Today, we bring you another installment of our “Summer of 1,000 posts” (more…)

This week’s sampling from our archives covers the topic of Hedge Fund Industry Trends…

HF managed accounts may not be no-brainer.  May require quarter - maybe half - a brain after all. Hedge fund managed accounts used to have only “limitations”.  Now they have “drawbacks”…

A three-way battle for supremacy in Hedge Fund Industry 2.0 Hedge funds, mutual funds, and pension funds seem to be positioning themselves for the “renaissance” in Hedgistan.

Does HF “enlightenment” actually herald an end to the industry as we know it? A column in the FT compares the current state of the hedge fund industry to the e-business industry circa 1999.  Do the uncanny parallels between the two industries mean we can now predict what’s to come? More…

We’re in Chicago this week for the Managed Funds Association’s Forum 2009.  More on that later.  But for now, here is a compilation of some stories that caught our eye last week…

Gates designed to keep investors out, not in

It was bound to happen.  Reuters reports that:

“A small number of top hedge funds are once more shutting their doors to new clients in a sign that investors are putting their cash back with the best performing managers, said fund of funds Corazon Capital.

“While heavy outflows last year meant almost all hedge funds were open to new investors, Barrie Duerden, director of Corazon Capital, told the GAIM 2009 conference here that in recent weeks some managers were now turning away business again.”

Gated Communities

As in real estate, however, such “gated” communities are for a ratified crowd.  While “top hedge fund” are closing their doors, Reuters also reports that most hedge funds have ramped up the marketing machine, quoting one participant at a recent conference as saying: More…

Is a thaw coming to the frozen streams of money that built the hedge fund industry?  According this piece in the Wall Street Journal:

“There is little new fund raising going on right now, so much of the activity is in the form of conversations. But some hedgies are beginning to sense a thaw in the market, and potential interest from pension plans that never moved much money to the business.” (our emphasis)

Take It From The Expert

You know how the FBI and CIA like to hire reformed computer hackers to critically evaluate their systems?  Well, we might be able to learn a thing or two from one of the key players in the biggest systemic mishap to ever be propagated by a hedge fund.  Hans Hufschmid, a former LTCM Partner told Reuters this week that he doesn’t think “…a hedge fund today is big enough to pose a systemic risk…”

A Highway to Hell?

…Maybe not for infrastructure funds according to The Economist: More…

AllAboutAlpha.com  rolled into the Chicago earlier today.  So if you see our tour bus rolling around the Windy City with the giant alpha symbol on the side, please wave and say hello.

It’s tough to drive a bus and read hedge fund research at the same time though (until leading investment journals launch a “books-on-tape” service).  So today we’ve assembled a series of story updates instead…

A few days ago, it looked like stock lending might be on the road to acceptability again.  But alas…

Top UK pension fund suspends stock lending-sources: “The BT Pension Scheme (BTPS) has suspended all stock lending on concerns that short-sellers using the shares could further hurt market sentiment, two sources close to the pension scheme said.”

As we reported last fall, the UK Hedge Fund Standards Board was having some recruiting challenges.  Since then, the number of signatories has tripled… More…

Double Black Diamond:

How bad was 2008’s decline in hedge fund assets under management?  According to the chart below from Pensions & Investments, it was somewhere between a single black diamond run and the storied Hahnenkamm at Kitzbuhel.  Still, this only puts the industry back to mid-2006 - hardly the very bottom of the slope (and not remembered as a particularly horrendous year for the industry).

But the bottom of this particular run may be near.  According to some pundits, we should know which scenario above is playing out pretty soon (the “Bullish”, “Base”, or “Bearish” case).  The head of hedge fund firm Thames River Capital told a conference audience recently that he thought the shakeout would end in June.  MIT’s Andrew Lo also suggests the same.  But other industry players say right month, but wrong year.  In any event, the head of UBS prime brokerage services says: More…

In Echoes Of Madoff, Ponzi Cases Proliferate: Apparently, we weren’t the only ones struck by the sudden abundance of alleged Ponzi schemes (see Ponzipalooza).  The WSJ notes the same in this story.  The question remains, however: Just because you cash out at a fictitious NAV, is it a true Ponzi scheme?  (Call us “Ponzi purists” if you want.)

