Hedge Funds 01 (Aug 08 - Nov 15)

[millionairemind]

Citadel winds down $1bn fund
By Anuj Gangahar in New York

Published: October 30 2008 23:31 | Last updated: October 30 2008 23:31

Citadel Investment Group, the alternative investment house, is winding down its $1bn fund of hedge funds and redeploying the capital to support new hedge funds as they emerge in the coming months.

The move suggests Citadel is positioning itself to back managers who have quit the business or been forced to shut their funds in recent weeks as they launch new funds in the coming months.

[millionairemind]

Another one bites the dust. It is all this unwinding and de-leveraging that is causing havoc in the world markets.

Polygon freezes redemptions on $4bn fund
By Kate Burgess and Peter Thal Larsen

Published: October 31 2008 23:32 | Last updated: October 31 2008 23:32

Polygon, the Anglo-US hedge fund group which built a name for investor activism at companies such as British Energy, is suspending redemptions in its flagship $4bn Global Opportunities multi-strategy fund while it unwinds the fund and returns money to investors.

The restructuring of one of London’s best-known hedge funds is the latest sign of the crisis in the industry where client redemptions and a squeeze on funding by banks is forcing funds to sell assets into falling markets.

[winston]

REFILE-Hedge fund Ramius considers closing HK unit - FT

NEW YORK, Nov 2 (Reuters) - Ramius, a U.S. hedge fund with $11 billion under management, is considering handing back its Hong Kong trading and advisory licences, in a sign that some funds are retreating from Asia, the Financial Times reported.

The move comes amid increasing signs of a pullback from Asia by hedge funds amid a global financial market slump which is forcing them to raise cash and cut operating costs ahead of an anticipated surge in redemptions, the FT said.

The article quoted Anthony Miller, a partner at Ramius, as saying that the possible abandonment of Hong Kong licences was "mostly about cutting costs and reallocating money to the United States and Europe".

He added: "We will continue trading Asia from New York and London."

Ramius was not immediately available for comment.

[millionairemind]

Carlyle raises €530m for new fund
By Martin Arnold in London

Published: November 3 2008 00:06 | Last updated: November 3 2008 00:06

The Carlyle Group will on Monday say it has raised €530m ($673m) for small buy-outs of European technology companies, showing there is still life at the smaller end of the private equity market in spite of the financial crisis.

Carlyle’s fundraising provides another sign that the Washington-based private equity group has recovered from the embarrassment caused by the bankruptcy of its $22bn Amsterdam-listed, mortgage-backed securities fund in March.

Its latest fund, named Carlyle Europe Technology Partners II, will seek to acquire technology companies worth between €20m and €200m, focusing on Carlyle’s preferred sectors of aerospace, media, telecommunications, industry and financial services.

“The part of the private equity market that gets reported most is the large end, where little is happening at the moment, due to the credit crunch,” said David Fitzgerald, managing director of Carlyle Europe Technology Partners.

“At our end of the market, deals are still happening, and interestingly we can still raise debt to fund transactions,” said Mr Fitzgerald.

The new fund is due to announce its first investment Monday, acquiring a small UK-based aerospace technology group that supplies top aircraft makers, such as Boeing.

The move confirms Carlyle’s shift in Europe away from venture capital, which is the smallest end of private equity and invests in early-stage start-up companies. Its most recent venture capital fund in Europe was raised in 2000 and has since stopped new investments.

Carlyle – which runs 64 different funds around the world with a total of $89.3bn under management – makes pure venture capital investments only in the US. Other past leaders of the European venture capital industry that have recently shifted up to bigger deals include 3i and Apax Partners.

Mr Fitzgerald said: “The regulatory and fiscal environment is not as supportive for risk-taking in Europe as it is in the US, or even as it is becoming in Asia. Venture capital investing in Europe is a tough business to be in.”

He admitted that a likely recession in Europe could hamper returns in the short-term for the new fund. “The days of exiting a business in two to three years are gone. We are planning to hold companies for four to six years,” he said.

