Friday, December 17, 2010
HFR Market Microstructure Hedge Fund Industry Report for Q3 2010
HEDGE FUND LAUNCHES ACCELERATE AS MANAGERS EMBRACE TRANSPARENCY, UCITS III
Liquidations decline by over 30 percent as risk tolerance returns; Incentive fees continue to decline
Strong capital inflows and a return of investor risk tolerance contributed to an increase in new hedge fund launches in the third quarter of 2010, while investors continued to exhibit a clear preference for transparency, liquidity and UCITS III compliance in their allocations, according to data released today by Hedge Fund Research, Inc. (HFR), the leading provider of hedge fund industry data. New hedge funds launches increased to 260 in 3Q 2010, up from 201 launches in the prior quarter. For the trailing 12 month period, 945 funds have launched, the highest 12 month total since the period ending 2Q 08.
Hedge fund liquidations continued to decline, falling to 168 in the quarter, slightly below the 177 liquidations of the prior quarter. Through 3Q, 585 funds have liquidated in 2010, representing a decline of 31.8 percent over the same period in 2009. The third quarter of 2010 marks the fifth consecutive quarter in which hedge fund launches have exceeded liquidations.
Equity Hedge, Macro strategies see most launches; UCITS III compliance gains traction
New launches are more consistently conforming to investor preference for liquidity and lower costs. The largest number of new launches occurred in Equity Hedge and Macro strategies, while the fewest occurred in Event Driven and Fund of Hedge Funds. In addition, nearly a quarter of new launches comply with UCITS III guidelines, which incorporate liquidity requirements, restrictions on instruments and leverage, and emphasize the role of the local market regulator. The average incentive fee fell by 11 basis points to 19.0 percent, the second largest quarterly decline in incentive fees since 2008, while the average management fees remained at 1.58 percent. Both management and incentives fees charged by fund of hedge funds declined for the quarter.
“The trends in new hedge fund launches clearly reflect powerful dynamics currently reshaping the landscape of the industry and redefining the relationship between investors and managers,” said Kenneth J. Heinz, President of Hedge Fund Research Inc. “These trends are likely to continue as the hedge fund industry appeals to an increasingly wider, more global and more institutional investor base.”
Details: HFR Market Microstructure Hedge Fund Industry Report - Q3 2010
Monday, December 13, 2010
SEC proposes regulations under Dodd-Frank affecting hedge funds
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During October and November 2010, the U.S. Securities and Exchange Commission proposed several key regulations called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed and President Obama signed into law in July 2010. Now, through its rulemaking proposals in October and November 2010 (the Proposed Regulations) which are summarized below, the SEC has begun to fill in a number of important details left unspecified by Congress in the original legislation.
The Proposed Regulations affect all private funds which claim exemption from the Investment Company Act of 1940 under Section 3(c)(1) or 3(c)(7) of that statute. This includes practically all hedge, leveraged-buyout, venture-capital, real-estate, mezzanine-debt, and distressed-debt funds, as well as funds-of-funds. As they relate specifically to private funds, the Proposed Regulations do three major things:
* First, they propose definitions and details regarding certain exemptions from registration with the SEC under the Investment Advisers Act of 1940 (the Advisers Act). (Dodd-Frank eliminated, effective in July 2011, the exemption which most private funds had been relying on until now, replacing it with new exemption criteria.)
* Second, the Proposed Regulations would require every firm that serves as an investment adviser to any 3(c)(1) or 3(c)(7) fund to file with the SEC and update annually a Form ADV. This requirement would apply even to smaller advisory firms which will remain exempt from registration because their assets under management are below Dodd-Frank's registration threshold.
* Third, the Proposed Regulations would impose new recordkeeping and reporting requirements on registered investment advisers.
Key definitions and details included in the Proposed Regulations
Advisers whose only clients are private funds and whose assets under management (AUM) are less than $150 million will generally remain exempt from registration under the Advisers Act when Dodd-Frank becomes effective in July 2011. (For advisers who have at least some non-fund clients, the applicable AUM threshold is $100 million.) The Proposed Regulations give guidance on how AUM is to be measured for this purpose.
Advisers whose only clients are venture capital funds will remain exempt from registration, regardless of the amount of their AUM. The Proposed Regulations would define the term "venture capital fund" for this purpose.
Advisers who qualify as "family offices" will also remain exempt from registration under the Advisers Act, regardless of the amount of their AUM. The Proposed Regulations would define the term "family office" for this purpose.
