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December 30, 2008, 10:02 am

Hedge Fund Returns: The Worst Year Evah

Posted by Deal Journal

That hedge funds have done poorly this year isn’t exactly a surprise. Still, the end of the year brings data that quantify the damage. David Walker of Financial News files this dispatch on how hedge funds are poised for the worst year on record. Financial News is a Dow Jones publication and a contributor to Deal Journal.

The global hedge-fund industry will register its worst year in almost two decades unless hedge funds can increase the value of their investments by more than a fifth before midnight Wednesday. It brings to an end a miserable year for the sector, which has been battered by falling markets and record redemption requests.

Hedge funds have until New Year’s Eve to earn a 21.7 percentage point rise on their investments or the industry will have had its worst year since at least 1990, according to Hedge Fund Research.

Turbulent markets and the record investor redemptions in the latter part of this year that forced hedge fund managers to sell investments into falling markets, left the industry down more than 23% by Christmas Eve, according to HFR’s investable index. Global shares, by comparison, fell 44% this year.

HFR found that only two of the investment strategies pursued by hedge funds that it monitors yielded investors a profit by Christmas Eve. Hedge funds that invested in companies undergoing mergers or acquisitions returned 1.5% through Dec. 24, while portfolios whose managers invest in instruments linked to macroeconomic variables earned 3.8%.

Returns from the other six strategies make for grim reading for an industry whose previous worst year was a 1.5% decline in 2002. That had been the only decline in the 28 years HFR has monitored performance. The sector rebounded strongly in 2003, returning 19.6%.

Convertible-bond arbitrage fell 58%, while funds staking cash on price disparities of related financial instruments fell nearly 38%. Those investing in market events, distressed securities and equities generally were down 23% to 27%. Funds that balance amounts they put on shares rising while others fall shed only 0.9%.

Investors in hedge funds said that next year should improve, and that global macro and computer-driven funds would fare best. Guido Bolliger, co-chief investment officer at Olympia Capital Management, said global macro managers had “aligned their style with the economic climate expected to prevail next year.” He added that global macro did well when market volatility was high, which he expected it to be “for the next few months”.

However Craig Baker, global head of manager research at consultants Watson Wyatt, said funds would continue closing down next year and “mass redemptions over coming weeks will affect short-term performance”.

HFR said 693 funds, or 6.9% of the industry, closed in the first three quarters of this year alone as losses were compounded by record monthly withdrawals of about $77 billion in September and October.

 

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October 17, 2008, 11:27 am

The Incredibly Shrinking Hedge Fund Industry

Posted by Deal Journal

Recent weeks for hedge-fund managers have been ug-lee.

And, as companies that track the industry scramble to put out estimates quantifying the value of the damage there is no consensus on just how much hedge funds have lost, but the trend is crystal clear.

Some of the latest come from Eurekahedge, a hedge-fund research company and consultancy. According to its preliminary estimates, hedge-fund losses totaled roughly $79 billion in September, including $44.5 billion of investment losses and $34.5 billion of investor withdrawals. That was only partially offset by about $10.5 billion of new money flowing into the more successful strategies, Eurekahedge figures.

The financial turmoil has caused steep declines across a number of markets, triggering widespread losses across the hedge-fund industry. Many hedge funds now are down as much as 30% or more for the year–and some 60% or worse. Even many of the biggest names in the hedge fund industry have suffered hefty declines, including Ken Griffin’s Citadel Investment Group and Tim Barakett’s Atticus Capital.

That is causing already skittish investors to take out money and park it in less risky places, such as cash. And, some of the industry’s largest investors–the fund-of-fund groups that invest in pools of hedge funds–have had hefty withdrawals from their own investors, forcing them to take out more money from hedge-fund managers.

In the third quarter, hedge-fund assets shrank by a record $210 billion, or more than 10%, estimates Hedge Fund Research. To put that in perspective, the decline in assets for the quarter exceeded the entire amount of money that flowed into the industry in 2007, which was a record $194 billion.

Of those third-quarter declines, more than $31 billion was attributed to investors taking out their money, the largest net capital redemptions on record, says Hedge Fund Research. That left total hedge-fund assets at $1.72 trillion, down from $1.93 trillion at the end of the second quarter.

As a group, they were down almost 5.5% in September alone and down more than 10% for the year so far, according to Hedge Fund Research. To be sure, that is still better performance than the broader stock market.

And, the contraction is expected to continue, with many industry insiders predicting that by year end hedge-fund assets will have shrunk by a quarter or more. Already a number of hedge funds have shut their doors and many more are expected to follow suit. Credit Suisse estimates 30% of the roughly 8,000 hedge funds will close in the next few years.

–Cassell Bryan-Low

 

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Hedge fund regulation

Published: January 22 2008 09:43 | Last updated: January 22 2008 13:59

Amid the global financial ructions, Tuesday’s publication of a set of voluntary standards for UK hedge funds felt like a solution to an old problem. Since work started on the project last June, mortgage lenders and structured finance desks have emerged as the mischief-makers, not managers taking straightforward punts on the movement of securities.

That is not to say the 140-page document – codifying existing best practices on disclosure, valuations, risk, governance and shareholder conduct – is a waste of time. On valuations, for example, it recommends third-party assessments. This tackles the conflict of interest inherent in most asset management models: while the manager is paid on the basis of assets going up in value, the investor just wants them fairly valued. The low cost of using the code’s kitemark should also encourage adoption, and not just in the UK, which is home to around 70 per cent of non-US hedge fund assets.

