Hedge Funds to Spend $2.09 Billion on Information Technology in 2011

Ω

Citi Prime Finance/First Derivatives Survey Shows Funds Spend Approximately Nine Basis Points of Assets Under Management on Average




Hedge funds will spend approximately $2.09 billion on information technology (IT) in 2011, representing an average of approximately nine basis points of assets under management, according to the Prime Finance 2011 IT Survey released today by Citi Prime Finance, a multi-broker, multi-strategy integrated business unit comprised of prime brokerage, financing solutions, business advisory and capital introductions, and First Derivatives, a global provider of software and consulting services to the financial services industry. The report, “Managing Your Hedge Fund IT Spend to Achieve Differentiation”, which surveyed over 75 hedge funds in the U.S. and Europe and 15 vendors , documents for the first time both the industry’s aggregate expenditure on information technology and the average expenditure per hedge fund.

“The Prime Finance 2011 IT Survey demonstrates the powerful impact of technological innovation on the hedge fund industry,” said Sandy Kaul, US Head of Business Advisory Services of Citi Prime Finance. “The survey, providing information on IT investment for the first time, enables industry participants to evaluate their own expenditures and see how they stack up against their competitors. While the $2.09 billion spent by hedge funds is equivalent to just 2.8 percent of forecasted total industry-wide securities and investment spending of $75 billion, hedge fund IT investments have a disproportionately large impact on advancing the capabilities of the overall financial services industry due to their complex trading strategies and multi-asset focus.”

As the survey demonstrates, hedge funds are changing their approach to investing in new information technologies. While hedge funds have traditionally sought to differentiate themselves and to enhance their own performance through technological innovation, the current risk and regulatory environment is driving hedge funds to invest instead in more efficient use of collateral and financing. Software and solutions designed to improve portfolio management and trading have become standardized and disseminated across a broad group of hedge funds.

“The survey findings have important implications for hedge funds making their own plans for technology and other capital expenditures in 2012,” said Alan Pace, Head of Citi Prime Finance in the Americas. “We are committed to delivering this type of thought leadership on a consistent basis as part of our overall business advisory offering, as feedback from clients and other industry players indicates that such studies provide information that individual clients would find impossible to obtain on their own.”

Large or “franchise” hedge funds – those managing $5 billion or more – realize significant economies of scale in their information technology expenditures. Franchise-sized firms with assets under management (AUM) in excess of $5 billion are expected to spend an average of $7.9 million on technology in 2011 – more than 13 times the amount forecast for small funds with AUM less than $500 million. Small funds charge nearly the entire IT expense to their management company, but as AUM grows, more of these expenses are charged back to the fund level. The largest hedge funds are able to charge 20 to 30 percent of these costs back to the fund.

“The allocation of more expenses to the fund, rather than to the management company, can be considered a premium that investors pay to access these managers and reflects the ability of the largest funds to absorb these expenses without significantly affecting performance,” said Bill Saltus, Head of Hedge Fund Technology Consulting, at Citi Prime Finance. “The hedge fund business is highly competitive and, as our survey also indicates, innovations in technology are making it easier for newcomers to enter the field.”

Other survey findings include:

- More funds are adapting unified data management solutions. Specialized consultants focusing on hedge funds’ needs are helping funds consolidate data from disparate sources to produce unified reporting of elements including risk, accounting, trading, finance, and counterparty data, allowing funds to satisfy reporting needs for investment management, compliance and regulatory requirements, and investor transparency from a single platform.
- The “buy versus build” decision has shifted for hedge funds. Hedge funds can choose from a broader range of commoditized solutions, pioneered by a set of large hedge fund managers who developed their own platforms when commercially available options failed to meet their complex requirements. These platforms over time have become commercialized and commoditized.
- Technology innovations are helping launch new hedge funds, and helping existing hedge funds launch new funds more quickly. The proliferation of outsourced solutions designed specifically for hedge funds helps new funds minimize their capital expenditures. Hedge funds, for example, can now buy not only software as a service (SaaS) but “infrastructure as a service” solutions, shortening the time and expense needed to launch a new fund. Third-party service providers are also enabling hedge funds to outsource entire functions.

“The survey results indicate that there are multiple vendors and outsourced service providers offering solutions for core functions such as portfolio management and trading,” said Bill Saltus, Head of Hedge Fund Technology Consulting at Citi Prime Finance. “Leading funds and specialized consultants are now offering risk, finance and collateral management solutions while developing unified data management platforms and other platforms to give hedge funds the flexibility they will need to address evolving demands from regulators and investors.”

