Hedge Funds 01 (Aug 08 - Nov 15)

[winston]

When you see one cockroach, there's probably a few others lurking around. Therefore, there could be more redemptions in the industry which may lead to a muted rally ...

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SEC Said to Examine More Ponzi Schemes After Madoff By David Scheer

Jan. 2 (Bloomberg) -- U.S. regulators working to untangle Bernard Madoff’s alleged $50 billion Ponzi scheme are probing other money managers suspected of using similar tactics, two people with knowledge of the inquiries said.

The U.S. Securities and Exchange Commission is pursuing at least one case in which investors may have been cheated out of as much as $1 billion, according to a person, who declined to name the manager and asked not to be identified because the probe isn’t public.

Regulators may discover additional Ponzi arrangements as declining stock markets prompt investors to withdraw their cash and they question how their money is being managed. This week, the SEC said it halted what the agency described as a $23 million scam targeting Haitian-Americans, and said the Florida- based operators as recently as last month sought more investors.

The new cases “signal it’s become an enforcement priority,” said University of Rochester President Joel Seligman, who wrote a history book on the SEC. After Madoff’s alleged fraud “you’ve got to check hard and see if there is more like it in the marketplace.”

Investigators haven’t found evidence the suspected frauds are of the same magnitude as in the Madoff case, which would be the biggest of its kind in history, the people said. In a Ponzi scheme, early investors are typically paid with money from later participants.

Madoff Catalog

Madoff, 70, was charged Dec. 11 at federal court in Manhattan with securities fraud after allegedly telling his sons his New York-based investment advisory business had been “one big lie” and that he was “finished.” The SEC, which sued him, is seeking to unravel the extent of the losses and recoup money for investors.

A catalog of Madoff’s assets provided by his attorneys to the SEC on Dec. 31 hasn’t revealed any major sources of additional cash, a person familiar with the matter said. Madoff said before his arrest that he had as much as $300 million remaining, according to the agency’s complaint.

SEC spokesman John Heine and Ira Sorkin, an attorney for Madoff, declined to comment.

Madoff’s clients included banks, hedge funds, charities, universities and individual wealthy investors. They had about $37 billion with his firm, according to a Bloomberg News tally of disclosures and press reports.

The House Financial Services Committee at a Jan. 5 meeting will examine regulatory efforts to catch investment scams and scrutinize how Madoff’s alleged conduct avoided detection for years. SEC Chairman Christopher Cox said Dec. 16 that the agency failed to act on “credible, specific” allegations about Madoff dating back at least to 1999.

Markopolos Ill

Harry Markopolos, the former investment-firm employee who said regulators failed to act on his 1999 suspicions about Madoff, won’t appear at the meeting as announced by the committee because of an illness, according to the office of U.S. Representative Barney Frank, the Massachusetts Democrat who leads the panel.

David Kotz, the Securities and Exchange Commission’s inspector general, and Stephen Harbeck, president of the Securities Investor Protection Corp., are set to appear.

The case is Securities and Exchange Commission v. Madoff, 08-cv-10791, U.S. District Court, Southern District of New York (Manhattan).

[millionairemind]

Hedge Funds Lost Record 18.3% on Misjudged Markets

By Saijel Kishan

Jan. 8 (Bloomberg) -- Hedge funds lost 18.3 percent in 2008, their worst year on record, as managers misjudged the severity of the biggest financial crisis since the Great Depression.

A gain of 0.42 percent in December lessened the average loss for the full year, according to Hedge Fund Research Inc.’s HFRI Fund Weighted Composite Index. The decline was the largest since the Chicago-based firm began tracking data in 1990.

“Hedge funds failed to appreciate the magnitude, breadth and duration of the declines we saw across most markets,” said Michael Rosen, principal at Angeles Investment Advisors LLC in Santa Monica, California, which advises clients on investments.

Investment losses and client withdrawals reduced industry assets to $1.1 trillion last month from its peak of $1.9 trillion in June, according to Morgan Stanley. Firms such as Dwight Anderson’s Ospraie Management LLC and Jeffrey Gendell’s Tontine Associates LLC closed funds, while Paul Tudor Jones’s Tudor Investment Corp. and Kenneth Griffin’s Citadel Investment Group LLC were among those to limit redemptions.

