Hedge Fund Reader

G20 Calls for More Regulation

-- By Pushpa Sathish, Staff Writer

On one hand, you have the European Union deciding against further regulation for the hedge fund industry in the fear that it will drive managers to more lenient pastures. On the other, you have the new chairman of the G20 group of economies, Trevor Manuel, calling for greater regulation in this $1.3 trillion industry in order to remove risks to global financial stability. Manuel, who also holds the portfolio of South Africa’s finance minister, revealed the G20’s plans to bring hedge funds under the umbrella of a common policy. Reuters reports:

“There are trends we are concerned about, in particular the quantity of money handled by unregulated hedge funds and the push we've seen towards private equity funds,” he said. “There is a push to take companies out of public scrutiny, a push to be unregulated. In the context of financial stability these concerns merit attention and informed comment.”

Regulation In, Managers Out?

-- By Pushpa Sathish, Staff Writer

The assumption that more regulation will drive hedge funds out of the country is gaining more truth by the day. The European Union has now decided not to meddle with existing regulations that govern the continent’s hedge fund industry, as it does not want “an exodus of its hedge fund managers”, according to Charlie McCreevy, Commissioner of the Financial Services Authority.

This stand is a marked contrast to the scene on the other side of the Atlantic where US Treasury Secretary Henry Paulson and Senate Finance Committee Chairman Charles Grassley are seeking more transparency in the operations of hedge funds. Europe’s regulatory body said it was investigating how funds valued their assets following a request from former Chancellor of Germany, Gerhard Schroeder, to enforce international rules for hedge funds in the EU.

McCreevy says the inspection of hedge funds in Europe was better left at the country-level and that existent rules would limit the consequences of a collapse like that at Amaranth or Long-Term Capital Management.

Citadel Loses Global Stocks Head – Or More?

-- By Pushpa Sathish, Staff Writer

It’s official - the Citadel Investment Group has lost its head of global stocks. Anand Parekh’s resignation, which was first reported in The New York Times, was confirmed by Bryan Locke, a spokesman for the hedge fund manager. The $12 billion worth fund has been in the news lately for the losses it reportedly suffered. Parekh’s resignation only added fuel to flames of speculation, but Locke categorically denied that the fund had suffered any losses.

According to trusted sources, both the multi-strategy funds that Citadel manages have done well this ear, returning 20 percent to investors. But the rumors of losses seem to have had far-reaching consequences – stocks in Tokyo slipped and played a part in the decline in energy, treasury, and currency markets on November 24.

Invest in Hedge Funds Now – Citigroup PB

-- By Pushpa Sathish, Staff Writer

The recent losses at Amaranth notwithstanding, Citigroup Private Bank is urging its clients with greenbacks to spare to invest NOW in hedge funds. According to a study of hedge fund return patterns through 16 years, the bank has discerned that hedge funds perform best in the months of December and January. With the average monthly return standing at 0.92 percent, December has pulled in 1.5 percent, and January 1.1 percent.

Not all hedge funds strategies perform equally well, though, says Citigroup PB. The best investment bets would be equity non hedge and macro strategies that bring in twice the average returns in the last and first months of the year. So what should investors stay away from? Well, the bank advocates not touching funds that sell short, even with a bargepole, as these shine only in September. Reuters reports:

A macro strategy generally involves taking leveraged bets on a top down basis in stocks, interest rates, foreign exchange and physical commodities.An equity non hedge strategy allows for long stock positions without necessarily hedging the bet by making short sales of stocks and/or stock index options.

The Asian Hedge Fund Scenario

-- By Pushpa Sathish, Staff Writer

Be prepared for the explosive growth of hedge funds in Asia, says Jean Pierre Bernard, the regional head of BNP Paribas for Southeast Asia and India. He predicts, that at the present annual growth rate of 35 percent, they will double over the next three years from their current value of $130 billion.

Amidst all the controversy and confusion regarding the impact of hedge funds on the financial markets, Bernard says they are not detrimental, and that they add liquidity to the market, IF they are regulated properly. Singapore follows a different path from the United States and regulates its hedge funds, he adds. Bernard is the chief architect of the (Singapore)$1.4  million Hedge Fund Center at the Singapore Management University, set up jointly with the London Business School in an attempt to boost the standing of hedge funds in the region.

The Asian hedge fund scene is still in the fledgling state when compared to the worldwide markets, but there is potential for growth as the Asian markets deregulate, according to Ong Chong Tee, the deputy director of the Monetary Authority of Singapore.

Contradictory statements indeed! Should the Asian hedge fund industry grow because of deregulation or should the financial markets be stabilized by regulating the funds that do set up shop in the world’s largest continent?