Hedge funds face new round of redemptions

Complete article

The hedge fund industry is braced for a new round of redemptions after two months of poor performance and growing investor desire to move money into cash.

The world's largest listed hedge-fund manager, Man Group PLC , stoked fears of another industry meltdown Wednesday when it reported a net $2.6 billion was pulled from its funds between June 30 and Sept. 26. It lost a further $1.5 billion from fund losses and $1.9 billion from the effect of a stronger U.S. dollar when accounting for euro- and Australian dollar-denominated funds. Its GLG unit, acquired last year, posted particularly large outflows.

Man Group shares fell as much as 25% in London.

Aberdeen Asset Management PLC (ADN.LN), a U.K. fund manager with about GBP26.2 billion of its GBP176.9 billion in alternative investment strategies, Monday said those funds lost about GBP2.2 billion between June and August from redemptions and performance losses...

Friday marks a deadline for investors in many hedge funds with monthly and quarterly liquidity to say they want their capital back.

Expectations of further hedge-fund losses for September come after an average 2.3% decline in August, according to Hedge Fund Research Inc.'s HFRI Fund Weighted Composite Index, the largest monthly decline since May 2010...

The global hedge-fund industry managed around $2.04 trillion at the end of June, according to HFR.

HFN Industry Report: August 2011

The HFN Hedge Fund Aggregate Index was -2.77% in August and -2.18% YTD 2011. Total industry assets fell an estimated 0.86% to $2.548 trillion as performance accounted for a decrease of $30.6 billion and investors accounted for a net inflow of $8.6 billion.

The net inflow in August was a reversal of the three month downward trend which ended with the outflow in July. Total estimated net capital increase for hedge funds in 2011 stands at $70.8 billion. Commodity, primarily precious metals and grains, along with short equity exposures were the saving grace for aggregate hedge fund returns in August and fixed income strategies again outperformed equity funds, the latter posting negative average returns for the fourth consecutive month, the longest losing streak since 2008.

Full report

HFN Strategy Focus Report: Statistical Arbitrage

HFN has published a new report on statistical arbitrage hedge funds. Statistical arbitrage funds were +1.72% in July and -1.23% YTD 2011. HFN estimates total hedge fund assets invested in statistical arbitrage strategies were $32.43 billion at the end of July 2011. Total AUM has decreased 16% in the first seven months of 2011, or $5.9 billion. AUM decreased 3% in 2010 after climbing to an all-time peak of $42.5 billion in March of that year. Statistical arbitrage strategies vary widely in terms of position holding time horizon and style, but the similarity across all of these funds is the fully quantitative nature of trade construction and execution. The full report touches on trends for the heterogeneous group and performance relative to its peers.

HEDGE FUND LAUNCHES OUTPACE LIQUIDATIONS AS INDUSTRY ASSETS REACH RECORD LEVEL

Average incentive fees continue to decline;

Fund performance dispersion rises, reversing recent trend

New hedge fund launches in the second quarter of 2011 totaled 280, a slight decline from the 298 new funds that were launched in the first quarter, according to data released today by HFR in the latest edition of Market Microstructure Report: 2Q11. The first half launch total of 578 was the strongest six months since the first half of 2007, as total hedge fund industry capital reached a record level of $2.04 trillion. Fund liquidations in 2Q totaled 191, a slight increase from the 1Q total of 181; the liquidation total for the second quarter represents an attrition rate of 2.07 percent.

Investors exhibited a preference for direct investment in single-manager vehicles, as opposed to commingled fund of funds (FOF). Single-manager launches accounted for 245 of the launches in 2Q11, the highest level since 2Q07, while FOF’s experienced a net decline, with 53 liquidations and only 35 new launches.

Lower Fees, Higher Volatility

Both management and incentive fees charged by hedge funds declined in 2Q, with incentive fees posting a more significant decline. Average incentive fees industry-wide declined to 18.81 percent in 2Q (from 18.95 percent in Q1); however, the average incentive fees of funds launched in the trailing 12 months was 17.56 percent, the lowest level since 2005. Average hedge fund management fees posted a narrow decline of 1 bp to 1.57 percent, while FOF management fees were unchanged at 1.3 percent.

