Hedge Fund Reader

Hedge Fund Performances

It has been indicated by recent studies in the field of hedge funds, that hedge funds as a class of investment vehicles offer far greater return than their cousins ‘mutual funds’. However, this offering of a greater return comes bundled up with yet greater risk, than investment benchmarks such as Standard and Poor’s S&P 500 stock index.

Well, it is not really surprising to note that certain classes of hedge funds have at times outperformed their benchmark measures on a risk-adjusted basis, while other classes have at times underperformed. The fact to note about hedge fund performance in general is that there has not been a high correlation, historically, between overall market performance and hedge fund returns. This unique factor has resulted in hedge funds finding place in the portfolios of wealthy individuals and institutional investors who seek a broad diversification of their investments. This flexibility and robustness could be one of the reasons behind the spectacular rise of hedge funds world over.

Longer Lock-ins in Hedge Funds

With each passing day, the hedge funds industry is getting around investors by exerting their
requirements. The distinguishing factor or as you would say the typical boundary that existed between 'private equity' and hedge funds is now slowly but surely getting eroded and blurred by the new developments in the whole hedge funds scenario. Industry experts take is that each and every day brings about a sublime change that further blurs the boundaries between private equity and hedge funds.

The fact is that hedge funds are pressing on for more illiquid terms on investors and also seeking returns in the non-public universe. Also the fact is that the conventional and traditional private equity behemoths such as Kohlberg Kravis Roberts & Co. and Blackstone are rolling up hedge funds.

Some are already in the process of dedicating a small, segregated portion of their multi-strategy hedge fund in to private equity or illiquid investments. Well this might not be entirely true but the
buzz sure is in the peg's favour. A growing trend nowadays seems to be the plans around allocation of a portion of hedge fund capital to private equity investments. By imposing longer lock-up terms on investors in order to invest in illiquid assets reflects the same trend.

However, not all hedge funds operating under the sun can expect to exert such kind of pressure on its investors, who by the way are typically large and wealthy investors or even institutional investors. Thus it is only the group of elite hedge funds who can afford to pull something like this.

As a thumb rule, if and when hedge funds want to lock up money for a longish tenure, it is better to do it at the launch stage. As changes in the management agreement of any nature are viewed with lots of unease by the investor community.

Hedge Fund Performances

It has been indicated by recent studies in the field of hedge funds, that hedge funds as a class of investment vehicles offer far greater return than their cousins ‘mutual funds’. However, this offering of a greater return comes bundled up with yet greater risk, than investment benchmarks such as Standard and Poor’s S&P; 500 stock index. Well, it is not really surprising to note that certain classes of hedge funds have at times outperformed their benchmark measures on a risk-adjusted basis, while other classes have at times underperformed. The fact to note about hedge fund performance in general is that there has not been a high correlation, historically, between overall market performance and hedge fund returns. This unique factor has resulted in hedge funds finding place in the portfolios of wealthy individuals and institutional investors who seek a broad diversification of their investments. This flexibility and robustness could be one of the reasons behind the spectacular rise of hedge funds world over.

Hedge Fund Performances

It has been indicated by recent studies in the field of hedge funds, that hedge funds as a class of investment vehicles offer far greater return than their cousins ‘mutual funds’. However, this offering of a greater return comes bundled up with yet greater risk, than investment benchmarks such as Standard and Poor’s S&P; 500 stock index. Well, it is not really surprising to note that certain classes of hedge funds have at times outperformed their benchmark measures on a risk-adjusted basis, while other classes have at times underperformed. The fact to note about hedge fund performance in general is that there has not been a high correlation, historically, between overall market performance and hedge fund returns. This unique factor has resulted in hedge funds finding place in the portfolios of wealthy individuals and institutional investors who seek a broad diversification of their investments. This flexibility and robustness could be one of the reasons behind the spectacular rise of hedge funds world over.

Regulators shut down three hedge funds

The financial regulators in Ireland and Britain are getting into action against the hedge funds industry at large. The Irish Financial Regulator in a display of grit, shut down three hedge funds operated by Broadstone Fund Management, a Dublin-based investment management firm. adireland reports:

Meanwhile a study by its British equivalent, the Financial Services Authority (FSA), highlighted concerns over potential conflicts of interest among fund managers and unfair treatment of investors. Hedge funds are specialist financial instruments that aim to deliver returns for investors by actively trading shares, commodities such as oil and gold, and derivatives such as put and call options and interest rate futures.

