ISRAEL HEDGE FUND INDUSTRY GROWS 162% IN LAST FIVE YEARS

Israel, already widely acknowledged as a global leader for innovation in technology and life sciences, is now making major strides in the financial services industry. A surveyhttp://tzurmanagement.com/tzur-management-israel-hedge-fund-survey released today, conducted by Tzur Management, the leading platform and fund administrator for the Israeli fund industry, highlights the significant expansion in the industry over the last five years. Since 2006 the number of funds in Israel has increased 162%, reflecting the emergence of a high growth investment industry in the country.

Over the past decade, deregulation and new legislation in securities and tax law, together with structural changes in the institutional market, have made it possible for a robust financial services industry to emerge. Israeli financial institutions, and particularly alternative investment funds, have evolved into sophisticated global investors with billions of dollars under management. However, a lack of knowledge and awareness of the potential of the Israeli investment industry means that less than a third of funds under management are raised from international sources, the survey has discovered.

The report’s other key findings include: .

• Assets under management in Israel grew 30% in 2011 and an additional 10% in Q1 2012.
• Israeli hedge funds (“IHF”) have consistently outperformed the HFRX Global Hedge Fund Index since the financial crisis (2009: IHF +33.7%, HFRX +13.4%; 2010; IHF +17.6%, HFRX +5.2%; 2011: IHF +7.9% HFRX -8.9%).
• Over 80% of participants agreed that foreign investors are not aware of the Israeli hedge fund industry.
• Equity Long/Short funds currently hold the largest share of the industry, with 43% of assets under management, with quantitative strategies the second largest accounting for 23% (doubling since 2008).
• Over 50% of funds invest all their capital in international markets with no direct exposure to the markets in Israel.

Yitz Raab, Founder and Managing Partner of Tzur Management, said:

“This report marks the first-ever survey of the Israeli hedge fund industry. Israel’s impressive academic and scientific infrastructure, continuing immigration of highly skilled professionals, and a developed economy with a strong entrepreneurial culture are all fueling the industry’s rapid growth. Although in its early stages, it is our belief that, as in the areas of technology and life sciences, the Israeli hedge fund industry will grow to become a recognized center of excellence over the coming decade.” .

New Dow Jones Credit Suisse Hedge Fund Index Commentary

The Dow Jones Credit Suisse Hedge Fund Index finished down 0.40% in June. A new monthly commentary offers insight into hedge fund performance through the month of June. Some key findings from the report include:

• Hedge funds, as measured by the Dow Jones Credit Suisse Hedge Fund Index, finished May down 0.40%, with 5 out of 10 strategies in positive territory;
• In total, the industry saw estimated outflows of approximately $2.53 billion in June, bringing overall assets under management for the industry to approximately $1.73 trillion;
• The Equity Market Neutral and Fixed Income Arbitrage sectors experienced the largest asset inflows on a percentage basis in June, with inflows of 0.93% and 0.43% from May 2012 levels, respectively;
• Long/Short Equity funds posted positive performance as June was somewhat of a “risk-on” month and select Bank exposure performed positively as Financials, in general, were positive; and
Event Driven funds generated overall negative performance in June against the continued backdrop of an uncertain economic environment.

While M&A activity experienced a slight decline in newly announced transaction volume in June, credit strategies generated gains during the month due to supportive technical conditions and improved risk appetite from investors.

Redemption Fees Becoming More Prevalent for Hedge Funds

In a recent survey of their alternative investment clients, TKS Solutions noticed a trend that more funds are enacting redemption fees as a means to retain capital. Given the struggle that has occurred between the investors’ desire for liquidity and the fund’s desire for a stable capital base, this development is not a complete surprise. However, the complications that are associated with the calculations and accounting implications often catch funds off-guard.

As a result of the recent economic turmoil, formerly dormant investors—who would happily park their money in a fund for years at a time—have become very active, always looking for sources of liquidity. This constant movement causes volatility in the fund’s capital, and firms have looked to various means to counter that movement in order to keep invested capital within their organization.

One approach is for funds to create stringent liquidity gates. While this meets the fund’s goals, investors abhor gates. They complain that managers are creating a “Hotel California for money”, which can never leave—even in times of emergency.

An alternative approach is enacting a redemption fee. This allows investors to withdrawal their money at any time they desire, but for a price. The idea being that most investors will leave their capital within the fund, rather than incur a penalty.

