The evolution of due diligence, Part 6 – MountJoy: institutionalization of hedge funds will allow for even stronger DD

Kirsten Bischoff, Opalesque New York: Some funds of hedge funds (FoHFs) and due diligence (DD) providers have had to review their methodology since the beginning of the credit crunch and the subsequent uncovering of frauds such as Madoff’s. Opalesque spoke to several industry players about their approach. Our conversations are presented in a Q&A format – as are DD forms.

The events of 2008 and 2009 served to bolster the risks that many due diligence firms have warned about in the past. Many of the due diligence managers we spoke with cited investor concern over fraud as one of the drivers behind new business. However, they also cautioned investors not to lose sight of many other......................

For full article : http://www.opalesque.com/56049/The_evolution_of_due_diligence_Part_6049.html

Of the major current regulatory developments, the EC Directive is attracting the most controversy

In the last couple of months, the two major developments on the regulatory front were the European Commission’s Directive draft, and the Obama administration’s general overhaul of regulations for the financial system. While the later was generally welcomed, the former has raised much controversy.
The controversial Directive The EC Directive, which first draft was announced on 29th April, and which will have to be approved by the European Parliament and the European Council later this year and be implemented in two years, is thought to be a political response to the credit crisis, heavily influenced by the EU's socialist group, in particular Danish ex-prime minister Rasmussen. As the draft was issued soon after the G20 summit, the European Commission might have tried to get in first (the G20 directive has not been finalised yet.)
The Directive proposes to regulate Alternative Investment Fund Managers (AIFM) established in the European Union who manage more than Eur100m, by authorising and regulating them, demanding more transparency and appropriate governance standards, allowing them to market their funds in the EU, and grant access to the European market to foreign funds after a transitional period of three years.
Infuriated reactions in the UK Seeing more oversight, signs of protectionism and incompatibility with the existing rules, the draft angered the UK fund management population in general. Some of the largest hedge funds warned the Treasury that they would leave Britain unless the draft Directive was drastically modified. The industry association AIMA gathered around a number of luminaries (such as BlackRock, Brevan Howard, CQS, DE Shaw, Fauchier Partners, Lansdowne Partners, Man Group, Marshall Wace) to fight and lobby against it.

Full story: http://www.opalesque.com/53231/Of_the_major_current_regulatory_developments_the231.html

Ernst and Young survey: Reputation the biggest risk for asset management risk managers

Opalesque Industry Updates - Major flaws identifying counter party risk exposures, finds Ernst & Young
Reputational risk is the biggest concern for UK asset management chief risk officers (CROs) followed by the hostile regulatory environment and greater client scrutiny, according to new research published today by Ernst & Young. But CROs are finding that they are not being given the information they need to adequately advise and protect their business nor are they being included in business processes, according to the poll of 23 CROs from some of the largest asset management firms in the UK.
Over a third of respondents can launch a new product from idea in up to eight weeks, while it takes 22% between three to six months. However, only 30% of the CROs thought that the process for pricing new risks into the product was adequate, compared to 48% who didn’t.
Dr Anthony Kirby, director in the Ernst & Young regulatory and risk management practice, comments: “Asset management firms are facing increasingly severe risks as the recession continues. Failing to get CROs involved in new product development or the strategic direction process could result further down the line in disgruntled clients and investors or worse. CROs play a hugely important element in ‘fine-tuning’ products. Their role is really business critical in the current environment.”
Model variations but drive to improve reporting
With market, liquidity and valuation at the top of the agenda for most firms, the report finds a wide variation in ex-ante risk modeling. While the vast majority of those polled undertake such modeling, 26% said they didn’t and 9% didn’t know.
Full story: http://www.opalesque.com/IndustryUpdates/251/Ernst_Young_survey_Reputation_the_biggest_risk251.html

Rallying commodities drove Morningstar Emerging Market Hedge Fund Index 13.5% gains in May,but some indecision has returned in the first half of June

The Morningstar 1000 Hedge Fund Index posted its largest monthly increase in May since its January 2003 inception, rising 6.7 per cent for the month and 9.7 per cent for the first five months of the year.
May was a strong month for the asset-weighted, currency-hedged Morningstar MSCI Hedge Fund Index, which also posted its largest one-month increase since January 2003, rising 3.7 per cent in May and 5.5 per cent for the first five months of the year.
European and developed Asian equity markets outpaced the US in May, but the real surge came from the rebound of emerging market equities. The unhedged Morningstar Emerging Market Hedge Fund Index increased 13.5 per cent, while the currency-hedged Morningstar MSCI Emerging Markets Hedge Fund Index rose 9.8 per cent. These indexes rose 25.2 per cent and 17.6 per cent, respectively, over the last five months.
The US dollar declined against many currencies in May, including those of emerging market countries, triggered by fears of a US government debt downgrade. Potential International Monetary Fund funding also whetted investors' appetite for risk in emerging market countries. The strongest performance was in India, Russia, Eastern Europe, and Brazil, driven largely by their financial and energy sectors.
"Emerging markets saw a large run-up in May, fuelled by US inflation expectations and commodity supply concerns. Hedge fund managers trading in these markets remained cautious, though, believing that the emerging world is still very risky, and sharp corrections are possible," says Nadia Papagiannis, Morningstar hedge fund analyst.

Full Story: http://www.opalesque.com/52946/Rallying_commodities_drove_Morningstar_Emerging_Market_Hedge946.html

Opalesque Exclusive: Small cap stocks may be indicator of economic recovery notes long/short manager Midwood Capital (fund +29% YTD)

From Kirsten Bischoff, Opalesque New York:
While ways to verify the much discussed “green shoots” are debated, one indicator may be the performance of small caps, which Chuck Royce CIO and Portfolio manager at Legg Mason recently said “should lead in the early phase of a prolonged recovery in stocks…”
In fact, while small caps leading recovery may be a historic rule of thumb, the Midwood team led by portfolio managers David Cohen and Ross DeMont has seen few industries where meaningful signs of economic recovery are evident. In its frequent discussions with public companies the team has been hearing comments such as, “Things are somewhat less bad,” or “We think we are near the bottom”.

Full Story: http://www.opalesque.com/52543/Small_cap_stocks_may_be_indicator543.html

From Kirsten Bischoff, Opalesque New York

Financial market turmoil sees activist investors holding positions longer, as proxy regulations change in their favor will investors have the required stamina?

From Kirsten Bischoff, Opalesque New York
It seems the point has been reached when the feeling of helplessness against market forces has shifted to a feeling of anger, sparking a new wave of investor activism. However, this trend (seen this past weekend with CalPERS/Bank of America, US Government/Auto Industry) does not indicate investors are specifically looking for opportunities in which to invest as activists, but reacting to the poor performance of companies they have already invested in.
The question then for activist hedge funds is, do investors have the interest, the patience and the stamina required to allocate to a strategy with a much longer view than has been required before?
The strategy overall has not fared as well as others during this crisis, and fell more than 30% in 2008 (according to Hedge Fund Research).
» Full Story http://www.opalesque.com/51897/Financial_market_turmoil_sees_activist_investors937.html
http://www.opalesque.com/