“We understand the cycles in the British aerospace industry, for instance, which has gone through four-year cycles time after time,” he said. “We are comfortable with investing at close to the bottom of the cycle.”

The new fund is more than twice the size of its predecessor, Carlyle Technology Partners I, a €222m fund raised in 2006, which is now almost fully invested.

Returns from Carlyle’s investments in small European technology buy-outs, including some later deals by its venture capital fund, have so far been about 36 per cent.
Copyright The Financial Times Limited 2008

[millionairemind]

Blue Mountain freezes withdrawals
By Henny Sender in New York

Published: November 4 2008 00:13 | Last updated: November 4 2008 00:13

Blue Mountain Capital Management is suspending withdrawals from its $3.1bn Credit Alternatives Fund, becoming the latest hedge fund firm to do so.

Unlike other hedge funds that have seen redemptions soar due to poor performance, Blue Mountain has done relatively well.

“Several large fund of fund investors are themselves facing liquidity pressures from their own investors,” wrote Andrew Feldstein, the firm’s founder, in a letter to investors.

“[As] a consequence, investors have submitted significant redemption notices representing a meaningful percentage of (the fund’s) assets under management.”

Mr Feldstein said that if Blue Mountain were to sell into markets where valuations remain “exceptional and unprecedented”, investors would be left with “severe liquidation costs and a less liquid portfolio”.

Since Highland Capital Management announced it was unwinding two of its debt funds a few weeks ago, debt markets have been spooked by the prospect of ever more debt sales. By unwinding, rather than merely freezing investors, Highland is buying more time.

It has told investors they may not get their money back for four years.

Such sales and the fear of ever more sales have driven down the prices even of the most senior safe debt to less than $0.70 on the dollar, leading investors to ask for their money back which, in turn, has triggered more sales in a vicious circle.

In addition, banks have been steadily cutting back the amount of money they will lend to credit hedge funds.

They have also called for increasing margin, raising the so-called ‘haircut’ on some debt securities to as much as 35 or 40 per cent.

Those actions, which some hedge funds complain is predatory, is also leading to forced selling at fire sale prices.

Blue Mountain has come up with an elaborate plan to balance the interests of those who want out of the fund with those who are staying in.

However, if investors don’t approve, the firm warned “we will likely suspend all redemptions until these illiquid markets abate”.

The firm is asking investors to either redeem or exchange their existing investment into several categories, with varying lock-ups of their money and fees.

Those who agree to longer lock-ups will be charged lower fees, in a trade-off that is likely to be adopted by other hedge funds over time.

In its letter to investors, Blue Mountain added that implementation of this plan partly depends on “dealer behaviour”.

One of the principal lessons of the past few months is that the Achilles heel of many hedge funds is the ability of investors to pull their money on short notice.

Blue Mountain formerly allowed investors to withdraw their money with 90 days’ notice at the end of any month after the first year.
Copyright The Financial Times Limited 2008

[millionairemind]

Lots of hedge funds are struggling this year...

Man Group slumps on 24% profits fall
Christine Seib
Shares in Man Group plunged almost 21 per cent to 310.75p in early trading today after the world's largst hedge fund manager reported a 24 per cent fall in interim pre-tax profits.

Profits for the six months to September 30 fell $622 million on the back of a 44 per cent fall in income from performance fees to $159 million.

Man Group was also hit by faster amortisation of its sales commissions at Man Global Strategies, one of its core investment managers, to reflect the impact that a lower level of assets would have on fee income from the manager.

Redemptions at Man's funds were $6 billion, which the group said was significantly lower than the industry average. Net inflow was up 17 per cent at $4.2 billion compared to the first half of last year.

Peter Clarke, chief executive of Man Group, said that market conditions remained challenging but that the manager had adapted quickly, which showed in its continued sales momentum.

Funds under management fell from the $70.3 billion that the manager estimated in its pre-close statement to $67.6 bilion. Man blamed extreme market and foreign exchange moves in the last week of September for the change. Since March 31, funds under management have fallen by 9 per cent.