Funds of Hedge Funds Feel the Amaranth Effect

It looks like Amaranth’s downfall is having a domino effect on all other players in the hedge fund industry. The latest to be affected is the fund of fund market – the International Organization of Securities Commissions (IOSCO) is contemplating revamping the guidelines for this sector.

The rules currently being followed are three years old, having been laid down in 2003; the Amaranth disaster has forced IOSCO to take a closer look at how funds of hedge funds operate, according to Hubert Reynier, chairperson of an investment management committee for IOSCO. Reynier added that this move was initiated by the large number of retail investors in funds of hedge funds in some countries.

A fund of hedge funds invests in more than one hedge fund to provide greater diversification for its clients’ portfolios.

New Rules for Hedge Fund Investors?

-- By Pushpa Sathish, Staff Writer

The US Securities and Exchange Commission (SEC) is changing tactics to prevent occurrences of fraud in the hedge fund industry. After its attempt to get funds to be more transparent in their dealings fell flat on its face, the regulatory body is toying with the idea of raising the bar for those wishing to invest in these funds.

Current requirements mandate that investors be accredited, i.e., they are worth at least $1 million or have an annual income of $200,000 (single) or $300,000 (joint). While the proposed revisions to these rules are still under wraps, Joseph Borg, president of the North American Securities Administrators’ Association which represents state securities regulators, has suggested that potential investors own assets worth at least $2 million, with real estate not be added to the total.

A meeting between the chairman of the SEC, Christopher Cox, and four other SEC commissioners some time next month is expected to hold the answers to all the questions being raised regarding the new investor accreditation rules.

Hedge Funds Hope for Hollywood Hits

-- By Pushpa Sathish, Staff Writer

Box office hits are pulling hedge funds deeper into Hollywood – Dune Capital Management is all set to produce at least 15 new films according to a $520 million agreement with 20th Century Fox. George Soros’ erstwhile hedge fund has already tasted screen success with two hits this year – Borat and The Devil Wears Prada. Die Hard IV and Fantastic Four: Rise of the Silver Surfer are two movies that are in the pipeline, thanks to this partnership.

20th Century Fox is not the only Hollywood studio to seek backing from hedge funds; Sony Pictures Entertainment and Universal Pictures have done it too, with funds Relativity Media and Gun Hill Road II, both managed by Ryan Kavanaugh, having raised more than $1 billion for the studios. But it's not all smooth sailing, as Warner Bros. realized. The studio suffered a setback to its $530 million, six-picture deal with Virtual Studios because of the major losses suffered by the motion picture Poseidon.

Did Amaranth Pull Down Max Re?

-- By Pushpa Sathish, Staff Writer

Speculation is rife in the hedge fund industry that Max Re Capital suffered significant losses in the third quarter of 2006 because of its investments in Amaranth Advisors. Close on the heels of Amaranth’s announcement that it had lost $6 billion on bad energy bets, the reinsurance firm said that it expected to lose $35 million because of trading losses in certain hedge fund investments.

While Max Re didn’t elaborate, scandal lovers are putting two and two together. It remains to be seen if they are left with four or five, since the company disclosed no details other than the fact that it was cutting back on the amount it had earmarked for its alternative investment portfolio. Earlier, the Bermuda-based insurance outfit invested between 20 to 40 percent of the premiums it received on hedge funds; it has decided now to set aside only 15 to 20 percent of assets for this purpose.

Listed Funds Head for Amsterdam

-- By Pushpa Sathish, Staff Writer

The fear that the tightening of the regulation noose around hedge funds’ neck will push them overseas is being realized in Europe.  London’s loss has turned out to be Amsterdam’s gain – with the Financial Services Authority banning single-strategy hedge funds from being listed in London, at least two large funds have been floated in Amsterdam.

Following Boussard & Gavaudan, the hedge fund launched by former Goldman Sachs employees, Marshall Wace has also chosen to set up base in Amsterdam. The fund made news recently when it set a target of €1 billion, which, if it attains, will give it the billing of the world’s biggest listed hedge fund. Another good thing going for Marshall Wace is the appointment of Sir Andrew Large, former Deputy Governor of the Bank of England and chairman of the FSA’s predecessor, the Securities and Investment Board.

Marshall Wace makes its money using the controversial “alpha capture” method, where investment bankers and brokers are compensated for ideas that do well. While a section of regulators feel that this reward system may lead to insider trading, the FSA has approved this technique.

The hedge fund has been extremely successful, and is worth €5.9 billion currently. Sir Andrew has been roped in with a one-time fee of £250,000 and an annual director’s fee of £70,000.