Exemption for advisers to private funds with cumulative AUM less than $150 million
The Advisers Act defines the term "assets under management" by reference to the "securities portfolios" with respect to which an investment adviser provides "continuous and regular supervisory or management services." The Proposed Regulations provide guidance on the calculation of AUM for private funds, as follows:
* An adviser to a private fund must include the fund's unfunded capital commitments in its AUM.
* An adviser to a private fund must include the value of proprietary assets, assets which the adviser manages on an uncompensated basis, and assets of foreign clients in its AUM.
* Advisers must use a fair-value methodology when measuring AUM, and cannot simply rely on cost basis.
Exemption for advisers to venture capital funds
Dodd-Frank exempts advisers solely to venture capital funds from registration under the Advisers Act. The Proposed Regulations define the term "venture capital fund" to include only private funds which satisfy all of the following criteria:
* The private fund invests only in equity securities of qualifying portfolio companies to provide them with business expansion and operating capital. At least 80% of the private fund's interest in the issuing company must be acquired directly from the company and not from the issuer's existing equity holders. An issuer can be a qualifying portfolio company if no more than 20% of the private fund's interest was acquired from founders or other preexisting investors.
* The private fund controls, or provides significant managerial services to, the qualifying portfolio companies.
* The private fund does not incur leverage at the private fund level, other than certain permitted short-term borrowings.
* The private fund is a closed-end fund, i.e., it does not offer routine redemption rights to investors.
* The private fund holds itself out as a venture capital fund to investors.
To be a "venture capital fund" a private fund may invest only in "qualifying portfolio companies." The Proposed Regulations define that term to include only an entity which satisfies all of the following criteria:
* is not publicly traded at the time of the venture capital fund's investment,
* does not incur leverage in connection with the investment by the venture capital fund,
* uses the capital provided by the venture capital fund for business expansion or operating purposes, and
* is not itself a fund.
Exemption for Family Offices
Dodd-Frank exempts family offices from registration under the Advisers Act. The Proposed Regulations define "family office" as an adviser whose clients include only persons who are family members. A "family member" includes a spouse, a spousal equivalent, a subsequent spouse, a parent, a sibling, a child (including children by adoption and stepchildren), and a spouse or spousal equivalent of the foregoing.
In the event of an involuntary transfer from a family member, the Proposed Regulations would afford the adviser a four-month transition period in which to register under the Advisers Act or transfer the management of the assets. In case of a divorce, a former spouse could continue to receive advice for the assets already being managed by the family office, but could not make additional investments with such adviser.
The clients of a family office may include any charitable organization that is funded solely by a family member, and any trust or estate existing for the sole benefit of a family client, or any investment vehicle wholly-controlled by a family client and operated for the sole benefit of family clients. Clients may also include non-family members who are executive officers, directors, trustees or general partners of the adviser, or other persons who have participated in the investment activities of the family office for at least 12 months.
New filing requirements for advisers exempt from registration
Under the Proposed Regulations, all investment advisers which are exempt from registration under the Advisers Act, but whose clients include any 3(c)(1) or 3(c)(7) private fund, would nevertheless be required to comply with certain limited reporting obligations. These exempt advisers would be required to file a limited Form ADV with the SEC and provide certain information about their activities to the SEC. The information required to be reported would include, among other things, the adviser's form of organization, a description of its other business activities, its financial industry affiliations, the identity of its control persons and owners, and any disciplinary history for the adviser and its employees.
The Proposed Regulations would require exempt advisers to file their first limited Form ADV by August 20, 2011, and to update their Form ADV filings annually.
Additional Reporting for Advisers to Private Funds
The Proposed Regulations amend Form ADV for a registered adviser to a private fund (exempt advisers will also be required to provide certain of this information in its limited Form ADV) in order to require reporting of the following information:
* The amount of AUM.
* Information regarding its private funds, including: (1) names and jurisdictions of such funds (though a code can be used to preserve anonymity); (2) general partners and directors; (3) names and jurisdictions of any foreign financial regulatory authorities are subject; (4) status as a master/feeder.
* Whether private fund is a fund of funds.
* The fund's investment strategy. The fund's gross and net asset value, minimum investment and number of beneficial owners.
* Whether clients of the adviser are solicited to in the fund, and the percentage of the adviser's clients invested in the fund.
* The number and types of investors in the fund.
* The name of the adviser's auditor, whether it is independent and registered with the PCAOB and whether audited financials are distributed to investors.
* The name of the adviser's prime broker and whether it is SEC-registered and acts as a fund's custodian.
* The name and role of the fund's administrator.