Man held its interim dividend at 19.2 cents per share.

[millionairemind]

Hedge fund managers 'funereal' in midst of crisis
More pain expected, but some look for opportunities in 'rubble'

By Alistair Barr, MarketWatch
Last update: 8:32 p.m. EST Nov. 7, 2008Comments: 92

SAN FRANCISCO (MarketWatch) -- In the midst of the worst financial crisis since the Great Depression, several top hedge fund managers sent a grim message to their investors in October: it isn't over.

One said he was sickened by the crisis, while another admitted shock and embarrassment at the severity of the market slump and the losses his firm suffered. A third warned clients to be careful about buying anything and said it will be years before investors should buy stocks.

Such pessimism is often taken as a sign that markets may have hit a bottom and most of the managers realized this. Indeed, some said they'd already begun buying securities that they think are cheap enough to discount all the gloom.

The Standard & Poor's 500 index slumped more than 16% in October, while credit markets collapsed.

Spreads on investment-grade corporate debt jumped by 151 basis points, while junk bond spreads surged by 521 basis points to a record 1,617, according to CreditSights.

Losses in these markets so far this year reached 19% and 31% respectively, prompting the fixed-income research firm to ask "Can it get any worse?"

Hedge funds have been hit particularly hard by this market collapse. The average manager lost 5.43% in October, leaving them down more than 15% so far this year, according to preliminary estimates on Friday from Hedge Fund Research.
That puts the $1.7 trillion industry on course for its worst year since at least 1990, when HFR began tracking performance. Before 2008, hedge funds had only one down year in that time: in 2002 they lost 1.45% on average.

'Funereal'
Steve Galbraith, a partner at Lee Ainslie's Maverick Capital, read about 25 letters other hedge funds sent to their investors in October.

"The tone of the discourse was funereal," he wrote in Maverick's own Oct. 9 letter to clients. "The global economy has already entered a grim recessionary period akin to those of the '90s and '80s rather than the shallow post tech bubble recession of 2001-2002."

The Maverick Fund, Ltd. was down more than 7% last month through Oct. 17, leaving it off roughly 26% so far this year, according to a hedge fund performance report compiled by HSBC's private bank.

In Maverick's Oct. 9 letter to investors, the firm reported that its funds lost between 14.4% and 40.6% during the third quarter.

"I cannot find words to describe our disappointment, embarrassment and shock over the above results," Ainslie wrote.
Oct. 1 marked the 15th anniversary of Maverick Capital, during which time Ainslie has outperformed the S&P 500 handily.
But Maverick couldn't shelter from what Ainslie called a "perfect storm" of hedge fund de-leveraging and failure, short selling bans, slumping equity markets, faltering prime brokers and a spike in volatility.

Buffett bashing
"Be careful buying ANYTHING today," Kyle Bass, managing partner of Hayman Advisors, warned in an Oct. 17 letter to investors.

"There will be a time to buy stocks," he added. "That time is a few years into the future when the strong have separated themselves from the week ... a time when unemployment has hit 10% and U.S. GDP has dropped 4-5% (maybe more)."
He criticized Berkshire Hathaway Chairman Warren Buffett who advised investors to buy U.S. stocks in a New York Times column last month.

"Mr. Buffett has enough money to be able to have his holdings drop 50% and still fly in his jets and live the way in which he has become accustomed," Bass wrote. "Do you have enough capital to take what you have left, cut it in half, and continue to live the way you have for the past few years? I don't."

'Carnage'
Seth Klarman, a top-performing value investor and head of The Baupost Group LLC, told clients in an Oct. 10 letter that the economic downturn could be "vicious and protracted."

"The financial market collapse and bailout makes us sick," he wrote. "There is likely more carnage to come."
The U.S. dollar will likely weaken and its reign as the world's reserve currency could end, Klarman predicted. Longer-term, U.S. interest rates may rise as foreigners have to be enticed more to invest in dollar-denominated assets, he added.
The recent Treasury Department bailout has yet to be paid for and should add to inflationary pressures over time, especially when the economy begins to recover, he said.

