Hedge Fund Reader

Longer Lives for Hedge Funds

-- Pushpa Sathish, Staff Writer

We’ve read and heard a lot about the relatively short lifespan of hedge funds – they average three years in existence before closing up shop. But that trend is slowly fading away, says hedge fund consultant and index provider Hennessee Group. The attrition rate for hedge funds, that is, the rate at which they are liquidated, is an average of 5.2 percent since 1999. The last two years have seen a significant decrease in the number of hedge funds that wound up due to poor performance or an exodus of staff and managers – 6.2 percent in 2004, 5.4 in 2005, and 5.1 in 2006.

Hedge funds are opening their doors to institutional money, a move that will generate larger funds with more expensive infrastructure. The very existence of these influential funds will make it difficult for startup and smaller funds to survive, which means that fewer people will be rushing to launch their own funds without the necessary clout to endure the stiff competition, according to Hennessee.

Conclusion – The attrition statistics do not mean that the failure rate in the hedge fund world is much higher than that in other industries – Hennessee’s managing principal Charles Gradante sums up the situation.

The Rich Shy Away from Hedge Funds

-- Pushpa Sathish, Staff Writer

A record amount of money may have flowed into hedge funds in 2006, but it certainly did not come from the pockets of the rich and famous in America. A survey conducted by consulting services provider Spectrem Group showed that only 27 percent of families with a net worth higher than $25 million (without taking primary residence into consideration) chose hedge funds as an investment vehicle in 2006, a considerable decrease from the 38 percent in 2005. Reuters Today reports:

"Hedge fund investing appears to have lost some of its luster for the very richest Americans," Catherine McBreen, Spectrem Group managing director, said in a statement. "A nearly one-third decline in the percentage of those households investing in hedge funds suggests the difficulties of 2006 have made their mark."

Canada’s Hedge Fund Industry

-- Pushpa Sathish, Staff Writer

An NBCN Prime Brokerage Services study offers a comparison between the Canadian hedge fund industry and its counterparts across the world:

• It’s pretty small – 30 percent have between $10 and $49 million (US) in assets under management. Only 4 percent have assets exceeding $5 billion. On the global scene, 21 percent manage assets higher than $5 billion, but only 10 percent have assets between $10 and $49 million.
• It’s new – only 17 percent of Canadian funds have been around for 10 or more years. At least 33 percent of hedge funds across the world have been in existence for a decade or more.
• As much as 25 percent of funding for Canadian funds comes from partners and employees, as compared to only 8 percent at the global level. A little more than 10 percent of global hedge fund assets come from banks and insurance companies.
• Nearly 80 percent of Canadian managers plan to raise more capital in the next 12 months using futures/commodities strategies as compared to only 22 percent that favored these strategies on a global level. Nearly half the respondents were inclined to use synthetic structures like swaps, forwards and options. Long/short equity emerged as the largest strategy used by Canadian managers.
• Canada’s hedge fund industry has grown 25 percent between 2005 and 2006, with assets under management rising by 40 percent in the same period to touch $25 billion.

So it follows that there’s ample scope for growth in the industry - because of strong regulations, a resource boom, and adequate returns. Not surprising, when 40 percent of Canadian hedge funds are active in Western Europe, 20 percent in Japan, 15 percent in the rest of Asia, and 15 percent in central Europe.

The survey covered 35 hedge fund managers in Canada, and compared their responses with those of 2,451 funds from all over the globe.

The Devil or the Deep Sea? Multi-Strategy Funds or Fund of Funds?

-- By Pushpa Sathish, Staff Writer

Fund of hedge funds or multi-strategy hedge funds? Are the two similar or do they have their own advantages and disadvantages? Corbin Capital Partners, a New York-based hedge fund which runs a fund of funds but is owned by founders of one of the world’s biggest multi-strategy hedge funds, Highbridge Capital Management, offers an insight into these two investment strategies:

• Both move in and out of various markets to maximize the returns and minimize the losses in each.
• Multi-strategy funds returned more that fund of funds over the past few years because of lower fees and better strategic skills. But since the latter are less volatile, their performance has been better.
• If multi-strategy funds are supposed to diversify and minimize risk, then why did Amaranth collapse? Because these funds use a technique known as cross-collateralization, where leverage is used across the whole firm and assets of all strategies are used to offset the risk. So if one strategy fails, it pulls down the rest like a house of cards.
• Multi-strategy hedge funds tend to put more money on markets that are doing very well. This backfires when the trader handling the strategy demands more money – the fund faces a dilemma to accede or not, because it may be damned if it does and damned if it doesn’t. If it does shell out more money and the strategy backfires, well, you have another Amaranth on your hands. And if it doesn’t, the trader may very well walk out and start his own hedge fund.

