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January 24, 2007

Unlikely Hedge Fund Managers

-- Pushpa Sathish, Staff Writer

It’s akin to law-enforcers setting up their own crime shops – with all the fuss that the U.S. Securities and Exchange Commission has been making recently about bringing hedge funds under their eagle eye, you’d expect that a former chairman would be the last person to float one of his own. But that’s exactly what’s happened – Richard Breeden, erstwhile chairman of the SEC, has crossed over and set up a $500 million hedge fund registered in the Cayman Islands.

Another surprise startup emerged from the shadows of the Clinton administration – news of former Secretary of State Madeleine Albright’s hedge fund raised more than an eyebrow or two. The Albright Capital Management fund, which will focus on emerging markets, has been built with $329 million from Dutch pension unit PGGM.

I’m curious - Will the former SEC chairman toe the line with current SEC rules relating to hedge funds, or, now that he’s on the other side, will he flout them?

Hedge Funds Face Opposition

-- Pushpa Sathish, Staff Writer

Hedge funds Centaurus Capital and Paulson find other Dutch voices being raised against them for forcing Stork NV to break up. Minor shareholder Robeco and pension firm ABP (though not a shareholder) are up in arms against the funds’ strong-arm tactics to push Stork to sell all except its aerospace and defense divisions. The two hedge funds jointly own a 31.4 percent stake in Stork, a figure that they apparently feel is enough to demand the dismissal of the supervisory board and curbs on its rights to take decisions on acquisitions and divestments higher than 100 million euros. Forbes reports:

ABP's Eugene Rebers said dismissing the supervisory board would be 'premature' and not in the interest of Stork. He added, “As yet Centaurus and Paulson have provided insufficient proof that their proposed strategy is indeed the best. If they wish to adopt a different strategy at all costs for reasons of their own then they should take the royal road to achieving this by making a public bid for all shares.”

The Rich Shy Away from Hedge Funds

-- Pushpa Sathish, Staff Writer

A record amount of money may have flowed into hedge funds in 2006, but it certainly did not come from the pockets of the rich and famous in America. A survey conducted by consulting services provider Spectrem Group showed that only 27 percent of families with a net worth higher than $25 million (without taking primary residence into consideration) chose hedge funds as an investment vehicle in 2006, a considerable decrease from the 38 percent in 2005. Reuters Today reports:

"Hedge fund investing appears to have lost some of its luster for the very richest Americans," Catherine McBreen, Spectrem Group managing director, said in a statement. "A nearly one-third decline in the percentage of those households investing in hedge funds suggests the difficulties of 2006 have made their mark."

Funds Flow into Hedge Funds

-- Pushpa Sathish, Staff Writer

The collapse of Amaranth led to a 64 percent decrease in the inflows to hedge funds in Q4, but even that was not enough to stop the industry’s assets from rising to an unprecedented $1.43 trillion at the end of 2006. This 29 percent increase in the total assets under management is a total shocker when we consider that hedge funds delivered poor returns.

But, the facts speak for themselves – Hedge Fund Research reports a net inflow of $126.5 billion for the whole year, a huge increase from $46.9 billion that 2005 garnered. All the Amaranth debacle served to do was bring down the amount invested in the final quarter to $15.8 billion from the $44.5 billion in the third quarter.

Canada’s Hedge Fund Industry

-- Pushpa Sathish, Staff Writer

An NBCN Prime Brokerage Services study offers a comparison between the Canadian hedge fund industry and its counterparts across the world:

  • It’s pretty small – 30 percent have between $10 and $49 million (US) in assets under management. Only 4 percent have assets exceeding $5 billion. On the global scene, 21 percent manage assets higher than $5 billion, but only 10 percent have assets between $10 and $49 million.
  • It’s new – only 17 percent of Canadian funds have been around for 10 or more years. At least 33 percent of hedge funds across the world have been in existence for a decade or more.
  • As much as 25 percent of funding for Canadian funds comes from partners and employees, as compared to only 8 percent at the global level. A little more than 10 percent of global hedge fund assets come from banks and insurance companies.
  • Nearly 80 percent of Canadian managers plan to raise more capital in the next 12 months using futures/commodities strategies as compared to only 22 percent that favored these strategies on a global level. Nearly half the respondents were inclined to use synthetic structures like swaps, forwards and options. Long/short equity emerged as the largest strategy used by Canadian managers.
  • Canada’s hedge fund industry has grown 25 percent between 2005 and 2006, with assets under management rising by 40 percent in the same period to touch $25 billion.