Emerging Market Hedge Funds Hot

It has been observed as a growing trend that wealthy pension funds, endowments and other institutional investors are scouting for opportunities to invest into regions they earlier avoided. The focus for investment is found to be emerging-market hedge funds. In December 2005, the California Public Employees’ Retirement System, or Calpers, reportedly set aside US $100 million of its $206 billion, while Vision Investment Management of Hong Kong invests in hedge funds specializing in Asian emerging markets. theroyalgazette reports:

“Just about any institution you talk to wants some emerging-market hedge-fund exposure,” says Gary Kleiman of Kleiman International Consultants, a New York researcher of emerging markets.While the investments are a fraction of the funds and endowments’ overall assets, the pace of cash flowing into emerging markets is quickening. So far in 2006, investors have put more than $20 billion into a basket of emerging-market stock funds – ten percent of which are hedge funds – tracked by Emerging Portfolio Fund Research, a Boston outfit. About $20.3 billion flowed into the basket in all of 2005. Roughly 70 percent of the money it tracks comes from institutional investors, says Brad Durham, a managing director.

Hedge Funds investment to grow

According to a recent survey by a leading investment bank, investors are likely to invest up to 28 percent more money into hedge funds in 2006. Also, they seem to be ready to put up with longer lock-in periods. reuters reports:

Investors are willing to accept longer lock-ups, sometimes two years or more, to gain exposure to less-liquid instruments in credit and emerging markets and private equity as a way of diversifying. These include growing institutional participation, the dominance of equity-based strategies and the flow of assets towards Europe and Asia.

Hedge Fund Survey By Goldman Sachs

A recent survey carried out by Goldman Sachs indicates that investors plan to put 28 percent more money into hedge funds in the current year. The investment stood at 28 percent last year, 31 percent in 2004 and 22 percent in 2003.

Further, investors are now also warming up to longer lock-in periods that could extend to upto two years or more. These periods are gaining acceptance as investors are looking at gaining exposure to less-liquid instruments in credit and emerging markets. This is being taken as a means to diversify their investment portfolio. 

Advantages of Funds of Hedge Funds

Most investors abstain from investing in hedge funds because of the high risk involved. Now, to deal with this situation, as an investor, you can turn to Funds of Hedge Funds. These help to more or less negate the risks that are associated with individual hedge funds.

Funds of Hedge Funds basically diversify your investment portfolio by investing in a number of hedge funds. This implies that your portfolio would constitute of different hedge funds with different managers and varied strategies. The job of the administrator of the hedge fund of fund is to keep a close watch on the performance of these funds.

Now, funds of hedge funds offer numerous advantages in comparison to hedge funds. The first and the foremost being that the risk in the case of these is much lower than that in case of individual hedge funds. These involve greater transparency as the administrator keeps a close watch on the performance of each of the hedge funds. Further, timely reports are made that ensure that you are in the loop of things. The administrator also selects hedge funds after researching the background of the hedge fund manager and being a part of the industry, can take a more informed and favorable decision.

Also, with fund of hedge funds you can gain access to a wider range of hedge funds that might not be possible if you are looking at investing in individual hedge funds. In case of these, the portfolio is made up of different hedge funds that employ varied strategies and this significantly lowers the volatility. And also, a fund of hedge funds usually require lower minimum investment amount than individual hedge funds.

Hedge Funds Might Affect Micron-Lexar Deal

Hedge fund activists might make it difficult for Micron Technology Inc. to take over Lexar Media Inc., as has been indicated by the latter. Micron recently indicated plans to buy Lexar in a stock deal worth about $680 million. Reuters reports:

But since the deal was announced, five multi-billion dollar hedge funds disclosed in regulatory filings that they hold more than 5 percent of Lexar, with one -- Elliott Associates LP -- flatly stating it opposes Micron's offer price, although it supports a sale of Lexar. Lexar shares are now trading significantly above the offer price, indicating that some investors are betting the offer will rise.

