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May 28, 2006

Hedge Fund Manager - The Most Attractive Profession?

Who wouldn't want to be in the shoes of the fellow who takes home a salary of $1.5billion? According to reports, with pay scales becoming more tempting, "hedge fund manager" seems to be the latest hot favorite, most coveted profession. According to Alpha (published by Institutional Investor), we are going through a golden era of hedge funds. And so, hedge fund managers are making more money today than ever before.

And the golden man who is leading the troupe is James Simons of Renaissance Technologies Corp. This veteran fund manager's Medallion hedge fund returned 29.5 percent net. And he was given a remarkable 5 percent management fee. That's not all, he also earned a 44 percent performance fee! Congratulations, Mr. Simons!

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May 27, 2006

Asia: Next Destination for Hedge Fund Managers

Hedge Fund operations began in the United States, as the market potential is high there. In the recent years, hedge funds have created more opportunities for the investors and market players. Hedge Fund managers oversee the operations in the country and elsewhere from their locations in the United States. If the latest trend is to be believed, the Asian markets are all set to be the major performers within the global economy. The opportunity in hedge funds is greater in Asia than other countries in the world. India and China are the two major Asian countries that will allow more hedge fund operations in their territory.

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Jerry Wang, CEO of Vision Investment Management, said that several large global hedge funds were setting up in Asia. They are not as nimble, but they bring different dimensions of sophistication.

Hedge Fund Investment Boosts Mills Stake

According to reports, a major hedge fund investor in Mills Corp. has increased its stake in the embattled mall developer. The hedge fund investor, Stark Investments has purchased 720,000 shares in the company since March. Now it controls 4.95 million shares, which is 8.7% of Mills' stock. Stark sources revealed that they were buying shares for investment purposes. However, they may seek to control management in the future.

There are some other investors that have expressed interest in Mills. Simon Property Group, Vornado Realty Trust and Westfield are said to have contemplating plans to invest in Mills. Mills has been exploring a sale of the company or assets as it deals with shareholder lawsuits and SEC investigation related to financial restatement. Mills has set a deadline for June 13 for letters of interest from prospective buyers. Recently, the company has entered into customary confidentiality agreements with potential buyers and investors. It has been reported that some of these potential buyers have expressed interest in some of the company's assets.

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In a research note, Bank of America analyst Ross Nussbaum provided additional color on his conversations with Mills' management this week at the annual International Council of Shopping Centers conference in Las Vegas.

Hedge Fund Regulation

Hedge Fund regulations in the US are not new for the investment companies. Investment companies that are registered with the US Securities and Exchange Commission (SEC) are subject to strict limitations on the short selling and use of leverage. These are essential to many hedge fund strategies. In order to implement these strategies in an effective manner, hedge funds elect to operate as unregistered investment companies. Interests in a hedge fund cannot be offered or advertised to the general public. They are limited to individuals who are accredited investors and qualified purchasers.

As per the guidelines, accredited investors must have total incomes of over US$200,000 per year or a net worth of over US$1,000,000. Similarly, qualified purchasers must own at least US$5,000,000 in qualified investments. A hedge fund is limited to 499 investors. The hedge funds having fewer investors may see few government-imposed restrictions on their investment strategies. There is a presumption that hedge funds are pursuing more risky strategies. The ability to invest in these funds is restricted to wealthier investors who have the financial reserves to withstand a possible loss.

The new rule implemented by the SEC in February 2006 requires most hedge fund advisers to register with the SEC as investment advisers under the Investment Advisers Act. It is applied to firms who manage in excess of US$30,000,000 or more investors. The SEC currently does not have the staff to monitor the estimated 8,000 US and international hedge funds. However, it is forming internal teams that will identify and evaluate irregular trading patterns for individual investors.

May 26, 2006

Hedge Fund and Financial Stability

There is no ambiguity that investors are looking for huge success for hedge fund business. However, the recent rout in financial markets has sparked talk of possible hedge fund failures. It might pose threat to financial stability. In the past fortnight, European stocks have tumbled more than 10 percent. In the Asian market, Indian shares have taken a downward turn with the BSE Sensex losing 1100 points in a day's trading.

Emerging market currencies are also encountering the same problem. The most important that is doing round is could a hedge fund collapse? There is also a suspicion whether the financial market could withstand the hedge fund collapse or not. Experts did not rule out this possibility. They believe that the biggest risk lies with the hedge fund counterparties.

What are Counterparties?

Counterparties include brokers and bank's prime brokerage divisions. They act as custodians and offer settlement services. They also lend money to hedge funds so that they can leverage up their investments. If hedge funds lose the money, the primary broker also loses money.

