Dow Jones Credit Suisse Hedge Fund Index - November

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The Dow Jones Credit Suisse Hedge Fund Index finished down 0.79% in November. Their new monthly commentary offers insight into hedge fund performance through the month of November, including an overview of November hedge fund performance, in-depth commentary on individual hedge fund sectors and hedge fund return dispersion statistics for each strategy.

Some key findings from the report include:


 On a year-to-date basis through November, six out of 10 strategies were in positive territory. In total, the industry saw estimated outflows of approximately $4 billion in November, bringing overall assets under management for the industry to approximately $1.7 trillion;

 Directional strategies, such as Long/Short Equity, experienced intra-month volatility related primarily to macroeconomic factors. The rally during the last week of November benefitted broader markets more than many Long/Short equity funds which continued to maintain a defensive bias;

 Tactical trading managers showed generally flat performance. Global Macro managers posted slightly negative performance while Managed Futures funds posted slight gains as managers held onto positive performance gained during the first three weeks of the month; and

 On the relative value front, managers showed mixed performance in November. Fixed Income Arbitrage managers posted slight gains despite the increased volatility in the fixed income markets, while Convertible Arbitrage and Multi-Strategy managers experienced overall losses.

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Hedge fund share restrictions favor managers over investors

Managers' actions raise conflict-of-interest questions for some hedge funds, new study finds

Armed with insider knowledge, managers of share-restricted hedge funds sell off their own holdings ahead of their investors in order to avoid low returns produced by an outflow of shareholder dollars, according to a new study by researchers from Boston College and EDHEC Business School in France.

The practice, known as front running, pits the interests of managers against those of investors in hedge funds where shareholder actions are limited by contract and there is scant disclosure of fund details. Managers act in advance on the information they possess, and can pass it along to preferred clients to shield them from declining returns, which the researchers say can be predicted by the flow of funds.

Analyzing rarely-seen data from the privately held funds, Boston College Professor of Finance Ronnie Sadka and EDHEC researcher Gideon Ozik identified 56 events where managers reduced their holdings, actions that were subsequently followed by a significant out flow of other investors' money. Further studying a larger sample of thousands of funds, the researchers conservatively estimated that managers in the hedge fund industry could have effectively sheltered approximately $2.4 billion dollars from reduced returns that Sadka and Ozik say are directly linked to the withdrawal of investor dollars from a hedge fund.

The findings follow a number of high profile cases in recent years that spotlight managers of the multi-billion dollar funds who shielded their own holdings from losses or tipped off preferred clients in advance of an investor's departure from a fund. Earlier this month, billionaire hedge-fund manager Philip Falcone's Harbinger Capital Partners was accused of providing preferential treatment to Goldman Sachs and other investors.

"The evidence suggests that private information about a fund, not only about the fundamental value of its assets, may constitute material information," report Sadka and Ozik. "Such private information engenders potential conflict of interest between fund managers and investors, with implications for proper fund governance and disclosure policy concerning managerial actions."

In share-restricted hedge funds, investors' actions are limited in order to protect the common interests of all investors in a fund. The restrictions, such as lockup periods or redemption-notice periods, provide an incentive to retain assets in a fund, allow managers to slowly acquire or sell positions and reduce the impact of trading-induced price pressures.

But these share restrictions produce a lopsided exchange of information between managers and their clients about future fund flows, said Sadka.

"We found that flow predicts returns, so the fund manager who receives the three- or six-months notice an investor plans to withdraw their stake possesses an information advantage on which they can act or communicate to other clients," said Sadka. "The fund manager can pull his or her stake out of the fund, or allow other investors out of the fund. The investor who is not informed is left out in the cold."

Focusing on share-restricted hedge funds between 1999 and 2008, Sadka and Ozik found that funds with recent inflows on average earned an additional 5.6 percent annually compared to funds that experienced outflows. No such return spread was observed for funds with fewer share restrictions. So regardless of the fund's assets or strategic approach, the basic knowledge about the flow of funds offers powerful incentive for both managers and investors in share-restricted funds to sell shares, the co-authors report.