Hedge Fund Failure Leads To Property Dealer Losing Millions

The collapse of PlusFunds, a hedge fund management firm, has led to Mark  Kavanagh, a  property developer, who owned 6.11 per cent of the firm, losing millions as well. Kavanagh had invested invested close to €2.5m in the company. 
Times Online reports:

A New York court agreed last week to the sale of PlusFunds, which was valued last year at more than $200m (€166m), for just $5m. Assets under management had dwindled from $2.5 billion to $1 billion in the first two months of this year.

Irish Financial Regulator and FSA Take Steps to Regulate Hedge Funds

The hedge fund market is usually considered to be highly unregulated. But then, there are times when a sudden interest can truly chop off heads. In a recent case, the Irish Financial Regulator made a move to shut down three hedge funds. These funds are operated by Broadstone Fund Management, a Dublin-based investment management firm.

Also, a study by the Financial Services Authority (FSA), carried out recently expressed concern over potential conflicts of interest among fund managers and unfair treatment of investors. It also highlighted the fact that some hedge fund managers were using unfair practices. The Post.IE reports:

The regulator has declined to say why it issued the order but stressed that investor funds were not under threat. It is understood, however, that issues relating to the firm’s filing requirements were among the regulator’s concerns.

Hedge funds need more transparency and better regulations

Investing in hedge fund? Well, you might have certain apprehensions that most investors have when they are looking at this investment tool.

Essentially any tool that offers high returns, also entails high risk. So this makes it imperative for you to ensure that you pick the right hedge fund manger as that is what would decide the future of your investment. Ideally you should pick a hedge fund manager who can manage and control risk in a manner that ensures that you don’t go into losses, even if the returns are not high.

Also, in most markets, the investment areas are now overcrowded. As a result, these areas are vulnerable to quick falls. This can be detrimental and can lead to sudden losses.

The requirement at this stage is a higher degree of regulation in the hedge fund market. This would ensure higher transparency so that an investor knows exactly where his money is going. Also, with better regulation, hedge fund managers would also become more accountable. At the same time it would become much simpler for an investor to research the background of a hedge fund manager before entrusting his money into their hands.

I believe that with these basic prerequisites in place, the hedge fund market would be much safer and as a result would attract a larger number of investors.

S&P; Hedge Funds Index Outperforms S&P; 500 for 2006

In February 2006, the S&P's overall hedge fund index returned 0.8 percent, bringing the total for 2006 till now to 2.83 percent. That compares with 0.05 percent and 2.59 percent for the S&P 500 index. Reuters reports:

Arbitrage hedge funds buy and sell securities against each other and include convertible bond managers. S&P's arbitrage hedge fund index returned 1.24 percent in February and 2.63 percent for the year to date. A dearth of new issues and low volatility has over the past two years squeezed returns in the convertible bond sector to around zero.

Hedge funds Get Aggressive on New Sectors

To satiate the growing hunger of higher returns among investors, hedge funds are increasingly concocting new strategies to be one up on this front. Hedge funds are now looking aggressively at new avenues such as loans, oil derivatives and agricultural futures markets. It is being reported that a large number of players in traditional markets such as stocks and bonds have reduced average industry returns in recent years. This is perhaps the root reason why hedge funds are reinventing themselves with a vengeance.Reuters reports:

"Hedge funds have barely scratched the surface of global financial assets ... They can trade anything ... As long as you've got the right guys in the right strategies in the right spaces, they will make money," he said. "The doomsayers who are talking about falling hedge fund returns have a blinkered view of what the industry can do." Hedge fund returns last year averaged around 7.5 percent, compared with around 9.5 percent in 2004 and more than 15 percent in 2003, according to industry estimates.

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 Laws Might Open to Small Investors

In move that is likely to change the whole hedge funds outlook, the city's financial watchdog is to make way for the hedge funds - as an investment vehicle - available to small retail investors. Once this move goes ahead, hedge funds units could be sold to the small investor community. In the current scenario, it is illegal to market hedge funds to ordinary investors in Britain, but the Financial Services Authority is likely to relax current restrictions. This is expected to happen when it finally publishes its recommendations on the future of the sector.