* The name of each marketer, whether it is a related person of the adviser, its SEC file number and URL for any website used to market the fund.
* Information regarding employees, including the number employees registered as representatives of a broker-dealer.
* Information regarding the adviser's clients, including disclosure as to whether any are business development companies, insurance companies or other investment advisers and whether any are subject to ERISA.
* Disclosure about participation in client transactions: The Proposed Regulations require advisers with discretionary authority to determine whether brokers or dealers used in client transactions would be required to report whether any such brokers or dealers are related persons.
* Information about the adviser's non-advisory activities.
* Advisers with $1 billion in AUM may be subject to future rules regarding certain incentive-based compensation arrangements.
During October and November 2010, the U.S. Securities and Exchange Commission proposed several key regulations called for by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed and President Obama signed into law in July 2010. Now, through its rulemaking proposals in October and November 2010 (the Proposed Regulations) which are summarized below, the SEC has begun to fill in a number of important details left unspecified by Congress in the original legislation.
The Proposed Regulations affect all private funds which claim exemption from the Investment Company Act of 1940 under Section 3(c)(1) or 3(c)(7) of that statute. This includes practically all hedge, leveraged-buyout, venture-capital, real-estate, mezzanine-debt, and distressed-debt funds, as well as funds-of-funds. As they relate specifically to private funds, the Proposed Regulations do three major things:
* First, they propose definitions and details regarding certain exemptions from registration with the SEC under the Investment Advisers Act of 1940 (the Advisers Act). (Dodd-Frank eliminated, effective in July 2011, the exemption which most private funds had been relying on until now, replacing it with new exemption criteria.)
* Second, the Proposed Regulations would require every firm that serves as an investment adviser to any 3(c)(1) or 3(c)(7) fund to file with the SEC and update annually a Form ADV. This requirement would apply even to smaller advisory firms which will remain exempt from registration because their assets under management are below Dodd-Frank's registration threshold.
* Third, the Proposed Regulations would impose new recordkeeping and reporting requirements on registered investment advisers.
Key definitions and details included in the Proposed Regulations
Advisers whose only clients are private funds and whose assets under management (AUM) are less than $150 million will generally remain exempt from registration under the Advisers Act when Dodd-Frank becomes effective in July 2011. (For advisers who have at least some non-fund clients, the applicable AUM threshold is $100 million.) The Proposed Regulations give guidance on how AUM is to be measured for this purpose.
Advisers whose only clients are venture capital funds will remain exempt from registration, regardless of the amount of their AUM. The Proposed Regulations would define the term "venture capital fund" for this purpose.
Advisers who qualify as "family offices" will also remain exempt from registration under the Advisers Act, regardless of the amount of their AUM. The Proposed Regulations would define the term "family office" for this purpose.
Exemption for advisers to private funds with cumulative AUM less than $150 million
The Advisers Act defines the term "assets under management" by reference to the "securities portfolios" with respect to which an investment adviser provides "continuous and regular supervisory or management services." The Proposed Regulations provide guidance on the calculation of AUM for private funds, as follows:
* An adviser to a private fund must include the fund's unfunded capital commitments in its AUM.
* An adviser to a private fund must include the value of proprietary assets, assets which the adviser manages on an uncompensated basis, and assets of foreign clients in its AUM.
* Advisers must use a fair-value methodology when measuring AUM, and cannot simply rely on cost basis.
Exemption for advisers to venture capital funds
Dodd-Frank exempts advisers solely to venture capital funds from registration under the Advisers Act. The Proposed Regulations define the term "venture capital fund" to include only private funds which satisfy all of the following criteria:
* The private fund invests only in equity securities of qualifying portfolio companies to provide them with business expansion and operating capital. At least 80% of the private fund's interest in the issuing company must be acquired directly from the company and not from the issuer's existing equity holders. An issuer can be a qualifying portfolio company if no more than 20% of the private fund's interest was acquired from founders or other preexisting investors.
* The private fund controls, or provides significant managerial services to, the qualifying portfolio companies.
* The private fund does not incur leverage at the private fund level, other than certain permitted short-term borrowings.
* The private fund is a closed-end fund, i.e., it does not offer routine redemption rights to investors.
* The private fund holds itself out as a venture capital fund to investors.
To be a "venture capital fund" a private fund may invest only in "qualifying portfolio companies." The Proposed Regulations define that term to include only an entity which satisfies all of the following criteria:
* is not publicly traded at the time of the venture capital fund's investment,
* does not incur leverage in connection with the investment by the venture capital fund,
* uses the capital provided by the venture capital fund for business expansion or operating purposes, and
* is not itself a fund.
