Hedge Funds 01 (Aug 08 - Nov 15)

[millionairemind]

November 14, 2008
George Soros warns 'hedge funds will be decimated'
(Kevin Wolf/AP)

Hedge funds will be decimated by the global financial meltdown and the crisis will wipe out as much as three quarters of the money they manage, George Soros, the billionaire investor, predicted in Washington yesterday.

His comments were made as he fielded hostile accusations in the US House of Representatives that hedge fund managers had enjoyed “unimaginable success” even though they were “virtually unregulated”.

Ordered to testify before the House Oversight and Government Reform Committee, the world’s wealthiest and most secretive hedge fund managers answered questions as lawmakers tried to work out who was to blame for America’s financial crisis. Apart from Mr Soros, those summoned to testify about the role of hedge funds, their tax status and regulation included John Paulson, who runs a hedge fund that bears his name and who was one of the first investors to bet that housing prices could decline on a national basis last year.

He was joined by Philip Falcone, senior managing director of Harbinger Capital Partners, James Simons, who runs Renaissance Technologies, and Kenneth Griffin, chief executive of Citadel Investment Group.

Henry Waxman, a California Democrat and the committee chairman, said that he had singled them out because each earned more than $1 billion (£670 million) last year. Mr Waxman said that they had benefited from the tax system, which allowed their earnings to be taxed at the lower capital gains tax rate, rather than as income.

He said: “That means at least some portions of their earnings could be taxed at rates as low as 15 per cent. That’s a lower rate than many teachers, firefighters or plumbers pay.” The hedge fund industry – estimated to control about $2.5 trillion of assets, mainly outside regulatory supervision – has been blamed for volatility in stock markets and destabilising a number of banks. Hedge funds have also been accused of seeking to trash companies by short-selling their stock – a trade in which the dealer benefits if the share price falls.

The first cracks on Wall Street started to appear in June 2007 when UBS and Bear Stearns both admitted to massive losses within their own hedge funds. UBS was forced to close its hedge funds and Bear Stearns had to bail out its own.

As Washington debates how to prevent another colossal financial crisis, some critics are calling for heavy regulation of hedge funds.

However, Mr Soros cautioned against “going overboard with regulation”. He said: “Excessive deregulation has inflicted enormous losses on the general public and there is a real danger that the pendulum will swing too far the other way. The bubble has now burst and hedge funds will be decimated. It would be a grave mistake to add to the forced liquidation currently dislocating markets by ill-considered or punitive regulations.”

Hedge funds have lured a growing number of ordinary investors, pension funds and university endowment funds, so that millions of Americans unwittingly invest in the funds indirectly.

Tom Davis, of Virginia, the committee’s senior Republican, said that hedge funds “now pose a very public peril when the bets go bad”.

The funds, which are delivering their worst-ever returns this year, have been widely blamed for contributing to the downfall of both Bear Stearns and Lehman Brothers. But Mr Falcone defended the industry, saying: “The behaviour of institutions in several financial sectors contributed to the crisis, but, in my view, the hedge fund sector was not among them.”

He also defended short-selling, arguing that it was a valuable component of financial markets and did not drive companies out of business. Two months ago, the SEC briefly banned money managers from shorting 1,000 financial stocks.

David Ruder, a former chairman of the US Securities and Exchange Commission, which in recent years tried and failed to force hedge funds to register with the agency, also played down the industry’s role in the credit crunch.

He said: “They do not seem to have played a major role in the events precipitating the crisis.”

[millionairemind]

News November 13, 2008, 5:00PM EST text size: TT
Fall of the Funds of Funds
Funds of funds were supposed to be the safe choice for wealthy investors and big institutions. But they were leveraged beyond the max
By David Henry and Matthew Goldstein

Hedge funds, already suffering from an ill-fated love affair with leverage, are finding themselves haunted by another problem. It turns out many so-called funds of hedge funds, portfolios with stakes in multiple hedge funds, also depended on borrowed money. Now, with lenders retracting credit, fund-of-funds managers are being forced to dump assets, putting further pressure on the hedge funds and the markets generally. It's "a vicious circle," says Kate Hollis, director of fund research at Standard & Poor's (MHP).

