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Browse by CategoryHome » Category List » Hedge Fund Industry
New data on hedge fund launches may be worse (or better) than first meets the eye30 July 2008
But hold the phone. Expressed as a percentage of the overall hedge fund industry, the 2008 number has got to be way lower than the previous 2002 low, doesn’t it? After all, growth during the intervening years has dramatically increased the size of the industry. In December 2007, we told you about a report by the European Central Bank than included the chart at the right. As you can see, global hedge fund launches amounted to about 20% of the industry from 1998 to 2004. Then in 2005 things started to change (although some databases indicated that 2005 was also a strong year for new funds). Curiously, this drop in launches didn’t coincide with a “bear market”. While ‘05 was described by some as a “disappointing year” for hedge fund returns, the drop in growth rates was likely also a result of the maturation and sheer size of the industry by that point.
Comments »The Road Ahead for Hedge Funds: Pot holes or sink holes?16 July 2008
In fact, Morningstar’s own press release yesterday observed:
The Morningstar release goes on reveal that performance chasing is alive and well in Hedgistan. While we have reported extensively about the flow of assets from smaller hedge funds to larger hedge funds, Morningstar’s data shows that money is also flowing quickly from stinky funds to ones that have maintained their bouquet through the credit crunch:
Comments »As markets fall, stock lending keeps on truckin’15 July 2008
In general, stocks are lent out on an ad hoc basis, allowing the lender (or more accurately, the lender’s agent, the prime broker) to set the “borrow fee” in a relative vacuum rather than letting the market dictate it. The resulting borrow fee is still loosely based on the supply and demand for the borrow. So if everyone wants to short a stock, then the demand will increase and the fee will rise. The possibility of a looming “shortage of shorts” has been bouncing around for some (see, for example, our posting “A Shortage of Shorts?” from November 2007). You’d think that a demand-driven increase in borrow fee would be accompanied by a commensurate drop in the price of the stock itself. After all, if everyone hates the company all of sudden shouldn’t the price fall? And as the price falls, shouldn’t some of the froth come out of the borrow demand (as marginal investors sense they have missed their chance to board the train)?
Comments »Making a negative call? Meet the new boss - same as the old boss.15 July 2008Sure, naked shorting and starting false rumours are socially undesirable. But isn’t there something a little ironic in the SEC’s clamp-down on negative opinions? Even the youngest junior analysts can remember a day not too long ago when the scarcity of any negative ratings was considered proof that research was actually just a lap-dog of the sell-side. Back then, with only one or two percent of analyst recommendations of the negative variety, the SEC wanted to see more “sell!” and less “buy!”. After peaking in 2003, sell ratings are still relatively rare - but they may become even rarer if the SEC starts to investigate people who don’t happen to love a particular stock. As Thomson reported today:
In May 2002, the SEC issued new rules to remove what it felt was a muzzle on analysts’ negative views. In the press release announcing its new rules, the commission said its goal was:
Comments »Alternative investing to be taken off endangered species list13 July 2008
Much as an animal is removed from the endangered species list when its numbers multiply, the report concludes that alternative investments may soon out-grow that moniker. Says the summary:
Notably, this year’s survey included questions on portable alpha and 130/30 strategies (appropriately, we might add, discussed in the same breath).
Comments »Cap Intro: The new emphasis for prime brokers. But how much do funds care?1 July 2008
At around the same time, eFinancial News noted…
But a recent survey of hedge funds raises some questions about what really attracts and retains prime brokerage clients. AllAboutAlpha.com media partner FINalternatives just released the results of its 2008 prime brokerage survey. It concludes that the new focus on cap intro may not be generating a lot of fans:
Comments »Hedge fund seeding: “hot” or “not”?26 June 2008
But strangely absent from the line-up is hedge fund seeding. The strategy seems to run hot and cold and would surely have elicited some chippy debate. (okay, maybe not). At the beginning of this year, seeding was hot (see related posting). Then it was not (see related posting). And with the continuation of a difficult fundraising environment for hedge funds, seeding is hot again. In fact, it was in the news several times last week. eFinancial News reports on HFR data showing that new hedge fund launches are at their lowest level in 8 years. One reason, suggests eFinancial News…
Comments »Alpha Magazine’s New Hall of Fame24 June 2008
Thankfully, our good friends at Alpha Magazine have just launched their own hall of fame, appropriately called the “Alpha’s Hedge Fund Hall of Fame“. It will contain several great write-ups on hedge fund legends such as:
Comments »A closer look at the CSX/TCI and Bear Stearns cases21 June 2008
Many of the facts surrounding each case have been obfuscated by sensational reporting. CNN’s Lou Dobb’s demanded, for example, that US legislators block the hostile take-over of CSX by London-based activist hedge fund TCI on national security grounds. Likewise, many mass media outlets seem to have bought into prosecutors’ arguments that the duo who ran Bear Stearns’ now infamous CDO fund were personally responsible for the entire global credit crunch.