Exemption for Family Offices
Dodd-Frank exempts family offices from registration under the Advisers Act. The Proposed Regulations define "family office" as an adviser whose clients include only persons who are family members. A "family member" includes a spouse, a spousal equivalent, a subsequent spouse, a parent, a sibling, a child (including children by adoption and stepchildren), and a spouse or spousal equivalent of the foregoing.
In the event of an involuntary transfer from a family member, the Proposed Regulations would afford the adviser a four-month transition period in which to register under the Advisers Act or transfer the management of the assets. In case of a divorce, a former spouse could continue to receive advice for the assets already being managed by the family office, but could not make additional investments with such adviser.
The clients of a family office may include any charitable organization that is funded solely by a family member, and any trust or estate existing for the sole benefit of a family client, or any investment vehicle wholly-controlled by a family client and operated for the sole benefit of family clients. Clients may also include non-family members who are executive officers, directors, trustees or general partners of the adviser, or other persons who have participated in the investment activities of the family office for at least 12 months.
New filing requirements for advisers exempt from registration
Under the Proposed Regulations, all investment advisers which are exempt from registration under the Advisers Act, but whose clients include any 3(c)(1) or 3(c)(7) private fund, would nevertheless be required to comply with certain limited reporting obligations. These exempt advisers would be required to file a limited Form ADV with the SEC and provide certain information about their activities to the SEC. The information required to be reported would include, among other things, the adviser's form of organization, a description of its other business activities, its financial industry affiliations, the identity of its control persons and owners, and any disciplinary history for the adviser and its employees.
The Proposed Regulations would require exempt advisers to file their first limited Form ADV by August 20, 2011, and to update their Form ADV filings annually.
Additional Reporting for Advisers to Private Funds
The Proposed Regulations amend Form ADV for a registered adviser to a private fund (exempt advisers will also be required to provide certain of this information in its limited Form ADV) in order to require reporting of the following information:
* The amount of AUM.
* Information regarding its private funds, including: (1) names and jurisdictions of such funds (though a code can be used to preserve anonymity); (2) general partners and directors; (3) names and jurisdictions of any foreign financial regulatory authorities are subject; (4) status as a master/feeder.
* Whether private fund is a fund of funds.
* The fund's investment strategy. The fund's gross and net asset value, minimum investment and number of beneficial owners.
* Whether clients of the adviser are solicited to in the fund, and the percentage of the adviser's clients invested in the fund.
* The number and types of investors in the fund.
* The name of the adviser's auditor, whether it is independent and registered with the PCAOB and whether audited financials are distributed to investors.
* The name of the adviser's prime broker and whether it is SEC-registered and acts as a fund's custodian.
* The name and role of the fund's administrator.
* The name of each marketer, whether it is a related person of the adviser, its SEC file number and URL for any website used to market the fund.
* Information regarding employees, including the number employees registered as representatives of a broker-dealer.
* Information regarding the adviser's clients, including disclosure as to whether any are business development companies, insurance companies or other investment advisers and whether any are subject to ERISA.
* Disclosure about participation in client transactions: The Proposed Regulations require advisers with discretionary authority to determine whether brokers or dealers used in client transactions would be required to report whether any such brokers or dealers are related persons.
* Information about the adviser's non-advisory activities.
* Advisers with $1 billion in AUM may be subject to future rules regarding certain incentive-based compensation arrangements.
Friday, December 10, 2010
Hedge Funds Post Inflow of $16.0 Billion (1.0% of Assets) in October 2010
Fourth Straight Inflow as Well as Heaviest since November 2009
Hedge Fund Investors Warming to Risk: Distressed Securities Funds Post Heaviest Inflow since February, while Fixed Income Funds Post Lightest Inflow in Six Months
TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an estimated inflow of $16.0 billion (1.0% of assets) in October 2010, the fourth straight inflow as well as the heaviest since November 2009.
“Flows are doubtless following performance,” said Sol Waksman, founder and President of BarclayHedge. “Hedge funds returned 1.95% in October and 7.10% in the four months following the May-June skid. Also, our preliminary data shows that hedge funds are outperforming the S&P 500 by about 21 basis points through November.
Distressed securities funds hauled in $3.8 billion (3.3% of assets) in October, the heaviest inflow of any hedge fund strategy, while emerging markets funds posted an inflow of $2.2 billion (1.0% of assets). Meanwhile, fixed income funds received only $506 million (0.3% of assets), the lightest inflow since April.