Performance dispersion between best and worst performing deciles of funds in the trailing 12 months rose to nearly 61 percent, reversing a trend of narrowing dispersion from prior quarters when volatility declined. The top performing decile gained an average of +48.2 percent over the trailing 12 month period, while the bottom decile declined by -12.7 percent. Recent performance dispersion represents an increase over prior quarters, however this remains well below the peak of over 116 percent observed in 2009.

“The first half of 2011 was a strong environment for new hedge fund launches, with the industry on pace to approach the full year total of nearly 1,200 launches in 2007,” said Kenneth J. Heinz, President of HFR. “While lower fees continue to be supportive of this growth trend, the evolution of fund transparency is also a significant factor driving new fund launches. As volatility has increased throughout 3Q, we expect fund launches to continue to appeal to these investor preferences, as hedge funds position for strategic growth and take advantage of tactical opportunities created by these volatile market conditions.”

About HFR

HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry. Established in 1992, HFR specializes in the areas of indexation and analysis of hedge funds. HFR Database, the most comprehensive resource available for hedge fund investors, includes fund-level detail on historical performance and assets, as well as firm characteristics on both the broadest and most influential hedge fund managers. HFR has developed the industry’s most detailed fund classification system, enabling granular and specific queries for relative performance measurement, peer group analysis and benchmarking. HFR produces over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus. With performance dating back to 1990, the HFRI Fund Weighted Composite Index is the industry’s most widely used standard benchmark of hedge fund performance globally. The HFR suite of Analysis Products leverages the HFR Database to provide detailed, current, comprehensive and relevant aggregate reference points on all facets of the hedge fund industry. HFR also offers consulting services for clients seeking customized top-level or more nuanced analysis. For the hedge fund industry’s leading investors and hedge fund managers, Hedge Fund Research is The Institutional Standard.
###

Hedge funds generated negative performance in August, falling 2.30% for the month

That compares a loss of 7.69% for the Dow Jones Global Index.

Oliver Schupp, President of Credit Suisse Index Co., LLC, said, "The Dow Jones Credit Suisse Hedge Fund Index fell 2.30% in August, although three out of ten sectors posted positive performance for the month. Overall, the index outperformed global equities by more than five percentage points with Dedicated Short Bias delivering the strongest performance, gaining 6.56% as short positions across equity markets proved profitable amidst broad market downturns. Global Macro also gained 1.91% as managers employed tactical trading strategies to navigate the high levels of volatility seen in August." Schupp continued, "The industry saw an estimated $4.77 billion in inflows. Including August's performance, total industry assets are now estimated at $1.79 trillion."

Performance for the Broad Index and its ten sub-strategies is calculated monthly. August, July and YTD performance numbers are listed below and are available at www.hedgeindex.com.

 

Index	August 2011	July 2011	YTD
Broad Index	-2.30%	0.69%	0.00%
Convertible Arbitrage	-1.73%	-0.14%	1.72%
Dedicated Short Bias	6.56%	3.01%	4.37%
Emerging Markets	-3.15%	1.67%	0.63%
Equity Market Neutral	-0.89%	-0.18%	4.40%
Event Driven	-5.37%	-0.78%	-4.87%
Distressed	-4.41%	-0.26%	-1.69%
Event Driven Multi-Strategy	-5.98%	-1.07%	-6.78%
Risk Arbitrage	-0.92%	-0.77%	1.21%
Fixed Income Arbitrage	-0.27%	0.55%	3.82%
Global Macro	1.91%	2.53%	5.89%
Long/Short Equity	-4.44%	-0.41%	-4.12%
Managed Futures	0.25%	4.03%	0.74%
Multi-Strategy	-1.93%	0.61%	2.99%
Dow Jones Industrial Average	-3.96%	-2.05%	2.14%
Dow Jones Global Index	-7.69%	-1.66%	-6.07%

 

The following funds are no longer reporting to the Dow Jones Credit Suisse Hedge Fund Index: Fletcher Income Arbitrage Fund, Forest Global Convertible Fund, FrontPoint Financial Services Fund L.P., FrontPoint Asia Pacific Fund L.P., BBM Gauss Fund

The Dow Jones Credit Suisse family of hedge fund indexes includes:

1.   The Dow Jones Credit Suisse Hedge Fund Index, an asset-weighted benchmark that measures hedge fund performance and seeks to provide the most accurate representation of the hedge fund universe.