So it follows that there’s ample scope for growth in the industry - because of strong regulations, a resource boom, and adequate returns. Not surprising, when 40 percent of Canadian hedge funds are active in Western Europe, 20 percent in Japan, 15 percent in the rest of Asia, and 15 percent in central Europe.

The survey covered 35 hedge fund managers in Canada, and compared their responses with those of 2,451 funds from all over the globe.

The 25 Most Intriguing Hedge Funds

George Bush would have had a better chance of actually finding some “weapons of mass destruction”, albeit financial ones, if he had only known where to look – not in Iraq, but inside the hedge fund industry. No, this is not my flight of fancy; I’m only repeating Warren Buffet’s succinct summation of the $1.34 trillion business that’s got the financial world in a tizzy. Where else would you find pay packets so obscenely high that a secretary can steal more than £4.5 million from under the noses of her three bosses (Partner Managing Directors in a hedge fund) before they even notice that the money is missing? Or hear one manager refer to the secretive nature of another as “the biggest elephant trying to hide unsuccessfully in a jungle”? Secrecy

There’s no doubt that hedge funds are part of an exciting and beguiling realm that thrives on secrecy and mystery, even as it draws and lures investors with the compulsive force of quicksand. The head honchos of these investment vehicles may be famous for playing their cards close to their chests, but we’re laying down what we know about them, face up on the table. So fasten your seatbelts folks, and let us take you on a whirlwind tour around 25 of the most intriguing hedge fund players in the game today. 

1. SAC Capital Partners: Secrecy may be Steve Cohen’s middle name but that didn’t stop his hedge fund from being embroiled in controversy over the Fairfax Financial Holdings affair. The sex, lies and financial fraud scandal saw SAC Capital being accused of driving down the Canadian insurer’s share value, and slapped with a $6 billion lawsuit in the process. Started in 1992 with just $25 million, the group worth $12 billion now is minting money, if its alleged gross returns are to be believed – 40 percent before fees every year between 1996 and 2001. And if you’re thinking of joining the SAC bandwagon tempted by the 50 percent the fund retains, you’re out of luck – it’s closed to new investors. The “new prince of Wall Street” and the “hedge fund king” are sobriquets that lie lightly on Cohen’s shoulders – all he’s interested in is ruling his kingdom with an iron (secretive) fist.

2. Goldman Sachs Asset Management Group: It projects a conflicting image - Alpha Magazine ranks Goldman Sachs as the world’s largest hedge fund with assets totaling $720 billion, but the firm’s Manhattan headquarters does not even sport a sign to advertise its presence. The company is loaded with talent and money, but the secrecy is so high that one employee often does not know what his colleague is making. “The Apprentice” and Donald Trump fans will remember Kwame Jackson as the “ambitious chap” who threw up his cushy job at Goldman (he was denied a leave of absence citing “reputational risk”) for a chance to be Trump’s apprentice. Pity he got “fired” at the final hurdle! But that’s Goldman Sachs for you – secretive to the point of “shunning those who seek the spotlight.”

3. Quantum Fund: “If you had invested $1,000 with George Soros in his Quantum Fund when he started in 1969, you would have found yourself worth $4 million by the new millennium” – that sums up this particular hedge fund in a nutshell. It returned a whopping 3,365 percent in the ten years since its inception in 1970, and in 1992, made $10 billion worth of pounds at the expense of the Bank of England. Soros’s shrewd currency speculation and strategy of selling short earned him the dubious distinction of “the man who broke the Bank of England.” Now a philanthropist, this Hungarian emigrant to England donates his money and time to the creation of “open societies.”

4. Man Investments: A unit of the Man Group PLC, the biggest futures contract broker in the world, this is the largest publicly-traded hedge fund company in the industry. With $12.7 billion in assets, Man Investments uses the AHL black-box systems to decide on its trading strategies. The technique claims to have an annualized return of 17.9 percent since December 1990.  An unlike achievement for a hedge fund, it’s also got its foot in the literary world – it sponsors the Man Booker Prize for Fiction, more popularly known as the Booker prize, awarded to the best original full-length English novel every year.

