stanley, besides reaching an agreement to acquire TransMontaigne Inc., an organization that markets oil products, is also in talks to buy The Heidmar Group, which ships oil and refined products across the world.

Interest in Energy Funds

If you’re looking to invest your money profitably, the new handbook from Peter C. Fusaro and Gary M. Vasey should help you with a few useful tips. “Energy and Environmental Hedge Funds: The New Investment Paradigm” is for those who are seriously contemplating investing in the energy industry, which Fusaro and Vasey call “the world's largest business with over $4 trillion in annual trade.” With over 450 hedge funds trading in energy-related companies that deal in coal and solar power, the authors explain that the interest in oil, gas, coal and power is due to the imbalance between consumption of energy and the lack of exploration to find new sources of energy. Energy funds have “between $400 million and $1 billion in assets under management, say the writers. The book is priced at $120, for those interested. 

Follow this link to read more articles by Fusaro and Vasey.