As the great edifice of leverage crumbles, funds of funds are faring worse than hedge funds. They're off 18.7% this year, vs. 15.5% for individual hedge funds. Among the funds of funds hit hard: some run by Fix Asset Management, Ontario Partners, and HRJ Capital, co-founded by former football star Ronnie Lott. All declined to comment for this story.

Funds of funds were supposed to be the safer choice for high-net-worth individuals and big institutions. By spreading their bets across dozens of investments, managers assured clients they didn't have to worry about a blowup in any single portfolio. It was the sort of flawed diversification argument used to justify many speculative investments during the boom, including those notorious collateralized debt obligations stuffed with subprime mortgage securities. The pitch fueled explosive growth: By the end of 2007, funds of funds accounted for 43%, or $747 billion, of the hedge fund industry, up from 19%, or $103 billion, in 2001, according to Hedge Fund Research.

OVERLOADED
Roughly half of that universe employed leverage. Some funds of funds borrowed directly from banks to buy $2 of assets for every $1 of investors' money. Brokers, meanwhile, encouraged wealthy customers to finance their fund-of-funds purchases on credit. Big banks sold "principal protection products," derivatives that supposedly guaranteed clients wouldn't lose a cent of their initial investment—and the banks in effect used leverage to create those insurance policies.

The funds of funds were layering leverage upon leverage. They owned hedge funds already loaded up with debt, roughly $6 for each $1 of capital. When credit seized up, the process began to reverse. "Once things start to delever, everything contracts," says Andrea S. Kramer, a lawyer at McDermott Will & Emery who represents hedge funds.

To protect themselves, such big global banks as France's BNP Paribas, KBC Group of Belgium, and the Royal Bank of Canada are now charging higher fees on loans they extended to funds of funds, or pulling the loans entirely. The tight credit is compelling fund-of-funds managers to sell their holdings, which is driving individual funds to dump stocks, bonds, and commodities.

The situation shows no sign of stabilizing. Consider CMA Global Hedge PCC, a $360 million fund of funds. The portfolio, which over the years used financing from JPMorgan Chase (JPM), Société Générale, and HSBC (HBC), is currently relying on credit from Citigroup (C) . Its holdings—47 hedge funds—are down 11%. Add in leverage, which amplifies losses, and CMA Global is off 25%.

Wary of Citi charging more for the fund's loan, manager Sabby Mionis is trying to sell hedge fund stakes to reduce debt. But a number of the funds have suspended redemptions, making it tough. Mionis is now working on a plan to return some money to investors: "For the foreseeable future, leveraged funds of funds are dead."

[kennynah]

to put this into simpler understanding...

i borrow from OD to buy stocks on leverage (eg using CFD), pledge this "assets" to OD issuer...stocks tumble...and i kana margin calls from CFD house... i go to OD issuer and ask for more money...they say..."but boss...your collateral now worth peanuts...lucky you i dont recall your OD...you still wana ask for higher OD....you wait gu gu ok?..."

but for those who were forced to repay these ODs.....they close shop....ie fund houses kana redemption until file for chapter 11...

using above post...

CMA Global Hedge PCC = retail investors who borrowed money to play CFD...
Citi, JPM, CS, etc = OD Issuers (being screwed becos the collaterals are worth peanuts)

[winston]

Picking up on your discussion, alot of Mrs Wanabe in Japan have been borrowing money to do carry trades in other currencies. They'll leveraging their carry trades as it was always a one way bet. Now, all these Mrs Wanabe are sitting on some huge losses ....

[winston]

Picking up on your discussion, alot of Mrs Wanabe in Japan have been borrowing money to do carry trades in other currencies. They were also leveraging their carry trades as it was always a one way bet. Now, all these Mrs Wanabe are sitting on some huge losses ....