2.   The Dow Jones Credit Suisse Core Hedge Fund Index, an investable, asset-weighted hedge fund index that seeks to provide broad representation of the liquid, investable hedge fund universe with limited platform bias. The index reflects the performance of managed accounts and other regulated fund structures sourced from across a range of platforms.

3.   The Dow Jones Credit Suisse AllHedge Index, an investable index comprised of all 10 Dow Jones Credit Suisse AllHedge Strategy Indexes weighted according to the sector weights of the Broad Index.

4.   The Dow Jones Credit Suisse Blue Chip Hedge Fund Index, an investable index comprised of 60 of the largest funds across the ten style-based sectors in the Broad Index.

5.   The Dow Jones Credit Suisse LEA Hedge Fund Index, an asset-weighted, composite index which provides insight in to three specific regions of the emerging markets hedge fund universe (Latin America, EEMEA (Emerging Europe, Middle East and Africa) and Asia).

In accordance with the Dow Jones Credit Suisse Blue Chip Hedge Fund Index Rules and the Dow Jones Credit Suisse AllHedge Strategy Index Rules, Credit Suisse Hedge Index, LLC is publishing the following notice: The following funds are in a Special Rebalancing Situation (as defined in the Index Rules available on www.hedgeindex.com): Alexandra Global Investment Fund I Ltd., Bennelong Asia Pacific Multi Strategy Equity Master Fund Ltd., Canyon Value Realization Fund (Cayman) Ltd., Castlerigg International Limited, Contrarian Fund I Offshore Ltd., Deephaven Global Multi-Strategy Fund, Drawbridge Global Macro Fund Ltd. - SPV Assets, Firebird Avrora Fund Ltd, GLG European Long Short Fund Ltd., GLG Market Neutral Fund Ltd., JANA Offshore Partners Ltd., Jayhawk China Fund (Cayman) Ltd., Longacre International Ltd., O'Connor Currency and Rates Portfolio II Ltd., Owl Creek Overseas Fund Ltd., Ramius Multi-Strategy Fund Ltd.,  Seneca Capital International, Ltd., Shepherd Select Asset Ltd. and WGTC Ltd. 

Europe Leads Equity Funds Down in August, Morningstar Canada Data Show

Ω

Equity funds suffered the worst of their now four-month-long slump in August, as weak economic data and a historic debt downgrade in the United States pushed world markets downward. All but one of the 23 Morningstar Canada Fund Indices that track equity categories posted losses for the month, with 12 of them losing more than 5%, according to preliminary performance data released today by Morningstar Canada.

The worst-performing fund index was the one that measures the European Equity category, which lost 8% in August. “The tribulations in Europe started a few years ago with the peripheral countries of Iceland, Ireland and Greece. Now there is fear that troubles may be spreading to the core as Italy and Spain came under pressure, prompting the European Central Bank to step in and purchase the government bonds of these countries,” said Morningstar Fund Analyst Salman Ahmed.

“These fears worsened when Germany, considered the stalwart in the region, released disappointing GDP growth numbers due to a slowdown in exports,” Ahmed said. Germany's DAX stock index lost 19.2% for the month, while major indexes in France (CAC 40) and the United Kingdom (FTSE 100) lost 11.3% and 7.2%, respectively, when measured in local currencies. For Canadian fund investors, these losses were tempered by currency effects, with the Canadian dollar depreciating against both the euro (2.6%) and the pound sterling (1.4%).

Things weren’t much better on this side of the Atlantic, where the SandP 500 Index lost 5.4% in August. “There was a sharp decline at the start of the month due to consistently poor economic news and an unprecedented downgrade of U.S. debt by rating agency Standard and Poor’s from the AAA to AA+. This prompted the Federal Reserve to commit to two years of low rates to try to help markets. Investors reacted positively to the news, but markets still ended this volatile month deep in negative territory,” Ahmed said. Canadian investors in this segment once again benefited from the weakening loonie, which dropped 2.5% against the U.S. dollar, and the Morningstar U.S. Equity Fund Index closed the month with a 4.8% loss.

Among the major diversified foreign equity categories, the Morningstar Global Equity Fund Index lost 5.5%, while the indices that measure the Asia Pacific Equity, Emerging Markets Equity and International Equity categories lost 5.2%, 6% and 7.4%, respectively.

Domestic equity funds generally outperformed their foreign counterparts, with the Morningstar Canadian Equity Fund Index posting a relatively tame 1.9% loss for the month. This result reflected both a sharp drop in one of Canada's major sectors—energy—and a significant gain in another: materials. The SandP/TSX sub-index that tracks the latter sector gained 5.1% for the month, boosted by solid performances from the major gold producers.