“Hedge fund investors are exhibiting a healthier appetite for risk,” noted Waksman. “They are finally venturing into areas like distressed securities after embracing conservative strategies for most of the year.”
Commodity trading advisors (CTAs) received $7.9 billion (2.8% of assets) in October, the eighth straight inflow, while funds of hedge funds took in $3.3 billion (0.6% of assets), the fourth straight inflow. Meanwhile, hedge fund managers are capitalizing on kind conditions heading into 2011.
“Borrowing money to buy assets is virtually costless, investors handed hedge fund managers $32.1 billion in the past four months, and margin debt is soaring,” explained Vincent Deluard, Executive Vice President of Research at TrimTabs. “At the same time, the rolling 12-month beta of hedge fund returns sits below the long-term average, and that of equity long-short funds is dipping below zero. Managers should be especially eager to book fat profits through year-end, but they remain very reluctant to make directional bets on equities.”
Managers are also extremely bearish on the 10-year Treasury note, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers. Bearish sentiment soared to 49% in November from 28% in October, while bullish sentiment sank to 13%, the lowest level since the inception of the survey in May.
“Retail investors and pension funds have been pouring money into high-flying fixed income for nearly two years,” noted Deluard. “But now hedge fund as well as retail bond inflows have ground to a halt, and mom and pop are ditching munis and junk. The more the infatuation with bond funds fades the more we fear the fallout will prove particularly ugly.”
Hedge Fund Investors Warming to Risk: Distressed Securities Funds Post Heaviest Inflow since February, while Fixed Income Funds Post Lightest Inflow in Six Months
TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an estimated inflow of $16.0 billion (1.0% of assets) in October 2010, the fourth straight inflow as well as the heaviest since November 2009.
“Flows are doubtless following performance,” said Sol Waksman, founder and President of BarclayHedge. “Hedge funds returned 1.95% in October and 7.10% in the four months following the May-June skid. Also, our preliminary data shows that hedge funds are outperforming the S&P 500 by about 21 basis points through November.
Distressed securities funds hauled in $3.8 billion (3.3% of assets) in October, the heaviest inflow of any hedge fund strategy, while emerging markets funds posted an inflow of $2.2 billion (1.0% of assets). Meanwhile, fixed income funds received only $506 million (0.3% of assets), the lightest inflow since April.
“Hedge fund investors are exhibiting a healthier appetite for risk,” noted Waksman. “They are finally venturing into areas like distressed securities after embracing conservative strategies for most of the year.”
Commodity trading advisors (CTAs) received $7.9 billion (2.8% of assets) in October, the eighth straight inflow, while funds of hedge funds took in $3.3 billion (0.6% of assets), the fourth straight inflow. Meanwhile, hedge fund managers are capitalizing on kind conditions heading into 2011.
“Borrowing money to buy assets is virtually costless, investors handed hedge fund managers $32.1 billion in the past four months, and margin debt is soaring,” explained Vincent Deluard, Executive Vice President of Research at TrimTabs. “At the same time, the rolling 12-month beta of hedge fund returns sits below the long-term average, and that of equity long-short funds is dipping below zero. Managers should be especially eager to book fat profits through year-end, but they remain very reluctant to make directional bets on equities.”
Managers are also extremely bearish on the 10-year Treasury note, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers. Bearish sentiment soared to 49% in November from 28% in October, while bullish sentiment sank to 13%, the lowest level since the inception of the survey in May.
“Retail investors and pension funds have been pouring money into high-flying fixed income for nearly two years,” noted Deluard. “But now hedge fund as well as retail bond inflows have ground to a halt, and mom and pop are ditching munis and junk. The more the infatuation with bond funds fades the more we fear the fallout will prove particularly ugly.”
Hedge Fund Managers Remain Predominantly Downbeat on U.S. Equities, According to TrimTabs/BarclayHedge Survey
Bearish Sentiment on 10-Year Treasury and U.S. Dollar Index Surges.
Hedge Fund Managers Nonetheless View QE2 as Gift Horse, Some Lever Up Accordingly.
Hedge fund managers remain predominantly downbeat on U.S. equities, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for November. About 39% of the 83 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, and bullish sentiment sank to 31% from 36% in October.
“Moods are still somewhat sour, but hedge funds returned 7.0% in the four months ended October following a rough patch in May and June,” said Sol Waksman, CEO of BarclayHedge. “About 80% of the funds that reported returns for the January-October period are profitable in 2010.”
Almost half of hedge fund managers believe QE2 will have a positive impact on asset prices, although four in 10 feel it will ultimately have a negative impact on the economy. Meanwhile, only 9% of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16% are inclined to increase it.