While redemption fees seem like a straightforward solution, they are anything but. There are two all-to-common, but often overlooked, complications in processing redemption fees: the allocation of the fees to the other investors, and the interaction of the fee with the performance fee calculation. Both of these complications combine to break many of the manual tools typically used by fund accountants.

The fees charged on redeeming investors are usually allocated to the remaining investors in the form of revenue. For redemptions which occur at the beginning of the period, capital percentages must be adjusted by the amount of the withdrawal before the “redemption fee revenue” is distributed.

For ending redemptions, a new set of percentages that excludes the withdrawn capital need to be created and used to allocate the redemption fees. Fund accountants must pay particular attention to the allocation percentages used; otherwise a portion of that income could erroneously go to the departing investor.

The other complication relates to the interaction of the incentive fee calculation and the redemption fees. Since the withdrawn amounts are typically determined after incentive fees are charged, an additional step needs to be taken for “end of period” redemptions in funds with incentive fees. For those redemptions, after the incentive fee is calculated, and after the withdrawal amounts are determined, and after the redemption fee income is allocated to the remaining investors, then the incentive fee needs to be re-calculated. That additional step is necessary since the income used to determine the incentive fee did not include the allocated redemption fee “income”. If that step is not done, then the general partner will forever lose out on charging a performance fee on the “income” that was distributed as a result of the redemption.

Funds need to maintain a stable base of capital in order to effectively invest. Investors are always looking for sources of liquidity. Redemption fees are becoming a common device for balancing these opposing desires. Funds can avail themselves to this tool, so long as their back office has the sophisticated systems/processes to handle the complications that arise from processing redemption fees.

Hedge Funds Take in Lackluster $852 Million in May 2012

BarclayHedge and TrimTabs Investment Research reported today that the hedge fund industry took in a lackluster $852 million (0.05% of assets) in May, but that was an improvement over April’s net outflows of $3.2 billion. Based on data from 3,001 funds, the May TrimTabs/BarclayHedge Hedge Fund Flow Report estimated that the hedge fund industry assets stood at $1.72 trillion in May, down 2.0% from $1.76 trillion in April and down 29% from the peak of $2.4 trillion set in June 2008.

“The small inflows of May did not really buck the larger hedge fund industry trend of meager returns, flat asset growth, and net outflows over the past year,” said Sol Waksman, founder and president of BarclayHedge. Outflows from the industry totaled $18.8 billion from June 2011 to May 2012, compared to inflows of $96.2 billion for the previous 12 months while assets hovered around $1.7 trillion for the past nine months.

Hedge Funds Lag Equity Markets in Macro Driven Market

The Hennessee Hedge Fund Index increased +0.06% in June (+2.10% YTD), while the S&P 500 gained +3.96% (+8.66% YTD), the Dow Jones Industrial Average advanced +3.93% (+5.42% YTD), and the NASDAQ Composite Index increased +3.81% (+12.66%). Bonds were also up, as the Barclays Aggregate Bond Index increased +0.04% (+2.37% YTD) and the Barclays High Yield Credit Bond Index increased +2.11% (+7.26%).

“It looked like June was going to be another poor month for risk assets until the last trading day of the month. The agreement from European Union leaders towards a future banking union resulted in a short-covering rally,” commented Charles Gradante, Managing Principal of Hennessee Group. “The markets continue to be macro driven. Trading volume is down, volatility is up, correlation is high, and macro events are driving price swings. It remains a challenging environment for security selection. Most managers are not trying to time the market, as it is difficult to do consistently. Most are conservative, trying to generate alpha in specific opportunities.”

“Hedge funds lagged in June as traditional benchmarks posted strong positive performance. The majority of gains came at the end of the month as investor sentiment improved on the hope for stability in Europe. Hedge funds did not participate in the rally due to conservative exposures and suffered losses due to short covering. ” said Lee Hennessee, Managing Principal of Hennessee Group. “For the year, hedge funds are underperforming traditional equity benchmarks.”

Equity long/short managers posted modest positive performance, as the Hennessee Long/Short Equity Index advanced +0.63% (+2.58% YTD). After a relatively calm start to the year, the Dow posted twenty-two days of triple-digit moves during the second quarter, compared with just six in the first quarter. Equity market volatility continued in June as the S&P 500 ended the month with a gain of nearly 2.5%, bringing the monthly return to +4%. Hedge fund managers started June with conservative exposures after the sharp selloff in May. As a result, hedge funds failed to participate in the market rally.