The best performer among the 43 Morningstar Canada Fund Indices—and the only equity-based index with a positive return—was the one that tracks the Precious Metals Equity category, which gained 4.8% in August. Only four other fund indices produced gains for the month, all of them tracking fixed income categories, with returns ranging from 0.5% to 1.7%. “As is usually the case during times of market uncertainty, investors flocked to the safe havens of gold and government bonds,” Ahmed said.

For more on August fund performance, go to www.morningstar.ca.

Morningstar Canada’s preliminary fund performance figures are based on change in funds’ net asset values per share during the month, and do not necessarily include end-of-month income distributions. Final performance figures will be published on www.morningstar.ca next week.

Hedge funds outperform global markets in August

Ω

The Eurekahedge Hedge Fund Index was down 1.95%1 in August. Even so, this loss marked a month where managers delivered significant outperformance and downturn protection in a highly volatile environment, as witnessed by the MSCI World Index falling 7.25%2 as market sentiment turned bearish across the globe. These sentiments were the result of the debt situation in Europe, a bleak outlook on global economic growth and the downgrade of US government debt by Standard and Poors. While global markets changed directions frequently during the month, hedge funds were able to deliver the 5.30% outperformance (compared to the MSCI World Index) as gains on the short side offset losses. Protective positions in safe haven assets also helped to prevent heavy losses.

Key highlights for August:

* Hedge funds outperformed global markets3 by 5.30% in August

* Macro hedge funds gained 1.12% during the month

* Early reporting funds suggest positive net asset flows in August, despite market turbulence

* Arbitrage, distressed debt, event driven, long/short equity and relative funds witnessed their fourth consecutive month of negative returns

Hennessee: HEDGE FUNDS DECLINE -3.36% IN AUGUST

Ω

Hennessee Group LLC, an adviser to hedge fund investors, announced today that the Hennessee Hedge Fund Index declined –3.36% in August (-1.80% YTD), while the S&P 500 declined -5.68% (-3.08% YTD), the Dow Jones Industrial Average fell -4.36% (+0.31% YTD), and the NASDAQ Composite Index decreased -6.42% (-2.78% YTD). Bonds were mixed, as the Barclays Aggregate Bond Index advanced +1.46% (+5.90% YTD) and the Barclays High Yield Credit Bond Index fell -4.00% (+1.95% YTD).

“August was a very challenging month for hedge funds as they were once again ‘whipsawed’. Hedge funds were forced to reduce exposure in order to limit losses as the financial markets plummeted. They then underperformed as the markets rallied back strongly into month end,” commented Charles Gradante, Co-Founder of Hennessee Group. “Markets continue to be driven by fear, resulting in high correlation among asset classes. The result is one of the most challenging investment environments for hedge funds on record since inception of the Hennessee Hedge Fund Indices in 1987.”

“Hedge funds experienced their worst loss in August since October 2008. Directional strategies, such as long/short and event driven, were the hardest hit, while short biased and macro funds were the best performing strategies,” commented Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are down about -2% on average, but that masks the wide dispersion in individual hedge fund manager returns.”

The Hennessee Long/Short Equity Index declined -3.68% (-1.65% YTD) in August, its fourth consecutive negative month. August was a turbulent month in the equity markets as the S&P 500 declined -5.68% for the month and was down as much as -17% during the month. The combination of slowing global growth, intensifying European sovereign debt issues, the U.S. debt downgrade, and disapproval with the political process triggered a sharp selloff. Momentum selling exacerbated losses, resulting in a slow motion market crash. While a month end rally relieved some of the losses and masked monthly volatility, investor confidence was shaken and the likelihood of a double-dip recession has increased.

This environment has been extremely challenging for hedge funds as the correlation between assets has increased to almost 80%, surpassing levels seen during the credit crisis of 2008. During the month, losses in many core positions were exacerbated as many hedge funds had overlapping holdings. Managers responded by taking down exposure levels and increasing their cash balance. Managers also shifted to higher quality, large cap names and traded out of more economically sensitive names for more recession-resistant ones. In addition, managers are using a variety of tools to hedge downside risk, while trying to maintain the ability to participate if we were to experience a sharp rally.

