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July 31, 2006

Hedge Fund Boom in Asia

The top 25 Asia-based hedge funds managed to generate $22.6 billion in assets. It signals a shift in the hedge fund industry towards the emerging Asian markets. Although the size of the Asian hedge fund market is small in comparison with the US and European market, the current trend suggests that it will give tough competition to the rival markets soon.

Japan and China are among the few countries that lead the hedge fund market in Asia. The largest Asian hedge fund is Tokyo-based Sparx Asset Management with an asset of $US5.2 billion. The rise of the Asian hedge fund industry is significant, as Asia was dubbed as a poor investment destination for a long time in the past.

Will There be an Islamic Hedge Fund?

It is strange, but true. Hedge fund business is now all set to get a religious color. The Arab media reported that Islamic equity investments are growing at an unprecedented level. It made analysts believe that Islamic hedge funds may soon become a reality. Despite the stricter regulations in the Muslim world, Islamic finance companies are optimistic that they can manage hedge fund businesses efficiently.

Islamic law forbids short selling because it involves the sale of something that is not owned by somebody. However, hedge fund managers can still adopt some of the accepted Islamic finance practices that are similar to conventional hedge fund strategies.

Khaleej Times reports that -

A further development of the hedge fund principle is the 'Salam Sale', where one sells a commodity to a buyer against full up-front payment for delivery at a future date. An investor can hedge downside risk by selling stocks as a Salam Sale, with the same economic result as short-selling, but without the involvement of a borrowing element.

London Leads Europe Hedge Fund Market

It is well known that Europe has emerged as a strong competitor to the United States in terms of hedge fund operation. Hedge fund growth in Europe is spearheading by London. London has become a major center for hedge funds with the value of assets invested in City hedge funds grew by more than 25 per cent in 2005.

The UK is the world's third largest asset management center. The value of funds managed in the City shot up by 7 per cent to £3,450 billion in 2005. The rise was fuelled by the investors' growing interest in hedge fund activities. Do you think that London can leave major US cities behind in terms of hedge fund business? Only the time will tell.

According to Times Online -

Alternative investments, including hedge and property funds, accounted for about £374 billion, or 11 per cent, of the funds under management. This figure takes into account only retail investments in hedge funds, to avoid double counting of institutional assets.

Benefits of Hedge Funds

If you invest in a fund of funds rather than a single hedge fund, you will get more diversification. Risk levels decline as diversification increases. It depends on investors as to whether they want a low risk product or not. Some funds of funds offer consistent absolute returns. They could offer better transparency and liquidity than some other single funds.

You will also be benefited from going with funds of funds in terms of the due diligence process that they can deliver. Individual investors may not have the expertise, but they have the systems in place to do the necessary research and due diligence on these hedge funds to extract maximum benefits.

Will the Pension Bill Benefit Hedge Funds?

The dream may soon become a reality. If the US Congress passes the current bill on pension system, hedge funds may be entitled to manage more pension fund money. Negotiations are going on about a bill shoring up the country's defined-benefit pension system. Under the provisions of the bill, the lightly regulated investment pools would be allowed to do away with a ceiling on how much money they can take from pension plans.

These types of transactions will allow pensions to reduce costs and give pensions more flexibility and options for diversification. The House will vote on this bill on 4th August and the Senate will consider it next week.

MarketWatch reports that -

A short provision in the massive bill allows hedge funds, the lightly regulated investment pools, to do away with a ceiling on how much money they can take from pension plans. They have traditionally limited the amount of pension-fund money they will take to 25% of their total assets.

July 29, 2006

Cox For Anti-Fraud Plan

The past five years have seen a sharp rise in the number of hedge funds and in the subsequent growth of the industry to its current mammoth proportions. The downside of this development is that the frauds and wrong-doings of these funds have also grown proportionally.

The numbers have increased exponentially, from four cases of insider trading, alleged stealing of fund assets, and hushing up the truth about fund performance, to more than 60 today. The US Securities and Exchange Commission (SEC) has charged fund managers of defrauding investors out of more $1 billion over the last five years.