Comments »Hedge funds starting to get “voted off the island”19 June 2008
Usually, the term “shakeout” refers to the culling of weaker, smaller players in an industry in favour of the larger and more dominant competitors. So it’s striking that Business Week this week suggests that the “parade of cave-ins” in Hedgistan included funds managed by major financial institutions (e.g. Citi, UBS, and parade-marshal Bear Stearns). The ones doing the culling? Pure play asset managers such as Bridgewater and BGI. In fairness, JP Morgan (which bought and subsequently grew Highbridge) and Goldman (which today announced its hide was saved in Q2 by its asset management business), buck the trend. But 8 of the top 10 largest hedge fund managers in Alpha magazine’s listing of the largest US hedge funds last month were NOT run by investment banks or other large financial services firms (we’d say that #9 BGI runs pretty independently of Barclays). So the question remains, what’s up with the bank-run hedge funds? Despite a rocky road for some bank-owned hedge funds, size continues to be an advantage. Reports BusinessWeek:
Comments »Investors pull $6b from hedge funds. So what’s the alternative “alternative”?11 June 2008
If you are a member of the Chartered Alternative Investment Analyst (CAIA) Association, you are probably familiar with the on-going polling conducted by the association each month. Survey topics are primarily focused on those areas for which market knowledge is currently fragmented or quickly evolving. In May, the CAIA curriculum survey focused on the growing area of “alternative alternative” or “alt-alt” investments. While there is no settled consensus on the boundaries of the alt-alt universe, the alt-alt universe is usually taken to include investments outside of traditional securities markets. Examples of alt-alts include weather derivatives, carbon credits, niche assets such as wine and art, litigation claims, insurance claims, and intellectual property rights such as patents.
Comments »ECB touches on some hedge fund myths in new report10 June 2008
The stated purpose of the report is:
As usual, June’s edition (released on Monday) makes some interesting observations about hedge funds and their potential role in “financial crises”… Hedge funds use relatively little leverage
Comments »PwC Survey finds hedgies report more frequently than most other alternative asset managers9 June 2008
So are hedge fund managers “held to the same standard of disclosure as other investments”? According to an extensive survey of hedge, private equity, real estate, infrastructure and commodity funds released last month by PwC, they may actually be. In fact, the survey finds that hedge fund managers report more frequently than managers of other alternative assets.
Comments »Silos, flesh wounds, the “disintermediation” of poultry, and a call to action4 June 2008More from London (see yesterday’s posting for background)… A pension plan as a financial services firm
It turns out that this view of the hedge fund portfolio as a sort of arm’s length asset manager with only one client can also be applied to the pension fund as a whole. That’s how one major private pension fund described it to a gathering here in London today – as a “financial firm that produces pensions.” This view also has implications for “liability-driven investing” (LDI). Some said that the process of liability-matching and return-enhancing should be kept separate within this financial services firm. For example, one major pension fund here created a team focused on removing interest rate and inflation risk (via a “matching portfolio” designed to match the plan’s future liabilities to pensioners) and a separate team focused solely on trying to squeeze additional returns out of those assets. In true arm’s length fashion, the “return portfolio” is required to literally borrow assets from the matching portfolio – creating a real economic incentive to beat the short-term rates charged on this internal loan.