“The political stalemate and resulting uncertainty has become a major issue for the financial markets. The inability for the U.S. political system to make progress has caused consumer and corporate confidence to decline significantly,” commented Charles Gradante. “As a result, individuals and businesses are reluctant to spend, hire, or invest. While a recession seemed unlikely a few weeks ago, the probability of another recession has meaningfully increased over the last month.”

The Hennessee Arbitrage/Event Driven Index declined in August, falling -2.98% (-0.79% YTD). Bonds were mixed as investors sold risky assets and fled into safe havens. U.S. Treasuries benefited from the flight to quality and yields declined substantially, while investment grade and high yield spreads increased substantially in August. Trading in the high yield market, which is seasonally slow in August, was essentially non-existent. The limited liquidity was challenging for managers looking to reduce risk in the declining market, helping to exasperate mark-to-market losses. Managers responded by adding short exposure in highly liquid instruments in order to protect capital. That said, after a painful August, managers are selectively adding to attractive opportunities, but remain cautious.

The Hennessee Distressed Index decreased -6.01% in August (-2.22% YTD). Distressed managers suffered significant losses as investors increased risk aversion in a flight to quality. Core long positions declined more than the market as investors sold risky assets indiscriminately. Hedges provided some relief, but distressed managers were hurt by their traditional long bias. Managers also suffered from a lack of catalysts as tumultuous markets prevented companies from pursuing refinancing, IPOs and other events.

The Hennessee Merger Arbitrage Index declined –1.77% in August (+0.31% YTD). Merger arbitrage mangers experienced losses as spreads in even the most solid merger arbitrage transactions widened dramatically. As a result, managers are finding opportunities to selectively add to positions at very attractive levels. The Hennessee Convertible Arbitrage Index returned -1.95% (+0.60% YTD) in August. Convertible securities sold off along with other risk assets. As a result, the Merrill Lynch CB index cheapened to 0.52%. There was no new issuance.

“Long positions in gold have been a key source of profits for hedge funds this year. Despite the strong performance this year, managers continue to be bullish on gold,” commented Charles Gradante. “As the developed economies approach a period when they cannot issue new debt and cannot raise taxes, the only option is to print money, which is bullish for gold.”

The Hennessee Global/Macro Index declined -2.91% in August (-3.07% YTD). Negative macroeconomic data, widening sovereign credits in Europe, and the S&P downgrade of U.S. debt drove markets lower and set an extremely negative tone for the month. Financial markets across the globe declined with the MSCI All-Country World Index falling -7.53% in August (-6.05% YTD). Europe was hit especially hard as the Euro Stoxx 50 ended the month down -13.8% and was down -22% at its month low. International hedge fund managers experienced losses as the Hennessee International Index declined -5.97% (-4.43% YTD).

Emerging markets also fell as the MSCI EM Index declined -9.19% (-10.27% YRD). Hedge fund managers outperformed as they were positioned cautiously with the Hennessee Emerging Markets Index falling -3.30% (-2.18% YTD).

Managers remain optimistic on emerging markets long term as many have stronger balance sheets, higher growth, and increasing consumption. The Hennessee Macro Index was one of the best performing indices, advancing +0.60% in August (+0.11% YTD). The flight to quality resulted in losses to almost all asset classes except for precious metals. Gold was a top performer in August, up +12.2%, while silver (+4.2%) and platinum (+3.7%) also performed well.

In terms of currencies, the conflicting headwinds of greater risk aversion versus the U.S. downgrade by S&P resulted in the U.S. Dollar remaining largely range bound in August (+0.3%). Managers did experience losses in their long Swiss Franc positions on intervention by the Swiss National Bank. Oil was also weak given the fears around slowing global growth and pending resolution of the Libyan civil war.

The Dow Jones Credit Suisse Core Hedge Fund Index Down 2.88% in August

Ω

Versus Losses of 7.69% for Global Equity Markets

Oliver Schupp, President of Credit Suisse Index Co., LLC, said, "The Dow Jones Credit Suisse Core Hedge Fund Index finished down 2.88% in August. Despite challenging conditions throughout the month, hedge funds appeared to be effective in providing a degree of capital preservation when compared to global equity markets, which fell 7.69% as represented by the Dow Jones Global Index. This outperformance is largely due to the strategic de-risking of many managers who began reducing net exposure in the weeks, or even months, preceding the correction.”