5. Caxton Associates: The world’s tenth largest with assets worth $12.5 billion, this hedge fund is known more for its enigmatic founder, Bruce Kovner. From driving a cab to pay rent during his days at Harvard to naming his fund after an obscure 15th century book printer – the range of Kovner’s eccentricities is wide. Caxton is a global macro hedge fund on the lines of Soros’ Quantum Fund. Kovner is said to have staff monitor the markets on a 24-hour basis, while he himself checks their status before and after trading hours.Trading

6. Tudor Investment Corporation:
Never had a down year since its inception in 1980” would best describe Paul Tudor Jones’ hedge fund. The shrewd trader made most of his money on Black Monday in 1987 when the Dow Jones Industrial Average dropped sharply and sent stock markets around the world crashing. Tudor Investment featured twice in Alpha magazine’s list of top 25 earners in the hedge fund industry in 2005 – Paul Jones in fifth place with $500 million and James Pallotta at number 14. The fund is known for more than just its global macro trading strategies – it runs the Robin Hood Foundation, an organization that helps New York City in the fight against poverty, besides collaborating with Save the Children to aid children affected by natural disasters and calamities like tsunamis and earthquakes all over the globe.

7. Renaissance Technologies Corporation: The year 2005 was obviously a good one for Renaissance - its flagship medallion fund made its founder James Simons richer by a cool $1.5 billion. Reliance on predictive computer models, science and associated spheres like mathematics and physics has paid off handsomely for Simons – in a world famous for its rollercoaster ups and downs, the Medallion Fund is known for its consistent success. Its average annual returns of 35 percent are 10 percent higher than the returns of Caxton Associates, Quantum Fund and Tudor Investment. And if you’re interested in learning how Simons earns so much, the 5 percent management and 44 percent incentive fees should tell you the entire story.

8. Hermitage Capital Management: It’s tempting to use the term “Russian Roulette” to describe the strategies of Hermitage’s CEO William Browder, but only because of the Russian connection. The fund, which focuses in Russian securities, has had a very successful decade since it was floated in 1996, with returns at an amazing 935 percent. Nelsons ranked it the “World’s Best Performing Emerging Markets Fund (1996-2001)”, Micropal called it the “Best Performing Fund in the World (1997)”, and Lipper termed it the “Best Russian Fund (1997-1998)”. A remarkable aspect of this activist fund is that it helps root out corruption in organizations, on the basis that this vice has an adverse effect on share prices. Browder is also renowned for his significant criticism of and subsequent effect on Russian corporate law, so much so that Russian President Vladmir Putin has banned him from setting foot in the country. The $1.25 billion fund has gone on record in 2000 to say that investors were valuing Hermitage at just 10 percent of its actual value. What is it really worth? Your guess is as good as mine!

9. ESL Investments: Its founder Edward Lampert is an eccentric chap; formerly of Goldman Sachs, he was the first hedge fund manager to earn more than $1 billion in a year, but then, this is also the same guy who drove around in an old car and lived in a rented apartment till he bought a $20 million mansion in 1999. The reclusive billionaire was thrust rudely into the spotlight when he was kidnapped and held for ransom; unfortunately for his kidnappers, he was rescued in 24 hours when one of them used his credit card to order pizza. Though Lampert has been compared to Warren Buffet for his low-key business style, his tactics in the merger of retail firms Kmart and Sears was anything but quiet. The deal earned his ESL Investments a 69 percent return on investments the same year the tycoon crossed the billion dollar earning mark.Oilwell

10. BP Capital Management: According to the company website, the fund’s sole objective is “investing with energy.” BP Capital is managed by T. Boone Pickens, the octogenarian founder of Mesa Petroleum who earned $1.4 billion in 2005 through massive returns from his BP Capital Commodity Fund (650 percent) and BP Capital Energy Equity Fund (89 percent). Pickens shot to fame through his series of acquisitions, takeovers and mergers that led Time Magazine to feature him on its cover under the headline, “The Takeover Game.” BP Capital contributed $7 million to Katrina rehabilitation measures, while Pickens himself has donated nearly half a billion dollars to various charitable causes during the span of his career. A born survivor and fighter, as proved by his birth – after doctors had given up on him, Pickens was the first C-Section baby to be born in Holdenville hospital in Oklahoma.