The decline by hedge funds last year compared with the 37 percent drop in the Standard & Poor’s 500 Index, including reinvested dividends, the benchmark’s worst showing since 1937. Commodities slumped 33 percent, according to the UBS Bloomberg Constant Maturity Commodity Index of 26 contracts.

The worst previous performance by hedge funds was in 2002, when they lost 1.45 percent while the S&P 500 tumbled 23 percent. Hedge funds returned 9.9 percent in 2007.

Stock Funds Lose

Among the major investment strategies, equity hedge funds lost the most last year, an average of 26 percent, Hedge Fund Research said. Event-driven funds, which invest in companies going through changes such as mergers and spinoffs, lost 21 percent. Macro hedge funds, which can bet on securities from commodities and interest rates, returned 5.7 percent.

Tontine, based in Greenwich, Connecticut, was among the firms with the biggest losses. Tontine Partners LP fund slumped 91.5 percent, while Tontine 25 Fund lost 64 percent, according to investors. Griffin, 40, who runs Citadel, lost about 53 percent from its two biggest funds. The Chicago-based firm oversees $13 billion.

Executives at the firms declined to comment.

Last year’s winners include Paulson & Co., run by John Paulson, 53. The New York-based firm, which manages about $36 billion, posted a 37 percent gain in its Advantage Plus Fund Ltd., according to investors.

Brevan Howard

Brevan Howard Asset Management LLP, Europe’s biggest single-manager hedge-fund firm, produced a 22 percent gain in its main fund, the $15 billion Brevan Howard Fund, investors said. London-based Brevan, founded by Alan Howard, 45, oversees $26.4 billion.

Ionic Capital Management LLC, a $3.9 billion fund run by former Highbridge Capital Management LLC executives Bart Baum, Adam Radosti and Dan Stone, returned about 20 percent last year, investors said.

“This is a Darwinism moment for the hedge-fund industry,” said Amit Shabi, a partner at Geneva-based Bernheim Dreyfus & Co., which invests in hedge funds. “Investors will be taking note of the managers who were able to preserve capital in 2008. They will form the core of the industry in the future.”

Managed futures funds, which rely on computers to decide when to buy and sell securities, outperformed peers in 2008 after betting against stock markets and correctly betting on the direction of commodities.

Futures Funds

Winton Capital Management Ltd., the $13.3 billion London- based firm started by David Harding, 47, generated a 21 percent return in its $5.5 billion futures fund. Tudor’s $1 billion futures fund, Tensor, returned 36 percent last year.

Banks restricted the amount of money they loaned to hedge funds as credit markets froze, while funds cut investments and held cash to avoid losses. Funds held more than $300 billion in cash, according to a December report by Man Group Plc in London.

RAB Capital Plc, based in London, and New York’s GLG Partners Inc. were hurt when some of their assets held in the European prime brokerage unit of Lehman Brothers Holdings Inc. were frozen after the New York-based investment bank filed for bankruptcy in September. The Lehman division provided lending and brokerage services to hedge funds.

Market losses in the second half of the year led funds to limit investor withdrawals. Tudor, run by Jones, 54, out of Greenwich, Connecticut, told investors in November that it would suspend withdrawals until the end of March. Citadel and Harbinger Capital Partners, which is run by 46-year-old Philip Falcone, last month restricted redemptions.

Funds of Funds

Funds that invest in hedge funds lost 20 percent last year, Hedge Fund Research said. Tiger Select Absolute Return Fund LP, a fund of funds overseen by Morgan Creek Capital Management LLC in Chapel Hill, North Carolina, lost 51 percent in the first 11 months of the year, according to an investor letter.

“They’ve shown not to have added any value above the broad market,” James McKee, director of hedge-fund research at Callan Associates Inc., an investment consulting firm in San Francisco, said of funds of funds. “I don’t think it will be the death of the fund-of-funds industry, but there will be a lot of pressure for change.”

Madoff Impact

The industry was hit by the alleged fraud by Bernard Madoff, who last month confessed to employees that his investment company was “a giant Ponzi scheme,” that may have cost clients as much as $50 billion, according to an FBI complaint. In a Ponzi scheme, early investors are paid with money from subsequent participants rather than from actual investments.

The hedge-fund units of Spain’s Banco Santander SA and Geneva-based Union Bancaire Privee were among those that had invested in Madoff.

“Recent events will unavoidably lead to a re-evaluation of the hedge-fund model,” Man Group said in the report. “The concept of absolute returns, once a key selling point for the industry, will have to be revised in light of recent losses.”