“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” explained Vincent Deluard, Executive Vice President at TrimTabs. “The Fed is begging firms, consumers, and market participants to take risks, and hedge fund managers are capitalizing on kind conditions. They view QE as an asset-price gift horse—one they are not looking in the mouth—and hedge fund investors have handed them $33 billion in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates.”
Bearish sentiment on the U.S. Dollar Index surged to 44% in November, the highest level in six months, from 30% in October. Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked. Bearish sentiment on the 10-year Treasury note vaulted to 49%, the highest level since May, while bullish sentiment dove to 13%, the lowest level in six months.
“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” noted Deluard. “But hedge fund managers are very bearish on the 10-year, and futures traders have been dumping the 30-year bond contract. Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and TIPS funds have raked in assets in 2010. The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”
The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. The Survey of Hedge Fund Managers appears monthly in the TrimTabs/BarclayHedge Hedge Fund Flow Report, which provides detailed analysis of hedge fund flows, assets, and returns alongside topical studies. For further information, please visit http://www.barclayhedge.com/products/trimtabs-hedge-fund-flow-report.html.
Hedge Fund Managers Nonetheless View QE2 as Gift Horse, Some Lever Up Accordingly.
Hedge fund managers remain predominantly downbeat on U.S. equities, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for November. About 39% of the 83 hedge fund managers the firms surveyed in the past two weeks are bearish on the S&P 500, and bullish sentiment sank to 31% from 36% in October.
“Moods are still somewhat sour, but hedge funds returned 7.0% in the four months ended October following a rough patch in May and June,” said Sol Waksman, CEO of BarclayHedge. “About 80% of the funds that reported returns for the January-October period are profitable in 2010.”
Almost half of hedge fund managers believe QE2 will have a positive impact on asset prices, although four in 10 feel it will ultimately have a negative impact on the economy. Meanwhile, only 9% of managers plan to decrease leverage in the coming weeks, the smallest share since May, while 16% are inclined to increase it.
“It is telling that some managers aim to lever up even though they are predominantly downbeat on stocks,” explained Vincent Deluard, Executive Vice President at TrimTabs. “The Fed is begging firms, consumers, and market participants to take risks, and hedge fund managers are capitalizing on kind conditions. They view QE as an asset-price gift horse—one they are not looking in the mouth—and hedge fund investors have handed them $33 billion in recent months. Also, it certainly doesn’t hurt that managers can borrow to buy assets for virtually nothing courtesy of historically low short rates.”
Bearish sentiment on the U.S. Dollar Index surged to 44% in November, the highest level in six months, from 30% in October. Meanwhile, bond sentiment has been hammered as long-term interest rates have spiked. Bearish sentiment on the 10-year Treasury note vaulted to 49%, the highest level since May, while bullish sentiment dove to 13%, the lowest level in six months.
“Market participants have no interest in fighting the Fed in the belly of the curve, where its Treasury purchases are concentrated,” noted Deluard. “But hedge fund managers are very bearish on the 10-year, and futures traders have been dumping the 30-year bond contract. Also, mom and pop ditched bond mutual funds in the past fortnight after pouring money into them for 100 straight weeks, and TIPS funds have raked in assets in 2010. The more the market feels the Fed’s reflation strategy will succeed, the more powerless policymakers become to prevent long yields from grinding higher.”
The TrimTabs/BarclayHedge database tracks hedge fund flows on a monthly basis. The Survey of Hedge Fund Managers appears monthly in the TrimTabs/BarclayHedge Hedge Fund Flow Report, which provides detailed analysis of hedge fund flows, assets, and returns alongside topical studies. For further information, please visit http://www.barclayhedge.com/products/trimtabs-hedge-fund-flow-report.html.
Wednesday, December 8, 2010
The Carlyle Group to Acquire Majority Stake in Hedge Fund Claren Road Asset Management
Long-Short Strategy Reflects Carlyle’s Long-Term View on Credit Opportunities
New York, NY – Global alternative asset manager The Carlyle Group and hedge fund Claren Road Asset Management today announced that Carlyle has agreed to purchase a 55 percent stake in Claren Road, a long-short credit hedge fund with $4.5 billion in assets under management, in exchange for cash, an ownership interest in Carlyle and performance-based contingent payments. Claren Road founders will reinvest substantially all of the initial cash proceeds from the transaction back into Claren Road funds. Terms of the transaction, which is expected to close by year end, were not disclosed.