Contrary to mutual funds, where investors can remove funds at any time and other investors can see changes in the net value of the fund, share-restricted hedge fund managers must receive several months advance notice before an investor can withdraw. That provides managers with opportunity to withdraw their own stake in advance of the outflow of funds.

"This raises a lot of issues about incentives and information," said Sadka. "All of a sudden, not all investors are equal in a fund. Even information about a fund itself, whether money is flowing in or out, could be material information because that is a reliable predictor of returns."

Sadka and Ozik also compared the effect of managerial capital reductions on high-governance funds – typically audited, US-based funds that report to regulators – and low-governance funds, which are located offshore, do not report audit results or file with regulators. The added disclosure measures produced dramatically different responses by managers to the outflow of funds.

The researchers found that outflows following managerial capital reductions were larger among low-governance funds, reaching a rate of about 18 percent within a year, while the outflow rate hovered at approximately 6 percent for high-governance funds.

To counter these findings, Sadka said hedge-fund managers should disclose their intention to subscribe to or redeem shares from the funds they manage to avoid the appearance of front-running their lesser-informed investors. In addition, imposing tighter share restrictions on managers and insiders should be considered. Finally, in light of these findings, managers and investors should consider that private information about a fund – not just fundamental asset values – may constitute material information.

Emerging Hedge Fund Managers Expect to Post Double-Digit Returns in 2012

GAIM USA Annual Survey of Emerging Hedge Fund Managers Finds 40% Hope to Raise $50 Million or More in New Capital

Emerging managers expect their hedge funds to achieve gains of 10% or more in 2012, according to the GAIM USA Survey of Emerging Hedge Fund Managers. The survey of 90 emerging managers (defined as having $250 million or less in assets under management) found that 61% of the managers expect their portfolios to earn more than 10%, net of fees, while 31% of them expect to earn 15% or more.

GAIM USA, one of the world’s leading organizers of alternative investment conferences, also found that while emerging managers overwhelmingly (81%) cited “raising assets” as their biggest challenge, 40% of said that they expect to raise more than $50 million in new capital in 2012. If successful, that would mean a doubling of assets under management for the smallest funds in the survey, and a 20% increase for the largest ones. The task of raising those assets will fall heavily on marketers outsourced by the emerging managers. When asked which activities they were looking for external partners or vendors, 41% listed marketing, followed by prime brokerage (37%) and compliance (30%).

“The survey tells us that emerging managers are almost by definition brimming with self-confidence” said Amanda Rodrigues-Cheung, GAIM USA Event Director. “Obviously, they have to think that they can outperform the markets, or they would not launch their funds.”

GAIM USA conducted its survey of emerging managers in early December 2011 in advance of the GAIM USA Hedge Fund Conference in Boca Raton in January 2012. Full results will be released at the conference. The survey was conducted to take the pulse of this subset of the hedge fund industry which, on the one hand, has found it difficult since 2008 to raise capital and, on the other hand, is receiving increased attention from investors who think smaller, more nimble funds are more likely to outperform their larger peers.

The 2012 GAIM USA program offers emerging managers several platforms to help them grow and expand their business. The Quickfire Showcase, Alpha Platform and GAIM CONNECT, which goes live online one month before the event, each present a tailored opportunity to describe smaller funds’ investment strategies and put them on the radar of potential investors. Plus, GAIM MATCH will actually set up meetings for emerging managers with investors who have expressed a desire to meet with smaller funds.

This year, key sessions will be dedicated specifically to the opportunities and challenges of investing in smaller and emerging managers and feature top investors. Representatives of LARCH LANE ADVISORS, JP MORGAN, UBP ASSET MANAGEMENT and FUND EVALUATION GROUP will participate in the panel entitled “Managing the investment selection and business risk of allocating to smaller managers.”

GUGGENHEIM PARTNERS, AKSIA, CAMBRIDGE ASSOCIATES, GOLDMAN SACHS ALTERNATIVE INVESTMENTS panelists will discuss “The new paradigm for operational due diligence” and “Meet the Seeders & Providers of First Capital” will feature no fewer than five seeders discussing the best ways to get on their radar screens and the types of opportunities on which they are currently focused.