So it comes as no surprise that the SEC  Chairman Christopher Cox has stated that he would advocate new emergency regulations for these high-risk investment pools. Cox outlined his plans for an anti-fraud rule that will ensure that fund managers are responsible for investors, before the Senate Banking Committee.

The plan will also meet the legal objections of the appeals court that invalidated the SEC regulation that required hedge funds to adopt transparent dealing strategies. The appeals court had also noted that a few federal anti-fraud regulations are not limited to fraud against clients.

Do Dirty Words Drive Down Share Value?

It’s a war of words and it’s getting downright dirty. The battle is heating up between the Canadian insurance firm Fairfax Financial Holdings Ltd. and the hedge fund SAC Capital Management LLC.
Fairfax has filed a lawsuit that alleges that SAC, together with other hedge funds, a research analyst, and a few hedge fund operatives, tried to muddy the personal and professional lives of Fairfax’s CEO Prem Watsa, in an attempt to reduce the company’s share value and gain huge profits in the process.

The rumors spread according to the lawsuit include:

  • An RCMP raid on Fairfax offices.
  • News that Watsa had fled the country after transferring his assets to his wife.
  • A letter sent to Watsa’s pastor comparing Watsa and a conman who scammed the Catholic Church. The letter paralleled Watsa’s management of Fairfax and his handling of his church’s funds to the fraudster’s money-laundering scheme.

This is not the first time that hedge funds have been accused of such lowdown tactics. Don’t the US Securities and Exchange Commission (SEC) regulations seem a good idea now?

July 28, 2006

Facts About Hedge Funds

Hedge fund market is now estimated at $1.1 trillion. It is growing at a faster pace. Hedge fund includes a variety of investment strategies. Some of the hedge funds use leverage and derivatives while others are more conservative in their approach. They use limited or no leverage. Most of the hedge fund strategies aim at reducing market risk by shorting equities. They are highly specialized and relying on the specific expertise of the manager or management team.

Performance of many hedge fund strategies is not dependant on the direction of the bond or equity markets. However, conventional equity or mutual funds were exposed to market risk. Hedge fund strategies are limited and can successfully employ before returns diminish. Hedge fund managers are always in an advantageous position to limit the amount of capital. Investing in hedge funds tend to be favored by investors that are more sophisticated. They fully understand the consequences of major stock market corrections.

July 27, 2006

Hedge Fund Risk Management

The increased focus on hedge fund risk transparency is part of the natural evolution towards institutionalization that occurred in the hedge fund world in the past few months. The investors’ base for hedge funds expanded beyond its traditional core of individuals. It now covers pension plan sponsors and foundations among others. Institutional investors are having 100 percent access to the securities used by their traditional managers. Here the question is does an institutional investor really need position level transparency? Risk management plays an important role in addressing these concerns of investors.

With risk tools, position level transparency allows institutional investors to create their own independent risk analysis of the funds in which they invest. They can also aggregate risks and exposures across their hedge funds and fund of funds portfolios. In reality, the institutional investors need position level risk transparency from the hedge funds and funds of funds. However, only few are equipped to effectively deal with this type of transparency. You will definitely acknowledge that risk management is crucial to the success of hedge fund operations.

Hedge Fund Consultant Charged with Data Theft

It is really strange that cases of hedge fund frauds have significantly increased in the past few weeks despite the so-called regulations enforced by the government. Every week, we are getting the news of scams and frauds involving hedge fund businesses. This is definitely a matter of concern for the investors and financers. Ira Chilowitz, a former consultant to Morgan Stanely was arrested and charged with stealing and electronic list of hedge funds that are clients of S3 Partners, a hedge fund advisory firm. Ira has been charged with conspiracy and unauthorized computer access. It may be just another fraud for the readers. However, the gravity of the situation needs to be understood. We must find out the solutions to prevent such incidents from occurring again.