A double-edged sword

The Managed Funds Association’s decision to wade into the data collection business is a blessing or a curse, depending on who you are.  For academics, this initiative could provide the kind of exhaustive industry data needed to get an accurate picture of the industry.  But for existing data collection players (many of whom manage to track only a portion of the industry), it amounts to a serious competitive concern.  We’ll be interested to see how they respond if and when the MFA gets this project off the ground.

A lucky break? Or something else?

With nearly three-quarters of new assets coming from institutions in 2009 and most redemptions coming from high net worth investors, it’s no surprise that institutions are reported to have the “upper hand…just as hedge funds stage comeback” (P&I).   The question remains, however, is this a stroke of luck for institutional investors, have institutions fueled this very comeback or have they simply managed to sniff out a good opportunity before the train left the station?

Then again, maybe the hedge funds themselves “have the upper hand.”  RAB Capital, for example, is actively seeking out institutional investors.  CEO Stephen Couttie told Reuters recently that although only a quarter of the firm’s assets are from institutions, they represent around half of new assets:

“It (net inflows across the business) began towards the end of the first half. We’re beginning to see now a bit more consistency…We’re putting more effort on focusing on institutions.”

Intentional Lies or Sloppy Due Diligence Questionnaires?

There has been a lot of research over the past few years about inaccuracies in the information communicated by hedge fund managers during due diligence.  It tends to be a bit dry sometimes.  But hedge fund due diligence company Swiss Analytics provides some interesting real-life anecdotes (via Barclayhedge) this month.  The firm gives examples such as this:

Please provide us the % of AuM accounted for by the largest three clients.

Manager: Largest three investors account for 10%, 7%, and 5% of fund AuM, respectively.

Due Diligence Findings: SwissAnalytics contacts two funds of funds we know are invested in the fund, each of which disclose investments in the fund amounting to approximately 30% of AuM.

Those of you with the responsibility for keep 100+ page DDQs up to date (and informing recipients of any changes since their particular hardcopy was printed) may have some sympathy for this hedge fund manager.  A loss of $10 million coupled with redemptions of $30 million can increase a 17% share to a 30% share within months.  That’s no excuse for incorrect information.  But it makes you wonder how much of this “misinformation” is really as nefarious as it is often made out to be.

New kid on the hedge fund recruiting block

Nefarious or not, the SEC isn’t going to have any more of it.  So the commission is now going up against hedge funds themselves in the war for talent.  Reuters reports:

“Veteran hedge fund and markets professionals are also in demand at the SEC, where a promise of increasing government enforcement and the creation of a new Division of Risk, Strategy, and Financial Innovation are leading to new hires.”

This may have sounded like a winner idea when hedge funds were dumping staff overboard.  But now that the hedge funds seem to be fighting for talent again, can the SEC still afford to make good on its plans?

“Stuff” flows downhill

After posting 2009 returns of approximately half the overall industry average, funds of funds are taking a bit of a drubbing right now.  There are many reasons for this performance delta.  But whatever the cause, funds of funds may now be taking a page from the playbook of endowments and pensions.  As regular readers know, these investors have come together over the past year to shine a public light on what they believe are inappropriate business practices.

Reuters reports that at least one major UK-based funds of funds is “rallying its peers” to “get agreement on how to better handle the managers running their money.”

According to Reuters, Hermes BKP Partners “…gathered the working group together at its London offices on Tuesday [Jan. 12] to kick-start a project it hopes will improve the disclosures made by hedge funds.”

Hermes’ CEO described the meeting as “…essentially a small group of peers with shared experiences talking about how they interact with underlying managers and exchanging information.”

Sounds a lot like how a similar group (this one of end-investors), the “Global Association of Alternative Investors” was born a couple of years ago.  According to the GAAI’s mission statement, it also aims to “share ideas of mutual interest.”  Translation:  Both groups are likely to kick-*** and take names in the coming years.

Here are a few news items that have caught our eye over the past couple of weeks.  Enjoy with a glass of eggnog and a sprinkle of nutmeg…

Hedge Funds Rebound From Record Losses: “…The industry is rebounding from record losses in 2008, though they paled in comparison to those seen by stock markets. Much of last year’s decline has been reversed in 2009, though redemptions as the stock market was tumbling crimped some investors.”

Hedges are showing signs of growth: “…12 months after the scandal hit the headlines, data shows confidence is returning – albeit slowly.  For the first time since mid 2008 the number of hedge fund launches has exceeded the number of closures….”

Insurers Will Come Back to Hedge Funds in 2010: “…it comes as no surprise that insurers reduced their hedge fund allocations through 2009, but the move isn’t permanent, especially given the returns posted by the sector this year.”

Funds Of Funds Losing Investors Even As Industry Grows: “…The huge loss of assets has not exactly led to a mass die-off of funds of funds, however…” More…

To help our American readers celebrate the Thanksgiving holiday, we have harvested a bushel-full of news items that show an industry in such transition that it may soon become a leading cause of indigestion.

PE firms getting into the HF business: “…Private equity firms will need to become more like asset managers, offering buyouts as just part of their portfolio…large U.S. private equity firms, such as Blackstone, KKR and Apollo, have spread their wings into new fields like real estate, hedge funds and general asset management…”

HF firms getting into the PE business: “Hedge fund investors stuck in products with illiquid assets are increasingly seeing interest in their stakes from specialist private equity or other buyers as markets recover…”

HF firms getting into the banking business: “Hedge funds provided as much as 40 percent of the money raised this year by U.S. and European banks as they sought to offset losses and meet government capital requirements…”

Banks getting into the HF business: “…despite their moniker of ‘highly-leveraged institutions’, most hedge funds today operate with leverage less than a tenth that of the largest global banks…” More…

Today, we bring you the final installment of our “Summer of 1,000 Posts” (more…)

This week we’ll be looking at alternative investments in the mainstream by pulling from our archives of posts on media coverage of hedge funds and hedge fund investing for retail investors.  Enjoy.