ABOUT GAIM (Global Alternative Investment Management)

GAIM is one of the world's most powerful brands in the investment conference business. With events in the US, Europe and Asia, GAIM has gained global renown in the alternative investment industry for its success in bringing together leading experts in finance, geopolitics, investing, and economics for a timely exchange of ideas and valuable insights about investment management. Participants, including some of the most recognizable names in the hedge fund industry have unusual access to panelists and an unsurpassed opportunity to make new relationships and strengthen existing networks. GAIM is a brand of Informa PLC.

The Dow Jones Credit Suisse Core Hedge Fund Index Down 0.95% in November

The Dow Jones Credit Suisse Core Hedge Fund Index was down 0.95% in November as a majority of component strategies declined.

Early estimates indicate the Dow Jones Credit Suisse Hedge Fund Index (“Broad Index”) finished down 0.75% in November (based on 80% of assets in the index reporting).

The Dow Jones Credit Suisse Core Hedge Fund Index provides the benefit of daily published index values which enable investors to track the impact of market events on the hedge fund industry. November, October and year-to-date 2011 performances are listed below and are available at www.hedgeindex.com.

Index


Nov 11


Oct 11


2011 YTD

Dow Jones Credit Suisse Core Hedge Fund Index


-0.95%


1.85%


-7.03%

Convertible Arbitrage


-2.35%


-0.52%


-8.84%

Emerging Markets


-1.43%


1.73%


-2.56%

Event Driven


-0.76%


2.66%


-11.68%

Fixed Income Arbitrage


-0.87%


0.18%


-0.86%

Global Macro


-1.43%


1.84%


-10.43%

Long/Short Equity


-0.94%


5.27%


-5.27%

Managed Futures


0.52%


-5.07%


-4.69%

HEDGE FUND LAUNCHES FALL, LIQUIDATIONS RISE IN 3Q

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Despite quarterly decline, new launches on pace for best calendar year since 2007; Fund dispersion rises by 30 percent in volatile quarter

The number of new hedge funds launches declined, while the number of liquidations rose in the volatile 3Q11, as Macro considerations surrounding the European sovereign debt crisis continued to drive financial markets and the resolution of the crisis remained unclear.

According to the Market Microstructure Industry Report released today by HFR (Hedge Fund Research, Inc.), new hedge fund launches declined to 265 funds in 3Q11, a decline of 15 over the prior quarter but representing a modest increase over 3Q10.

Hedge fund liquidations rose to 213 funds, an increase of 22 over the prior quarter and 45 over 3Q10. The 3Q11 liquidation total represents the highest quarterly total since 1Q10, when 240 funds liquidated, while hedge fund launches remain on pace for their highest calendar year total since nearly 1,200 funds launched in 2007.

Hennessee: HEDGE FUNDS DECLINE -0.96% IN NOVEMBER

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Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined -0.96% in November (-3.91% YTD), while the S&P 500 decreased -0.51% (-0.85% YTD), the Dow Jones Industrial Average advanced +0.76% (+4.04% YTD), and the NASDAQ Composite Index fell -2.39% (-1.23% YTD). The Barclays Aggregate Bond Index lost -0.09% (+6.69% YTD) as bonds were mixed. Treasuries increased with the S&P/BG Cantor 7-10 Year Treasury Bond Index climbing +0.70% (+13.52%), while the Barclays High Yield Credit Bond Index fell -2.74% (+1.66% YTD).

“One hedge fund manager referred to November as a game of ‘macro roulette’ with major equity indices fluctuating wildly on news concerning the European sovereign debt crisis,” commented Charles Gradante, Co-Founder of Hennessee Group. “For most of the month, the markets were in ‘risk off’ mode, and global equity markets plunged. At one point, the S&P 500 was down over -9% for the month. The last few days of November saw a complete reversal and a rally in response to coordinated global easing and the hope for European stability, erasing the month’s losses. This environment has proven extremely challenging, and hedge funds were whipsawed again.”

“Hedge funds have been conservatively this year positioned due to elevated risks in the market. As a result, they have underperformed for the year,” commented Lee Hennessee, Managing Principal of Hennessee Group. "In recent weeks, hedge funds have increased net exposures marginally, but remain well hedged. They have consolidated into high conviction names and added macro level protection. Despite recent challenges, many are optimistic and want to remain flexible in order to take advantage of attractive investment opportunities once markets stabilize."