Comments »Day one from the un-named event in London2 June 2008We report today from a three-day London gathering of some of the world’s largest institutional investors and the hedge funds that serve them (see postings from sister event in Boston last fall). The event focuses not on hedge funds per se, but on how institutional investors use them (portable alpha, fees, alpha/beta separation, 130/30, alternative beta, analytics etc…all the good stuff). In order to create an open atmosphere for candid discussion, organizers have us on a tight leash (there are otherwise no media present here and we can’t even tell you the name of the event). And while we can’t really tell you who said what today, we can pass along some of the major themes from the conference floor. Here’s some of what we heard… Hedge Funds: Innovation from the garage?
Most here held the opinion that “hedge funds” was no longer a useful definition of an asset class. One panellist put it in terms of innovation. He described hedge fund companies as a “platform for innovation”. In an allusion to innovation in the technology sector, he said that “innovation usually happens in garages”, not in large corporations (a clear reference to the oft-cited garage where tech behemoth Hewlett Packard was born - pictured above). In other words, it may be difficult for a large traditional manager to deliver on the major promise of the hedge fund sector - innovation. Issues such as profit- (and risk-) sharing, for example, can often confound the efforts of long-only managers (e.g. banks – see related WSJ piece from last week) to maintain hedge fund programs over the long term.
Comments »New surveys on August quant meltdown: Investors have learned a lesson. But have managers?28 May 2008“We essentially have 10,000 Ph.D.s looking at the same data.” That’s how Vadim Zlotnikov, CIO for growth equities at AllianceBernstein described the world of quant funds to the Annual Meeting of the CFA Institute last week in Vancouver. Zlotnikov was talking about the findings of a new paper by the Research Foundation of the CFA Institute based on a survey of asset managers, consultants and investors. A press release announcing the study confirms what is now commonly believed, that August’s mayhem was mainly the result of quant hedge funds yelling “Fire!” and running for the exits (see related posting).
Larry Siegel, the Director of the Research Foundation of the CFA Institute (see previous guest posting), points out the supreme irony of this development:
Comments »Respected columnist warns on hedge funds, prompting response from AIMA chapter27 May 2008Amongst public relations professionals, there is an axiom that goes something like this: In the absence of the complete story, journalists are forced to create their own conclusions. Many companies have learned that starving the news media of the facts they demand often backfires. In such a situation, journalists a) have no choice but to attempt to fill in the gaps with conjecture and b) often do so totally unchallenged. So “filling in the gaps” is actually a very rational response when you think about it. A column on Monday by one of Canada’s most respected commentators makes this point in spades. In a piece entitled “Hedge Funds: the credit crunch’s enigma“, Globe & Mail columnist Eric Reguly makes a series of remarks about hedge funds that even he suggests is based on little, if any, hard facts. Clearly miffed about another drive-by smearing, the Canadian Chapter of AIMA (the Alternative Investment Management Association) followed its parent organization’s lead this week by speaking out - this time in a letter to Reguly obtained by AllAboutAlpha.com yesterday. As you may recall, AIMA’s London headquarters issued a rare rebuke of hedge fund media coverage last month in the form of a press release quoting the organization’s Chief Executive (see related posting, read press release). Taken together, these responses suggest AIMA is taking a more active stance on educating the media and the public at large about alternative investments. And that’s a good thing. Here’s what Reguly said about hedge funds on Monday:
Comments »Economist article’s “catchy” title may overstate complexity a little26 May 2008
“Catch” #1: If everyone invested in hedge funds, the average hedge fund would not beat the index.
Put forth as a sort of “victim of its own success” argument, this is a restatement of William Sharpe’s oft-cited 1991 article in the Financial Analysts Journal. In a way, everyone is already “investing in hedge funds” since every investor who is not a passive investor necessarily owns a small piece of (pure) active management embedded in their portfolios. So this argument, while entirely valid, isn’t specific to alternative investments. It’s also a “Catch 2%” for mutual funds or a “Catch 50 bps” for active long-only institutional investors. “Catch” #2: Endowments and pensions pride themselves on their ability to earn an illiquidity premium, yet they strive for diversification.
