February 02, 2007

SLI CEO Slams Hedge Fund Strategies

-- Pushpa Sathish, Staff Writer

Fund managers have come in for criticism from Keith Skeoch, CEO at Standard Life Investment (SLI), one of the biggest fund managers in the United Kingdom, for their increased usage of shorting and other hedge fund strategies. Skeoch warned of the dangers lurking around the corner when fund managers bet on the company’s stock falling even as the board was constructively talking of succession. Shorting can bring down the price of a company’s stock, an occurrence that is not good for long-term investors.

The censure comes following other large fund management houses like Barclays Global Investors, Henderson Global Investors, Gartmore, Morley Fund Management, Legal & General Investment Management, and Threadneedle Investments increasing their use of long-short strategies that are typical of hedge funds. Business Times Online reports:

Mr Skeoch said that increased use of shorting could cause conflicts within a business, particularly a large one that conducted hundreds of trades each day. “If you have one fund manager making a decision to short and one deciding to go long, which trade takes precedence?”

Teachers and Hedge Funds – The Pension Connection

-- Pushpa Sathish, Staff Writer

Oh how quickly we forget! The ashes of Amaranth are not yet cold, and the San Diego County public employees’ pension has not yet healed fingers burnt in the collapse. But that has not deterred another state-run pension from throwing its lot with the hedge fund industry. Rising benefits and miserly funding from the state have pushed the $39 billion Teachers’ Retirement System in Illinois to seek high returns from the high risk world of hedge funds.

Teachers’ is not learning from the misfortunes of the $7.5 billion pension for the public employees of San Diego County – the fund invested $175 million in Amaranth and lost more than $85 million in under a month. It has recouped half the amount since then, but the fact remains that hedge funds are probably the riskiest investment vehicles in the financial world, especially for a bunch of school teachers.

Teachers’ may have been forced to jump on the hedge fund bandwagon tempted by the promised high returns, because it holds just 62 percent of the money needed to meet its obligations. But does it know that its choices are limited? Hedge funds are extremely secretive about their operations, and taking on public pensions as clients will force them to reveal information as per the Freedom of Information Act. They are also bound by state laws that restrict the scope of their investments – for example, an Illinois statute bans investments in Sudan.

The pension is not worried though – It understands and is well-equipped to monitor the risks involved, and is going in with “eyes wide open,” according to spokeswoman Eva Goltermann.

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.

January 07, 2007

Pirate Pushes Brink’s to the Brink

-- By Pushpa Sathish,  Staff Writer

It looks like things are back to normal at Pirate Capital! The hedge fund was in the news not so long ago for losing half its investment team and subsequently being investigated by the SEC for failing to provide information relating to its stock sales. Following a dismal showing by its flagship fund Jolly Roger, Pirate’s founder decided not to accept new investors, and instead, focus on delivering more returns.

Six months on, and Pirate is back in the media spotlight, this time for forcing Brink’s Company to hire an investment bank, with the tentative plan of selling it sometime in the future. The fund is the largest shareholder of Brink’s, which provides armored truck and security services, with 8.5 percent of the total stake. Pirate is also pushing to get its founder and one of its executives on Brink’s board.

The $1.7 billion worth Pirate is not alone in its persuasive tactics; another major shareholder in Brink’s, MMI Investments, has also moved the SEC with the same request.

BGI Sets Sights on $1 Billion

-- By Pushpa Sathish, Staff Writer

Barclays Global Investors (BGI) is using AlpEx as a vehicle to raise money this year, an ambitious amount of $1 billion. AlpEx is the fund of hedge funds set up by BGI in the fag end of 2006. Managed by Stan Beckers, AlpEx has a research team led by Jonathan Morgan who was lured away from his position as CEO of alternative investment at Julius Baer by BGI. According to data from Hedge Fund Research, Barclay’s is the world’s sixth-largest hedge fund manager.

December 31, 2006

Hedge Funds and Municipal Bonds

-- By Pushpa Sathish, Staff Writer

Following a miserable year that hasn’t exactly seen spectacular returns pouring in, hedge funds are looking to municipal funds to help revive their fortunes. These funds are investments in state and federal government projects, and allow investors to skip on federal, state and local income taxes on interest earned on them.