The code’s raison d’être is to provide extra comfort to investors but it is questionable whether they need it. Institutions seem happy to take their chances on the information provided. Global asset growth in the hedge fund industry was more than 50 per cent last year, according to Hedge Fund Research; overall assets under management should nudge $2 trillion this year. Moreover, the funds will remain in a regulatory lacuna. The standard-setters are at pains to emphasise that a new body funded by levies, the Hedge Fund Standards Board (HFSB), will oversee the standards, not compliance with them. While the Financial Services Authority will continue to regulate fund managers, the actual funds remain subject to very low-level supervision.

There is no way of telling whether the standards, on their own, would have been enough to head off the threat of tougher oversight. But with markets in the state they’re in, there is more than enough skulduggery elsewhere to keep regulators occupied.

http://www.ft.com/cms/s/1/78e6e28e-c8ce-11dc-b14b-0000779fd2ac.html

New British Watchdog for Hedge Funds

Financed by the industry, the Hedge Fund Standards Board will promote best practices and act as a “custodian” of voluntary guidelines. www.businessweek.com/globalbiz/content/jan2008/gb20080123_145472.htm - 45k - Cached - Similar pages - Note this

Hedge Fund: Hedge Fund Standards Board (HFSB) : Hedge Fund

hedge funds standards board (HFSB) You might have already heard of the Hedge Fund Standards Board (HFSB). They are an organization built from the pocket … richard-wilson.blogspot.com/2008/01/hedge-fund-standards-board-hfsb.html - 75k - Cached - Similar pages - Note this

NakedShorts: New standards quietly castrated

Firstly, the Hedge Fund Working Group has mysteriously evolved into a self appointed “Hedge Fund Standards Board.” Secondly, every single “standard”—already …
nakedshorts.typepad.com/nakedshorts/2008/01/new-standards-q.html -

Hedge Fund News | HedgeWeek | HedgeMedia

Jan 23, 2008 … A Hedge Fund Standards Board is being set up to act as custodian of the standards. The board’s trustees will be responsible for updating the … www.hedgeweek.com/articles/detail.jsp?content_id=241013 - 41k - Cached - Similar pages - Note this

Financial Stability Forum Chairman welcomes hedge fund manager …

Jan 22, 2008 … The “comply or explain” expectation on hedge fund managers, the planned establishment of a Hedge Fund Standards Board to maintain the …
www.bis.org/press/p080122.htm

New standards quietly castrated

The UK-based Hedge Fund Working Group released its final ‘Hedge Fund Standards’ report, 140-odd pages of sound-sounding stuff that the good guys are already at least trying to do, and the bad-to-mediocre will studiously ignore. With markets focused on on their own calisthenics, the feedback loop on Tuesday’s announcement was more muted than it might have been a few months ago.

The Financial Times’ Lex acknowledged that a lot of the issues long blamed on hedge funds really, paraphrasing Bill Gross’s famous “non-bank banks” comment, belong on the doorstep of “non-hedge fund hedge funds.”

Amid the global financial turmoil, Tuesday’s publication of a set of voluntary standards for UK hedge funds felt like a solution to yesterday’s problem. Since work started last June, mortgage lenders and structured finance desks have emerged as the real mischief-makers, not money managers taking honest punts on the movement of securities. [Emphasis added.]

But Castle Hall’s Chris Addy, on his Risk Without Reward blog, was was profoundly disappointed:

We see two problems with the final report. Firstly, the Hedge Fund Working Group has mysteriously evolved into a self appointed “Hedge Fund Standards Board.” Secondly, every single “standard”—already woolly—has been amended so that a hedge fund manager is only required to “do what it reasonably can.” In all, this magic phrase appears some 40 times in the text of the standards. [Emphasis added.]

Somebody, and from a quick scan of the formal comments on the draft released last October it’s not immediately obvious who (although the report credits five prominent law firms with large hedge fund practices with helping bring the document together, so that would probably be a good place to start with the search warrants) got to this one with the castration shears.

Meanwhile, serendipity rules. The report was published on the same day that Bayou scammer James G. Marquez was sentenced, and something called Protean Investment Risks began offering insurance to protect hedge-fund portfolios “from any misrepresentation of assets, theft or other type of fraud by hedge-fund employees or directors.”

Linkage after the jump.

Doing what you reasonably can
by Chris Addy
Risk Without Reward Jan. 22 2008

Hedge fund regulation [$$]
The Financial Times Jan. 22 2008

Insurance for Hedge Fund Investors
DealBook (The New York Times) Jan. 23 2007

Hedge Fund Working Group Standards Board

Hedge Fund Working Group Standards Board
Hedge Fund Standards: Final Report

Hedge Fund Working Group Standards Board
Consultation Responses

January 24, 2008

http://nakedshorts.typepad.com/nakedshorts/2008/01/new-standards-q.html

January 22, 2008

Hedge Fund Working Group - “doing what you reasonably can”

The Hedge Fund Working Group, a group of hedge fund managers based in the UK, today published its final report, “Hedge Fund Standards.” It is, of course, encouraging to see any effort to define operational, accounting and business “best practices”: as due diligence practitioners, our work shows us each day the degree to which operational controls vary enormously across today’s hedge fund industry. We are, however, profoundly disappointed with the HFWG’s final document.