Comments »“Non-top-100″ hedge funds continue to flat-line25 May 2008
The result is often a common assumption that starting a hedge fund is easy. For example, people will sometimes be overheard saying “everyone and their dog is starting a hedge fund” or “they’re sprouting up like weeds” or “there are over 10,000 of these funds with new ones being created every day”. In other words, the media often seems to set the tone more than the actual assets managed by the industry. You’d think that if you golfed with a bunch of hedge fund managers, they’d all be betting thousands of dollars in each hole, drinking champagne and lighting their cigars with twenties. But (unfortunately for aspiring hedgies) that’s an inaccurate view of the industry as a whole. Last year, we commented on the growing phenomenon of concentration in the hedge fund industry. When the growth of the top 100 hedge funds was removed from last year’s industry size figures, it turned out that the remainder of the industry (99% of the widely assumed 10,000 hedge funds in existence) were actually not growing at all. This, as the media trumpeted how the industry was essentially taking over the world. Well it appears from this year’s data from Alpha magazine that industry concentration continues unabated (press release). Last year 69% of hedge fund assets were managed by the top 100 firms. This year, 75% of the world’s hedge fund assets were managed by the top 100 firms. According to Alpha, this select group of mega-managers increased assets by $350 billion (from $1 trillion to $1.35 trillion) over the past year.
Comments »Weekly Newsreel: Madrid, Stockholm, Maple Syrup and 130/3025 May 2008
Nervous alternatives managers could be leaving alpha on the table: P&I reports from ”AlphaMax” in Madrid that “Fees became a point of contention between pension fund executives and hedge fund managers…with the pension executives arguing that the typical hedge fund management fee of 2% and performance fee of 20% can be a deterrent…” 8 out of 10 managers fail to add value: Meanwhile in Stockholm, Watson Wyatt’s Roger Urwin tells another conference why pensions have an allergy to “2 and 20″.
Comments »A “small-cap bias” in hedge funds themselves?21 May 2008
Earlier this week, the company announced the updated results of the same study. It came as no surprise to researchers that last year’s findings were reinforced. Young funds and small funds did better than their larger and older cousins. The chart below appears in the firm’s press release:
You don’t need to be a finance Ph.D. to see the parallels between this research and the work of Eugene Fama and Kenneth French on the “small-cap bias”. Apparently, small cap stocks aren’t the only small things that tend to outperform.
Comments »New 130/30 and “hedge fund replication” mandates bridge gap between alts and skeptical pensions20 May 2008
One of Sweden’s public pension plans, the EUR9 billion AP7, announced the news at a conference yesterday. Reports IPE.com:
Grottheim told the gathering that he could get “the same returns” by investing directly in the risk factors that tended to drive hedge fund returns. (see previous posting on AP7’s alpha/beta separation programme) But is this really the primary motivation for the move? Since hedge fund of funds returns are reported net of fees, it appears as though AP7 won’t be any better off after the shift. Granted, they won’t have to deal with the discomfort of making any fund of hedge fund managers rich (while they simultaneously aim to fund the retirements of hard working Swedes). But how does this shift really make life easier for the pension plan?
Comments »Research says funds of funds not just “multi-manager funds with extra fees”13 May 2008
There are some in the hedge fund industry that look at the fees charged by funds of hedge funds as the equivalent to Puddy’s “optional overcharge“. However, a new study by one fund of funds supplier aims to dispel this notion once and for all. (Says Puddy: “Yeah. That’s right.”) As hedge funds began to ride a wave of interest around the turn of the century, there seemed to emerge a general consensus among those new to the asset class that funds of funds were the most appropriate way to invest. The argument made a lot of intuitive sense as the idiosyncratic risk posed by hedge funds could be ameliorated through diversification. And so the fund of funds became a dominant species in Hedgistan. But as we reported last week, there now seems to be a subtle shift back to single-strategy hedge funds. In fact, discussion about the potential weaknesses of funds of funds (fees, illiquidity of underlying funds and a lack of transparency into the underlying funds etc.) began a few years ago with the rise of the multi-strategy fund.
Comments »HF and PE managers square off on implications of credit squeeze9 May 2008
Samper was a member of a panel discussing the different views taken by hedge funds and private equity funds on the recent credit crisis. Catherine Lewis, a partner with London-based private equity firm Parish Capital, said there was now a significant alpha-generation potential for small private equity funds that focus on niche sectors. In this segment, she said, transactions are less likely to be over-leveraged and are therefore more likely to flourish in the current credit environment. Lewis said that the illiquidity crisis facing credit markets was leading to a marked slowdown in new investment activity, a return to more conservative deal structures, postponed exits and smaller IRRs.