Hedge funds shouldn’t be scapegoat for the crisis: At least one reader of Investment News agreed with the new head of the MFA that “Hedge funds are an easy target, but rather than vilifying them, the government should reach out to them as partners who can help clean up the mess.”

Institutional investors keep allocations to hedge funds: Hold the phone!  One of the most important categories of hedge fund investors told Greenwich and SEI pollsters in November that their view of hedge funds had remained unchanged.  Said one SEI official, “The silver lining for hedge fund managers is that institutions appear committed to hedge funds as an asset class…”

Hedge Funds, Unhinged: The NYT observes that nearly 2,000 hedge funds actually made money last year (a third of all hedge funds).  The paper includes this nifty graphic (click to view original):

More…

Today, we present several recent news stories that never made it into a post here at AllAboutAlpha.com.  Taken together, they suggest that predicting the future of the hedge fund industry is more complex than some have argued…

Not the end of the line for hedge funds after all?

The reputed demise of funds of hedge funds is exaggerated: Asian Investor reports that “Ironically, the market turmoil coupled with hedge fund implosions and swindles make it an easier task for funds of hedge funds analysts to separate the wheat from the chaff.”

UN fund eyes hedge funds, private equity: Apparently, not everyone is shunning alternative investments…

Returns mark out hedge funds’ stellar performers: The FT recently raises questions about some hedge fund predictions, saying “Several analysts have predicted that the hedge fund industry might not survive this financial crisis. Even George Soros, the billionaire hedge fund manager, predicted late last year that hedge fund assets would fall by 75 per cent.  But funds across a variety of investment strategies managed impressive double-digit returns last year…”

2008 “Hedge Fund 100″: Institutional Investor reports that despite high profile draw downs at large hedge funds, the top 10 aren’t doing too badly after all.  Says the magazine, “Climbing in aggregate to record heights, the world’s ten biggest hedge funds controlled $324 billion in capital, up 29%…”

Hedge fund attrition: How bad?

Hedge funds, battered in ‘08, brace for more pain: Business Week notes that “roughly one in 10 hedge funds will have disappeared last year when final numbers are released in coming weeks.” But what they don’t point out is that this number is pretty unremarkable.  Studies have shown hedge fund attrition to range from 5% to nearly 17% (also see this FAJ piece - Table 7).  The big story from 2008 is that new fund launched were down - not that funds were closing that much more frequently that usual.

(Mutual) Fund liquidations may reach record: You might expect mutual funds to be somewhat more stable.  But according to Investment News, “…359 funds were liquidated last year, compared with 257 in 2007, a 39.6% increase, according to the Denver-based research firm Lipper Inc.”

Hedge Fund AUM Drop: How far?

Hedge fund withdrawals top $269bn in 2008: “…Hedge fund assets fell to $998.4 billion in December 2008 as a result of redemptions and poor performance. In December 2007 assets totalled $1.92 trillion. This is the first time industry assets fell below $1 trillion since July 2004 when they were $976.7 billion.”

Meanwhile, Bloomberg reports that “Hedge-fund assets fell a record 36 percent to $1.84 trillion in 2008 as tumbling global markets prompted investor withdrawals and fund liquidations, according to industry researcher HedgeFund.net.”

Post Madoff marketing, regulation, and industry structure

Hedge Fund Marketing Challenges in the Recessionary, Post-Madoff Environment: “…Today, more than ever, success in attracting investors is dependent upon a hedge fund’s ability to educate and persuade people to be aware of, and buy into, how it invests.”

Fear Of Hedge-Fund Fraud, Meltdown To Spur Debate On Rules: Morningstar reports that hedge fund regulators have traditionally focused on investor protection.  But now “The newer concern has been financial stability.” (Although we notes that it seems one recent $50 billion blow up hasn’t had much of an impact on the financial system.)

2009 Global Asset Management M&A Activity to be Paced by Divestitures, Distress Sales: Hedge fund consolidation to continue, says Putnam Lovell.