Looking to July, managers expect volatility to continue as we enter second quarter reporting season, but are optimistic as earnings releases should lead to more dispersion among securities. Managers are seeing opportunities as equity valuations appear cheap. The S&P 500 is trading at a price-to-earnings multiple of less than 13. Although expectations for earnings have come down, many remain bullish on corporate profits. However, there are plenty of longer term concerns. While Europe remains a worry for markets, focus seems to have shifted to the U.S., where investors are concerned about whether a political stalemate will dictate performance during the second half of the year. With government policy affecting financial markets, investors are nervous about the November elections and the year-end “fiscal cliff” of tax cuts and economic stimulus that could drive the U.S. economy into recession.

“Some pundits are saying that a ‘perfect storm’ is developing due to stalled growth in the United States, the European debt crisis, a slowdown in China, and military conflict in Iran,” commented Charles Gradante. “But many managers are taking a contrarian point of view, stating that this scenario is already built into stock prices. By any measure, stocks are cheap. The S&P 500 is currently trading at a price-to-earnings (PE) ratio of 12.8. Stocks in the United Kingdom and France now are trading at only 9.5 times 2012 earnings, the lowest in 30 years. With more than 60% of corporate sales from European firms originating internationally, investing in Europe may be around the corner.”

The Hennessee Arbitrage/Event Driven Index declined -0.28% (+3.11% YTD) in June. The Barclays Aggregate Bond Index increased +0.04% (+2.37% YTD). U.S. yields ended the month slightly higher, as the yield on the 10 Year U.S. Treasury increased 8 basis points from 1.59% to 1.67%. The spread of corporate bonds in the Barclays U.S. Aggregate index over Treasuries tightened slightly, with the average yield on the bonds reaching 3.27%. High yield credit rallied, as the spread of the BofA Merrill Lynch High Yield Master Index tightened 52 basis points from 6.96% to 6.44%.

The Hennessee Distressed Index fell -1.24% in June (+2.29% YTD). Distressed funds were down for the month as core long positions and special situations declined in value.

The Hennessee Merger Arbitrage Index decreased -0.64% in June (+1.93% YTD). Managers’ performance was mixed as deal spreads widened in several core positions amid heightened volatility. Global mergers-and-acquisition activity has declined due with renewed concerns about the health of global economies.

The Hennessee Convertible Arbitrage Index advanced +1.02% (+5.04% YTD). Convertible arbitrage managers were marginally higher driven primarily from the tightening of credit spreads.

“Many managers booked gains in a short oil trade betting on a global slowdown. Signs of slowing global growth and a production increase by Saudi Arabia pushed prices to nine month lows. Most were able to book gains despite a sharp reversal at month end as oil jumped +8%,” commented Charles Gradante. “While many are short oil due to near term growth concerns, most are longer term bulls. Secular demand from emerging markets and the depletion of oil resources will provide upward pressure over the next decade.”

The Hennessee Global/Macro Index declined -0.99% (-0.25% YTD) in June. Throughout the month, investors were focused on events in Europe, and a victory for Greece’s pro-bailout party was well received by the markets. Global financial market volatility continued throughout June due to concerns about the European banking system. Global equity markets ended the month with broad-based gains, posting strong performance on the final trading day. The MSCI All-Country World Index advanced +6.79% in June (+0.77% YTD). Italy (+13.58%) and Spain (+20.63%) were top performers.

International hedge fund managers posted small gains due to conservative positioning, as the Hennessee International Index advanced +0.20% (+2.50% YTD).

Emerging markets were also positive, but underperformed the developed markets. The MSCI Emerging Markets Index gained +3.43% (+2.29% YTD). Hedge fund managers posted losses as currency exposure detracted from performance, as the Hennessee Emerging Market Index declined -1.93% (-4.79% YTD).

Macro managers were down in June, as the Hennessee Macro Index decline -1.44% (-0.64% YTD).

Managers experienced losses in currencies and fixed income as most were positioned for a continued “risk off” environment. Many macro funds attempt to follow trends, resulting in crowded trades and painful reversals. Those managers were whipsawed by the euro, which suffered its longest losing streak of the month only to reverse and post its biggest gain since October. The Dow Jones-UBS Commodity Index was up +5.49% for the month of June (-3.74%). However, performance among commodities was mixed, with a sharp decline in oil, significant gains in natural gas and agriculturals, and mixed performance across metals.