This is a big move away from the earlier rigid stand at the start of the consultation exercise, which began last year in the month of June. This move would allow fund of hedge funds to be set up in the UK and marketed to ordinary investors as well. But given all this lenience, these onshore hedge funds are likely to come with warnings on their risks. This might prove to be a deterrent for many risk-averse retail investors.

Hedge funds Industry Dynamics

Till sometime back the estimated number of hedge funds was reported at over 8,000 active hedge funds. Add to this the trend of the marketplace – where more and more hedge funds managers are setting up their shop each day. And this brings the potential number of hedge funds in the market in the future simply to a staggering proportion.

Well you might ask – what is the big deal about the growing numbers? Or how is going to affect the markets? Or how is going to be a challenge?

Well to come to the point directly, all that can be said that although this growth in the number of hedge funds seems to augur well for the industry – there is an inherent challenge for the managers of fund of funds. The biggest challenge is to pick the best performers and promise holders out of such a huge and rapidly growing universe of hedge funds. To fight this issue, most fund of funds managers are increasingly turning to new talent, who they say provide better returns than their more established counterparts.

The trend witnessed recently in the heating up hedge funds scenario is that coup on the energy sector. The leading investment banks and financial services giants such as Goldman Sachs and Morgan Stanley are reportedly making a killing on energy investments. And it happens to be no surprise that aggressive hedge fund managers have been getting in on the action, and more are likely to do so in the coming months at the energy front.

As they say in the capital markets – the market is back! This time it is back driven by interest into the energy commodity driven investment and the exiting of the previous fixation of electric utilities.

New Ways to Make Money

When you invest your money, what you want is the highest possible returns. And to satiate this desire, hedge fund managers are getting more innovative with the strategies that they employ. They are introducing new strategies for loans, oil derivatives and agricultural futures markets.

According to reports, last year hedge fund returns averaged around 7.5 percent, compared with around 9.5 percent in the year 2004. This clearly suggests a downward trend, thus giving birth to the need to reinvent strategies.

In the drive to improve returns and exploit new hedge fund strategies, PSolve plans to list a new fund of hedge funds, PSolve Niche Opportunities, on the London Stock Exchange. In fact this is just the beginning, and the market is expected to see a lot of new funds and strategies in the coming future.

Know More About Hedge Funds at Gathering on Wealth Management

The annual gathering on Islamic wealth management scheduled at Hôtel du Rhône in Geneva in the end of March is attracting a lot of attention and most of the seats are already booked. The meet would address a variety of investment issues including the growing demand for hedge funds and would include speeches by speakers from Citigroup and Deutsche Bank.

There is an increasing demand for spreading awareness on investment options for Islamic investors, especially keeping in view the increasing interest in hedge funds, and the meet addresses this requirement.

Besides spreading knowledge, the meet would also provide the perfect platform for strategic networking. A number of optional workshops on Islamic Finance, Shariah compliant asset management and Family Offices, are also being offered for those interested.

For those of you who are interested in being a part of this interesting and informative interaction, register before it is too late. PR Web reports:

The seminar covers the most pressing needs of the high net worth Muslim investor, which are the replacement of bonds, the new trend for Islamic hedge funds, how to alleviate poverty with rewarding investments, and new methods for addressing issues of family offices. Alternatives that can be used to create an efficient portfolio would be the subject for a dedicated session.

Know your hedge fund manager

When you select the hedge fund that you would be investing in, make it a point to also find out details about the hedge fund managers. At the end of it, what happens with your money is in the hands of these hedge fund managers. It is important to find out if the managers are qualified to manage your money. So don’t get intimidated by the hedge fund manager, make it a point to go a little further and find out the facts before taking a decision.

Limitations in redeeming shares

Investing in hedge funds? Remember that even though most hedge funds promise hefty returns, there are certain limitations as well. An important fact is that in the case of most of the hedge funds, there are certain limitations on your right to redeem your shares. A lot of times there is a basic lock-in period that can extend to over a year, wherein you cannot redeem your shares. So think twice and take into consideration a long term perspective before investing money.

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.

What are hedge funds?

Well if you have had some interest in the financial market, then you sure must have come across the term “hedge fund”. This term is most commonly used to describe a variety of investment vehicles that share similar characteristics. Even though the term is not statutorily defined, it mainly encompasses any pooled investment vehicle that is privately organized, administered by professional investment managers, and not really open to the public at large – or so to say not usually available for retail small time investors.