Comments »Report says hedge funds, portable alpha and 130/30 all leading to (financial) climate change5 May 2008
Although the 130/30 market has grown since then, it remains in the very low hundreds of billions globally. Yet in a report released a few days ago, the Security Traders Association (STA) blames recent market volatility, in part, on 130/30 funds. Says the report:
High velocity hedge funds seem to be primary focus of the STAs concern. But 130/30 isn’t the only institutional investment strategy at which the STA points a finger. The use of derivatives (for example, for portable alpha) is also identified as a growing source of market volatility by the report:
Comments »Does shift away from funds of funds mean diversification is dead?4 May 2008
Now it appears they weren’t kidding. Bloomberg cites Pensions & Investments data that shows the proportion of US pension assets invested in funds of funds fell from 57% to 49% over the 2002-2007 time period. Meanwhile, Euopean funds of funds seem to be doing just fine - this according to Global Pensions. The magazine reported back in March that:
Comments »Small US hedge funds fail to reach orbit, fall back to Earth.30 April 2008
Apparently, large hedge funds - the kind that get all the media attention when they perform poorly or have to suspend redemptions - are actually shutting down less frequently than the average fund. HFN reports that teeny-weeny funds with less than US$15 million of assets had an attrition rate in Q1 that was more than twice as high as their proportion of all funds in the HFN database. Tough times for the small fry? Possibly. But HFN doesn’t say whether this level of turnover is actually out of the ordinary. Assets of $15 million translate into $300,000 in management fees - barely enough to keep one or two people and a small office afloat. So, as with small restaurants, high attrition may simply be par for the course. Does this portend doom for the industry? Probably note. It simply shows that it’s getting harder and harder to reach the “critical velocity” required to put a new hedge fund into orbit. It’s as much an asset raising issue as it is an investment performance issue (although the two are obviously related). Starting a hedge fund is often viewed as a route to easy riches. However, many start-up managers soon realize they’d rather make more and work less back at the prop desk.
Comments »Is high hedge fund compensation really that new?17 April 2008
But even this staid reverence has its limits. Yesterday’s release of Alpha Magazine’s top-earning hedge fund managers has – at least for this week – reignited the debate over what is fair and equitable in US society. The result has been a sort of mixture of two familiar issues: CEO compensation and the get rich quick phenomenon of the (pre-implosion) tech bubble John Paulson was #1 on Alpha’s list with 2007 earnings of $3.7 billion. Nine other hedge fund managers made over $500 million. Not surprisingly, the media is now replete with stories about how “crumbling home prices and $100 oil helped Wall Street’s Highest Earners pull in $19 billion last year”, and there is growing outrage over the quantum of these numbers. Paulson’s net worth rose by $3.7 billion last year. Yet he wouldn’t have even have made the top 10 on Forbes annual list of the largest year-over-year increases in wealth. According to the most recent Forbes 400 list (October 2007), Bill Gates and Warren Buffet each made $6 billion while Michael Bloomberg made $6.2 billion. Relative no-names like David Koch and Sheldon Adelson made $5 billion and $7.5 billion respectively.
Comments »Hedge fund survey reveals managers either a) fulfilling mandate, or b) dreaming in Technicolor (check one)16 April 2008
The accounting firm Rothstein Kass found that 90% of senior partners thought hedge funds would pull in more assets this year and three quarters felt that there would be more fund launches this year than last year. Pulling off this feat would require brand and marketing expertise according to 90% of respondents. Apparently Rothstein Kass’ mailing list includes a lot of optimistic managers. Last September, when the firm last polled this group, 50% of hedge funds felt that the (then recent) credit crisis was “positive” for their hedge fund. Less than 20% felt the credit crisis was going to have a negative impact (see posting).
Comments »European institutions apparently staying the course on hedge funds16 April 2008US hedge fund managers aren’t the only ones bullish on their sector. Mercer recently released the results of a survey of European institutional investors that concluded hedge funds were “targeted for increased exposure” by European institutions.
And State Street Global Advisors reiterated its bullish position on the hedge fund industry in this Thomson Investment News article. Reports Thomson:
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New data released this week shows that Europeans just aren’t launching hedge funds like they used to. 