Report shows that some wounds recently suffered by wealth managers may have been self-inflicted
A recent report by Capgemini and Merrill Lynch show that wealth managers may have stopped listening to clients at exactly the wrong moment.

Research shows private bankers still favour hedge funds. Managers not convinced though
Two different surveys paint a picture of concerned hedge fund managers – even though private bankers see continuing value in their craft.

Hedge funds & mutual funds: “resistance” and “turf wars” or just eloping in Vegas More…

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 Institutional Investing…

Shipping as an alternative investment
Thought shipping was just a global growth play?  Apparently, it depends on how you measure it.

BCG Forecast: Institutions to seek “innovative products” such as HF and PE
A new report by the Boston Consulting Group explains why institutional investors have stuck with hedge funds and why alternative investments in general will play a key role going forward.

Report shows that some wounds recently suffered by wealth managers may have been self-inflicted
A recent report by CapGemini and Merrill Lynch show that wealth managers may have stopped listening to clients at exactly the wrong moment.

Alternative Viewpoints: When it comes to transparency, institutional investors are being treated as “second class citizens”
Guest contributor Steve Deutsch of Morningstar says that despite all the talk of “transparency”, the micro-economics of the institutional investment industry often prevent the message from getting through. More…

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 Regulation…

Hedge Fund Standards Board issues rules on how to exit crowded theatres when someone yells “Fire!”
Here’s a set of safety instructions every movie usher needs to have.

“Libertarian Paternalism”: A happy medium on HF regulation?
Regulation may not be all that bad for the hedge fund industry if the proposals of this author are adopted by the SEC.

HF trade groups, regulators call truce: peace breaking out on several fronts
The first week of summer has apparently brought a serious thaw in relations between the hedge fund industry and international regulators.

Quick…What’s the similarity between California and Connecticut?
California and Connecticut are separated only by Colorado on an alphabetical list of US states.  But when it comes to hedge fund regulation they may be attached at the hip.

The United People’s Front for the Preservation of Rationalization Association Network Alliance
Tough times bring boom times for a plethora of new hedge fund industry trade groups. More…

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

This week we’ll be looking back through our archives to cull posts on the topic of CAPM/Alpha Theory…

How Hollywood, lotteries and mutual funds show that all risk is relative
Since the birth of the CAPM, empirical evidence has been uncooperative – showing that high risk investments produce lower returns, not higher ones.  Now one author looks beyond equity markets and finds even more evidence against the vaunted CAPM.

Real Estate Alpha
A lot of research has been conducted on real estate mutual funds.  But precious little has ever been conducted on the alpha produced by institutional funds that invest in commercial real estate – until now…

Crowds may not be so “wise” after all
A new book, an industry survey, and media reports have propelled the age-old topic of market efficiency into the spotlight this month.

Study hints that alpha may be finite (at least in the short term)
Is it a coincidence that hedge fund returns are exploding right after the biggest culling in the industry’s history? More…

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

This week’s sampling from our archives covers Portable Alpha and Alpha/Beta Separation.

Private equity survey may not be all doom & gloom
Despite recent research that suggests otherwise, we may be due for an unexpected boom in private equity beginning sooner than many expect.

“Beta blockers” aim to reduce the blood pressure of those facing hedge fund gates
Stressed about having your money locked up in a hedge fund?  Just pop a few of these…

Portable Alpha to be “reborn” according to author of new paper on the topic
Portable alpha may have died last year.  But according to at least one expert, it’s about to be reborn.

Did Pennsylvania take a wrong turn with portable alpha?
After the announcement by Pennsylvania’s state employees pension plan that it lost money on its portable alpha strategy, some are saying this is proof that portable alpha is “exotic and risky” and that its promoters are “thieves”.  We examine the validity of these claims. More…

E.M.H. R.I.P. W.T.F?

In an ironic twist, the Economist suggests that financial engineering (and by extension the hedge funds built with its outputs) are built on the shoulders of the efficient market hypothesis.  Yet the much ballyhooed demise of the EMH should, in theory, pave the way for skill-based, alpha-centric returns.  In fact, the newspaper even makes the case for hedge funds in this weeks edition:

“…In 1980 Sanford Grossman and Joseph Stiglitz, another subsequent winner of a Nobel prize, pointed out a paradox. If prices reflect all information, then there is no gain from going to the trouble of gathering it, so no one will. A little inefficiency is necessary to give informed investors an incentive to drive prices towards efficiency…”

Confirmation that fund of funds investment is a trailing indicator

Hedge Funds Review reports on S&P’s latest fund of funds asset flow data, observing that “…Investors quick to respond to disappointing returns have been much slower to react to improving performance.”

Is new 130/30 ETF active or passive?

While it’s originators, Andrew Lo and Pankaj Patel call it a “passive” strategy, the model upon which the new Proshares 130/30 ETF is built looks a lot different that a typical passive index.   Says Lo: “The quantitative model behind our 130/30 Large-Cap index is based on extensive, robust research on the real-world factors contributing to stock performance.”

(btw,did you know Lo’s first science project was to make a battery out of a lemon.  Amazing but true.)

When is a rebound not actually a rebound? More…

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…