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.

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.

Large Hedge Fund to be Floated

The London stock market will see its largest fund of hedge funds if all goes according to plan for Angelos Metaxa, owner of the hedge fund Capital Management Advisors, and Sabby Mionis. The duo have decided to jointly float CMA Global hedge, a $500 million close-ended fund, which is scheduled to debut in autumn this year. UK Telegraph reports:

Conscious of investor nervousness, the fund is offering a novel safeguard. If, after a year of being listed, the net asset value of the fund has traded at more than a 3 percent discount to its flotation value during the period, the directors are offering to buy back 25 percent of issued stock.

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

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 funds market Crosses US1.5 trillion mark

It is now being touted that the much hyped hedge funds industry now manages more than US Dollar 1.5 trillion in assets worldwide. In Europe alone, the hedge funds managed more than US Dollar 300 billion of investments, up almost 18 percent over last year. Forbes reports:

Two thirds of European hedge funds are managed out of London, representing 12.5 pct of the 8,000 worldwide. The figures have been compiled by HedgeFund Intelligence, which publishes EuroHedge, the industry bible for the European hedge fund markets.

Hedge Funds Focus: Leverage as a Tool

World over hedge funds are known to use specialized investment strategies to be one up on the market and deliver strong returns and minimize risks. Most of you might have wondered what these strategies could be. Well if not all – we at least try to throw some light on one of the tools used by these funds. In this piece we will be highlighting the usage of leverage in the hedge funds strategies to magnify exposures and, as a direct consequence, magnify their risks.

We understand many of our readers might not be familiar with the term ‘leverage’. And for such readers, here is an attempt to explain the term from scratch. The term leverage can be defined in balance-sheet terms – as it refers to the ratio of assets to net worth. There is also an alternatively definition to the term ‘leverage’ – which can be defined in terms of ‘risk’ as well, as it is a measure of economic risk relative to capital.

Hedge funds derive economic leverage in various different ways; some of the common methods are through the use of repurchase agreements, short positions, and derivative contracts. Many a times, even the choice of investment is influenced by the availability of leverage. Much beyond a trading institution’s risk appetite, both balance-sheet and economic leverage can be constrained in some cases by initial margin and collateral at the transaction level, and also by trading and credit limits imposed by trading counterparties.

It might be ok to say that hedge funds are limited in their use of leverage only by the willingness of their creditors and counterparties to provide such leverage. Much like banks and securities firms, although unlike most mutual funds, hedge funds are known to lever their capital bases to increase their total asset holdings by a multiple of the amount of capital invested in the funds.

Hedge Funds: Technology Frontier

In one of the previous articles, we outlined and discussed the technology element in the hedge funds industry and how the prime brokers were responsible for solid technology integration in the sector. Also, we highlighted that for technology adoption to reach the next level; a lot would depend on how proactively hedge fund houses push the frontiers from the current scenario, where most of the technology needs of the sector are supplied by the prime brokers and other broking nodes.

This brings us to the inevitable question - At what stage of the growth curve will Hedge Funds establish their own technology platforms? Or a corollary of this would be - Should Hedge Funds continue to rely on Prime Brokerage Units for their technology support?

Although, hedge funds tend to be uncommunicative about their business and organizational strategy, the need to execute a lean administrative setup coupled with the responsibility for technology, including technology strategy, in all probability falls on the CFO or the COO at the larger Hedge Funds managers.

As most major Hedge Fund managers have number of funds, the mathematical complexity underlies the application of each investment strategy. With impending growth in size and increasing complexity, demand for a robust and appropriate technology platform and, subsequently, planning and implementation to accommodate migration would be critical.

It is a known fact that new financial products are the lifeblood of many hedge funds houses. Thus, technology is required to ensure that fund managers are able to deliver products efficiently and at the necessary scale for commercial viability. In essence, the function of technology could very well be the trump card in driving future growth in the sector. Now the critical question to be asked is – should such an important function be outsourced, even to Prime Brokerage Units?

Hedge Funds Average 1.48% Returns for November

As reported by Credit Suisse First Boston and Tremont Capital Management, Hedge funds as a class of investments clocked returns averaging about 1.48% in the month of November. This was driven by rising stock markets and a strong U.S. dollar, which helped hedge fund managers with better returns. Marketwatch reports:

The CSFB/Tremont Hedge Fund Index, which tracks the performance of more than 400 managers, is up 5.9% so far this year, outperforming U.S. equity benchmarks such as the Dow Jones Industrial Average and the Nasdaq Composite Index, CSFB and Tremont said in a statement...

Analysts say hedge funds hold copper prices at nadir

The copper price for a three-month delivery peaked at $3,812 a tonne on the London Metal Exchange (LME) and closed at $3,780, 1 per cent above its previous $3,775 close. Copper prices have risen 20 per cent this year and 64 per cent since the beginning of 2004. The demand for copper fell by 2 per cent in the first half of 2005. Copper stocks on the LME had slumped to a 31-year low in July this year. However, it jumped 229 per cent to an 11-month high of 83,295 tonnes as the smelters return to full capacity after closures for maintenance. One wonders why do the copper prices keep rising, and keep setting newer and newer high each day, and haven’t the prices overshot the fundamentals. The answer to same lies with hedge funds which are major buyers in the metal and are going to try to hold up the price. They are creating the momentum and trying to run along with it while they are pushing the market to test the previous high. It although seems gloomy days ahead for the hedge funds since there is a clear dislocation of demand and supply with the current price levels. FT.com Reports:

Mr Moore thinks the crunch may come during “LME Week”, from October 31, when traders gather in London to negotiate future supply contracts. Copper prices fell sharply during this event last year. “Once that is out of the way, the gloves are off,” he said. Natexis sees scope for profit taking as the quarter ends, paving the way for prices to slide to about $3,200 a tonne by the year’s end.

Read More: Copper peak ‘due to hedge funds’

Hedge Funds to benefit from M&A; strategies

Swiss Capital Group believes that the hedge fund returns may get a boost from recent activities in Merger & Arbitrage along with equities. In the first half of the year, downgrading of bond status of Ford Motors and General Motors, Merger & Arbitrage strategy suffered heavy losses. However, Swiss Capital Group is upbeat about Merger & Arbitrage hedge funds. The group is also positive about hedge funds utilizing equity long-short strategies primarily in technology and healthcare sectors. Commenting on macroeconomic data, Joerg Ruetschi who is a business analyst with Swiss Capital Group said that the data makes it difficult for hedge funds to spot and play sustainable trends. This may lead to erratic movements in the market. Swiss Capital Group which primarily focuses on alternative investments and structured products also added that the hedge funds which follow the macroeconomic trends might continue struggling in the second half as well. The macroeconomic trend they were chiefly referring to are global macro strategies and managed futures. Hedgeco.net reports:

“Swiss Capital Group says its outlook for Merger and Arbitrage hedge funds is neutral-to positive. The Group also said it has a more positive outlook for hedge funds utilizing equity long-short strategies, particularly in the technology and healthcare sectors. “

Read More: M&A seen boosting returns for Hedge Funds in the coming months