Baupost has built a "sizable position" in low-cost inflation protection for the next three to five years, he noted.
'Genuinely depressed'

Howard Marks, chairman of Oaktree, a giant LA-based fixed-income hedge fund firm, said some "great" investors he knows were "genuinely depressed" when the credit crisis reached a peak in October.

Pessimism fed on itself as managers exchanged increasingly gloomy emails about the coming meltdown, he explained in an Oct. 16 letter to investors.

"People's only concern was bullet-proofing their portfolios to get through the coming collapse, or raising enough cash to meet redemptions," Marks wrote. "The one thing they weren't doing last week was making aggressive bids for securities. So prices fell and fell -- the old expression is 'gapped down' -- several points at a time."

Like Klarman, Marks worried about the impact of government bailouts and interest rate cuts on future prices, recalling the hyper-inflation in Weimar Germany in the 1920's.

It may be time to re-think holding long-term U.S. Treasury bonds, which currently yield little because investors have bought them as havens from riskier assets, Marks said. (Inflation eats into the future fixed payments of bonds, undermining their value).

Interconnected
Thomas Barrack, founder of distressed debt and real estate investment firm Colony Capital, said the crisis has exposed how complicated the financial system has become -- and how difficult it will be to get it working properly again.
"I have absolutely no idea how the intricacies of the global financial system function. I had previously taken solace in believing that 'the other guys' did understand," said Barrack, a former Reagan administration official. "What we all now realize is that nobody understands and nobody ever understood."

"The current turmoil is larger, more complicated, more volatile, more interconnected and more global than anyone had anticipated," he added in an Oct. 14 letter to investors.

Barrack has experience with troubled banks during previous financial crises, having worked with TPG's David Bonderman and Cerberus Capital Management's Stephen Feinberg restructuring Korea First Bank and Aozora Bank respectively.

He was gloomy about the Treasury's efforts to buy toxic assets from troubled U.S. banks, arguing $750 billion won't be enough. The amount needed to acquire these assets, even at true market value, could be in the trillions, he said.
Bank stocks probably haven't bottomed yet and the stock market "will no doubt have further and dramatic dips," he predicted.

Rubble
Still, almost all these managers said the carnage will create great investing opportunities. The key is surviving to take advantage. Perry Capital LLC, run by former Goldman Sachs trader Richard Perry, has been buying first-lien bank debt that yields more than 15%. It's also bought a portfolio of securities backed by near-prime and so-called Alt-A mortgages.
"We will continue to pick through the carnage," Perry said in an Oct. 8 letter to investors.

Baupost's Klarman has been buying corporate debt offering yields of as much as 30%. The firm is also seeing some opportunities to invest in real estate, through the debt of distressed companies, he added.
"The seeds of recovery and eventually of substantial profit are sown amidst the carnage," he wrote. "The world is not ending."

Oaktree's Marks expects boutique investment banks including Evercore to benefit as larger banks become more regulated, bureaucratic and risk-averse.

"In the third stage of a bear market ... everyone agrees things can only get worse," Marks wrote on Oct. 16. "There's no doubt in my mind that the bear market reached the third stage last week."

"That doesn't mean it can't decline further, or that a bull market's about to start," he added. "But certainly it's a good time to pick among the rubble."

Maverick's Ainslie said on Oct. 9 that he'd never seen as many extremely over-valued and under-valued stocks at the same time. That presents great opportunities for hedge funds that both short equities and go long.
"The most important objective at this point is simply to endure this unique turbulence to be positions to take advantage of the far more productive environment that will exist on the other side of this nightmare," he wrote

[millionairemind]

Good article. Reminds me of alternative investment in the book by El Erian - When Markets Collide

Too long to post here. I like the last part best.

