Archive for May, 2009
New Fund Regulations in Connecticut
Half a dozen professionals today sent me the news stories on the new hedge fund regulations being put into place in Connecticut. The good news – they don’t appear to be extreme and they won’t affect many managers who are already registered with the SEC. While many managers don’t want to increase costs of compliance I think almost every manager would like to see tools put into place to raise investor confidence in the industry.
Here are some article excerpts discussing these new regulations:
Prompted by the Bernard Madoff investment scandal and other financial failures, Democratic senators called Tuesday for Connecticut to become the first state in the nation to require more disclosure and transparency for hedge funds, private-equity firms, and venture capitalists.
Led by Senator Bob Duff of Norwalk, senators said the move was necessary in order to protect consumers and investors. The bill, which is supported by the Managed Fund Association, states that any firm that is not registered with the Securities and Exchange Commission must still abide by the SEC rules that state that material conflicts of interest must be disclosed to the investors.
“We’re not changing the rules. These are the rules the SEC has,” said Duff, who has been pushing for legislation for three years.
Hedge funds are sparsely regulated pools of money that belong to highly wealth individuals, who generally must put a minimum of $1 million into the fund. Many hedge funds are involved in risky investments and many have closed or are closing because of the collapse on Wall Street that started last September with the implosion of Lehman Brothers. source
We are looking forward to seeing all the hedge funds move to Nevada. Actually, when you think about it, the convenience factor alone is reason enough to make the move. A lack of proximity to Washington is also a major point for the trip West. source
For more information on hedge fund regulations and compliance please see our Hedge Fund Regulation Corner.
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Pequot Capital & Arthur Samberg
One thing has been made very clear over the past 18 months, in the United States if you are accused, publicly suspected or charged with insider trading or fraud you are done. On the one hand this may serve well in scaring off some bad apples who may otherwise operate within more gray waters but it also hurts business in the fund management industry and destroys individual businesses as well. Below is a short article excerpt on Pequot Capital:
Arthur Samberg, among the best-known hedge-fund managers, is closing down his firm amid an ongoing investigation into possible insider trading.
“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” Mr. Samberg wrote in a letter that was sent to investors of his Pequot Capital Management Inc source
To read our Hedge Fund Tracker Profile on Pequot please see this link: Pequot Capital Management Hedge Fund Profile.
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Prime Brokerage Firms Hiring
Here is a short article excerpt on how banks have once again begin to expand their prime brokerage operations. I personally have not heard of any hiring sprees by prime brokerage departments or mini primes over the last two months, but I do know that with a wealth of experienced prime brokerage professionals in NYC without bonuses or sometimes employment that sevearl prime brokers are being opportunistic and bringing the best professionals they can find in house. Here is the article excerpt:
During the bleakest days of last October–November, few banks were touting their prime brokerage operations. Hedge fund liquidity dried up, banks lost appetite to lend to these institutions, and prime brokerages were backed into a corner. However, this business is making a comeback and banks are starting to rehire, as Hugh Chow reports.
A hiring drive by Barclays Capital and Bank of America Merrill Lynch is highlighting the ambitions of smaller players in the opaque world of Asian prime brokerage, an industry that seemed to be on the ropes after the collapse of Lehman Brothers late last year.
Barcap is looking for a head of prime services Asia-Pacific, after advanced negotiations with ex-UBS banker, Matt Pecot, fell through at the 11th hour last week. The firm’s prime services division includes a prime brokerage – the business of lending and providing other trading-related services to hedge funds.
Meanwhile an internal announcement on May 18 by BoA Merrill heralded the appointment of former Tremont Capital Management and Morgan Stanley man James Fallon as a director on the Asia-Pacific financing sales team. Fallon’s job will be to drive the business of lending to hedge fund clients in this region. source
This article was first published on Prime Brokerage Guide.com.
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Credit Default Swaps Definition
Here is a short video on Credit Default Swaps and how hedge funds sometimes position their portfolios to profit based on positive or negative movements within the markets.
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Hedge Fund & Bank Discussion Video
This video talks about the futures of hedge funds, regulation, and the stability of banks in the US vs. Europe.
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Over 100 of São Paulo’s senior legal and business executives attended a launch function held by offshore financial law firm Conyers Dill & Pearman, in celebration of the formation of their new Brazil partnership.
The event was held on at the newly re-opened Casa Fasano Jardins on Haddock Lobo.
While addressing the audience Conyers Chairman, John Collis, spoke of the firm’s international growth. “Over the past decade, Conyers has seen a marked increase in the use of offshore structures by South and Latin American clients, as well as clients seeking to do business in those regions. The decision to open in São Paulo is part of the firm’s strategy of positioning itself in the world’s leading financial centres in order to provide responsive, timely and thorough advice to clients.”
