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

Review of hedge fund launches, closures, trends, regulatory, and legal events - week 35

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By Benedicte Gravrand, Opalesque London: A roundup of last week’s hedge fund launches, closures, index performance, trends, regulatory, legal and financial events pertaining to the alternative investments world.
Last week, we heard of fund launches or possible launches from Desert Shores (momentum trading); Allianz (European Ucits III); 613 Capital (global L/S); Aviva (UK Absolute Return); Noctua (global macro); and Spruce Point Capital (L/S value).
The HFN Hedge Fund Aggregate Average Index was up 2.56% in July, +12.03%YTD; and HFR reported that emerging markets hedge funds had gained 19% for the quarter, and that assets were up by $10bln, to $77bn.
It is not the smoothest time for funds of hedge funds; it was found that investors had pulled $200bn from Europe’s largest FoHFs since Sept-08; UBP confirmed it would reduce its staff by 10%; and Gottex cut fees for investors in its listed products.
Some ranking lists from Alpha had Sparx, Value Partners, Artradis, ADM on top of the Asia list and Brevan Howard, Man, BGI, BlueBay on top of the Europe list.
Some of the fund managers who hit the headlines last week were: Einhorn, who said that Greenlight had “no net long exposure to equities;” short-seller Jim Chanos, who was said to be looking at pharmaceuticals, accused the UK prime minister of ignoring the credit crunch alarm bell; and John Paulson, who is pushing into gold, bought a stake in Citigroup.
TCI's Chris Hohn is to let investors withdraw cash from its fund and introduce a more liquid share class; clients of Cerberus Capital Management's core hedge funds opted to withdraw the majority of money from the funds; and Goldman Sachs Asset Management became the latest manager to announce a levy on investors coming and going from its funds.

Man Investments: Hedge funds back on track as risk appetite comes back strongly, funds retain assets even after removing gates

From Matthias Knab, Opalesque Europe: Man Investment's Research and Analysis Group has published its Q2 Quarterly Review, which can be downloaded at the Source link below. We highlight some of relevant findings from report:
Hedge funds had their best quarter in nine years as risk appetite came back strongly. All styles except for managed futures made profits. Last year's laggards such as convertible bond arbitrage have been this year's biggest gainers and vice versa.
Overall, hedge funds are back on track. The liquidity situation has improved considerably and many gated or suspended funds could liquidate their holdings in an orderly fashion and, in some cases, lift redemption restrictions earlier than expected.
For a variety of reasons, many hedge funds are now less constrained by the de-leveraging process and are able to redeploy risk. When gating was in full swing the consensus was that gated money would melt away quickly when the gates were removed. In fact, this seems not to have happened.Hedge funds are back on track. Broad hedge fund indices enjoyed its best quarterly returns since Q1 2000 in the wake of much improved liquidity, higher risk appetite and tailwinds from credit, equity and commodity markets.
In Q2, the HFRX Global Hedge Fund Index gained 4.85% (YTD 5.56%). Strong performance was recorded across all styles and strategies except for managed futures. Convertible bond arbitrage was the best performing strategy again, benefiting from further credit spread tightening and more normal liquidity. CTAs lagged due to frequent trend reversals in currencies and fixed income markets. Interestingly, the gains were led by strategies that have struggled in the recent past and vice versa.

For full story go here: http://www.opalesque.com/53896/Man_Investments_Hedge_funds_back_on896.html

Bank of China (Suisse)-managed Heritage Fund up +3.45% in June, +39.19% YTD, seeks to focus on China related securities

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From Komfie Manalo, Opalesque Asia:
The Heritage Fund-China Absolute Return was up 3.45% in June, and returned +39.19% YTD. In the fund’s June monthly report, the managers of HF China said they wanted to focus on long-term capital appreciation by investing primarily in China related securities (Hong Kong, H-shares, A-shares, B-shares, Taiwan, U.S., Singapore, and other listings) and in securities with significant exposure to economic developments in China.
The fund is managed by Bank of China (Suisse) Fund Management SA located in Geneva, Switzerland.
According to HF China’s managers, the fund fared well in June compared with the MSCI Golden Dragon Index which was down 1.1% for the month, and was up 34.5% YTD. By maintaining a high cash exposure in recent months (around 30% on average) to reduce volatility, HF China managed to keep its performance in line with the HSCEI Index and MSCI Golden Dragon Index. This shows that HF China’s stock-picking has been able to generate enough alpha to compensate for the 30% cash drag. As a stand alone equity portion, the fund’s stock-pick has substantially outperformed those indices.
China’s market reviewChinese economic fundamentals continue to steadily improve, as strong domestic demand offsets weak external demand. Industrial-output growth accelerated to 8.9% YoY in the first five months of the year compared with a collapse in output growth at 3.8% in January and February combined. Urban fixed-asset investment climbed +32.9% YoY in May, the highest surge in five years.