Still, “millionaires”, “institutions”, and buyers of hedge fund IPOs licking wounds

Wealthy Wary of Putting New Money in Hedge Funds: The bad news: “Millionaires who long put money with hedge funds are now skittish about adding fresh cash.” The good news: We have probably seen the worst of the [hedge fund industry redemptions]…”

Smart Money Takes a Dive on Alternative Assets: The WSJ’s Jason Zweig cites Larry Seigel’s view that “…Institutions used to rely upon bonds to generate income. But if you sell your bonds to make room in the portfolio for alternative assets, what is left to sell when you need to raise cash for capital calls and to fund your operating budget?”

Investors joining hedge fund club get burned: Buried deep in this article about tanking hedge fund stocks is this light at the end of the tunnel, “Analysts covering Och-Ziff this week cut their profit forecasts, although many also forecast redemptions would ease and that Och’s strong relative performance and reputation would bring investors back.”

Hedge Funds Will Be Ruined by Withdrawal Limits: At least one columnist is really peeved about redemption gates, writing “By forcing investors to keep their money tied up during a bad year, the hedge funds are damaging their own reputation, and it may well never recover.” Problem is that a portion of investors often want their co-investors’ feet held to the fire with theirs.  So managers may be damned if they do and damned if they don’t.

End of the Hedge Fund? Unlikely, according to Washington Post columnist Sebastian Mallaby who writes, “Even if you define Madoff’s investment outfit as a hedge fund, which for various reasons is debatable, there’s nothing in this saga that supports clamping down on the industry.”

Hedge funds return to roots as alpha claim refuted: This prediction of the hedge fund apocalypse tops all others.  Robert McAdie, a credit strategist at Barclays Capital, was quoted by Reuters last week as saying “Eighty percent of the hedge fund sector will not be here in three to four months“.  Check back in April for an update…

Regular readers may recall this post on “hedge fund forum shopping” - the theory that hedge funds search out the least-regulated jurisdictions in which to ply their trade.  AIMA’s Canadian chapter announced last week that the study cited in this post was the recipient of the organization’s annual research award.  If you want to compare jurisdictions side-by-side, this study is the place to start.

Man bites dog!…GLG Partners to buy SocGen UK asset management arm: Here’s an addendum to our recent  post on hedge funds being snapped up by traditional asset managers.  Except this time, the hedge fund is the one doing the buying.

In another twist on the traditional, T. Boone Pickens has reportedly decided to unilaterally relax quarterly redemption and 90-day notice rules on his equity fund - begging the question, why did he have these liquidity rules in the first place?

University endowments may reduce their hedge fund exposure next year, but not for the reason you might think.  Quoting InvestHedge, Bloomberg reports that “Hedge funds might be put ‘on the backburner’ when endowments have to fulfill previous obligations to private-equity managers.”

And here’s another problem faced by otherwise healthy hedge funds…J.W. Henry worries that even strong hedge funds may go under.

Breaking Views reports on “six changes they [hedge funds] need to prepare for” (via IHT).  One is that industry concentration will accelerate.

But Portfolio.com’s Jesse Eisinger has a different view.  Writes Eisinger: “Most hedge fund watchers think the biggest fund managers will only get bigger. But that’s hard to see…”

At least hedge funds aren’t the only ones looking at a huge drop in fees next year.  Thomson reports that “UK unit trusts and open ended investment companies have seen rises in both TERs [total expense ratios] and annual management fees for equity funds for the past ten years.”

You may have noticed that our fancy-schmancy new website displays all of our discarded news clippings and displays them on right behind this panel in our “news clippings” section (check it out right now if you like).  However, if you don’t have the time or inclination to click on every link you see in that section, then you’ll still find some value in our (semi) regular “newsreel” segments that provide you with a brief explanation about why we were drawn to each story.  If you’re interested in more of these snippets from the cutting-room floor, click on the “AAA Newsreels” in our Topics listing in the right column.  So, without further ado, here is this week’s AllAboutAlpha Newsreel…

US Managers Stem the Fall in Assets: Investors checked under the sofa cushions and found a bit of extra change - just enough that “for the first six months of this year, unlike the largest European asset managers, the largest US investment firms have been able to stem their fall in assets under management.”