The Dow Jones Credit Suisse Core Hedge Fund Index Closed Down 0.45% in June

The Dow Jones Credit Suisse Core Hedge Fund Index closed down 0.45% in June as the index component strategies reported mixed results for June.



Dow Jones Credit Suisse Core Hedge Fund Index
-0.45%
Convertible Arbitrage
-0.77%
Emerging Markets
-0.09
Event Driven
-0.70%
Fixed Income Arbitrage
0.92%
Global Macro
0.15%
Long/Short Equity
0.02%
Managed Futures
-3.37%



Early estimates indicate the Dow Jones Credit Suisse Hedge Fund Index (“Broad Index”) finished down 0.19% in June (based on 66% of assets in the index reporting).



Strategy Estimates

Broad Benchmark Index
-0.19%
Convertible Arbitrage
0.56%
Dedicated Short Bias
-2.82%
Emerging Markets
0.60%
Equity Market Neutral
0.98%
Event Driven
0.40%
Distressed
0.05%
Event Driven Multi-Strategy
0.48%
Risk Arbitrage
0.66%
Fixed Income Arbitrage
0.71%
Global Macro
-1.16%
Long/Short Equity
0.66%
Managed Futures
-3.53%
Multi-Strategy
0.69%

HEDGE FUNDS POST NARROW JUNE GAIN TO CLOSE FIRST HALF WITH GAIN OF +1.7 PERCENT

Relative Value Arbitrage and Equity Hedge lead June gains;

Macro losses concentrated in CTA, Commodity strategies
Hedge funds posted a narrow gain to conclude the first half of the year, with the HFRI Fund Weighted Composite Index posting a gain of +0.05 percent for the month of June, according to data released today by HFR, the global leader in the indexation and analysis of the hedge fund industry.

Hedge funds overcame conservative positioning in the final days of the month, as June ended on a note of optimism with regard to the European sovereign debt crisis. Macro losses partially offset gains in Equity Hedge, Event Driven and Relative Value strategies. June marks the conclusion of a positive, but muted, first half of the year for the hedge fund industry, with the HFRI Fund Weighted Composite gaining +1.7 percent for 1H12. Hedge funds had gained nearly 5 percent in the first two months of the year before posting three consecutive months of decline, including a decline of -2.4 percent in the volatile month of May.

Indicative of the wide dispersion of hedge performance in 1H12, three of the four main hedge fund strategies posted gains higher than the broad-based composite. Fixed income-based Relative Value Arbitrage strategies posted a gain of +0.9 percent for June and +4.3 for the 1H12; Relative Value strategies have produced consistent, non-directional arbitrage gains, posting positive monthly performance in 36 of 42 months since January 2009.

Equity Hedge strategies posted a gain of +0.9 percent in June and +2.1 percent for 1H12; broad-based June gains were offset by weakness in Energy/Basic Materials and Short Bias sub-strategies. Equity Hedge strategies traded in a volatile range in 1H12, gaining nearly +7.0 percent in the first two months of the year, before experiencing a sharp decline of -4.6 percent in May.

Event Driven strategies posted a gain of +0.1 percent in June and +2.4 percent for 1H12. Corporate transaction activity remained steady for the quarter, and all ED sub-strategies posted gains for 1H12, despite specific transaction volatility, disappointing performance of several equity IPOs and continued regulatory and shareholder pressure on financial institutions.

Macro funds posted a decline of -1.6 percent for June, reducing Macro performance in 1H12 to a decline of -0.6 percent; Macro weakness was concentrated in Systematic CTA strategies, which posed a June decline of -3.0 percent, reversing most of the prior month’s gain of +3.6 percent.

Emerging Markets hedge funds posted a gain of +0.6 percent in June to end 1H12 with a gain of +1.1 percent, while Fund of Hedge Funds posted a decline of -0.50 percent in June, also ending 1H12 with a gain of +1.0 percent.

“Hedge fund performance in the first half of 2012 reflects the challenging and volatile environment created by the combination of slowing global growth, persistently low levels of investor risk tolerance and the wide-ranging impacts of the European financial crisis across asset classes and global regions,” stated Kenneth J. Heinz, President of HFR. “The broad based gains concentrated in Relative Value Arbitrage and Event Driven strategies reflect not only defensive positioning with regard to the European sovereign debt crisis, but caution with regard to regulatory and shareholder reaction to developments at specific financial institutions. Performance also reflects continued evolution of the hedge fund industry toward lower equity market beta strategies; we expect hedge fund industry growth to continue along these dynamics in coming quarters.”