We had previously commented on the issuance of the HFWG’s draft report back in October 2007. We were also interested to read a subsequent article in the Financial Times, which made the point that the “weakness lies in the woolliness.” According to the FT at the time:

“It is hard to quibble with the main focus areas of the draft, such as fuller disclosure of where funds have invested their money, what strategies they follow and what their illiquid holdings are actually worth. The weakness lies in its woolliness. The draft standards stipulate the setting of “risk limits”, for example, without any attempt to calibrate them. This does not address the problem, which is that many funds’ limits are meaningless, set wide enough that they cannot be breached. Ditto the requirement that governing bodies appoint “reputable” auditors. The non-word “adequate” is used more than 40 times, while “sufficient” crops up almost as frequently.”

The final version, however, puts the first version to shame.

We see two problems with the final report. Firstly, the Hedge Fund Working Group has mysteriously evolved into a self appointed “Hedge Fund Standards Board”. Secondly, every single “standard” - already woolly - has been amended so that a hedge fund manager is only required to “do what it reasonably can”. In all, this magic phrase appears some 40 times in the text of the standards.

Let’s turn first to the idea of the HFWG becoming the “Hedge Fund Standards Board”. As accountants, Castle Hall Alternatives lives in a world where bodies such as the Financial Accounting Standards Board, International Accounting Standards Board and their peers worldwide promulgate accounting standards. At first glance, the name “Hedge Fund Standards Board” evokes the same sense of authority and independence.

However, the HSFB is not independent: its initial members are the 14 hedge fund managers who formed the hedge fund working group. There is, critically, absolutely no representation from investors.

We are very disappointed at the lack of balance in this initiative. It is simply impossible to introduce credible and enduring guidance as to industry best practice without specific involvement from investors. Indeed, in our view, investors should be the group that leads any best practice initiative: it is likely that investors may prefer distinctly tighter operational controls than hedge fund managers may prefer to deliver.

Let’s turn to the standards themselves. We’ll take a couple of examples - the very first standard on disclosure, and, secondly, the critical section on valuation.

The October 2007 HFWG draft report said that the best practice standard for disclosure was:

“Managers should carefully consider the appropriate level of disclosure and explanation of its investment policy/strategy and associated risks in the fund’s offering documents and marketing materials. When doing so they should take into account the nature (that is, the identity and sophistication) of potential
investors.”

This was already a bit - wait for it - woolly (exactly what is an “appropriate level of disclosure”, and is it a good idea to leave it to the manager to decide what is “appropriate”?) However, as the final “Standard”, the text becomes:

“A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to include an appropriate level of disclosure (taking into account the identity and sophistication of potential investors) and explanation in the fund’s offering documents of the fund’s investment policy/strategy and associated risks.”

Turning to valuation, the October 2007 draft said that:

“A hedge fund manager should seek to ensure that conflicts of interest over asset valuation are avoided by arranging for the fund to appoint an independent third party valuation agent and/or (where agreed with the fund governing body) by operating a segregated independent in-house valuation function.

The fund’s administrator will often be responsible for calculating the fund’s net asset value and, based on such calculation, the fees and expenses payable to the manager. Where the fund’s administrator is unable to perform this function or where the manager is involved in the valuation process because of its role in assisting the administrator, the manager should ensure that the relevant employees operate independently of the portfolio management team and are not remunerated according to the value of, or increase in the value of, the fund’s portfolio.”

In our view, best practice is always to appoint an effective, independent administrator (although we agree with many commentators that effective is just as important a criteria as independent). The HFWG hence provided an unwelcome either / or in this critical area, although the overall emphasis on independence and segregation of duties was a very positive step in the right direction.

2008’s final standard becomes:

“A hedge fund manager should do what it reasonably can to enable and encourage the fund governing body to put in place valuation arrangements aimed at addressing and mitigating conflicts of interest in relation to asset valuation.

HFSB believes that the most satisfactory way to achieve this is for a hedge fund manager to do what it reasonably can to enable the fund governing body to appoint an independent and competent third party valuation service provider.

HFSB acknowledges, however, that in some cases it will not be possible in practice to achieve both independence and the required level of competence by appointing a third party valuation service provider, in which case the involvement of the hedge fund manager in the asset valuation process will, to a greater or lesser extent, be unavoidable.

Where a hedge fund manager determines the value of any of the fund’s assets (whether by performing valuations in-house or providing final prices to a valuation service provider), it should operate a valuation function which is segregated from the portfolio management function and should explain its approach to investors. If a smaller or start-up manager considers it impractical to do so, it should disclose this in its marketing documents and do what it reasonably can to enable and encourage the fund governing body to disclose this in the fund’s offering documents.”

This “standard” now has multiple layers of exceptions - how can investors determine when involvement by the hedge fund manager in pricing to a “greater or lesser extent” is best practice, or when it is unacceptable? When does it become “impractical” to have third party oversight over valuation?

As we think about these issues, it is helpful to make a distinction between “best practices” and what we might call “threshold practices”. Threshold practices are the minimum that investors will accept, recognising that, in an imperfect world, it is unrealistic to expect every hedge fund to tick every “best practice” box. That does not mean, however, that such practices are ideal. True “best practices” must provide investors with the maximum level of protection from loss due to either honest error or, on occasion, dishonesty. We often make the point that if no-one ever made an honest mistake and if everyone was always honest, no business organisation of any type would need any operational controls at all. People do make mistakes, however - and every now and again someone breaks the rules - meaning that the goal should always be to create the most robust control environment possible.
Clearly, some very skilled and thoughtful managers have contributed to the HFWG standards and the document will generate welcome further attention to the best practice debate. We stand by our view, however, that to be meaningful, any best practice framework must be more specific, prescriptive and, above all, must incorporate the needs and preferences of hedge fund investors, not just the manager community.