[millionairemind]

Asia
November 15, 2008, 11.01 am (Singapore time)

Asia hedge fund assets shrink in Q3

BOSTON - Hedge funds that focus on Asia saw assets shrink by 13 per cent in the third quarter as investors pulled out money after heavy fund losses, according to new data from Hedge Fund Research.

The Chicago-based hedge fund tracking company said the Asian hedge fund sector declined to US$87 billion at the end of September from US$100 billion at the start of the quarter.

The global hedge fund industry invests US$1.7 trillion.

Asian hedge funds faced US$10 billion in performance-based losses in the quarter, prompting investors to pull out US$3.4 billion, according to the fund tracker.

Managers are now waiting to see how much more money investors will pull out hedge funds as a Nov 15 deadline, set by many funds for investors to get out by year's end, approaches.

George Soros, the hedge fund manager who emerged from retirement at age 78 to protect his fortune at Soros Fund Management, said he expects hedge fund industry assets to shrink between 50 per cent and 75 per cent. -- REUTERS

[winston]

Triple A seeds new hedge fund by Hong Kong's EIP
Mon Nov 17, 2008 9:35pm EST

HONG KONG, Nov 18 (Reuters) - Triple A Partners, an alternative fund firm specialising in seeding new managers, said on Tuesday it would invest an initial $20 million in a new hedge fund launched by Hong Kong's Enhanced Investment Products Ltd.

Triple A, also known as Asia Alternative Asset Partners, said it had bought a minority equity interest in EIP as well and signed a deal to distribute their existing and future funds globally.

EIP, which has more than $200 million of assets under management, operates using a rare marriage of passive and alternative investing, creating market tracking index funds its EIP Overlay Fund can use to source stock for complex trades.

Chief Executive Tobias Bland, a former Jardine Fleming proprietary trader who founded EIP in 2002, has said the structure is a solution for markets where hedge funds can't easily or cheaply borrow stock they need for their often sophisticated trading strategies.

He told Reuters in June that many of its trades would be less profitable or not even viable if it had to pay to borrow the shares from the prime brokerage divisions of big banks. Large prime brokers in Asia include Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz).

Its new EIP Aleph Fund, managed by Bland, is expected to launch in January 2009. The Asia Pacific market neutral fund will target absolute returns by employing a number of non-correlated investment strategies.

"With the launch of the EIP Aleph Fund, we are opening our second market neutral fund to take advantage of opportunities that the existing EIP Overlay Fund cannot take full advantage of due to its more conservative risk attributes," Bland said in a statement.

Triple A is partly owned by CLSA, Credit Agricole's (CAGR.PA: Quote, Profile, Research, Stock Buzz) Asian investment banking arm. CLSA and Triple A announced last year they would team up to raise funds for investing in start-up hedge funds.

Some hedge fund analysts believe new managers perform better than the industry on average, citing a hunger to prove themselves and build a track record. Part of this may also be because they have less capital, and can invest more nimbly.

But positive hedge fund returns have been rare with the global financial crisis hammering the industry. After five straight years of double-digit percentage gains, the Eurekahedge Asian Hedge Fund Index is down more than 27 percent this year.

The research firm estimated earlier this month that at least 87 Asia-focused hedge funds closed in January-September, while 69 were launched. This compared with 66 closures and 124 launches during the same period last year.

[millionairemind]

John Paulson Buys Mortgages After U.S. Drops TARP Purchases

By Tom Cahill

Nov. 18 (Bloomberg) -- John Paulson, the hedge-fund manager who generated sixfold returns last year with the help of bets against subprime mortgages, has started buying debt backed by home loans, investors said.

Bonds linked to U.S. residential mortgages fell last week after U.S. Treasury Secretary Henry Paulson abandoned plans to buy distressed securities using money from the $700 billion Trouble Asset Relief Program. The ABX-HE-PENAAA 07-2 index of credit-default swaps tied to AAA-rated securities has fallen 13 percent to 36.25 since the Treasury’s announcement on Nov. 12, according to Markit Group Ltd. That indicates the bonds might fetch about 36 cents on the dollar.