Mitch Petrick, Managing Director and head of Carlyle’s Global Credit Alternatives business, said, “Claren Road has a track record of consistent, low-volatility, uncorrelated performance across varying market conditions during the last five years. This new partnership is an important addition to our expanding stable of credit product offerings. Claren Road’s long-short approach to investing in the credit markets globally is consistent with Carlyle’s views on the optimal strategy to exploit investment opportunities in credit over the long term.”
Brian Riano, Claren Road Chief Executive Officer and Co-founder, commented, “We believe this partnership will benefit our investors, strengthen Claren Road and position us well for the future. We have an ability to recognize and identify under- and over-valued securities in the credit markets through fundamental research, combined with a broad understanding of pricing, technicals and liquidity. This partnership should benefit Claren Road by accessing Carlyle’s global network and industry expertise as well as its strong regulatory, compliance, legal and investor services capabilities.”
William E. Conway, Jr., Carlyle Co-founder and Managing Director, said, “Carlyle has significant scale in our corporate private equity and real estate businesses, as well as a clear leadership position in emerging markets. This investment further expands our credit platform under Mitch Petrick’s leadership and adds to the variety of investment options by strategy and region for our investors.”
Citigroup, which seeded Claren Road in 2006, and the Goldman Sachs Petershill Fund, which bought a minority stake in Claren Road in 2008, will both monetize their economic interests in Claren Road as a part of this transaction. Brian Riano noted, “We thank Citigroup and the Goldman Sachs Petershill Fund for being vital partners of our firm over the past few years.”
Claren Road was established in 2005 by four former senior members of Citigroup’s Credit Trading Department – Brian Riano, John Eckerson, Sean Fahey and Albert Marino – who will continue to manage the day-to-day operations (including all investment decisions) and, together with Carlyle, affect broader strategic decisions.
Carlyle’s global credit alternatives business comprises an array of structured credit, mezzanine and distressed products – 34 funds with $14.7 billion in assets managed by 54 investment professionals in New York and London as of September 30, 2010.
* * * * *
About Claren Road Asset Management
Claren Road Asset Management, LLC is a long/short credit manager founded in 2005 by senior members of Citigroup’s Credit Trading Department. The Investment Manager primarily manages two funds comprising approximately $4.5 billion of assets under management. Claren Road employs 48 people with offices in New York, London and Hong Kong.
Monday, December 6, 2010
Asset Allocation Changes May Add More Value than Stock Selection in Hedge Funds, According to Mellon Capital Management
BNY Mellon Boutique Points to Timely Changes as Most Valuable Part of Investment Process
Skill in adjusting exposures to various asset classes over time could be the most valuable part of the investment process for hedge funds and is likely to add more value than either selecting securities or maintaining a static equity exposure. That is the key finding from a recent white paper from Mellon Capital Management Corporation, part of BNY Mellon Asset Management.
"Of the three components, adept asset allocation can be the most important," said Eric S. Goodbar, hedge fund strategist for Mellon Capital, who co-authored the paper with Karsten Jeske, Ph.D., a senior quantitative analyst at Mellon Capital. "Well-timed asset allocation decisions can lower the correlation of the hedge fund's performance to stocks or bonds. Unfortunately, many hedge fund portfolios have a sizeable static allocation to equities, which increases the correlation of the hedge fund portfolio with the performance of equities."
Hedge fund managers who lower the correlation of their investment portfolio to the performance of traditional equity investments are more likely to avoid worse performance in down markets than those maintaining a static equity exposure, according to the paper.
Jeske said, "We believe raising the impact of asset allocation and lowering the static exposures to stocks and bonds can reduce the risk in the portfolio and position it so it better reflects the skills of the portfolio manager instead of mirroring the moves of the markets."
Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of September 30, 2010, the firm had $191 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation, The Bank of New York Mellon and The Dreyfus Corporation, and $9.2 billion in overlay strategies. It is part of BNY Mellon Asset Management, one of the world's largest asset managers.
BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.
Skill in adjusting exposures to various asset classes over time could be the most valuable part of the investment process for hedge funds and is likely to add more value than either selecting securities or maintaining a static equity exposure. That is the key finding from a recent white paper from Mellon Capital Management Corporation, part of BNY Mellon Asset Management.
"Of the three components, adept asset allocation can be the most important," said Eric S. Goodbar, hedge fund strategist for Mellon Capital, who co-authored the paper with Karsten Jeske, Ph.D., a senior quantitative analyst at Mellon Capital. "Well-timed asset allocation decisions can lower the correlation of the hedge fund's performance to stocks or bonds. Unfortunately, many hedge fund portfolios have a sizeable static allocation to equities, which increases the correlation of the hedge fund portfolio with the performance of equities."