As master investor Warren Buffett has noted, there's an inevitable trend in many pursuits, including money management: First come the innovators, then the imitators and, finally, the idiots. Or as Charles Darwin might put it: Those who don't evolve pay the price.

http://online.barrons.com/article/SB122 ... e_home_top

[millionairemind]

One of the reasons for the violent movements in the markets - Redemptions

Hedge Funds Lost $100 Billion on Investor Withdrawals (Update1)

By Tomoko Yamazaki

Nov. 13 (Bloomberg) -- The global hedge fund industry lost $100 billion of assets in October, according to an estimate from Eurekahedge Pte, as firms including Sparx Group Co. and Tantallon Capital were buffeted by investor redemptions.

Funds fell an average 3.3 percent in October, based on preliminary figures from the Singapore-based data provider, as measured by the Eurekahedge Hedge Fund Index, which tracks the performance of more than 2,000 funds that invest globally.

The loss compares with the 19 percent slide in the MSCI World Index last month, as managers who trade futures, known as commodity trading advisers, or CTAs, and those who invest in Japan helped offset declines, Eurekahedge said.

http://www.bloomberg.com/apps/news?pid= ... refer=home

[millionairemind]

Any scapegoat will do... try the rich ones.. quick...

'Hedge funds will be decimated'
5 top hedge fund managers testify at congressional hearings about the industry.
By Katie Benner, writer
November 13, 2008: 5:14 PM ET

WASHINGTON (Fortune) -- A Congressional panel grilled five of the world's richest and most powerful hedge fund managers Thursday as lawmakers sought to understand how much blame they could assign the little-understood hedge fund industry for the global economic collapse.

The managers testifying before the House Committee on Oversight and Government Reform included John Paulson, George Soros, Philip Falcone, James Simons and Kenneth Griffin, a group that made on average more than $1 billion in 2007.

Committee Chairman Henry Waxman said his reasons for holding a hearing were twofold: He wanted these men, "some of the most successful and knowledgeable investors in our financial markets," to discuss how to nurse the financial system back to life. And he wanted the committee to examine how hedge funds contributed to the current financial crisis, whether they pose a systemic risk to the financial system, and how best to regulate the industry, which is now subject to very little oversight.

Noting that we are in the worst financial crisis since the 1930s, George Soros told the committee: "The salient feature of the current financial crisis is that it was not caused by some external shock... The crisis was generated by the financial system itself."

Soros' prepared testimony read very much like an advertisement for his latest book, "The New Paradigm for Financial Markets;" but on the point of how much blame hedge funds should shoulder, Soros was less explicit. He noted that while funds may have helped inflate the bubble, "the bubble has now burst and hedge funds will be decimated."

The hearing is the latest in a series held by Waxman to understand how different players contributed to the global financial collapse. While ratings agencies, bankers and regulators like Alan Greenspan have been blamed by pundits and politicians, the hedge funds have become an increasingly popular villain as the story of the crisis has unfolded because of the mystery and tremendous wealth that are the hallmarks of the industry.

But hedge fund managers have suffered along with the markets, delivering their worst-ever returns this year. The industry has shrunk from more than $2 trillion a year ago to about $1.7 trillion today. Not only have managers lost money amid the credit and equity turbulence, investors have yanked funds out of the industry in order to hold more cash or to protect themselves from further losses.

Even though hedge fund losses have been severe, the industry as a whole is outperforming the broader market. As Houman Shadab, a research fellow at George Mason University, noted in earlier testimony, the hedge fund industry as a whole is down about 15% for the year, while the S&P is down more than 30%.

While few questions were actually answered during the hearing, what was certain was that the industry will face more regulation. Moreover, this push will occur amid an economic downturn that will hit Main Street hard and likely give lawmakers populist support to impose perhaps severe limitations on hedge fund activity or higher taxes.

Massachusetts Democrat John Tierney noted that ever more average investors are exposed to hedge funds as pension funds pour money into the asset class. These investment pools will suffer the same losses as the so-called sophisticated investors (i.e. wealthy individuals and fund-of-fund managers) that hedge funds have traditionally served. Regulation, the committee agreed, will take into account this fact.