John Paulson, whose New York-based Paulson & Co. oversees $36 billion in assets, said at a conference in June that he sees “opportunities this year” to buy mortgage-backed debt. While he said it was “premature” to start buying, the ABX indexes have since fallen 35 percent.

“Paulson’s timing is typically very good,” said Louis Gargour, chief investment officer of LNG Capital LLP, a London- based hedge fund that invests in distressed credit markets. “Pulling the TARP program was the last straw for this market. Now that Paulson is buying others may say this is a great trade.”

Gargour said he isn’t buying residential securities for “technical” reasons, including the prospect for legislative changes to home-foreclosure rules in the U.S.

Armel Leslie, a spokesman for Paulson’s firm, declined to comment on purchase of residential-mortgage securities, which the Financial Times reported yesterday.

Hearing Testimony

Paulson, in an appearance Nov. 13 at a U.S. Congressional committee, said that the TARP program could be more effective by investing in companies rather than buying mortgage debt itself.

“I’m thinking we’ve probably got the wrong Paulson handing out the TARP money here,” Representative John Tierney, a Democrat from Massachusetts, said during the hearing. The two Paulsons aren’t related.

John Paulson, 52, corrected Representative Jim Cooper, a Tennessee Democrat, when he said the headline of the hearing was “Paulson versus Paulson.”

“I, in no way, want to be critical of Secretary Paulson,” he said. “He’s done a great deal for this country. He’s willing to change his position when the circumstances change.”

All of Paulson’s funds profited last year buying credit default swaps on mortgage assets, which are instruments that rise in value as the risk of default increases. Paulson told investors in November that he had increased his holdings of derivatives that gain in value when the chances of corporate credit defaults rise.

Paulson’s Advantage Plus fund has climbed 29 percent this year through October while many managers are enduring the worst year of their careers.

[millionairemind]

Hedge Funds Have Worst Two Months in At Least 8 Years (Update1)
By Tomoko Yamazaki

Nov. 19 (Bloomberg) -- Hedge funds capped their worst two months in at least eight years in October, as global declines in stocks and commodity prices curbed returns and investor withdrawals cut assets, according to Eurekahedge Pte.

The Eurekahedge Hedge Fund Index, tracking more than 2,000 funds that invest globally, dropped 4.5 percent last month after falling 5 percent in September, the Singapore-based data provider said. October's drop, based on 71 percent of constituent funds reporting as of today, pushed the index down 12 percent on the year, the worst since Eurekahedge began publishing data in 2000.

Investors withdrew a net total of $62.7 billion from hedge funds last month, according to Eurekahedge, shrinking the industry by $110 billion to $1.65 trillion of assets as markets tumbled amid a global recession. Assets may fall to about $1 trillion by the middle of next year, Citigroup Inc. said in a report this week.

``The industry will probably face more redemptions for a while,'' said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.'s investment advisory division. ``The decline is a reflection that a majority of hedge funds seem to be taking risks betting more on beta,'' a gauge of a fund's risk that measures the volatility of its past returns in relation to the returns of the benchmark.

The October loss compares with a 19 percent decline in the MSCI World Index, which tracks more than 1,700 companies worldwide, and a 22 percent drop in the Reuters Jefferies CRB Index, a benchmark for commodities.

Hedge Funds Fold

About 350 hedge funds shut down in the first half of this year, up 16 percent from 303 a year earlier, according to Hedge Fund Research Inc. An estimated 700 may go out of business by the end of the year, according to the Chicago-based firm.