$ 150 million raised by New Star Asset Management for a London listed daily tradable security

Hedge ETS, a London-listed daily tradable security from New Star Asset Management has raised an initial USD 150 million. The fund will help its investors to have access to the RBC Hedge 250 Index through its offering. The hedge fund index has extensive diversification across over 250 hedge funds and boasts of using at least nine distinct strategies. And as on 1st September 2006, total assets under management of the hedge funds in the index was around $ 192 billion. As per the RBC Capital Markets report, this amount represents at least 20% of the total industry’s hedge fund assets under management.

The new fund will obtain exposure to the RBC Hedge 250 Index through a contract with Royal Bank of Canada. The new fund from New Star Asset Management offers daily liquidity making it an even more appealing investment tool. Hedge Media reports:

Shares were issued under a global placing (outside US) and a public offer in the UK. UBS Investment Bank are acting as sponsor to Hedge ETS. Royal Bank of Canada Investment Management (UK) Ltd and UBS Investment Bank acted as placing agents.  Additional tranches of shares are expected to be issued in the future.

Jersey Finance appoints Robert Kirkby as its new Technical Director

Robert Kirkby succeeds David Wild as new Technical Director of Jersey Finance Limited. This appointment was made public by the board of Jersey Finance Limited. Robert Kirkby is currently working at PricewaterhouseCoopers in Jersey as a Senior Manager. He is all of 32 years old and started his career in 1995 at KPMG. While at KPMG, he worked for the firm at their New Zealand and London offices. After working there for five years, he moved to PricewaterhouseCoopers.

Kirkby is an MA honors graduate from Cambridge University and a qualified accountant. He worked in the Mergers and Acquisitions Tax Department of PricewaterhouseCoopers in London. Jersey Finance is quite excited with the appointment since they feel that he has an existing knowledge and understanding of many of the opportunities and challenges of the finance industry of the island. Hedge Media reports:

“Aside from our role as the official promotional body, the consultation process that is instigated by Jersey Finance and its role as a forum for discussion on the issues affecting the Industry are two of the organisation's most important tasks.

Hedge-Fund Profit from two funds of Citadel increased by five fold in 2006

Kenneth Griffin, of Citadel Investment Group LLC informed in a press release that the earnings of its funds have increased over five fold on the gains from debt and energy investments. These gains were made by two of its largest funds. He mentioned that in the first eight months of last year, Citadel Kensington Global Strategies Fund Ltd. had posted net income of $148.4 million. However in the similar time frame in 2006 the income rose to $795.6 million.

This information was revealed in the 363 page prospectus for the company’s first bond sale. Figures also indicate that the third quarter of 2006 returned 7% while in the third quarter of last year the return was only 3.1%. This dismal performance in the mentioned quarter last year was chiefly attributed to the fund’s corporate-debt and energy bets losing money.  It may also be noted that the Kensington fund from Citadel returned 17 % this year as on 30th September. This is much higher than the average returns of similar hedge funds in the same time frame - 8.8%. Bloomberg reports:

The 363-page prospectus, a copy of which was obtained by Bloomberg News, details the finances of the closely held firm, which oversees almost $13 billion for wealthy investors and institutions. Hedge funds, private pools of capital that allow managers to participate substantially in their investment gains, oversee $1.3 trillion, more than double what the industry's assets were five years ago.

December January good for investing in Hedge Funds: Citigroup

If one is to go by the advice of Citigroup Private Bank, the turn of the year may be the best time in the year to actually invest in hedge funds. December and January have been showing a familiar trend of higher than usual net average return year after year. This trend has been observed by the bank which is advising its clients to invest in the instrument. Their research also indicates that barring ‘short selling’ all other strategies seem to be working well during the mentioned two month period. Short Selling has generally been spotted doing relatively well in the month of September. This revelation is the result of careful analysis of data from the last 16 years or so.

Citigroup indicated that eight out of twelve specific hedge fund strategies had been observed to have dished out their highest returns in December and three had done best in January. Of all the 12 strategies studied two stood out together in their trend. Reuters reports:

Average hedge fund returns during the turn of the year (December and January) are almost 1.5 times ... average returns during the rest of the year," the private bank's investment analysis and advice group said in a recent presentation.”

Gottex test markets its flagship fund of hedge funds in the UK

Gottex Fund Management has recently started test marketing of its flagship fund of hedge funds in the UK. The test marketing of the fund if successful, will pave the way for a formal launch of the fund of hedge funds in the first quarter of 2007. Gottex, as one may know is a hedge fund giant in the US. The planned hedge fund is expected to comprise a minimum of 50 market neutral hedge funds. And the company expects all the comprising hedge funds to have a global focus.

It is therefore evident that the fund of hedge funds is going to be following Market Neutral investment strategies. The fund has already collected $ 3.7 billion. The prospects are high considering the assets already in hand despite the minimum investment requirement of $ 25,000. The ultimate aim of the fund is to generate consistent absolute returns with a low annualized standard deviation. Reuters reports:

The fund uses relative value, event driven and hedged equity styles in a bid to ensure the fund remains neutral to the market. The group combines a top-down asset allocation with a bottom-up manager selection to identify investments.”

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.