The Hennessee Long/Short Equity Index declined -0.45% (-2.94% YTD) in November. Hedge funds entered the month with conservative exposures and were positioned well to protect capital in a down market. Equity markets traded mostly lower during the month, dragged down by about the worsening European debt crisis. However, a strong three-day rally at month end, which saw the S&P 500 Index gain +7.69%, reversed the month’s losses. The best performing sectors during the month were consumer staples (+2.41%) and energy (+1.65%), while the worst performing sectors were financials (-5.02%) and information technology (-1.87%). Hedge funds underperformed the markets during the rally as short portfolios generated losses. In addition, several managers reported that long positions lagged as many names faced selling pressure ahead of year end. While managers remain cautious about the macro picture, managers are bullish on equities over the longer term. Companies have strong fundamentals and posted record earnings in the third quarter of 2011. Cash is at an all-time high, dividend payments are up, and cash flow is strong. However, over the shorter term, managers are cautious, as the investment environment has become extremely challenging. In the current environment, managers are well hedged in order to protect capital in case of a major ‘risk off’ move and with significant cash balances in order to be opportunistic once new investment opportunities present themselves.

“As many hedge fund managers anticipated, the ‘Super Committee’, which was tasked with creating a plan to reduce the U.S. deficit by November 23rd, did not deliver” commented Charles Gradante. “Both political parties appear to be digging in their heels and plan to make debt reduction a key issue in the 2012 election year. The result will be greater uncertainty for the markets, which will continue to serve as a headwind for equity markets.”

The Hennessee Arbitrage/Event Driven Index declined in November, falling -0.47% (-2.15% YTD) as risk assets declined and spreads widened. The Barclays Aggregate Bond Index fell, down -0.09% (+6.69% YTD). Treasuries were positive, as the S&P/BG Cantor 7-10 Year Treasury Bond Index advanced +0.70% (+13.52%). The Barclays High Yield Credit Bond Index declined -2.74% (+1.74% YTD). High yield credit spreads widened from 707 basis points to 779 basis points at month end. Managers state that spreads for high yield bonds and loans are cheap relative to default risk, though managers remain cautious as macro risks are extensive, volatility remains high, and interest rates are at historically low levels, justifying the higher than average spread. That said, this provides attractive security selection opportunities for credit focused hedge funds. The Hennessee Distressed Index declined -0.96% in November (-3.26% YTD). Default activity picked up to the highest level since November 2009 as American Airlines filed for bankruptcy. However, default rates remain low and are expected to remain low for the next couple years. Distressed managers suffered losses due to weakness in illiquid names and post reorganization equities, which lagged during the late month rally. The Hennessee Merger Arbitrage Index increased +0.13% in November (+0.00% YTD). Merger arbitrage funds were essentially flat for the month. Deal activity continues, and managers are actively putting capital to work. The volatility is providing trading opportunities as managers continue to focus on strategic deals. The Hennessee Convertible Arbitrage Index declined -0.29% (-0.88% YTD) in November. Convertible portfolios were down slightly due to wider credit spreads. Volume was light and valuations were little changed.

“While the U.S. economic data appears to be somewhat encouraging, European debt and economic worries will likely continue to weigh on investor confidence. Most managers expect very low GDP growth for the Eurozone next year and for several countries to contract,” commented Charles Gradante. “Austerity measures have already pushed some periphery countries into recession. Thus, the investment outlook remains negative. However, managers are optimistic that this will create compelling opportunities across several strategies, including event driven, distressed and macro.”