``The hedge fund industry is witnessing some of the biggest asset outflows in over three years, but we also continue to see less risk-averse investors seeking entry into previously closed funds or retaining their current allocations in view of substantial future gains,'' Eurekahedge said in its October performance commentary, posted on its Web site.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Best Performers

By strategy, managers trading futures, known as commodity trading advisers or CTA funds, outperformed the industry by exploiting directional trends in the commodity and currency markets, Eurekahedge said. Similar trades also helped boost the performance of macro-fund managers, who wager on trends in stocks, bonds and currencies worldwide, the firm said.

Managers of so-called long-short funds, who bet on rising and falling prices, had the biggest redemptions last month at $24 billion, followed by CTAs, which saw withdrawals of $12.3 billion as investors made wrong-way bets on commodity prices. Other strategies saw single-digit redemptions, Eurkeahedge said.

In terms of regional mandates, the Eurekahedge Japan Hedge Fund Index was the best performer, declining 2.8 percent in October even as the benchmark Topix index slid 20 percent.

Trades that involved selling regional stocks while taking advantage of currency moves helped stem losses, Eurekahedge said in a preliminary report last week. The yen strengthened more than 7 percent against the dollar in October, the most in a decade.

Funds investing in Latin America followed with a 3.8 percent drop, while the Eurekahedge Asian Hedge Fund Index lost 5.3 percent and the Eurekahedge North American Hedge Fund Index fell 4.7 percent.

The index tracking emerging-market hedge funds was the worst performer, declining 8.1 percent, while the Eurekahedge European Hedge Fund Index slid 7.2 percent, according to the data provider. All October index data are preliminary figures.

[millionairemind]

Commodity volatility now favoured by hedge funds
By Anuj Gangahar in New York

Published: November 19 2008 20:51 | Last updated: November 19 2008 20:51

With stock market volatility running close to all-time highs, trading equity volatility as a separate asset class is becoming more expensive and hedge funds are turning their attention instead to the commodities markets.

Derivatives based on commodity indices provide cheaper access to the “long volatility” trade that has been among the most successful equity market strategies of the past two years.

Implied equity market volatility, as measured by the CBOE’s Vix index – known as Wall Street’s fear gauge – is below the all-time high reached in late October. But it remains at historically elevated levels. This heightened volatility has become a regular feature in recent months with huge price swings becoming the norm as equity markets are driven by fear generated by the wider economic crisis.

At the high levels of the past 18 months, buying volatility in the form of options based on the Vix is often prohibitively expensive.
As a result, hedge fund managers anxious not to lose out on some of the potential benefits of trading volatility as an asset class are turning their attention to derivatives products including variance swaps based on commodities indices, according to Carl Mason, equity derivatives strategist at BNP Paribas.

“Interest in variance swaps playing volatility in the Dow Jones-AIG Commodity Index has picked up over the past month or so,” he said.

A variance swap is an over-the-counter derivative that allows users to speculate on, or hedge risks associated with, the size of movements in the price of an underlying product such as a commodity or equity index.

These products are proving attractive because while commodity market volatility is some way below its all-time highs, equity market volatility remains near record peaks, said Mr Mason. “As a result, traders see more scope for upside to long commodity volatility trades than for long equity volatility trades.”

Their growing use comes as investors seek more generally to extend the scope of traditional investments outside pure equities in order to benefit from the performance of other asset classes.

Thomas Droumenq, head of the hedge funds and options business at Société Générale in New York, said: “Many hedge funds are trading commodities the same way as equities. One type of instrument that is proving particularly interesting is options based on the dispersion of commodities.”

The growing use of commodity derivatives also comes as the commodity and equity markets display greater correlation, making commodities a good and relatively cheap proxy for equity market volatility.

As a result, variance swaps based on commodity indices are starting to attract attention as traders seek to reap the upside from this increasing correlation between volatility in stock and commodity prices.

This greater uptake of variance swaps based on commodities indices comes amid strong growth for commodity derivatives in general.

According to the Bank for International Settlements, the notional amount of commodity derivatives outstanding grew by 56 per cent in the first half of 2008, to $13,000bn, at the end of June.

Copyright The Financial Times Limited 2008