Thus the next question that we expect from you while reading this piece is that if it is not open to retail investors – then for whom is it open. Well the answer to this query is that hedge funds as a class of investment vehicles are primary open to wealthy individuals and institutional investors. Also, hedge fund managers frequently have a stake in the funds they manage. In reference to hedge funds’ structure, entities are organized as limited partnerships or limited liability companies, and in many cases are domiciled outside the United States.

Flat February for Hedge funds

There has been a lull after the storm in the hedge funds sector. As after the strong results reported by the hedge funds in January 2006, the sector report flat results for February 2006. The flat performance was attributed to pompous month for the equity markets. It was reported that most of the major hedge fund indices gave average returns of between zero and one percent, with Chicago-based hedge fund tracker Hedge Fund Research showing a gain of 0.35 percent for the month. The S&P 500 finished February up just 0.05 percent. CNN reports:

Some of the larger long/short equity funds posted big gains, such as Mark Kingdon's M. Kingdon Offshore fund, which returned 2.1 percent in February and is up 4.9 percent this year. Noted value investor David Einhorn's Greenlight Capital Offshore fund gained 2.4 percent in February, bringing it up to 4.5 percent for the year. But most managers struggled to post gains in what was a tough month for the broader markets as a whole. Art Samberg's Pequot International fund was down about a percent but is still up about 6.2 percent on the year following a strong January.

AP7 to Monitor Its Hedge Funds Companies

The Seventh Swedish Pension Fund (AP7), the first of Sweden's public pension funds that invested in hedge funds, has reportedly placed its two hedge fund companies on observation due to performance and administrative issues. Blackenterprise reports:

AP7's executive vice president and chief investment officer, Richard Grottheim, explained that AP7 has clearly defined performance criteria, and that the hedge funds had not fully met their 2005 performance targets. He also cited administrative reasons for the funds' "on watch" status, saying that AP7 had not been satisfied by "certain delays in information flow."

Women emerging in the hedge funds sector

Till now the whole hedge fund domain has been all about aggressive fund managers, but more so about men. However, women did manage money at just a tiny fraction of the nearly 9,000 hedge funds. This surely is breaking the conventional barrier, and it augurs well for the hedge funds sector at large. Seattlepi reports:

Not only is it a business dominated by men, but it is also known for its aggressive testosterone-driven trading. So it may not be surprising that women in the hedge fund business have been active in forming connections among themselves, primarily on behalf of philanthropic endeavors.

The basics that you need to know before investing in hedge funds

Are you investing in hedge funds for the first time? Well, make sure that you garner the basic information that is necessary and can affect the future of your investment, before you select the hedge funds.

In case of most hedge funds there is a proper prospectus or a memorandum, go through these in detail. Understand the investment strategies of the fund that you are planning to invest in and the risks that arise from these strategies. These strategies and risks should be in tune with your personal investing goals.

Also, remember that like all other investment tools, even in the case of hedge funds, the potential returns are proportional to the risk factor. In simpler terms, the higher the potential returns, the higher is the risk factor.

Next, you would have to make an effort to understand how the funds assets are valued. It might pose a problem to value the securities that the funds of hedge funds and hedge funds invest in, but at the same time you cannot ignore this.

Make it a point to clearly ask the manager the fee structure for the hedge fund. The fees can have a significant impact on your returns. In case of most hedge funds, you would need to pay an asset management fee of 1-2 per cent of assets, along with a performance fee. The performance fee is usually 20 per cent of the profits that arise from the hedge fund.

A hedge fund might also have certain limitations in terms of redeeming your shares, make it a point to clarify any doubts about this in the very beginning.

Last but not the least, research the background of your hedge fund manager before investing your money. With these points taken care off, your basic research is more or less in place. Just remember that it pays to be careful.

Hedge funds in Asia attracting investors

The Asian Hedge Fund industry is currently sailing on a high wave with global investors increasing their allocation to these funds. In fact, the industry has seen significant growth in terms of assets in the last year.

At the same time, experts are predicting that the industry would continue to flourish in the coming year. This growth can largely be attributed to the increasing interest of investors that stems from a healthy economic and financial scenario.