11. Fortress Investment Group: This global alternative asset manager made news in November last year when it became the first hedge fund listed manager in the United States. It filed for an IPO that puts its value at $7.5 billion, and is looking to raise $750 million with Lehman Brothers, Goldman Sachs, Bank of America, Citigroup and Deutsche Bank as underwriters. The hedge funds arm of the group manages assets worth $9.4 billion and deals in hybrid and liquid hedge funds.

12. D.E.Shaw & Co.: Fortune Magazine called it “the most intriguing and mysterious force on Wall Street” in 1996. D.E. Shaw, founded by an erstwhile computer science professor at the Columbia University, is chock full of Rhodes, Marshall and Fulbright scholars and Putnam winners who are extremely skilled in problem solving and quantitative trading. Amazon.com’s founder, Jeff Bezos, was an employee at the fund before he left to make his own millions. And if you think you have a reasonable chance of getting your foot in the door, well, rumor has it that not even one in 500 applicants pass the eligibility criteria. The $24 billion fund recently made headlines when it hired Lawrence Summers, former Treasury Secretary with the Clinton administration and ex-president of Harvard University as its managing director. With its penchant for the erudite, it’s no surprise that this fund supports various educational programs like math and problem-solving Olympiads.

Pirate 13. Pirate Capital: This hedge fund worms its way into the list for the sheer audacity of its name; its website features a pirate ship sailing across the seas, and its flagship funds are all tagged with the name Jolly Roger, an allusion to the flags of pirates of yore that sported the skull and crossbones. Pirate lends itself to the best headlines being crafted – an exodus of its staff saw this beauty hit the newsstands – “Staff Walks the Plank at Listing Pirate Capital.” The fund, which focuses on shareholder activism, was the subject of an SEC investigation for failing to provide accurate information on its stock sale. Tiger Management is another hedge fund manager that belongs in the category of captivating names – its founder Julian Robertson named his funds Puma, Jaguar and Panther after his wife, Tiger Robertson. The second-largest hedge fund in 1997, Tiger Management closed shop in 2000.

14. Barclays Global Investors: The largest money manager in the world, this London-based hedge fund had $1.77 trillion in assets under management as of March 2006. It is also the biggest privately-held beneficial owner of companies in the world. A part of Barclays PLC, this group manages $14.3 billion in single manager hedge funds, the sixth largest in the world according to Alpha Magazine. The fund management unit accounted for more than 50 percent of the firm’s revenue in 2005. Barclays Global is credited with the creation of the first index strategy in 1971 and the first quantitative active strategy in 1978.

15. Vega Asset Management: What’s going on at Vega Asset Management? The fund, which was ranked by Alpha Magazine as Europe’s biggest hedge fund manager in 2005, is now facing a crisis. With assets down to $6 billion from $12 billion just a couple of years ago, and investors seeking quick redemptions, questions are being raised if the fund will go the way of Amaranth. Vega is an example of the wide fluctuations in fortune that characterize the hedge fund industry.Fall

16. Eton Park Capital Management: He retired from Goldman Sachs at the “ripe” old age of 36, with 15 years of experience, to float his own hedge fund, Eton Park. Meet Eric Mindich, the “Doogie Howser” in the world of hedge funds, Harvard economic graduate and youngest partner at Goldman Sachs at 27. Eton Park, launched in early 2004, was one of the largest start-ups with $3 billion in assets. Investors made a beeline for the fund even though there was a minimum investment limit of $5 million, a lock-up period of 4.5 years and a 6 percent redemption fee within the said period, an annual management fee of 2 percent, and 20 percent of the profits to the manager. Mindich’s financial savvy is demonstrated clearly by the 12.8 percent returned by Eton Park in 2005.

17. Geronimo Financial: A relatively small and new start-up that makes the cut because of its unusual attitude to hedge fund investing. Geronimo Multi-Strategy, which diversified into mutual funds, “sets a new standard for advancing the concept of democratizing hedge fund investments.” It has the ridiculously low investment limit of $1,000, with no need for net accreditation and a performance-based fee structure. Geronimo could well go ahead and create a new benchmark for publicly-traded alternative investments.