Low Returns Spur Big Cuts: Re-use your paperclips everyone, “…while massive layoffs are still rare in the asset management industry, headhunters report that bonuses - with some exceptions for the top echelon of talent - and other incentives have softened.”

Large Cap Doldrums Drive Alternative Investment Quest: Apparently turning their backs on plain vanilla mark beta, financial advisers are looking to products with a higher proportion of alpha in their returns - in this case, real estate, commodities and small caps.

JP Morgan Increases Allocations to Alternative Investments: The firm’s private bank says equity allocations in discretionary accounts have dropped 40-80% in the past five years to between a quarter and a half of the typical client portfolio.  Now they’re roughly the same size as alternative allocations.

Touted 130/30 Funds are New and Unproven: MarketWatch’s Chuck Jaffe rains on the 130/30 parade by setting up the following straw man: “…there’s a logical expectation that it will deliver superior performance in all market conditions.”

Appeal of 130/30 funds swell: Hold the phone!  Investment News says “…the market continues to move in the direction of 130/30 strategies, with growing supply meeting growing demand.”

Inflows to Emerging Market Hedge Funds Fall 72%: Sure, emerging market hedge funds with a local presence in the region to better than those with no presence (see related posting).  But apparently, the whole category took it on the chin anyway in Q2.

Who Needs a Hedge Fund Anyway?: CNBC reports that hedge funds rock - as long as you’re a big institution.   Says one expert, “High net worth investors don’t get access to alpha managers.”

Regulatory Paranoia Means Hedge Fund Claustrophobia: SEC xenophobia is resulting in hedge fund claustrophobia.  A crack-down on sharing investment ideas threatens one of the most cherished traditions of the hedge fund industry, the “best ideas dinner”.

Ivory Towers Showing Some Cracks: After “blowing the bell curve” for the rest of the class for years thanks, mainly to alternative investments, US university endowments have finally lost some money.

US Seeks Delay of Civil Case vs. Bear Managers: So much for civility!  Prosecutors appear to think their chances are better with a criminal case, rather than civil one.

Comptroller Seeks Flexibility in Managing Pension Fund: To protect the retirements of New York’s public servants, the head of its pension fund wants only one thing: the ability to invest more in alternatives.

But mega-pensions aren’t the only ones who want more flexibility.  A Bank of America survey found 30% of wealthy individuals were satisfied with traditional long-only investments during the past year while over 50% were satisfied with hedge funds.

Back down to earth for hedge funds of funds: The FT reports that New York actually wants more single strategy funds and less funds of funds.  The paper says it’s a sign of the “growing maturity” of the hedge fund marketplace.

Hedge fund assets hit $3.8 trillion: Unlike estimates by database managers, this one is based on a survey of fund administrators.  But is the definition of “hedge fund” the same?

State pension fund forms partnership with DE Shaw: Relationships between institutional investors are becoming more complex.  South Carolina now “co-invests” with its managers.

Fledgling longevity swap market faces uncertain future: People, stop exercising and start smoking again.  Pensions can’t afford you any more!

Reuters says that “hedge funds are looking less and less like a single asset class”. Problem is, they never were one asset class.  But Reuters sounds surprised to report “fund of hedge fund managers are actively reshuffling their portfolios to take advantage of the next winning strategies.”

AQR drills for beta in new style: So-called “hedge fund beta” is usually delivered in the form of hedge fund sub-indices.  But AQR now say “fund beta can be captured by using a quantitative, bottom-up security selection process that replicates the common elements of a particular hedge fund style strategy.” P&I reports they’ll put their money where their mouths are this September.

Business Week reports on the growing “Freaky Friday” phenomenon where hedge funds and banks switch roles.

Passive LDI gives fake security: Pimco says that simply replicating estimated future cash outflows doesn’t mitigate all risks for a pension plan.

We’re reported extensively on the dwindling ranks of small hedge funds as the industry consolidates.  Should small fry give up?  No way, says one consultant.  Instead, here’s what they need.

