Hedge Fund Reader

Mittal Extends Stake in RAB Capital

-- By Pushpa Sathish, Staff Writer

Recently in the news for his hostile takeover of the steel giant Arcelor and for the subsequent creation of the world’s largest steel manufacturing plant, Arcelor Mittal, Lakshmi Mittal is making headlines again. The richest Indian is spending some of his wealth on the hedge fund industry with an investment in the London-based RAB Capital.

The Mittal family, which already owns a 3.5 percent stake in RAB Special Situations, the largest hedge fund managed by RAB Capital, has upped its share to 6.2 percent, with the option to increase it to 7.9 percent. According to information provided to the London Stock Exchange by RAB Capital, Mittal now owns another 10 million shares of the fund and also has the choice of buying another 10 million before April 30, 2007.

The investment seems to be part of the long-term plans of the Mittal family, with no redemptions being allowed for a period of three years, and an advance notice period of one year for the next two years.

The shares were bought through the family’s investment vehicle Karrick Ltd. Mittal first associated himself with the hedge fund industry in June 2005 when he bought 18 million shares of RAB Capital. 

What’s Hot, What’s Not!

-- By Pushpa Sathish, Staff Writer

Executives in the hedge fund industry are forecasting a good performance year ahead for those funds that deal in merger and acquisition arbitrage. These funds take advantage of impending mergers to trade stocks of the concerned companies, either before the news is made public or after the announcement is made.

Another category that is expected to do well is the global macro fund that speculates on bond, equity and currency markets, and on long/short funds equity funds. The best performers so far are the convertible arbitrage funds that trade in the components of convertible bonds that can be converted into a company’s stock.

Convertible arbitrage funds returned 10.68 percent this September, while event-driven (merger and arbitrage) funds returned 9.16 percent, according to monthly statistics from the Credit Suisse/Tremont index.

So what’s been performing below par? The managed futures funds which bet on market trends by using computer models – they declined by 0.13 percent since the beginning of this year, said Credit Suisse/Tremont.

Record Inflow into Hedge Funds

-- By Pushpa Sathish, Staff Writer

Contrary to recent reports, the hedge fund industry doesn’t seem to show signs of slowing down. Not if the report from Hedge Fund Research Inc. stating that $44.5 billion was invested in funds over the past three months is to be believed. One can only conclude that Amaranth’s downfall doesn’t seem to have had the intended effect. This amount is the highest registered for a quarter since 2003. The total investment so far this year is a record $110.6 billion, a significant jump from the $46.9 billion gleaned in 2005. Bloomberg reports:

The previous annual record was $99.4 billion in 2002. Managers are pulling in money even as average hedge-fund returns have lagged behind those of stocks and bonds over the past six months.

Oppenheim to Launch Internal Hedge Fund

Sal Oppenheim Jr. & Cie. has plans to invest 150 million euros with a Zurich-based hedge fund that will operate a long short global equities investment. The hedge fund is aiming to raise 300 million euros to 400 million euros in managed funds. Oppenheim's investment involves just over 1% of its overall 136 billion in assets under management. It is important to note that 6.3 billion euros of the total amount is managed by their Swiss subsidiary. The in-house hedge fund is part of a series of initiatives taken by Oppenheim's Swiss bank.

Read my previous post titled “Main Characteristics of Hedge Funds” to know more about hedge fund characteristics.

Mosaid Rejects Hedge Fund's Demand for Sale

Canadian intellectual property provider Mosaid Technologies Inc. said that its board of directors has rejected a demand by a New York-based hedge fund that it put the company for sale. The hedge fund, Loeb Partners Corp. demanded that the directors put the company up for sale, threatening a proxy fight for control of Mosaid. Loeb has 6 percent stake in Mosaid. The board of directors at Mosaid decided that sale of Mosaid is not in the best interest of the company's shareholders. They also said that Mosaid would like to avoid a disruptive and costly proxy fight. However, it is ready to engage in a proxy contest to confirm the support of its shareholders.