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The Hedge Fund Standards Board acts as custodian of the best practice standards published by the Hedge Fund Working Group on Tuesday, 22 January.

Please click here to download the HFWG Final Report.

To access the foreward, executive summary and the best practice standards only, please click here.

http://hfsb.org/?section=10563

http://hfsb.org/?section=10563

 http://online.wsj.com/article/SB120304381506270735.html?mod=hpp_us_whats_news

Citigroup Fund Bars Exit
By Investors After Bad Bet

By DAVID ENRICH
February 15, 2008; Page A1

Citigroup Inc. has barred investors in one of its hedge funds from withdrawing their money, another black eye for the financial behemoth’s troubled foray into new types of investments.

Citigroup suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to yank more than 30% of the fund’s roughly $500 million in assets. To stabilize the fund, which had an 11% loss last year, Citigroup last month injected $100 million. The fund’s longtime manager, John Pickett, has left, following a bitter dispute with Citigroup executives and complaints from investors that he put too much money into a single investment that went bad.

Alternative-investment products such as hedge funds are a relatively small business for Citigroup, which has about $2.4 trillion in assets. Citigroup’s more than 80 alternative products held $61.9 billion in assets as of Sept. 30, of which about $11.5 billion represented Citigroup’s own capital.

Still, the turmoil at CSO Partners is an embarrassment as Citigroup tries to dig out from billions of dollars of losses on mortgage-related investments. Citigroup’s new chief executive, Vikram Pandit, briefly ran the alternative-investments group, and some of the funds he oversaw have been struggling.

A large Citigroup hedge fund called Falcon Strategies suffered a 30% decline last year as its bets on the credit markets backfired. Old Lane Partners, a hedge fund now run by Citigroup that was founded by Mr. Pandit and other former Morgan Stanley executives, has shown lackluster performance, posting a 1.8% loss in January.

As hedge funds boomed earlier this decade, investment banks sought to get a piece of the action. They bought stakes in existing funds and started some of their own. They hoped to grab some of the cash pouring into these funds from large institutions — and rake in lucrative management fees. Investments banks also wanted in-house alternative-investment products to offer to their wealthy individual clients.

Some of the efforts have succeeded. But those cases have been overshadowed by high-profile disappointments. Last summer, heavy losses at debt-oriented funds run by Bear Stearns Cos. helped throw a match onto the subprime-mortgage fire. UBS AG last year shuttered a fund run by a prominent investment-banking executive that had racked up heavy losses.

Even Goldman Sachs Group Inc., which has thrived amid the volatile market, has had trouble with its hedge funds. Its Global Alpha fund, which bets on macroeconomic trends, was down 39% last year, though it’s up a bit this year. Another $6 billion Goldman fund that started this year has stumbled out of the gate, according to investors, losing more than 5% in January.

The weak performance by CSO Partners and other Citigroup hedge funds contributed to an 89% decline in fourth-quarter net income by the bank’s alternative-investment unit. Its profit fell to $61 million from $549 million a year earlier.

Citigroup bought the Old Lane hedge fund in July, installing Mr. Pandit as head of the alternative-investments unit. He became Citigroup’s chief executive in December. The unit now is run by John Havens, a longtime lieutenant of Mr. Pandit. Citigroup is not marketing Old Lane to outside investors.

The CSO Partners fund ran into trouble last June when Mr. Pickett, the fund manager, placed an order for hundreds of millions of dollars in loans. The size of the order exceeded internal trading limits at Citigroup, according to people familiar with the situation. A lawyer for Mr. Pickett declined to comment.

CSO, which stands for Corporate Special Opportunities, was started in 1999 with Citigroup’s own capital. In 2004, it began accepting money from outside investors such as pension funds and wealthy individuals. Those investors now account for most of the fund’s assets.

Since its start, the hedge fund has been run by Mr. Pickett, who in the late 1980s joined Salomon Brothers, now part of Citigroup, as a bond analyst in New York. Mr. Pickett was well-regarded on Wall Street. Some colleagues say he was one of the most talented credit traders they’ve known. CSO, based in London, compiled a solid track record investing in European and U.S. corporate debt, gaining about 27% since opening to outsiders.

Mr. Pickett’s big order last June was for several hundred million dollars of leveraged loans that a group of banks was selling in a private auction on behalf of a German media company, according to people involved in the transaction. At the time, CSO had roughly $700 million in assets, meaning that Mr. Pickett wanted to commit more than half of the hedge fund’s assets.

Some investors in the fund contend that executives at Citigroup didn’t supervise Mr. Pickett closely enough. “I don’t understand…how it would have been possible for him to take on a position that was disproportionately large,” says one investor in CSO.

Citigroup defends its handling of the situation. Spokesman Jon Diat said CSO and similar funds “are subject to comprehensive internal fiduciary risk oversight, risk management practices and senior-level management supervision.”

The seven banks running the June auction allocated CSO a bundle of loans with a price tag of more than €500 million ($730 million), say the people involved in the transaction. Mr. Pickett tried to back out, saying the banks in the deal changed the loan terms after he submitted his bid.

There was a lot riding on whether Mr. Pickett could cancel his order. The credit crisis roiling financial markets last summer was eroding the value of the loans. If they wound up on the CSO’s books, the hedge fund’s performance would suffer.

Mr. Pickett argued that it was his fiduciary duty to investors to cancel the order. He proposed to Citigroup executives that the fund sue the banks arranging the transaction.

Executives at Morgan Stanley, a lead bank on the loan deal, cried foul. They called Mr. Havens, who was Mr. Pickett’s superior and former head of global sales and distribution at Morgan Stanley.