Do PE firms make bad owners? Not according to a new survey: According to Investment News, E&Y finds that “Businesses sold by private equity firms last year saw greater growth in value and profit than their publicly held peers.” (related posting: New research on private equity surprises even some of the experts)

Like the movie Freaky Friday, hedge funds and banks have switched bodies.  John Snow says Fannie Mae and Freddie Mac are really hedge funds (Bloomberg) and hedge funds are side-stepping tightwad banks and lending money to each other (Financial News).  Stay tuned for more zany antics!

Online dating sites aren’t helping the elderly hook-up in Austria.  But that’s a good thing for pensions who are saving a bundle by not having to support a pensioner’s spouse (IPE)

Despite often issuing enough information to satisfy a Ph.D. in statistics, hedge funds get failing grades from advisors.  A new survey finds nearly 90% of advisors rate hedge fund sales efforts as “ineffective” according to Investment News.

As a follow-up to our posting on the rising cost of stock borrowing, we note that the FT ran a couple of interesting pieces last week: Rising costs of shorting hampering funds and Shorting ‘makes billions’ for groups.  Those poor hedge funds.  Suffering at the hands of evil pension funds.

New data from Hedge Fund Research finds first half allocations to hedge funds increased by about a quarter of what they added in the same period last year.  While that sounds horrendous, it wasn’t as bad as 2003.

No worries, though.  P&I reports that “Institutions stick to hedge-fund guns“.  Says the newspaper: “…institutional investors weren’t the culprits…Institutional hedge fund hiring and search activity was strongly positive, totaling $19 billion…”

But wait!  Financial News reports that Morningstar found net redemptions from hedge funds up to the end of May.  Did things really turn around that much in June?  Or could measuring the hedge fund industry be an inexact science?

P&I reports that Moody’s gave a raging endorsement to LDI, saying: “We believe the positives and negatives will tend to offset one another over the long-term, making LDI neutral to mildly positive for most issuers, depending on their unique facts and circumstances.” Okay.  Not really “raging”.

Contrary to some earlier academic research, one accounting firm finds performance fees don’t lead to better performance after all.

Giants launched with record $19.5 bln in first half: Industry concentration means that its feast and famine at the same time in the hedge fund industry.

Swedish funds hope rules to change soon: The Swedish public pension scheme lobbies its government to allow more access to alternative investments.  As P&I observes, “Alternatives managers — particularly global players — should be in the best position to benefit from what consultants estimate will be billions of dollars up for grabs.”

Don’t Pay Alpha Fees for Beta Performance: Advisor Perspectives gives us a sneak peak at a new article by previous AllAboutAlpha guest contributor Larry Siegel on various alpha-centric themes.  This is a great discussion - particulary for financial advisors.

Hedge funds hit troubled banks with a hiring binge: More on a topic in last week’s newsreel - the employee pillaging being conducted by hedge funds.

Bigger may be better as smaller hedge funds give up: Says one industry player, “The costs of entry into the hedge fund industry have always been very low, but the costs of remaining in business are very high.”

Fewer U.S. hedge fund starts so far this year: Reuters reports on Absolute Return magazine’s analysis of US hedge fund start-ups.

UK asset management industry moves towards multi-boutique model: Gartmore isn’t the only asset manager wrapping itself in the “multi-boutique” flag.

Aberdeen changes tack on hedge fund strategy: Another UK-based manager says “Hedge funds are going to be a long term game and not a short term win.”  (ed: especially for Aberdeen, which is now a quarter-owned by hedge funds)

Hedge Funds Hire From Wall Street as Jobs Disappear, Pay Falls: Bloomberg reports that hedge fund recruiters may be the biggest beneficiaries of the carnage on Wall Street.

Asia to Create Thousands of Hedge Fund Jobs, Pinnacle Says: And it appears that some of those hedge fund recruiters are likely to be located in Asia.

First Half 2008 Sets Record for Alternatives Manager M&A: Putnam Lovell predicts “In the next 12 months, we expect strong M&A activity involving battered banks and other financial institutions divesting asset management businesses to raise capital, and continued record demand for alternatives.”

Feds Cast Scapegoat Net, Snag Cioffi and Tannin: Bloomberg’s Caroline Baum, author of the book “Just What I Said”, reiterates just what we said last week about the fundamental questions raised by the recent Bear Stearns indictments.