The Hennessee Global/Macro Index declined -2.77% in November (-8.01% YTD), driven by losses in global markets. International equities performed in line with U.S. stocks throughout November, though movements were amplified. The month was dominated by two key negative issues: U.S. and European debt and the slowing growth of European nations. Conditions dramatically approved on November 30, when central banks in the U.S., EU, Britain, Canada, Japan and Switzerland lowered the cost of U.S. dollar swaps by 50 basis points in order to increase global liquidity, resulting in a strong global rally in risk assets. Despite the month-end rally, the MSCI EAFE was down -4.85% for November (-11.30% YTD). The financial sector was the hardest hit due to its exposure to European sovereign debt. International hedge fund managers were negative, but outperformed as the Hennessee International Index fell only -0.71% (-5.63% YTD). The MSCI Emerging Markets Index lost -6.75% for the month, leaving it down -19.37% for the year. Managers suffered losses as equities fell due to concerns about slower growth. Key detractors included Brazil (-7.21%), India (-15.19%), and China (-8.46%). Hedge fund managers were down, but outperformed due to hedges, as the Hennessee Emerging Markets Index was down -3.60% (-12.06% YTD). The Hennessee Macro Index was down -1.12% in November (-2.23% YTD). Macro funds continue to post mixed performance, with some funds generating profits in gold, treasuries and the U.S. dollar, while others experiences losses due to currency, commodities and equity exposures. The U.S. Dollar Index increased +2.89% (-0.84% YTD), benefiting funds positioned with a “risk off” bias. Managers also generated gains long precious metals as gold closed the month at $1,751 per troy ounce. Treasuries advanced as interest rates decreased in November. The 10-year Treasury declined to 2.09% and the 30-year Treasury decreased to 3.07%. Outside of precious metals, commodity prices were mostly down.

November sees hedge funds outperform underlying markets by 2.6%

The Eurekahedge Hedge Fund Index was down 0.65%1 in November amid larger declines in global markets. Risk aversion remained high during the month with the Euro zone debt crisis continuing to dominate investor sentiment. Although the month started with gains in equity markets, mid-month trend reversals and a strong rally at month’s end made it a tough investment environment. The MSCI World Index2 witnessed losses of 3.22%.

Key highlights for November:

* CTA/managed futures hedge funds gained 0.71% in November

* The Mizuho-Eurekahedge Top 100 Index remained in the black November YTD; up 2.66%

* Early reports indicated net positive asset flows to hedge funds in November 2011

* Hedge funds outperformed underlying markets by 2.6% in November



Most regional indices finished the month in the red, with the exception of North American hedge funds which were flat to slightly positive. After the strong rallies in October, a number of North American managers had indicated low net exposures for November to protect gains from the previous month. This cautious positioning helped the managers during most of the month while the last day rally, driven by the surprise move by central banks to provide liquidity, had mixed results. The S&P 500 declined 0.51% during the month.

Among other regions, Latin American and European hedge funds fared better than their Asian counterparts, with returns of -0.27% and -0.48% respectively. Similar to North American hedge funds, European hedge funds maintained low net exposures through the month, helping managers to avoid significant losses in a highly volatile environment. Early sell-offs were triggered in the markets by the possibility of a Greek referendum. November witnessed some significant events such as changes in the Greek and Italian governments, and failure of the ‘super-committee’ to reach an agreement on budget cuts, which drove the market swings. The MSCI Europe Index3 was down 4.96%.


Strategy Indices

In terms of strategic mandates, most strategies were loss making for the month. The best performance was delivered by the Eurekahedge CTA/Managed Futures Hedge Fund Index – up 0.71%. Trend followers posted the largest gains, with FX trades (such as long dollar positions) yielding significant profits for the managers. Long exposures to the Hang Seng Index negated some of the profits however. Short-term systematic traders also finished the month with small gains on the back of short positions in bonds. Macro investing hedge funds made gains through short exposure commodities and posted a positive return of 0.17% for November. Among other strategies, hedge funds investing in riskier assets witnessed the largest losses; the Eurekahedge Distressed Debt Hedge Fund Index was down 1.75% while the Eurekahedge Long/Short Equities Index lost 1.77% during the month.

HFN Industry Performance Report - October 2011

The HFN Hedge Fund Aggregate Index was +2.37% in October and -3.61% YTD 2011 while the S&P 500 Total Return Index (S&P) was +10.93% during the month and +1.30% YTD. Equity market exposure was the primary positive performance driver in October. Credit strategies lagged, but were positive and commodity funds, primarily those with high exposure to FX markets brought down aggregate hedge fund returns. Total estimated hedge fund assets at the end of October 2011 were $2.484 trillion, an increase of 1.01%, or $25.0 billion from September.

Complete report