Mr. Havens essentially sided with Morgan Stanley. He and James O’Brien, another Morgan Stanley fixed-income veteran who joined Citigroup in October, instructed Mr. Pickett to not initiate any legal action. They also began trying to negotiate a settlement with Morgan Stanley over the deal.

Mr. Pickett responded by accusing Messrs. Havens and O’Brien of ignoring the fund’s fiduciary duty and having a potential conflict of interest given their ties to Morgan Stanley, say people familiar with the events. Mr. Diat, the Citigroup spokesman, declined to comment on behalf of Messrs. Havens and O’Brien. Morgan Stanley spokesman Mark Lake declined to comment.

Negotiations between the banks and Mr. Pickett dragged on for months. “There was an army of lawyers on both sides,” says a person familiar with the matter.

In early December, Citigroup executives agreed to a settlement proposed by Morgan Stanley. Under the deal, CSO would purchase €512 million (about $746 million) of the loans at face value, even though they were trading for 86% to 93% of their face value, according to a letter that CSO sent to investors. The agreement also required CSO to pay the banks’ legal expenses.

Had it not purchased the loans and paid the legal costs, CSO would have reported a modest positive return for 2007 — not a 10.9% loss.

On Dec. 12, the week after the settlement, Mr. Pickett handed in his resignation.

Within weeks, anxious investors were trying to pull their money out of CSO. Mr. Pickett’s successor, Michael Micko, said in a Jan. 25 letter to investors that the fund had received requests to withdraw more than 30% of the fund’s capital. Explaining why CSO was halting redemptions, Mr. Micko said that if the fund granted all of those requests, it would have to sell valuable assets at deep discounts.

“This would be to the detriment of all investors,” the letter said.

–Tom Lauricella, Gregory Zuckerman and Kaja Whitehouse contributed to this article.

Write to David Enrich at david.enrich@wsj.com

Bad Bets and Accounting Flaws Bring Staggering Losses

•  

By JENNY ANDERSON

Published: February 12, 2008

Mark S. Fishman was a modern prince of the markets — a pedigreed money manager who raised billions of dollars at the height of the hedge fund boom.

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Steadier Returns

But last week his dream collapsed. Hobbled by bad trades in the credit markets, Mr. Fishman began to shut the fund he helped found, Sailfish Capital Partners, which oversaw $2 billion just six months ago, investors said.

On Monday Mr. Fishman, 47, sat in the paneled Princeton Club of New York, explaining what it was like to battle the markets — and lose.

“It feels like someone has died,” Mr. Fishman said, his eyes welling up. “We’ve disappointed people, and there is no one more disappointed than me.”

Mr. Fishman is not the first hedge fund manager to run into trouble — and he certainly will not be the last. After years of explosive growth, this secretive, sometimes volatile corner of the financial world is entering a dangerous new era. The running turmoil in the markets is stirring fears that more of these funds will fail, some, perhaps, spectacularly.

“This will be the year with the highest number of hedge fund failures given the huge number of new and untested hedge funds,” said Bradley H. Alford, founder of the Atlanta-based Alpha Capital Management, an investment advisory business.

“Last year there were some easy trades: short financials, short subprime, long non-U.S and emerging markets. This year there’s no clear trend and no safe place to hide.” So far few funds have suffered the same fate as Sailfish Capital. But the signs are troubling. The average stock-picking hedge fund sank 4.1 percent in January. While that tumble was not as steep as the one taken by the broad stock market — the Standard & Poor’s 500-stock index was down 6 percent — it nonetheless represented the hedge fund industry’s worst showing since November 2000. Few of the investment strategies employed by these funds made money.

Big-name funds are suffering. David Slager and Timothy R. Barakett, who run the Atticus European Fund, lost more than 13 percent, and Lee Ainslie, who heads Maverick Capital, lost 9 percent through Jan. 25, according to SYZ & Company, which tallies hedge fund returns. (Compare that with 2007 performance when the funds returned 27.7 percent and 26.9 percent, respectively.)

Even Goldman Sachs, which turned out record profit last year while many other Wall Street banks stumbled, is struggling to make money for its hedge fund investors. Its $7 billion Goldman Sachs Investment Partners fund, started on Jan. 1, fell 6 percent last month.

Press officers for Atticus and Goldman declined to comment. A spokesman for Maverick could not be reached.

“People who have been in business for 20 years are saying January was one of the most difficult and challenging times they have ever seen,” said a manager who oversees a fund of hedge funds, who asked not to be identified because he does business with many managers.

It is a remarkable turnabout for an industry that upended the old order on Wall Street and, in the process, redefined Americans’ notions of wealth. In recent years hedge fund money has driven up prices of everything from New York apartments to Andy Warhol paintings and reshaped the worlds of philanthropy and politics.

Managing a hedge fund has become the running dream on Wall Street. Since 2000, the number of funds has more than doubled, to 10,000. These private pools of capital now sit atop almost $1.9 trillion in assets.

Until recently, times in the industry were good, very good. On average, so-called long/short hedge funds — those that bet on some stocks and against others — returned 10.51 percent in 2007, according to Hedge Fund Research. The Standard & Poor’s 500, by contrast, returned a mere 5.49 percent, including dividends.

But making money is getting tougher. Many hedge funds are products of a bull market. Many profited by making leveraged bets on what were, until recently, steadily rising markets. Some plowed into emerging markets while others dove into the loan market. But now, as the credit squeeze tightens and talk of recession grows louder, those same markets have collapsed.