For full story: http://www.opalesque.com/53842/Bank_of_China_Heritage_Fund_up842.html

Hong Kong Securities and Futures Commission’s half yearly review of the securities market shows economic recovery is emerging

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From Komfie Manalo, Opalesque Asia:
The Hong Kong Securities and Futures Commissioner has just released its latest research paper entitled: “Half Yearly review of the Hong Kong Securities Market” which shows that despite the recent strong rebound of the global stock markets, fundamental support to the surge in the stock markets has not been broad-based. Signs of economic recovery are emerging at best. The recent rally in the stock market seems to be underpinned by a strong capital inflow, but it should be noted that capital movements are known to be volatile and subject to sudden reversals.
According to the paper, since the trough in early March this year, major stock markets have rebounded some 30% – 60% until the end of June. However, it is worth noting that such strong rebound might not be uncommon following a crisis.
The report says that Hong Kong stocks fell at the start of the year on uncertainties over the global economic performance and concerns about financial institutions in the U.S. The Hang Seng Index (HSI) and Hang Seng China Enterprise Index (HSCEI) dropped to this year’s trough in early March. Later, markets rebounded strongly on optimism over global economic recovery amid signs of stabilization in economies. In addition, strong capital inflow to the Hong Kong banking system and stock market also lifted the markets. During the first half of 2009, the HSI and the HSCEI rose 27.7% and 38.9% respectively from their end-2008 levels.
Full story: http://www.opalesque.com/53590/Hong_Kong_Securities_and_Futures_half590.html

Byron Wien’s Farewell Commentary as Pequot shuts

Byron R. Wien, who joined Pequot in December 2005 as chief investment strategist after two decades as Morgan Stanley’s chief strategist, writes in an investor communication obtained by Opalesque that "What has happened to Art and the firm is sad. I have been in the investment business for close to half a century and I have never worked with a group of finer professionals. We will all go on to other challenges...."
Here is the full text: "Back in the 1970s, Art Samberg, the founder of Pequot, and I were partners at a small Wall Street money management firm. We were both analysts and portfolio managers, but Art had a special talent for technology stocks and special situations. He also managed something called “The ‘57’ Account”, named after Heinz’ 57 varieties because its holdings leant new meaning to the concept of diversification. I left the firm in the mid-1980s to go on to two decades as a strategist at Morgan Stanley and Art left a year later to become an investment management entrepreneur.
When Art started his hedge fund in 1986 I was a charter investor because I wanted to benefit from what I knew by then was his special talent for stock picking. Over the years I referred many friends to Pequot because I believed that Art not only had the ability to manage money well, but also could attract other able investment professionals and guide them as the firm grew.

For full story : http://www.opalesque.com/53374/Byron_Farewell_Commentary_as_Pequot_shuts374.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

Opalesque Exclusive: While investment banks look to change pay structure, hedge funds are expected to maintain the bonus culture

The anticipated 50% salary raise for a number of Citi employees has generated almost 600 news articles dissecting, debating and many denouncing the bank’s decision. Under the proposed plan, first reported by the NY Times, Citi will raise base salaries for investment bankers and traders whose compensation is typically skewed towards bonuses rather than yearly salary. Employees in risk management, consumer banking and credit card areas will see much smaller increases.
This increase in base pay likely marks a shift within the banking industry as firms such as Bank of America and Morgan Stanley plan to follow suit, but it is not one that is likely to be echoed within the hedge fund industry.
“Citi needs to [increase pay] to retain their talent and due to the uncertainty regarding the firm’s future,” Deborah Markus, Founding Partner at New York-based executive recruitment firm Columbus Advisors told Opalesque.
Meanwhile, the hedge fund industry appears to be cycling out of a period of loss and the general consensus is that firms that survived 2008 are well positioned to move forward.
“What is driving compensation in hedge funds right now is the historical performance of the fund, the size of the fund, marketability, and funds future plans.”
Trends for the currently employedWhile there is less job hopping in general due to the decrease in opportunity across the hedge fund industry, people still have their ear to the ground for more appealing situations.
Individuals considering moving from a current position are doing much more in terms of due diligence on a firm’s background. “They want to make sure that they are going to a fund that has not only performed well in the past, but is also positioned to perform well in the future,” says Markus. “Candidates ideally want to move to a fund that has strong infrastructure and relationships, smaller less institutional focused funds are less appealing than they have once been.”
Full Story: http://www.opalesque.com/53086/While_investment_banks_look_to_change086.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

The State of Real Estate Around the World: No Signs of Stabilization?

Slowing economic activity and a credit crunch contributed to a decline in housing activity, prices and construction in most major economies. Eastern Europe and the Baltics, as well as the U.S. and UK, have endured some of the sharpest declines. In many countries, not only in the U.S., the bottom of the property markets still seems far off, with sales, prices and starts forecast to continue declining, albeit at a slower pace, through much of 2009.
In fact, many European economies (and Canada) tend to have housing cycles that lag behind the U.S. by about 2-3 years, suggesting that their declines could also persist beyond a U.S. housing stabilization. Sounder lending standards and lower incentives to invest in residential property in some countries may allow them to avoid the depths of the U.S. property correction but others may suffer more severely. The liquidity resulting from quantitative easing has contributed to a slower deterioration of the housing markets. Yet with high inventories in many markets, it may take some time to absorb the excess. This will continue to erode the value of asset-backed securities and banks' balance sheets and defer the revival of construction activity, a major driver of growth.
The decline in retail trade and contraction of the financial sector has worsened the commercial property outlook. Commercial vacancy rates are on the rise in almost all major centres in Europe and North America and net effective rates have declined by 25-30% in major cities in Asia, suggesting that new investment is unlikely as these cities try to absorb overcapacity in retail and hotel trade. Meanwhile, still tight corporate debt markets pose obstacles for corporate finance. Despite the weak fundamentals, REITs and other property investments have benefited from the renewed risk appetite and have been climbing off late. These property investments might well be vulnerable to any reversal of risk appetite.

Full Story: http://www.opalesque.com/Realestate_Briefing/?p=10501