18. Bridgewater Associates: The world’s second largest hedge fund manager with $21 billion managed by its fund Pure Alpha, the biggest in the United States, and the founder in the top 25 earners in the business – Bridgewater sure has impressive credentials. Ray Dalio, CIO and president of the outfit, believes in the equality of all his employees. There is no hierarchy, with even the least important subordinate being encouraged to voice his/her opinions.

19. UBS AG: This fund of hedge funds is the world’s largest money manager with $45 billion assets under management. But that’s not what makes it interesting; rather, it’s the contrasting facades that UBS projects. The financial services organization has been named among the 100 best companies for working mothers in the United States for the fourth straight row; the same company was sued successfully by a female employee who alleged sexual discrimination in the workplace. UBS claims to have active gay and lesbian and ethnic minority groups, but it was taken to court by three African-American employees in a class action lawsuit that alleged racial discrimination in hiring and employment policies. And that’s not all – a watchman was dismissed after he found a historian destroying archives that tied a UBS subsidiary to the Nazi holocaust.

20. Brevan Howard: One of the largest and fastest growing hedge fund managers in Europe, Brevan Howard is all set to float a new permanent capital vehicle in London. The move has been eased by the Financial Services Authority relaxing rules to allow single-strategy hedge funds to float in London. With BH planning to raise between €500 million and €1 billion, the London Stock Exchange is finally keeping its share of listed funds instead of losing them to Amsterdam and other European destinations.

21. Lone Pine Capital:
Named the hedge fund of the year in 2004 by the Alternative Investment News' Second Annual Hedge Fund Industry Awards, Lone Pine created a flutter of sorts when it broke away from industry norms and created its own performance fee structure. Instead of no fees for performances below the high-water mark, Lone Pine’s founder Steve Mandel gave his staff 10 percent for figures under the mark and 20 for those over, with investors also compensated accordingly. From Tiger Management to Goldman Sachs to Lone Pine Capital, Mandel’s long journey through the hedge fund industry has only served to put him among the top ten earners in the business – Trader Monthly pegged his 2005 income between $300 and $350 million.Lone

22. Moore Capital Management: He calls Paul Tudor Jones II a close friend and Julian Robertson’s sister step-mother, but he’s quite the recluse that there are not too many photographs of him around – that’s Louis Bacon of Moore Capital Management for you. A shrewd macro money manager, his Moore Global Investments flagship fund has returned 31 percent every year, after fees, since it launched in 1990. Bacon is another of those hedge fund bigwigs who guard their trading secrets with their lives – he’s against the publishing of even historical returns for his funds.

23. GLG Partners: One of Europe’s largest hedge funds in 2005, GLG Partners has of late found itself in the news for all the wrong reasons. The first sign of trouble came in August 2006 in the form of a severe rap on the knuckles from the Financial Services Authority which fined the fund and its former managing director, Philippe Jabre, £750,000 each for market abuse and violation of FSA principles. To show that it pours when it rains, the French financial authorities pulled up GLG in December for alleged trading abuses relating to a convertible bond sale in 2002. Jabre’s brush with the wrong side of the law seems not to have had any adverse effect on him; two months down the line and the former MD is setting up his own financial company in Switzerland, with open plans for the development of a hedge fund!

24. Avenue Capital Group: Of course you’re going to make news when the daughter of one of the most (in)famous presidents in American history joins the ranks of your staff, especially when she’s also the child of a prospective future president. Chelsea Clinton dragged Avenue Capital into the front pages of newspapers when she signed up to work with the $12 billion fund. Of course, it also helps that Avenue’s Marc Lasry is among the top 25 earners in the hedge fund industry.

25. Atticus Capital: This investment management firm with $5.6 billion in assets under management is the largest shareholder in the pan-European currency exchange house Euronext. Atticus had a significant role to play in the merger between the New York Stock Exchange and Euronext, paving the way for the creation of a single platform where traders can deal in stocks, futures, commodities, options and corporate bonds across two continents for at least 12 hours every day.