Sol Waksman, president of Barclay Group, an alternative investment database, said that three-quarters of the 1,241 hedge funds that have reported returns for January lost money.

“That’s a scary number,” Mr. Waksman said.

Many managers fear things will only get worse. The mood was bleak at a hedge fund conference given by Morgan Stanley recently at the Breakers resort in Palm Beach, Fla., according to people at the gathering.

Larry Robbins, the founder of Glenview Capital, a $9 billion hedge fund, captured the atmosphere of the conference, entitled, “2008 and Beyond,” with a bit of black humor. Asked what his strategy was for 2008, Mr. Robbins joked, “To get to, ‘and beyond,’ ” according to a person at the meeting. Mr. Robbins declined to comment.

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Hedge Funds vs. S&P 500

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Sailfish seemed like a hedge fund that might weather the storm. Before founding the fund, Mr. Fishman spent seven years working for Steven A. Cohen, the founder of SAC Capital Advisors, another hedge fund based in Stamford, Conn. Mr. Fishman called Mr. Cohen the “Michael Jordan” of the trading world.

Mr. Fishman and Sal Naro, a friend who worked at UBS, formed Sailfish in 2005, aiming to “build a better mousetrap,” Mr. Fishman said. The firm’s name is a play on their names.

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.

“We are working exceedingly hard in an illiquid market to position the portfolio in a way that can withstand these conditions and enable us to participate aggressively as the market stabilizes,” Sailfish wrote to investors in August. The fund lost 12.5 percent that month.

“Wall Street was not willing to make orderly markets for high- quality short-dated paper,” Mr. Fishman recalled on Monday. “They didn’t know their own balance sheets.” (Banks have taken more than $200 billion in hits since August.)

Sailfish bounced back in September and October, but investors, alarmed by the deteriorating markets, began to take their money out of the fund. By the end of the year, Sailfish was down more than 15 percent. In January, it fell an additional 7 percent.

Last Thursday, Sailfish started to alert investors that the fund was likely to shut down, two investors said. Mr. Fishman visited investors in Chicago and California, these investors said, while Mr. Naro met with investors in New York. The fund met all its margin calls and has ample cash, said one investor who spoke with one of the principals. Neither of the fund managers would confirm that the fund was closing.

But Mr. Fishman will say what it is like to lose money for investors —including himself.

“It’s that sad dawning when you realize the market is so much bigger than you are,” he said.

Say hello to the ‘market dislocation vehicle’

Aug 30 16:29
by Paul Murphy
Comment
(1 comment)

Blindingly obvious, really - Wall Street’s having a sale of returned/shop-soiled stock.

Or, more precisely, investment banks are following the lead of some private equity funds in launching fresh funds to buy leveraged loans that are trading at depressed prices in the secondary market. More…

Who’s afraid of the big bad banks? Everyone.

Aug 30 16:26
by Sam Jones
Comment

The much whispered-about Lehman Brothers have some harsh words for their detractors: the investment bank today downgraded the outlook for four of their Wall Street stablemates.

Lehman downgraded third and fourth quarter earnings as well as the 2008 outlook for Morgan Stanley, More…

Like chocolate soldiers - structured credit bankers can’t take the heat

Aug 30 15:23
by Helen Thomas
Comment

We worry that just as we’re getting slowly to grips with the acronym-rich world of structured credit, the people in charge of creating the stuff are all leaving their respective organisations.

The hunt is still on for the last bankers to take their P45s and exit the structured product scene. More…

 

Goldman Bets Hedge Money of Its Own

http://dealbook.blogs.nytimes.com/2007/07/27/

goldman-bets-hedge-money-of-its-own/

Goldman Bets Hedge Money of Its Own

July 27, 2007, 8:13 am

The equity proprietary trading desk at Goldman Sachs, where traders make bets on stocks with the bank’s own capital, is the American Idol of the trading world, having produced a rock-star roster of top hedge fund managers.

Raanan A. Agus, 39, head of that desk, is starting a new hedge fund, but with a twist. His fund will be inside Goldman Sachs itself, The New York Times reports.

In the last few decades, the group has produced a long list of hedge fund talent, like Richard Perry of Perry Capital, Daniel Och of the Och-Ziff Capital Management Group, Thomas F. Steyer of Farallon Capital Management, Edward S. Lampert of ESL Investments, Dinakar Singh of TPG-Axon and Eric Mindich of Eton Park Capital Management. Collectively, the six manage almost $100 billion.

In a first for Goldman, Mr. Agus will move part of his principal strategies team — the formal name for the equity proprietary desk, which had been known as the risk arbitrage desk — to the bank’s asset management division to start a hedge fund that some insiders speculate could reach $10 billion, The Times said.

The fund, which does not have a name yet, will apparently receive money from Goldman and raise money from its private clients and outside investors, according to people with knowledge of the fund.

The decision to move Mr. Agus highlights the importance of hedge funds for investment banks because of the potential revenue they can generate and as an option the banks can market to their wealthy clients. Inside the securities division of Goldman Sachs, Mr. Agus puts up the firm’s own capital.

With Mr. Agus’s shift into the asset management division, he and his team can gather money from Goldman Sachs, its clients and outside investors, offering Goldman three benefits: a fund for its clients to invest in, a stream of fees from the funds and the ability for Goldman to put more money at risk — through the hedge fund, and in principal strategies.

The fund, which will be added to a lineup of other hedge funds in Goldman Sachs Asset Management, will be the bank’s first significant “long-short” fund, one which invests in stocks (“going long”) and hedges with bets that prices will fall (“going short”).