Hedge funds face tough month in June amid trend reversals and shifts in risk sentiment

Hedge funds witnessed a flat to slightly negative performance in June amid reversals in market trends. The Eurekahedge Hedge Fund Index was down 0.19%1 during the month, bringing its June year-to-date performance to 1.33%. In comparison the MSCI World Index was up 3.65%2.

Key highlights for June 2012: •

Hedge funds posted negative returns for the fourth consecutive month in June, the longest losing streak since 2008._ •

North American fixed income and relative value hedge funds gained 3.71% and 3.40% respectively in June._ •

The Mizuho-Eurekahedge Long Short Equities Index was up 1.10% in June, showing that larger funds outperformed their peers._

Hedge funds down 2.4% in 2Q-2012, making it the worst second quarter on record for the industry

Hedge funds under-performed the markets during June, with most losses coming from trend-following strategies with global mandates. Most regional hedge funds delivered positive returns, with managers investing in Eastern Europe and Russia posting the largest gains. The Eurekahedge Eastern Europe & Russia Hedge Fund Index was up 3.83% in June, while the RTS Stock Index gained a strong 8.70%, following a sharp rally on the last trading day of the month. North American and Japanese hedge funds also witnessed positive returns of 0.77% and 2.15% respectively, with most managers gaining from currency exposures and long positions in equity indices and financial stocks. European and Asia ex-Japan hedge funds witnessed losses of 0.15% and 0.43% respectively as many managers had been positioned for greater declines in the markets.

Strategy Indices

Most strategies posted marginally positive returns in June with relative value and fixed income hedge funds delivering the highest returns. The Eurekahedge Relative Value Hedge Fund Index increased 1.85% as market neutral and mean reversion trades locked in profits for the managers. Macroeconomic uncertainty and recession in European economies helped fixed income hedge funds, which averaged gains of 1.18%. Distressed debt managers were down 0.38% for the month even as US high yields and leveraged loans gained through the month. The frequent changes in market sentiment due to Spain’s request for financial support and concerns over global growth made it difficult for trend-following managers to navigate successfully through the month. After an excellent performance last month, CTA/Managed futures hedge funds dropped 2.09% in June.

_Eurekahedge indices are available for download from www.eurekahedge.com/indices/hedgefundindices.asp and are updated with the latest fund returns at 23:30 GMT every day. Index values and data can be downloaded for free and subscribers can download the full list of index constituents. Please contact indices@eurekahedge.com for more information.

Investable hedge fund composite index was down 1.38% quarter-to-date

Bank of America Merrill Lynch’s Hedge Fund Monitor reports that the investable hedge fund composite index was down 1.38% quarter-to-date (QTD) as of June 27, compared to down 5.44% for the S&P 500. All seven strategies outperformed the S&P 500.

CTA Advisors and Macro performed the best and were the only strategies with positive returns, up 0.99% and 0.46%, respectively. Market Neutral and Equity Long/Short performed the worst, down 3.45% and 3.27%, respectively.

Market Neutral funds continued to cut market exposure to 1% net short from 1% net long. Equity Long/Short sold market exposure further to 23% from 26% net long. Macros added to their shorts in the S&P 500 & NASDAQ 100, partially covered commodities &10-year Treasuries, bought EM & EAFE to net longs, and maintained their long positions in USD. In addition, macros reduced small cap tilt.

Significant HF moves across asset classes based on CFTC data: •
Equities. Large specs bought the NASDAQ 100, partially covered the S&P 500 and added to their shorts in the Russell 2000. Readings are neutral.
•
Agriculture. Large specs bought soybean, corn and wheat. Soybean stays in a crowded net long, wheat is approaching a crowded long.
•
Metals. Large specs sold gold, silver, platinum and palladium, while adding to their shorts in copper. Readings are neutral.
•
Energy. Large specs sold crude oil, heating oil & gasoline, and added to their shorts in natural gas. Heating Oil is approaching a crowded short._
•
Forex. Large specs sold USD & Yen, while adding to their shorts in Euro. Euro remains in a crowded short; USD is in a crowded long.

Interest Rates. Large specs sold 30-yr and 2-yr Ts, while adding to their shorts in 10-yr Ts. 30-yr Treasuries stay in a crowded net long