January 13, 2007

TCI Reduces Stake in Euronext

-- Pushpa Sathish, Staff Writer

British hedge fund The Children’s Investment Fund (TCI) has sold a substantial part of its shares in the European exchange operator Euronext, reports the French market monitoring firm AMF. Even as TCI refused to comment, the gossip mill is rife with rumors that the move has something to do with the fact that plans are afoot for the merger of Euronext and the New York Stock Exchange (NYSE) to form the first transatlantic trading house. Apparently, TCI was in favor of Euronext tying up with its German equivalent, Deutsche Boerse.

Following the divestment of four blocks of shares by Witchfield Holdings, a subsidiary of TCI, shares of Euronext decreased by 1 percent. A further decrease is expected as the hedge fund prepares to shed more of its stake in the exchange operator. TCI is currently the second-largest shareholder in Euronext, next only to Atticus, the New York-based hedge fund.

From Hedge Funds to Investment Management

-- Pushpa Sathish, Staff Writer

In what can be called a move against the flow of the stream, a hedge fund executive has been hired to boost the sagging fortunes of the investment arm of Legal & General Investment Management (L&G). Not so surprising perhaps, when you consider the poor showing of most hedge funds last year. Ian King, earlier associated with the equity hedge fund KDR Europe, has been roped in by L&G to help rebuild its team of equity managers following an exodus of its staff in August 2006. King brings with him more than 10 years of experience in the asset management field, having worked for American Express Asset Management International for a decade or so. L&G, with assets of 218 billion pounds, is one of the larger asset firms in the United Kingdom. Reuters reports:

Active equity managers look to make money by buying and selling stocks rather than holding equities because they are in an index like the FTSE 100. Index-tracking funds typically charge lower fees than active funds and there is debate over which technique is better value over the long run.

Hedge Funds Bow to Islamic Laws

-- Pushpa Sathish, Staff Writer

Selling short is not allowed according to the Islamic Sharia law, which is why many wealthy Arab institutions have steered clear from floating hedge funds. But there’s no more reason to stay away from this intriguing world anymore, not with the new system developed by the London prime broking arm of the French bank Societe Generale (SocGen) that allows short selling even while complying with Sharia rules.

So we see the birth of three new funds – Stark Al-Noor from Stark Investments, Wisconsin, Al Raed Emerging Markets from North of South Capital, London, and another from an unnamed London-based manager - launched with $60 million from a large Middle Eastern bank. Fimat, a subsidiary of SocGen is partnering the launch of these funds and a fourth from Old Mutual Asset Management. The funds will create investments that weigh risks and returns between equity and Sharia-compliant bonds called “sukuks,” said Philippe Teilhard, head of prime brokerage at Fimat.

Meanwhile, a Sharia-compliant fund of hedge funds is also in the pipeline, courtesy the Middle Eastern bank responsible for the funding. The Sharia-compliant investment market is apparently worth $500 billion.

A Closer Look at Lending Risks

-- Pushpa Sathish, Staff Writer

Disclosure and transparency seem to be the buzzwords doing the rounds in the hedge fund industry. Though regulatory agencies have not met with much success in their attempts to get funds to be more open about their investment strategies, they’re trying to minimize the risks to others associated with the industry – like banks and prime brokers who lend leverage amounts to the funds. A committee comprising economists and representatives from the U.S. Securities and Exchange Commission (SEC), the Federal Bank of New York, and the U.K. Financial Services Authority will probe lending practices, counter-party risk measures, and collateralization at large broker dealers, according to the SEC’s commissioner Paul Atkins.

Atkins stressed on the fact that it was not a question of laying down rules for banks to follow; rather, the regulators sought to improve good lending practices and encourage banks and prime brokers to share information with counter-parties and creditors. Being prepared for the risks will make all the difference in how the market copes when a massive collapse occurs – Atkins said that prime brokers were better prepared to deal with Amaranth’s losses of $6 billion than they were when Long Term Capital Management went down in 1998. Reuters reports:

More useful down the road, he said, is to improve disclosure by market participants. "It seems if we can push forward and make sure that the right hand knows what the left hand's doing, that people are involved to a good extent, that the government brings people together so they know what's going on, then that's a very positive thing for the market," Atkins said.