Hedge-fund mystique: the need for transparency: The Australian reports that Morningstar VP of research says it’s time for hedge funds to come clean.

US Presidential Election May Spur Hedge Fund Regulation: Then again, hedge funds may have no choice if this guy is right.

Finding alpha with few bets: Seeking to avoid short-selling, institutions are looking to “concentrated” funds for long-only alpha.  (ed: While not technically short-selling, a concentrated portfolio has a negative weighting vs. its benchmark in a huge number of names and a positive weighting in select others - raising interesting questions about whether a long/short fund is really that different.)

State Street world’s largest again: According to Pensions & Investments, State Street Global Advisors is the world’s largest institutional manager for the 7th year in a row ($1.8 trillion AUM).

“Best Blogs”: Speaking of P&I, we think they are one of the best.  Coincidentally, that’s exactly what they said about us in their recent ranking of “best blogs” (where they ranked us #9).

Increased regs not in the cards for hedge funds: Morningstar says their database is “the closest hedge funds are going to come to oversight” in the near future.

Seed capital providers now vital for funds: The FT reports that as assets get harder to raise, some are saying “seeders” are just about the only way to go for hedge fund start-ups.

Value Partners Says Smaller Hedge Funds Face Takeover: …and if smaller funds don’t have access to a sugar-daddy ”seeder”, guess what…

Several 130/30 funds come to the market: Investment Week reports that Roger Ibbotson is about to launch a 130/30 fund.

The hedge fund industry is big. Make that really big. Or sorta big?: Reuters provides a great summary of the myriad of ways to determine the actual size of the hedge fund industry.

Goldman offers mutual fund based on hedge fund index: After launching its Absolute Return Tracker (ART) index last year, Goldman has now built one of its own funds around the “hedge fund replication” model.

The LDI analogy of pensions and airlines: One expert says that airlines and pensions face the same challenge - fluctuating liabilities.

Battered funds cling to hope of recovery: One noted manager hits the nail on the head with regard to hedge funds’ PR problem, saying they “have an image problem among some institutional investors…the perception that the sector is dominated by cowboy attitudes, high fees and unfavorable risk adjusted returns.”

The Lo Down: The Economist scrapes bottom of pun barrel to draw attention to Andrew Lo’s new book.

Study finds managers prefer lean teams: This is exactly why we’ll never see a lot of lay-offs in the hedge fund industry.  There’s no one to lay off.

Portfolio construction job one, study says: Cerulli report says that two-thirds of asset managers surveyed are planning to develop alternative investments or products that blend traditional and alternative strategies.

New York Life 130/30 Webcast (video): New York Life Investment Management 130/30 video is now online.  Enjoy on your 60″ plasma screen with some popcorn.

Institutional Investment Managers Predicted to Increase Hedge Fund Allocations by 25 to 50 Percent Over the Next Two Years: Wharton prof. says “You’d expect a certain proportion of failures — including some spectacular failures — in a universe that now includes roughly 15,000 funds. But hedge funds are not necessarily riskier as a group just because some fail.”

New LDI tools evoke ‘false sense of security’: A UBS study questions the suitability of new liability-driven investing (LDI) techniques.

AP3 restructures for alpha-beta separation: Our favourite Swedish pension plan confirms organizational changes that will pave the way for the separation of alpha and beta.

No Shortcuts Here: 130/30 Funds Require A Long, Hard Look: Poor performance from the early 130/30 mutual funds has convinced at least one major business newspaper that, “individuals are better off sticking to plain-vanilla funds.”

Back in Black: After a relatively good May, hedge funds are back in the black for 2008 - prompting the CEO of one major hedge fund firm to report in a recent telephone interview with AllAboutAlpha.com:  “We’re back in black, I hit the sack.  I’ve been too long, I’m glad to be back.”

After a brief pause, the executive continued, “Yes, I’m let loose from the noose that’s kept me hangin’ about.  I’ve been livin’ like a star ’cause it’s gettin’ me high.  Forget the hearse, ’cause I never die.  I’ve got nine lives, cat’s eyes, abusing every one of them and running wild.”