“We are pleased to have the regulatory approval to move ahead with the São Paulo office, which will facilitate even greater personal contact with our clients.”
Alan Dickson, managing partner of Conyers’ São Paulo office, said.
The new São Paulo office is located on Rua Jeronimo Da Veiga, 384 and will provide general corporate, company and commercial advice, with particular emphasis on investment funds, public company listings, initial public offerings and holding company incorporations providing clients with direct access to the jurisdictions of the Cayman Islands, British Virgin Islands, Bermuda and Mauritius.
While previous research has confirmed the widely held belief that emerging funds tend to outperform older and larger funds, hedge fund performance in 2008 saw a partial reversal of that trend, according to PerTrac Financial Solutions in its third annual study that examines hedge fund returns, volatility and risk, based on age and size.
“Last year was a difficult one for hedge funds of all ages and sizes, but once again we saw younger funds outperforming older ones, confirming our findings from earlier studies,” said Meredith Jones, managing director at PerTrac. “However, when it comes to hedge fund performance as a function of fund size, we saw a reversal of the trend established from 1996 through 2007. During 2008, funds with the least assets actually performed the worst, while larger funds posted better returns.”
As in past studies, PerTrac conducted two different analyses: one based on a fund’s asset size, and the other based on a fund’s age. Monthly hedge fund returns were compiled from leading hedge fund databases and analyzed using the proprietary PerTrac Analytical Platform software. In each analysis, funds were re-categorized into one of three assets under management (AUM) size groups: up to $100 million; $100 million to $500 million; and over $500 million. The funds were also categorized into one of three age groups: up to 2 years; 2 to 4 years; and over 4 years. The mean fund return was calculated for each group in each month, creating three size-based monthly indexes and three age-based monthly indexes. Various risk and return statistics were calculated on the returns of each index to evaluate historical performance, and Monte Carlo simulations were run on each index to indicate probable ranges of future returns and drawdowns.
Small Hedge Funds Underperformed Larger Funds for the First Time Since Beginning of Study Data.
The study reveals that small funds averaged a loss of -17.03% in 2008, while medium-sized and large funds fared better, with average losses of -16.04% and -14.10% for the year, respectively. However, over the full history of the indexes, from 1996 through 2008, small funds performed best, with an annualized return of 13.05% versus 9.99% for medium-sized funds and 9.28% for large funds. Along with its stronger returns, the small fund index also showed greater volatility over the 13-year period with an annualized standard deviation of 6.96% versus just 5.92% and 6.05% for the medium-sized and large fund indexes, respectively.
“There are several possible reasons why small funds underperformed their larger peers for the first time ever in 2008. Due to losses across the board, hedge funds experienced heavy redemption requests last year. Larger funds generally have more cash on hand and greater access to lines of credit than small funds, better enabling them to handle redemption requests without compromising their portfolios’ performance,” noted Jones. “The recent market crash also appears to have prompted a ‘flight to quality’ among investors, with surveys indicating that hedge fund investors have become more interested in larger, more ‘institutional’ funds. So it’s likely that smaller funds had to deal with relatively greater redemptions than did their larger peers. We also noted a larger differential in the number of large managers reporting in both the prior and current studies, with a larger percentage of small managers participating in both updates. As a result, there is heavier survivor bias in the large fund group. Other possible reasons include infrastructure considerations, greater reliance on beleaguered prime brokers, and larger redemptions from poor performers pushing more managers into lower asset bands.”
“However, one year does not make a trend,” concluded Jones. “It will be interesting to see whether the small funds’ underperformance in 2008 proves to be a short-term exception to the rule or the start of an official trend.”
Young Funds Continued to Outperform Older Funds in 2008
An examination of the relationship between fund age and performance revealed no surprises for 2008. Hedge funds with the shortest track record continued their trend of superior performance last year as the young fund index lost -11.31% for the year compared to much larger losses of -19.46% and -17.85% by the mid-age and older fund indexes, respectively. Over the full history of the indexes from 1996 through 2008, young funds have generated an annualized return of 15.74% while mid-age and older funds have trailed with annualized returns of 11.48% and 10.12%, respectively. Young funds have also fared best from a risk perspective over the long term; the young fund index has produced an annualized standard deviation of just 6.47% over the 13-year period while the mid-age and older fund indexes have proved more volatile with annualized standard deviations of 7.11% and 6.72%, respectively.
The new study is the latest in a growing body of research produced by PerTrac Financial Solutions for the investment community. The company is devoted to advancing the study of hedge funds and other investments by publishing original research as well as providing free access to their PerTrac Analytical Platform software to academic professors, students, and selected researchers through the PerTrac Educational Use Program.
Editing by Alex Akesson
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More than 85 hedge fund professionals last week attended the 6th Annual Hedge Fund Symposium hosted by financial software provider SS&C Technologies in London.
