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August 29, 2006

Possibility of Hedge Fund Invasion Ruled Out

Recently, I had written a post titled "China Must Modify Policies on Foreign Investment" about how China must make changes to its foreign investment policies. Today, I am going to write a post on hedge fund, which is relevant to that post.

Despite the recent fluctuations in the exchange rate of the Renminbi (RMB), China's currency, international hedge funds are unable to flood the country and profit from the future appreciation of the RMB. Strict management of capital account inflows and outflows prevents hedge fund and other speculative money from invading China to bet on the RMB's value. Although overseas hedge fund managers want to buy more RMB, they can't do it because the country does not provide corresponding financial derivatives.

Mosaid Rejects Hedge Fund's Demand for Sale

Canadian intellectual property provider Mosaid Technologies Inc. said that its board of directors has rejected a demand by a New York-based hedge fund that it put the company for sale. The hedge fund, Loeb Partners Corp. demanded that the directors put the company up for sale, threatening a proxy fight for control of Mosaid. Loeb has 6 percent stake in Mosaid. The board of directors at Mosaid decided that sale of Mosaid is not in the best interest of the company's shareholders. They also said that Mosaid would like to avoid a disruptive and costly proxy fight. However, it is ready to engage in a proxy contest to confirm the support of its shareholders.

To know about the tax crackdown on hedge fund activities, read my previous post titled “Tax Crackdown on Hedge Fund Activities”.

Questions You Should Answer

When you consider investing in hedge funds, you should have some general risk questions that will determine the course of your action. The following are good general risk questions to start a hedge fund:

How do you insure the separation of front and back office?
Do you have written policies and procedures?
How do you manage risks?
Do you have a designated risk manager?
Do you include risk limits in your guidelines?
What are your backup and recovery plans?
How do you define leverage?
What is the type of your borrowing - long term or short term?
What is your attitude towards transparency?

Read our previous post titled "Risk Arbitrage on Hedge Funds" for information about Risk Arbitrage.

Selecting a Hedge Fund Manager

Selecting a hedge fund manager is not an easy task, as it requires careful planning and screening. It may be easy to compare their performance against a "benchmark". However, the variation between funds within an index and the index itself vary enormously. Process transparency is as much important as risk transparency. Institutional investors need to be able to satisfy themselves and their ultimate beneficiaries that their investment decisions meet the practical standard.

Read my previous post titled "Hedge Fund Activism Pushes the Firms Up", which is an interesting one.

Hedge fund managers must have a clear understanding of what the hedge fund manager can and cannot do. They should know that there is a rigorous process within the fund for measuring and evaluating both risk and reward. Select a hedge fund manager who understands what the manager's strategy is and what the responsibilities of a hedge fund manager are.

Leveraged Loan Market

The dearth of high return opportunities in the stagnant stock market has compelled many hedge funds to rethink their investment strategies and rebalance their portfolios. One area that has attracted numerous hedge fund investors over the last few years has been the leveraged loan market. It has delivered satisfying returns at lower risks.

In addition to private equity and hedge funds, numerous commercial financial companies and regional banks have entered the leveraged loan market. The influx of aggressive lenders and investors has fueled an unprecedented merger and acquisition boom. Although hedge funds have been short-term oriented investors, over the years they have extended their time frame for return to participate in these types of leveraged buyouts.

Read my previous post titled "Is Hedge Fund Valuation Necessary?" to know about hedge fund valuation.

August 28, 2006

Key Hedge Funds Strategies

Hedge fund strategies vary on several counts. Most investors hedge against market downturns. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions. The popular misconception is that all hedge funds are volatile and they use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities or gold. However, this is far from truth. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don't use them at all. My previous post titled "Facts About Hedge Funds" provides important information about hedge funds.

Hedge Funds: China's Main Source of Hot Money

Recently, I had written a post titled "Hedge Fund Boom in Asia" on the hedge fund boom in Asia. China is leading the hedge market in Asia. According to the report from International Centre of National Bureau of Statistics of China, the hot money betting on RMB appreciation has been rising since February this year.

The total scale of hot money inflows during the period from February to May reached to USD 23.28 billion. The calculation used by the Bureau is based on the difference between the regular increase of foreign exchange and the combination of FDI and current account surplus. Based on the calculation, the size of hot money was stood at USD 1.02 billion, USD4.45 billion, USD 5.31 billion and USD 12.5 billion at February, March, April and May respectively.

Hedge Fund Investors Warned of Energy Risks

The Energy Hedge Fund Center recently observed an increasing investor risk, due to the collapse of at least one energy commodity trading hedge fund. The Energy Hedge Fund Center LLC provides analysis and consulting services in energy and environment. Energy has become a major risk factor for investors.

Although many energy hedge funds continue to perform better than other hedge funds of asset classes, experts continue to warn investors about the additional and poorly understood risks involved in energy. The Energy Hedge Funds Center is set up to provide basic information on hedge funds that are active in the hedge fund industry and trading energy commodities.

Read my previous post titled "Hedge Fund Assets Rising" to know about rising hedge fund assets.

Finding the Right Hedge Fund

Hedge funds used to woo investors by providing great annual returns of 10% to 15%. However, hedge funds' returns have not lived up to expectations in recent years. Huge inflows of money have hampered investment returns, as fund managers struggle to find innovative ideas for the large amounts of money entrusted to them for investment. Hedge funds should not be considered a separate asset class because they invest in the same equity and fixed-interest securities as traditional fund managers.

Since there are many different hedge funds available, you may find it tough to select the right hedge fund. Always think of hedge funds as small businesses. Do not limit yourself to hedge funds that use an equity long/short investment strategy. Always keep in mind that many equity long/short hedge funds are really long funds in disguise, which will fluctuate with equity markets. You should invest in hedge funds that operate in "positive alpha" pools. That will maximize your profits.

Read our previous post titled "Main Characteristics of Hedge Funds" to know more about hedge funds.

Clarium Capital Hedge Fund Sued

It seems that hedge fund and controversy have become synonymous. We have been regularly updating you about the fraud cases involving hedge fund operations. Recently, I had written a post titled "Former Mayor Convicted in Hedge Fund Fraud" in this regard. Today, I came to know about another such case. An investor in Clarium Capital Management filed a suit, saying that it was defrauded out of returns for nearly a decade. Clarium Capital Management is a hedge fund headed by PayPal founder Peter Thiel. The lawsuit was filed in the US Court for the Northern District of California. It was filed by Cyprus-based Amisil Holdings Ltd. that seeks recovery of up to $18 million.