At the same time, it is a well established fact that Asian hedge funds are much smaller than those in the US and the Europe, but at the same time, these are now finding favor amongst seasoned as well as new investors. Investors are investing in these funds with the hope of higher returns than what are assured by other hedge funds. And the favorable conditions in the industry are supporting this hope.

Fortis aims at strengthening position through acquiring HFS

In a recent move, Fortis Merchant Banking acquired Hedge Fund Services, in order to strengthen its position in the hedge funds industry. Through this move, the company is essentially looking at catalyzing its growth in niche markets. Banking Business Review Online reports:

HFS is the British Virgin Islands' largest independent full-service fund administrator. At the end of 2005 it had approximately E2 billion in assets under administration in 104 funds from 53 different fund managers, 90% of which are based in the US.

Caledonia Investments to acquire Liberty Groups fund of hedge funds business

According to recent reports, Liberty Group, a South African insurer has indicated that it would be selling its fund of hedge funds business to Caledonia Investments plc. The deal has been struck at close to 41 million pounds. Reuters South Africa reports:

Liberty said the potential acquisition price for Liberty Ermitage Jersey Limited, one of Europe's biggest offshore hedge fund management groups, would constitute an initial 35.1 million pound payment and up to a further 6 million payable over the next 3 years. Sources from Calendonia have indicated that the company would own 60 per cent of Liberty Ermitage Jersey Ltd, while Ermitage's management and its new Chairman Paul Myners would own the rest.

Are Hedge Funds Going Down?

The skeptics, who have been on a look out for a bubble to break, were too keen on the housing market last year. However with some signs of lackluster performance from the capital market they have apparently turned their focus towards it. The key here is that the shady show did not come from segments such as stocks, bonds, oil, all of which closed the year on a positive note.

The problem child apparently was the hedge funds sector - the segment with over US $1.1 trillion in assets under management, which has witness growth literally doubling the industry size since 2000.

It was observed that by December 2005, the steam was venting out of the roaring hedge funds sector. The net money flows into hedge funds, which are investment pools available mainly to institutional and wealthy individual investors, were down 44% in the third quarter from a year earlier.  And further they almost stagnated during the fourth quarter of the year.

With the flows drying up, there was a likewise effect on many hedge funds. According to reports by Chicago's Hedge Fund Research in December 2005, that through September 30 2005, a record number of hedge funds (484 funds),  more than 6% of the total hedge funds segment, had been forced to shut down in 2005.

Although the figures for the fourth quarter are yet unavailable, reports are that they are worse than that of the third quarter. Many industry experts or you could say skeptics are gunning that this stage is potentially one of "recession for hedge funds". Many believe that the exact scenario in the hedge funds space could be worse than what the data indicates, as the numbers are clearly based on un-audited results, which are reported to industry groups.

Rating agencies now looking at hedge funds

The interest of investors in the highly unregulated hedge fund industry is rising continuously. This has also led to a rising interest of rating agencies that are eying the industry to increase their scope.

Amongst the agencies that are expanding operations is Moody's Investors Service, New York is one. The agency is currently developing a methodology for rating hedge fund operations. It plans to release its first rating by the end of next month.

These ratings would be focused on hedge funds in the US. These ratings would actually be an assessment of the quality of the operations of the fund. As a result, it would make t easier for investors to select the hedge funds that they would want to invest in. Globe and Mail reports:

The move comes as global interest has soared in Canada's $30-billion hedge fund industry, lured by its exposure to commodities prices. However, the industry has been plagued recently by several high-profile scandals, such as the collapse of Portus Alternative Asset Management Inc. and Norshield Financial Group.

Ratings agencies now looking at hedge funds
The interest of investors in the highly unregulated hedge fund industry is rising continuously. This has also led to a rising interest of ratings agencies that are eying the industry to increase their scope. Amongst the agencies that are expanding operations is Moody's Investors Service, New York is one. The agency is currently developing a methodology for rating hedge fund operations. It plans to release its first rating by the end of next month. These ratings would be focused on hedge funds in the US. These ratings would actually be an assessment of the quality of the operations of the fund. As a result, it would make t easier for investors to select the hedge funds that they would want to invest in. Globe and Mail reports:

The move comes as global interest has soared in Canada's $30-billion hedge fund industry, lured by its exposure to commodities prices. However, the industry has been plagued recently by several high-profile scandals, such as the collapse of Portus Alternative Asset Management Inc. and Norshield Financial Group.