To know about the tax crackdown on hedge fund activities, read my previous post titled “Tax Crackdown on Hedge Fund Activities”.

Most Hedge Funds to Stay Registered

A few days ago, I had written a post titled "SEC Not to Appeal Court Decision on Hedge Fund Rule" about the SEC's decision not to appeal against Appeal Court decision on hedge funds. A failed regulatory push by the Security and Exchange Commission (SEC) may have far-reaching consequences on the hedge fund industry. Hedge funds traditionally have been lightly regulated. Hence, SEC efforts to tighten the control met with criticism from the hedge fund industry and a federal appeals court. An SEC rule requires hedge fund advisers to register with the SEC and undergo routine inspections.

The ruling was rejected as "arbitrary" by the US Court of Appeals for the D.C. Circuit. While most hedge fund advisers said that they would remain under SEC oversight even though it is not mandatory, a significant number of hedge fund advisers said that they would deregister. The response given by hedge fund advisers suggests that hedge funds will stay registered.

NFL Seeks Dismissal of Hedge Fund Suit

The NFL and its union want a lawsuit filed by six current and former players to be dismissed. The lawsuits filed by these players seek to recoup $20 million they lost in an alleged fraud scheme. NFL argues that the league players solely responsible for their own finances. The league and players association filed papers in federal court in Atlanta seeking to dismiss the lawsuit.

Read our previous post titled "Main Characteristics of Hedge Funds" to know more about hedge funds.

The lawsuit claims that the union endorsed the services of an investment firm even though its manager had liens against him. In the lawsuit, the players said that the league and the NFLPA are liable for the losses because of investments with hedge fund manager Kirk Wright.

Casper Star Tribune reports that -

According to authorities, Wright and his company collected as much as $185 million from at least 500 investors since 1997 and used false statements and documents to mislead some of them to believe the value of those investments was increasing. Much of that money is now missing.

Is Hedge Fund Valuation Necessary?

Valuation is fast becoming a critical issue. Only few hedge fund managers can afford to ignore this issue. If you want to avoid dilution and unfairness, valuation numbers must be accurate and unbiased. A key element of monitoring the risk of hedge funds is to understand the valuation used by the concerned funds. Institutional investors always need better and accurate information. Hence, they must have a clear understanding of a hedge fund's valuation process.

Certain institutional investors take the help of liquidity option to make hedge fund valuation more accurate. Critics argue that not all positions in hedge fund operation should be valued. However, there is no doubt hedge fund valuation is necessary in order to improve transparency and reduce risk.

Risk Arbitrage on Hedge Funds

One of the common hedge fund strategies is to buy shares of a company that is in the process of a merger or acquisition. The company's stock should have a fixed price. Hence, it is a safe investment to purchase the stock and wait. Sometimes, this strategy can be risky, as there is no assurance that the merger will be finalized. The trade may also short sell the stock of the acquiring company in addition to buying the stock of the target.

In the past, most hedge funds employed this strategy. They were very popular to achieve more gain at a lower risk. However, the negative aspect of this strategy forced hedge fund managers to employ new strategies, which are aimed at high growth. Hedge fund market has been divided into several classifications. Fixed-income arbitrage, global convertible bond arbitrage and commodity trading are the most important classifications.

Implications of Growth of Hedge Funds

Hedge funds represent a small portion of the US financial markets. Yet, they have grown significantly in size and influence in recent years. The growth in hedge funds has been fueled primarily by the increased interest of institutional investors such as pension plans, endowments and foundations seeking to diversify their portfolios with investments that offer absolute return strategies. Hedge funds contribute significantly in protecting investment principal.

The investment goals of hedge funds vary among funds. Many hedge funds seek to achieve a positive, absolute return rather than measuring their performance against a securities index or other benchmark. Hedge funds invest in equity and fixed income securities. Some hedge funds may take on substantial advantage and employ certain hedging and arbitrage strategies. They engage one or more broker-dealers to provide a variety of services including trade clearance and settlement.