Since hedge fund managers generally take home 2 percent of assets under management and 20 percent of profits, the fee opportunity for Goldman is tremendous. If performance in the fund is good, the incentive fees are huge; if they are bad, the bank still makes sizable management fees.

Goldman already runs several hedge funds in its asset management division, including its flagship, the $10 billion Global Alpha fund. That fund, which by intention is very volatile, posted returns of almost 40 percent in 2005, helping to generate $739 million in incentive fees the first quarter of 2006. Since then, its returns have slowed, and the fund is running a 4.5 percent loss for the year through June.

That performance appears to have had an impact on the group’s ability to attract assets. In the first quarter of 2006, $7 billion worth of alternatives flowed into Goldman’s asset management unit. By the first quarter of 2007, flows were $2 billion and in the second quarter, they were zero.

The Times notes that, in many ways, it is surprising that the bank has not already started a more significant long-short hedge fund in its asset management division: long-short is the strategy most closely associated with the hedge fund world. In the heyday of 2005, it would have been hard to persuade a successful hedge fund manager to work on the Goldman platform because a successful manager could raise lots of money and not have to share any of it with Goldman.

But 2006 was a hard year for big starts, with only one fund reaching the billion dollar level in the first half of the year, according to Absolute Return magazine. During the same time this year, there have been three starts of more than $1 billion.

Economix

Worth a Lot, but Are Hedge Funds Worth It?

 

 

By DAVID LEONHARDT

Published: May 23, 2007

When Institutional Investor’s Alpha magazine released its annual list of the highest paid hedge fund managers last month, it allowed the rest of us to play an entertaining little parlor game: what could you buy if you made as much money as those guys?

 

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Michael Nagle for The New York Times

James Simons, the top-earning hedge fund manager last year.

 

Multimedia

Graphic

Performance of Top Hedge Funds

 

Related

• The 100 Biggest Hedge Funds
• What Else Can $1.7 Billion Buy?
• The Quantitative, Data-Based, Risk-Massaging Road to Riches (June 5, 2005)
• New York Magazine’s Primer

James Simons, a 69-year-old mathematician who was at the top of the list, earned $1.7 billion, which equaled the amount of money that the federal government spent last year running its vast network of national parks. Down at No. 3 on the list, Edward S. Lampert of Greenwich, Conn., the investor who owns a large chunk of Sears, made $1.3 billion, which, if you forget about taxes, would have allowed him to buy the entire economic output of Sierra Leone. We’re talking about real money here.

Today, Alpha magazine will release another big list, and this one offers a chance to answer another, arguably more important, question: Are these billionaire hedge fund managers really worth it?

•

The reason hedge funds are a license to print money is their fee structure. A typical fund charges a 2 percent management fee, which means that it keeps 2 cents of every dollar that it manages, regardless of performance. Mutual funds, on average, charge about 1 percent.

On top of the management fee, hedge funds also take a big cut — usually at least 20 percent — of any profits that exceed a predetermined benchmark.

So in a good year, a fund’s managers bring in stunning amounts of money, and in a bad year, they still do very well. Some quick math shows why: 2 percent of a $5 billion portfolio, which was roughly the cutoff for making Alpha’s list of the 100 largest funds, equals $100 million. A fund’s managers get to take that fee every single year.

Last year was actually a pretty tough year for the industry. Because hedge funds tend to make a lot of countercyclical bets — thus the name — they can often turn a profit even when the stock market falls. When it’s rising broadly, though, many struggle to keep up. Last year, the Standard & Poor’s 500-stock index jumped 14 percent, while the average hedge fund returned less than 13 percent, after investment fees, according to Hedge Fund Research in Chicago.

But the men — and they are all men — who appear on Alpha’s list of top earners don’t manage average hedge funds. They manage the biggest funds in the world, the ones that are winning the Darwinian competition for capital, and many of them aren’t having any trouble beating the market. One of the funds at Mr. Simons’s firm, Renaissance Technologies, delivered a net return of 21 percent last year. The other returned 44 percent after fees. And Mr. Simons, who relies on a fantastically complex set of algorithms, doesn’t charge “2 and 20” — as the typical industry fees are called. He charges “5 and 44” — a 5 percent management fee and 44 percent of profits — yet he has still been doing very well by his investors for almost two decades.

I realize that a lot of people find 9- and 10-figure incomes to be inherently excessive. Or even immoral. From a strictly economic point of view, however, they are also perfectly rational. You cannot find anyone else who is providing the same returns as the best hedge fund managers at a lower price. If you don’t like it, you don’t have to give them your money.

(Even if you do like it, they probably won’t take your money. In exchange for being lightly regulated, hedge funds are open only to wealthy investors and big institutions.)

Thanks to their incredible performance, the biggest funds have grown far bigger in recent years. The 100 largest firms in the world managed $1 trillion at the end of last year, or 69 percent of all the assets in hedge funds, according to Alpha. At the end of 2003, the top 100 had less than $500 billion, or only 54 percent of total hedge fund investments.

“The best performance is coming from the largest funds,” said Christy Wood, who oversees equities investments for the California Public Employees’ Retirement System, which, like a lot of pension funds, is moving more money into hedge funds.

• 1
• 2
• (Page 2 of 2)But there is an irony to this influx of money. It all but guarantees that hedge fund pay over the next few years won’t be as closely tied to performance as it has been. The hundreds of millions of dollars that have flowed into hedge funds have made it all the harder for fund managers to find truly undervalued investments. The world is awash in capital.