Emerging Markets

Emerging markets can be liquid at times of turmoil. Most emerging market hedge funds usually buy, sell and leverage to make bigger investments. If the derivatives markets are not well developed, they might pose problems for hedge funds, but they will not pose any problem for financial stability.

Man Group Heightens Hedge Fund Concerns

There are some concerns in the market over hedge fund. The fear was fuelled by the world's largest hedge fund manager, Man Group. Man Group disclosed that some of its smaller competitors might be in serious trouble, as its future funds have made substantial losses this month. The disclosure made by Man Group raised serious concern that some smaller hedge funds may suffer greater losses and they might result in a decline in share prices. The news already had its impact as the FTSE 100 dropped 91.6 points, by reversing most of the gains made earlier.

Man Group confirmed that its flagship Man AHL Diversified Futures fund lost 3.7 per cent last week. In total, it has dropped 4.5 per cent so far this month. Despite of the losses, it has shown a net gain of 31.9 per cent in the first five months of the year. According to experts, Man Group's poor performance is a short-term movement due to volatile equity markets. The AHL fund has seen such fluctuations before. Hence, it is expected that the market will be able to handle this news efficiently.

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Many hedge funds have been betting huge sums on a complex commodity and currency strategy, involving short selling the dollar while at the same time buying gold and platinum using borrowed yen. Any funds in these positions in the last two weeks will have sustained heavy losses as commodity prices have tumbled and the dollar strengthened.

Is hedge fund risk for real?

Yes, whenever a hedge fund collapses, it is bad news for all. You cannot ignore it, as it has the potential to shake the financial stability of the market depending on the kind of investments made. The recent turmoil in the stock market is further discouraging hedging in emerging markets.

Especially the emerging markets, as they have the tendency to develop cold feet in the face of crisis with liquidity problems. This could pose a major risk for the hedge funds as the derivatives market is not well developed. But things are changing and looking at the returns, it's worth taking the risk.

Hopefully, hedge funds in these markets have done their homework and have strategies in place. Including the key players namely, the hedge fund counterparties, i.e., the brokers and bank's prime brokerage division who are supposed to be the custodians are extra cautious of their dealings.

So unless something drastic like a natural calamity destroying the economy happens, which will inevitably result in the fleeing of investors, the hedge funds are treading safe pathways in the emerging markets.

May 24, 2006

Small hedge fund players might be in trouble...

There's lot of speculation going around. It began with Man Group, the world's largest quoted hedge fund manager revealing that some of its futures fund made substantial losses this month. This has sparked the fear that smaller hedge funds might be suffering even greater losses.

The volatility in the equity markets seem to be finally taking its toll. Many hedge funds are also likely to be hit by the recent strengthening of the dollar even as the commodity prices tumbled.

Why should we be concerned of a failing hedge fund? Because it is one sure shot recipe of creating panic in the market. As the hedge fund will be forced to sell stock into an already falling market which will further pull it down. But then nobody has much of a choice, since if they don't do it, they would end up breaching their financial obligations.

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May 23, 2006

European hedge funds gain the trust of Pension Funds

In a recent survey by Mercer Investment Consulting, it was found that nearly 13% of continental European and Irish pension funds invest in hedge funds. They have identified the biggest growth areas to be the liability-driven investment strategies and interest rate hedging strategies.

The current trend in Europe acts a pointer towards the increasing investment in alternative assets, mainly hedge funds and active currency management rather than traditional alternatives like private equity.

According to Andy Green, European Director of Consulting Policy at Mercer IC,"The proportion of funds investing in hedge funds has the potential to rise even further, by up to 5 percentage points across Europe, as pension funds become more comfortable with this asset class."

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Skepticism on Hedge Fund Rules

According to Ben Bernanke, US Federal Reserve Chairman, allowing hedge funds and trading partners to manage risk and impose discipline in the sector is the economic need of the hour. However, he had expressed skepticism about proposals to give regulators more powers and authority.

Recently, the German central bank made a proposal that the world's hedge funds should open up their books for public grading by rating agencies. Introducing a code of conduct is part of a self-regulation initiative to start a debate on how to avoid disasters in hedge funds. Hedge funds help improve the functioning of financial markets. However, it is better to take precautionary measures rather than waiting until a market crisis happens.

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Mr Bernanke, who was speaking at a Sea Island, Georgia conference sponsored by the Federal Reserve Bank of Atlanta, raised caution about regulators taking an overly heavy hand.