According to Bloomberg, recent interest in “munis” have pushed them to perform better than U.S. Treasuries and corporate bonds over the past three years. Hedge funds are not just profiting on the interest from these bonds.   

Rather, they are employing various arbitrage strategies to profit from the difference between the yields paid by longer-dated muni bonds and other, shorter-dated securities. One such strategy involves using the bonds as collateral in trusts that issue variable-rate notes.

Delphi in Tussle Between Funds

-- By Pushpa Sathish, Staff Writer

It could well heat up to become the battle of the hedge funds, with Delphi being the spoils, and it could well have an outcome that even an oracle couldn’t predict with accuracy. The auto parts manufacturer which formerly belonged to General Motors is in the middle of a tug of war between Highland Capital Management and a group comprising Appaloosa Management, Cerberus Capital Management, Harbinger Capital Partners Master Fund I, Merrill Lynch and UBS Securities.

Highland, which is the second-largest shareholder in the ailing company, is protesting the $3.4 billion deal struck with the consortium, on the grounds that it will allow the group an advantage over current equity holders in stocks and convertible preferred securities. In addition to this, the Appaloosa-Cerberus group would gain control over the board through its right to nominate six of the total twelve directors, including the chairman.

The hedge fund is countering the offer with one of its own – a $4.7 billion pact that will allow it to buy any unsubscribed shares for a fee of 2.5 percent. Highland will accordingly file a petition against the consortium’s deal on Jan 2, three days ahead of the Delphi hearing at the U.S. bankruptcy court of the Southern District of New York and the Securities and Exchange Commission.

December 20, 2006

We’re Full, Don’t Need Any More Investors

-- By Pushpa Sathish, Staff Writer

House Full – That’s the notice posted on the doors of Renaissance Technologies Corp. The hedge fund, which had a sterling year after increasing its assets by four times to reach the $16 billion mark, is refusing to accept new investors and their money. Why? Because it wants to manage better the hoard it already has!

An investigation into the poor performance of its Institutional Equities Fund, Renaissance found that returns were more forthcoming when it remained a relatively small fund. Too much money in equity strategies is obviously not a good thing, as Ted Aronson will confirm. A main player in the $30 million Aronson+Johnson+Ortiz quantitative hedge fund that closed shop last year under similar circumstances, he says that there is certain evidence that there are capacity constraints on even the best products.

It’s a known fact that hedge funds zealously guard their trading secrets; with the quantitative, mathematical strategies that Renaissance leverages, keeping operations under wraps becomes harder as the money invested in trades increases.

Quant funds such as Renaissance make heavy use of algorithmic trading, or timed trades in small quantities through multiple brokers to hide their intentions. But while algorithmic trading can hide trades in large-cap stocks, big execution orders are hard to mask in smaller stocks. Furthermore, rival hedge funds frequently look to profit from trading against competitors by observing "footprints" -- moves that drive down returns for those looking to hide such trades.

Small wonder then that Renaissance is turning away those knocking on its doors!

December 11, 2006

Major private debt offering from Citadel that hopes to sell almost $2 billion worth of debt

Citadel Investment Group LLC is trying to capitalize on wider investor interest in its line of business. It plans to sell $2 billion in debt to investors. Though the company has not given a formal comment on this development, industry pundits feel that the same is being done in order to increase the hedge fund’s liquidity and financial standing thereby giving it more investment flexibility. Citadel Investment Group LLC is a Chicago based Hedge Fund with over $12 billion in assets under management. Since Citadel is selling the debt directly to a limited number of investors, it is not required to register with the SEC.

While Citadel is one of the newer hedge funds indulging in the ball game, there are others who have already walked on this path. Take the case of Fortress Investment Group LLC that filed for an initial public offering of its stock with the Securities and Exchange Commission. Fortress is a New York based hedge fund that was founded in 1988 and currently has $26 billion in assets under management. Chicago Tribune reports:

“Their design is to reduce their reliance on Wall Street firms for funding, which would eventually provide them with a competitive advantage because they won't be forced into liquidation during periods of stress," Eileen Fahey, managing director for Fitch Ratings, told Bloomberg News.”