Index	Aug 11	Jul 11	2011 YTD
Dow Jones Credit Suisse Core Hedge Fund Index	-2.88%	0.20%	-3.76%
Convertible Arbitrage	-3.46%	-0.56%	-3.60%
Emerging Markets	-3.45%	1.20%	0.04%
Event Driven	-5.31%	-1.22%	-8.06%
Fixed Income Arbitrage	-0.66%	-0.35%	1.35%
Global Macro	-1.84%	-0.16%	-5.95%
Long/Short Equity	-3.56%	0.20%	-3.23%
Managed Futures	1.03%	3.61%	0.02%

 

Hedge Fund Managers Turn Very Bearish on U.S. Equities

Ω

Bearish Sentiment on S&P 500 Soars to 42% in August from 27% in July

Hedge Fund Managers Downbeat on Economy. More Than Half Believe Economy is Already in Recession or Will Slip into Recession Soon.

Hedge fund managers have turned very bearish on U.S. equities, according to BarclayHedge and TrimTabs Investment Research. Bearish sentiment on the S&P 500 among hedge fund managers soared to 42% in August, the largest reading in a year, from 27% in July. Bullish sentiment sank to 27%, the smallest reading in four months, from 43%.

“This reversal to extremely bearish from markedly bullish is striking,” says Sol Waksman, founder and President of BarclayHedge. “Especially sour moods probably owe in part to the recent crash in the S&P 500, which plunged 16.8% between July 22 and August 8. Additionally, on August 9, the Fed announced it feels downside risks to the economic outlook have increased so much that it plans to keep the policy rate at exceptionally low levels until the middle of 2013.”

Hedge fund managers have turned modestly bearish on the greenback. Bearish sentiment on the U.S. Dollar Index increased to 34% in August from 30% in July, while bullish sentiment decreased to 24% from 33%. Meanwhile, managers remain downbeat on long-dated Treasuries. Bearish sentiment on the 10-year note stands at 32%, while bullish sentiment sits at 15%.

“Hedge fund managers have been net bearish on the long end all year even though the 10-year yield plunged to a record low of 2.07% in August from 3.75% in February,” notes Leon Mirochnik, CFA and Associate Portfolio Manager at TrimTabs. “Flows have also proven resilient. Demand at recent Treasury auctions was robust, Treasury mutual funds and ETFs continue to pull in cash, and fixed income hedge funds boast one of the heaviest year-to-date inflows of all hedge fund strategies.”



Hedge fund managers are very downbeat on the economy. About 56% think the economy is already in recession or will slip into recession soon, while only 3% feel economic growth is poised to accelerate.

“This pessimistic view squares with recent downward GDP revisions from the Fed, the IMF, and many Street forecasters,” notes Mirochnik. “Additionally, hedge fund managers tell us they are most upbeat on defensive sectors (Utilities and Consumer Staples) and least upbeat on risk sectors (Consumer Discretionary and Industrials). Consumer Discretionary is up 20.7% in the past year, the second-best performance of all sectors, but hedge fund managers feel strongly that moving away from risk is now the right way to go.”

Ropes & Gray’s Hedge Fund Update: August 2011

Here is an excerpt from the Ropes & Gray’s Hedge Fund Update: August 2011. The complete report is available here.

SEC Proposes Rules to Disqualify “Bad Actors” from Reliance on Rule 506 Private Placement Safe Harbor

The SEC has proposed new regulations under Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would disqualify certain “bad actors” from relying on Rule 506, the most widely used safe harbor for private placements. The proposed rules reflect the Dodd-Frank Act’s directive to the SEC to issue disqualification rules for Rule 506 offerings that are “substantially similar” to those for Regulation A offerings while expanding the list of disqualifying events to include certain actions taken by state securities regulators.

Persons covered by the disqualification rules. The SEC’s proposal designates the following as “Covered Persons,” the acts of whom could disqualify an issuer from relying on Rule 506:
• the issuer, any predecessor of the issuer, or an affiliated issuer;
• any director, officer, general partner or managing member of the issuer;
• any beneficial owner of 10% or more of any class of the issuer’s equity securities;
• any promoter connected with the issuer in any capacity at the time of sale;
• any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with sales of securities in the offering; and
• any director, officer, general partner, or managing member of any such compensated solicitor.
The investment adviser to a private fund is not named as a Covered Person. The SEC’s proposal solicits comment on whether the investment adviser to a private fund issuer should be made subject to the disqualification regime. However, several comments pointed out that without further tailoring by the SEC, the definition of “promoter” under Rule 405, which includes “any person who…directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer,” may be broad enough to encompass an investment adviser.