Hedge fund managers who lower the correlation of their investment portfolio to the performance of traditional equity investments are more likely to avoid worse performance in down markets than those maintaining a static equity exposure, according to the paper.
Jeske said, "We believe raising the impact of asset allocation and lowering the static exposures to stocks and bonds can reduce the risk in the portfolio and position it so it better reflects the skills of the portfolio manager instead of mirroring the moves of the markets."
Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of September 30, 2010, the firm had $191 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation, The Bank of New York Mellon and The Dreyfus Corporation, and $9.2 billion in overlay strategies. It is part of BNY Mellon Asset Management, one of the world's largest asset managers.
BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.
Private Equity Combines With Hedge Funds
Apollo Global Management, LLC (together with its affiliates, "Apollo"),
a leading global alternative asset manager, and Lighthouse Investment
Partners LLC ("Lighthouse"), a leading fund of hedge funds manager with
$4.5 billion of assets under management, today announced a strategic
alliance between the two firms and Lighthouse's parent company, HFA
Holdings Limited (ASX: HFA). Through this new alliance, Apollo further
diversifies its product offering by adding Lighthouse's expertise in
hedge fund and managed account products to its existing suite of
investment strategies. Lighthouse's proprietary managed accounts program
now has approximately 90 distinct managed account investments across the
full range of hedge fund strategies.
"Lighthouse, throughout its long history, has proven to add significant
value to institutional portfolios, most recently with the development of
its proprietary managed account program, which we view as a clear
differentiator in the marketplace," said Leon Black, Founder, Chairman
and Chief Executive Officer of Apollo. "We are extremely impressed with
Lighthouse's management team and its unique business model, which we
believe is highly complementary to our current product offering and
broadens our comprehensive range of investment solutions for our
clients."
"We believe that Apollo's distinguished institutional brand name, long
track record and scale among global institutional investors are
unmatched," said Sean McGould, Founder, President and Co-Chief
Investment Officer of Lighthouse. "This alliance represents a major
milestone for our firm and will open new avenues for institutional
investors to consider our differentiated approach to hedge fund
investing. It also validates our longstanding and aggressive pursuit of
managed accounts for our portfolios."
Long known as a contrarian, value-oriented investor in private equity,
credit and real estate, Apollo adds a new product line for its investors
through this alliance with Lighthouse. As of June 30, 2010 Apollo
managed $33.5 billion in private equity, $18.9 billion in
credit-oriented capital markets strategies and $2.1 billion in real
estate. With more than $54 billion in assets under management from
predominantly institutional investors including leading pension funds
and endowments, Apollo brings additional scale to Lighthouse's business
at a time when numerous opportunities exist in the hedge fund industry,
particularly from large, sophisticated investors seeking full service
solutions for their hedge fund allocations. Currently, Lighthouse offers
distinct products in multi-strategy, equities, credit, managed futures
and Asian region investments, most of which are exclusively funds of
managed accounts.
As part of the transaction, Apollo will make a $75 million convertible
note investment into HFA Holdings, the parent company of Lighthouse. The
proposed investment in HFA is a strategic position for Apollo, being
undertaken at the parent company level, outside of Apollo's investment
funds. Both firms will continue to operate and be managed independently.
About Apollo Global Management
Apollo is a leading global alternative asset manager with offices in New
York, Los Angeles, London, Frankfurt, Luxembourg, Singapore, Mumbai and
Hong Kong. Apollo had assets under management of more than $54 billion
as of June 30, 2010, in private equity, credit-oriented capital markets
and real estate funds invested across a core group of nine industries
where Apollo has considerable knowledge and resources. For more
information about Apollo, please visit www.agm.com.
About Lighthouse Partners
Lighthouse Investment Partners, LLC is a fund of hedge funds and managed
account investment adviser managing approximately $4.5 billion for
institutional and private investors with offices in Florida, Chicago,
New York, London and Hong Kong. The proprietary managed account program
is a hallmark of Lighthouse's investment process. For more information: http://www.lighthousepartners.com
The information provided herein does not constitute an offer to sell or
a solicitation of an offer to buy interests in any Lighthouse-managed
investment fund. Such an offer shall only be made to accredited
investors and qualified purchasers through a private offering memorandum
and related subscription documents. Investing in hedge funds is intended
for experienced and sophisticated investors only who are willing to bear
the high economic risks of the investment.
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