The panel was moderated by Richard Greensted, Editor of Script Issue, and participants included Simon Hookway, CEO of MSS Capital and Managing Partner of MAG capital; Jon Mills, Partner at KPMG; Duncan Crawford, Head of Capital Introductions, Prime Brokerage at Newedge Group; Peter Astleford, Partner at Dechert; and Joe Seet, Senior Partner at Sigma Partnership.
“The proposed directive on alternative investment funds was prepared in too great a hurry and is too ambitious.” Peter Astleford, Partner at Dechert, advised on the topic of regulation, “However there are some useful parts that will help restore confidence to the industry and improve marketing opportunities in Continental Europe.”
On a more positive note for the industry, Jon Mills, Partner at KPMG, commented, “There really are plenty of reasons for the hedge fund industry to be optimistic in 2009 and beyond – we are seeing improving performance during Q1, institutional investors continuing to allocate assets to alternative investments, a healthy pipeline of new fund launches and recognition from regulatory bodies that hedge funds were not the cause of the financial crisis.”
“Although the alternatives industry as well as the global financial services industry as a whole is going through arguably the biggest change it has seen, there are still many challenges and opportunities for the remaining participants,” host of the event Edwin Parker, Business Development Manager of SS&C Funds Services EMEA, an independent Fund Administration service provider, explained. “Alternative investments will continue to remain a pivotal part of any investment portfolio diversification. Having the right service provider and technology partner helps ensure that managers stay ahead of the game. As one of the largest independent administrators globally, SS&C Fund Services delivers big firm resources with small firm responsiveness.”
The Alternative Investment Management Association (AIMA) – the global hedge fund industry association – has announced plans to mobilise the world’s hedge fund industry on the European Commission’s draft directive for Alternative Investment Fund Managers.
“There are provisions in this directive with potentially serious consequences for managers, investors, service providers and advisers internationally.” Andrew Baker, AIMA CEO, said, “As the global trade body for the industry it is right therefore that AIMA takes the lead in mobilising resources in order to secure the best possible outcome for the industry on the directive.”
“The feedback we’re getting from our members, who manage more than 75% of hedge fund industry assets globally, is that the draft directive has created enormous confusion. Because of the lack of proper consultation the directive presumes a structure for the industry which bears little relationship to reality. Implementation in its current form could prove to be unworkable. It also appears to be in conflict with much of existing EC financial services legislation.” Baker said.
“We will therefore call for urgent effort to be devoted to re-drafting this directive.” Baker continued, “To achieve this, AIMA will be announcing a series of initiatives to mobilise the industry. We will not oppose everything in the directive; some of the provisions, such as manager authorisation and registration, are already supported by us and measures which increase transparency to assist the authorities in the understanding of systemic risk issues are to be welcomed.”
“We want to work with the Commission, EU governments and the European Parliament on this. We are not opposed to the directive per se, we just want the final directive to be practical and realistic.” Baker concluded.
Alpha Magazine unveiled the 2009 Europe Hedge Fund top 50, showing that that Europe was not immune to investor angst over hedge funds. A wave of investor withdrawals shapes the magazine’s annual ranking of the 50 biggest European single-manager hedge fund firms, as total assets fell to $285 billion as of January 1, 2009, from $405 billion a year earlier, a 30% drop.
Europe’s hedge fund business may be looking at an encouraging longer-term picture, however. The region boasts five of the world’s 20 biggest hedge fund firms — led by two London-based powerhouses, Brevan Howard Asset Management and Man Investments.
Brevan Howard’s total assets surged from $21 billion at the end of 2007 to $26.8 billion when this year began, elevating the firm from third to first in Alpha’s 2009 Europe Hedge Fund 50. Man Investments had a similarly strong year; its overall assets grew from $20.9 billion to $24.4 billion, lifting the firm two rungs to second place.
The two top European hedge fund firms in last year’s ranking have been taken down a few notches. Barclays Global Investors falls from No. 1 to No. 3, and GLG Partners drops from No. 2 to No. 8; the firms saw their assets drop, respectively, 35 percent and 52 percent.
Alpha’s Europe Hedge Fund Top 5
Rank Firm Total Capital ($ millions)
1 Brevan Howard Asset Management $26,840
2 Man Investments 24,400
3 Barclays Global Investors 17,000
4 BlueBay Asset Management 16,700
5 Bluecrest Capital Management 13,273
Click on Alpha’s 2009 Europe Hedge Fund 50 to view the complete rankings of all 50 firms.
How the Ranking Was Compiled
For Alpha’s 2009 Europe Hedge Fund 50, data was gathered through questionnaires completed by hedge fund managers, supplemented by extensive Alpha staff research. We provide each manager’s total assets under management as of January 1, 2009, unless otherwise indicated. Where possible, we also show assets at the individual fund level, with 2008 net returns, for the five biggest funds run by a firm.