As Dow Jones 
They say that the market for borrowing stocks (to execute short sales) is one of the last great inefficient corners of the financial industry - where participants can simply back their trucks up to the loading dock and use a pitch fork to shovel the cash inside. 
Last week, while JP Morgan CEO Jamie Dimon was busy 
Last fall, after a particularly busy period on the pro-am hedge fund conference circuit, we noted that prime broker salespeople seemed to all be updating their business card to include the title “cap intro”. Apparently, capital introduction (a.k.a. fund raising assistance) was seen as a great way to differentiate one’s self from the growing throngs of prime brokerages. 
A few years ago, before social networking was all the rage, a website called “
The AllAboutAlpha.com “
Two recent court cases have captured the attention of hedge funds. One pits a corporate raider cum philanthropist (TCI) against the increasingly desperate management of a old-line 100,000-car railroad (CSX). The other accuses two average-Joe hedge fund managers as the ones who originally infected patient zero in the global credit pandemic (Bear Stearns’ High Grade Structured Credit Strategies Enhanced Leverage Fund or “BSHGSCSELF” for short)
As the hedge fund industry matures, assets are flowing disproportionately to the larger players in what some have called a “shakeout”. Taking a page from TV’s “Survivor”, investors are apparently starting to vote smaller players off the (Manhattan) island. 
There are 
Every 6 months, the European Central Bank issues a state of the union report on the financial system called the “Financial Stability Review” (
Think hedge funds are secretive? Think they do their best to communicate with investors as little as possible and get visibly upset when investors call? You’re not alone. Stereotypes of the super-secret hedge fund abound. But in the absence of specific regulation, how much transparency is enough? As the Journal of Wealth Management 
As some pension funds begin to shift from funds of funds to single-manager hedge funds, they usually create what amounts to their own internal fund of funds. The only difference between this fund of funds and a “real” fund of funds is that the pension has only one client: its own pension plan. 
After years of steady growth, it’s no surprise that traditional long-only money managers have been licking their chops over the potential to offer hedge funds. Meanwhile, hedge funds have been strangely attracted to the gazillions of dollars under management by the long-only managers. Today in London, managers and investors debated the relative merits, not of hedge funds and long-only funds, but of hedge fund management companies and long-only management companies. While many people can tell you the difference between a hedge fund and a traditional long-only fund, few seem to agree on the unique characteristics of each type of company.
This week’s 
When people talk about how the hedge fund industry growing or shrinking, they are usually referring to hedge funds as a social and media phenomenon, not the more technical definitions such as assets under management. 
If you’re in the hedge fund industry, you know the name Pertrac. These are the guys who make the ubiquitous software platform that many hedge funds use to analyse and report performance to their investors. Last March, the firm compared the performance of large ($500 million+), medium ($100 million-$500 million) and small (under $100 million) hedge funds to see if size determined success in Hedgistan. They also compared the performance of young (under 2 years old), middle aged (2-4 years old) and seasoned (4 years old +) hedge funds.
It’s shaping up to be a banner week for alpha-centric investing in Europe. No sooner had the ink dried on one landmark alpha-centric mandate (see 
In a 
(Madrid, April 25) - The former head of the pension for a large US state has suggested the value provided by funds of funds has increased as a result of market turbulence. Al Samper, former Head of Virginia Retirement System told a gathering of the Chartered Alternative Investment Analysts Association in Madrid recently that protection against the idiosyncratic risks of single strategy hedge funds is more important than ever for institutional investors. He also told the audience that a long term investment horizon was a prerequisite for adding alternatives to a traditional portfolio.
Last year, we published a couple of articles on the somewhat Malthusian possibility of a global shortage of stocks available for borrowing. (”
On Friday, 
After all the negative press about hedge funds over the past few months, one can be excused for believing that every other hedge fund is blowing up. In fact, 
Many countries around the world take a somewhat skeptical view of wealth. While many people in those countries aspire to be wealthy, those who have achieved wealth are usually expected not to flaunt it. As a result, foreigners are often struck by the respect and admiration engendered by wealth in the United States. In the US, wealth isn’t just tolerated, it is celebrated. 
A new survey shows that hedge fund managers are negative on the U.S. economy, yet positive on the prospects for the hedge fund industry in 2008 (