Hedge Funds Financing Exposures

Mainly there are two types of hedge financing exposures for banks, especially in case of banks in the European Union region. The two forms of financing can be broadly distinguished as bridge (liquidity) financing and normal cash or security lending for gearing.

The first type of exposure, bridge, is designed to allow hedge funds to:

•manage unexpected liquidity shortages of various origins;

•remain fully invested (minimizing cash drag);

•iron out timing mismatches of proceeds related to investor subscriptions and  redemptions; and

•not miss attractive investment opportunities when all available funds are fully invested

The last option from the list enlisted above is of critical important for funds of hedge funds, as the opportunity to invest in otherwise closed funds must be accepted at short notice. Research studies outline that some banks clearly prohibit outright credit to hedge funds. This is because lending to hedge funds is a balance-sheet-intensive activity; it was not surprising that smaller banks or banks that were not prime brokers usually had minor financing exposures.

Hedge Funds Capitalize on Share Speculations

Increasingly Hedge funds are capitalizing on share speculation, as European hostile or unsolicited M&A bids reach a six-year high. The unsolicited bids augur well for share-speculation. The initial bid is generally rebuffed, increasing the chances of a second or rival offer and resulting share price jump. Reuters reports:

In a recent textbook case, shares at ports firm P&O (PO.L: Quotazione, Profilo) rocketed 65 percent during a three-month bidding war between Dubai Ports and PSA International, ending in Dubai Port's second, 520 pence offer. Its shares were trading near 315 pence per share before the first offer at 443 pence.

Pension Schemes Role Could Beckon Hedge Funds

In a potentially industry altering discussion, the possibility of allowing Investment banks, asset managers and hedge funds to take over pension schemes of financially strapped companies under plans are being discussed. The discussion is driven by the Pensions Regulator and the City watchdog. It is being reported that this move will offer hope to pensioners of failing companies in form of a higher retirement income than that guaranteed by the Pension Protection Fund, the government-sponsored safety net. This move will also have a positive impact on companies, particularly in traditional industries where the core business has shrunk and pension liabilities have mounted. Ft reports:

Investment banks have been clamoring for the right to acquire the assets and liabilities of closed pension schemes at competitive prices, arguing they could make a profit. Other investors are understood to be seeking a role. These include Mark Wood, the former head of Prudential’s UK life assurance business. The Pensions Regulator was initially worried that such deals posed grave risks to scheme members. But it has now begun exploratory talks with potential investors and the FSA.

Hedge Funds: Risky Business

The recent trend witnessed in the investment pattern of hedge funds investors is that they are not ready to bet all their fortune on one single hedge funds manager. This was outlined by Donald Putnam, chief executive of the investment bank Grail Partners, while he was speaking to a room full of fund of funds managers. Iht reports:

While few agree with Putnam's prediction of extinction, a recent flurry of deals in funds of funds shows that the business is rapidly changing. Since June, institutions have bought, at high prices, nine funds of funds, compared with eight such deals from 2000 to 2005, according to one major investment bank's data.

Hedge funds eye pension schemes role

In the coming times, hedge funds might get the green signal to take over pension schemes of companies that are facing a financial crunch. This suggestion is a part of the plans being discussed by the Pensions regulator and other authorities. FT.com reports:

The move would offer pensioners from failing companies hope of a higher retirement income than that guaranteed by the Pension Protection Fund, the government-sponsored safety net. It would also be a boon to companies, particularly in older industries where the core business has shrunk and pension liabilities have ballooned.

Requirements to form a hedge fund

Are you planning to form your own hedge fund? Well there are some basic requirements that you would need to take care of.  You will need to have your Private Offering Memorandum, Limited Partnership Agreement, and Subscription Documents, in place. Following that, you will also need to prepare your Form D and file it with the Securities and Exchange Commission. Another important requirement is to ensure that you comply with the filing requirements of the states where your investors are located. Also, it is important to remember that you cannot advertise your hedge fund. With these facts and requirements in place, you can go ahead and form your own hedge fund.