   

  Skip to next paragraph

   

  Multimedia

  Graphic

  Performance of Top Hedge Funds

   

  Related

  • The 100 Biggest Hedge Funds
  • What Else Can $1.7 Billion Buy?
  • The Quantitative, Data-Based, Risk-Massaging Road to Riches (June 5, 2005)
  • New York Magazine’s Primer

  All that capital, of course, also translates into ever-greater management fees, regardless of a fund’s performance. The flagship hedge fund at Goldman Sachs lost 6 percent last year, but it still brought in a nice stream of fees. Bridgewater Associates, which is based in Greenwich, has earned a net return of less than 4 percent in each of the last two years. Yet its founder, Raymond T. Dalio, made $350 million in 2006.

  “When we have a bad year, we’re essentially flat,” Parag Shah, a Bridgewater executive, told me. “And when we have a good year, we have a great year.”

  Goldman and Bridgewater may well bounce back, but the combination of extraordinary pay and ordinary performance is going to occur more and more in the coming years.

  Outside of the highfliers on the Alpha list, it’s already the norm. Since 2000, the average hedge fund hasn’t done any better, after fees, than the market as a whole, according to research by David A. Hsieh, a finance professor at Duke. Still, even mediocre managers, after a lucky year or two, are able to attract gobs of capital and charge “2 and 20.”

  So are today’s hedge fund managers really worth it? Sure, but only if they deliver the sort of performance that Mr. Simons has, and very few will in the years ahead. More to the point, it’s extremely difficult to know who the stars will be.

  In all sorts of walks of life, people tend to think that the past is a better predictor of the future than it really is. That’s why journeyman baseball players — a Yankees pitcher named Carl Pavano comes to mind — are able to sign huge contracts based on a single good season. It’s also why so many investors chase returns.

  The genius of the world’s hedge fund managers isn’t only in how they invest their money. It also lies in having set up an industry that takes advantage of a timeless human trait.

http://www.nytimes.com/2007/05/23/business/23leonhardt.html?pagewanted=2

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The International Association of Financial Engineers presents

-•-

The 2007 IAFE Annual Conference - From Quant to Riches

Monday, May 21, 2007

Hosted at Bear Stearns, 383 Madison Avenue, New York City

Featuring Talks by Jim Simons and Andrew Lo.

Program Agenda:

8 am

Registration

Coffee & Light Breakfast

Kindly sponsored by Wilmott’s Certificate in Quantitative Finance Program

8:30 am

IAFE Annual General Membership Meeting

9 am

Opening Remarks

Richard Lindsey, CEO, Callcott Group & IAFE Chairman

9:15 am

Demystifying Quantitative Trading

A Panel Conversation

Panel led by Giovanni Beliossi, Managing Partner, FGS Capital & IAFE Board Member

Richard Bookstaber, Frontpoint Partners

Harvey Stein, Head of Quantitative Finance Research and Development, Bloomberg LP

Ramu Thaigarajan, Principal and Portfolio Manager of Quantitative Strategies, Pequot Management

10:30 am

Mid-Morning Break

Kindly sponsored by University of California, Berkeley – Masters Financial Engineering

11:00 am

The Psychology of Trading

Andrew Lo, Harris & Harris Group Professor, MIT Sloan School of Management & IAFE Senior Fellow

Are financial markets driven by fear and greed, or by rational arbitrageurs? Is there any method to the market’s madness? In this talk, Dr. Lo will attempt to reconcile behavioral finance with the Efficient Markets Hypothesis by focusing on the psychology of trading and the role of emotion in financial decision making.

12:15

What are They Thinking?

The results of a poll of the IAFE Board and Senior Fellows in regards to the most interesting question in finance. IAFE Senior Fellows include Phelim Boyle, John C. Cox, Emanuel Derman, Darrell Duffie, John C. Hull, Jonathan Ingersoll, Robert Jarrow, Andrew Lo, Harry Markowitz, Leo Melamed, Robert C. Merton, Stephen A. Ross, Mark Rubenstein, Paul A. Samuelson, Myron Scholes, William Sharpe, Oldrich Vasicek.

Presented by Tanya Styblo Beder, IAFE Board Member

12:45 pm

Lunch

Kindly sponsored by Tethys Technology

2:15 pm

Keynote Speech: Mathematics, Common Sense and Good Luck

How Jim stumbled his way into the world of finance, and miraculously managed to land on his feet.

Jim Simons, President, Renaissance Technologies and 2006 IAFE/SunGard Financial Engineer of the Year

3:30 pm

Mid-Afternoon Break

Kindly sponsored by Carnegie Mellon’s Computational Finance Program

4:00 pm

Hedge Fund Valuation

A Panel Conversation incorporating the work of the IAFE Investor Risk Committee and AIMA’s New Publication “Guide to Sound Practices for Hedge Fund Valuation”

Panel led by Leon Metzger, Adjunct Professor and Editor, IAFE Whitepaper on Valuations.

Mark Anson, CEO, Hermes Pension Management & IAFE Board Member

Michael Greenstein, Partner, PricewaterhouseCoopers, Alternative Investment Funds

David Woodhouse, Fauchier Partners & Chief Author/Editor, AIMA Guide to Sound Practices for Hedge Fund Valuation.

5:15 pm

Top Ten Hedge Fund Quotes

What hedge fund managers really say – the best (or worst) statements from managers.

Mark Anson, CEO, Hermes Pension Management & IAFE Board Member

Andrew Weisman, Managing Director, Merrill Lynch & IAFE Board Member

5:45 pm

Reception

Kindly sponsored by FlexTrade Systems Inc.