About 6.9 percent of the industry, or 693 funds, closed in the first nine months of 2008, Hedge Fund Research said. For the whole year, 920 funds may have been shut, topping the all-time high of 848 closures in 2005, the firm said.

Ospraie’s Anderson, 41, closed his flagship $2.8 billion fund in September because of losses in commodities. Gendell said in November it would start liquidating two of its four hedge funds.

Carlyle Group, the private-equity firm run by David Rubenstein, 59, began closing its Blue Wave hedge fund in July. Arience Capital Management LP and Sunova Capital LP, both based in New York, also liquidated funds.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

[millionairemind]

Jan 13, 2009
More pain for hedge funds

NEW YORK - YEAR after year, the hedge fund industry dazzled Wall Street by delivering 'absolute returns' - outsized profits whether markets rose or fell. Using sophisticated trading models, the pools of managed capital made wealthy people wealthier with eye-popping returns that carried seemingly moderate risk.

Not these days. Blind-sided by a colossal market collapse and the widening Bernard Madoff scandal, hedge funds suffered their worst showing on record last year.

And they're bracing for more pain in 2009. The industry's fall proves that even the quantitative brilliance and market wizardry of elite hedge funds are no magic bullet for investors during brutal times.

'Hedge fund managers have always said, 'Look, we know how to make money even in difficult times,' and that turns out to be a fallacy,' said Mr Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital Management.

Nearly 700 funds - 7 per cent of the industry - shut down in the first three quarters of 2008, up over 70 per cent from the same period the previous year, according to Hedge Fund Research, a Chicago-based data firm.

At that rate, roughly one in 10 hedge funds will have disappeared last year when final numbers are released in coming weeks.

Thousands more are expected to die in 2009 as investors who have been clobbered by losses yank out what's left of their money. Those investor redemptions have forced many hedge funds to liquidate large chunks of their assets, triggering 'dramatic' swings in the stock market late last year, Mr Brog said.

'Even if hedge funds make up only 10 per cent of the market, it's going to have a big effect if they sell all at once,' he said.

Besides the financial crisis and massive losses from Madoff's alleged pyramid scheme, self-inflicted wounds also haunted hedge funds, experts say. The funds' high-octane investment philosophy, they say, pushed many managers to make big bets with borrowed money despite the dangers.

'We grew into this culture of gunslingers,' said Mr Bill Fleckenstein, founder and president of Seattle-based hedge fund Fleckenstein Capital.

For many hedge fund managers, the notion of managing risk through cautious trading was a 'recipe for getting fired', he said.

'All anyone really wanted was performance, and managing risk was a drag on performance,' Mr Fleckenstein said.

The average hedge fund lost 18 per cent of its value in 2008, the industry's worst performance on record and down from an average gain of 9.96 per cent in 2007, according to Hedge Fund Research. The only other negative year on record was in 2002. But even then, funds only lost an average of 1.45 per cent.

Still, compared with the wider market, hedge funds don't look so bad. The Dow Jones industrial average lost 34 percent in 2008, while the Standard & Poor's 500 index fell 38 percent.

But hedge funds were never supposed to lose money.

The loosely regulated pools of capital burst onto the investment scene in 1990 with $39 billion in assets and quickly ballooned in numbers. Today, there are some 10,000 hedge funds, most of which cater to wealthy investors and promise big returns in virtually any economic climate.

Many hedge funds use complex models to trade crude oil and soybean futures, derivatives and other exotic assets out of reach to ordinary investors.

Investors typically are charged a yearly fee equal to 2 percent of assets and 20 per cent of profits. That fee structure has reaped eight- and even nine-figure paydays for the most successful portfolio managers.

But not now. Hedge funds' assets hit an all-time peak of $1.93 trillion in June but have since fallen to $1.56 billion, according to Hedge Fund Research. The steep declines mean that most portfolio managers will be taking much smaller paydays in 2009.

Still, not every hedge fund lost money last year.

Mr Chris Wang, founder and portfolio manager of New York-based SYW Capital Management, enjoyed a sizzling 2008 managing $52 million in assets. Using a strategy of 'short-selling', or betting that stocks will fall, he managed a return of 80 per cent.

Mr Wang, 36, said his fund 'became ultra-bearish' once the scope of the credit crisis became clear.

'We could see the world coming to an end before our very eyes,' Mr Wang said.

Unnerved by losses, many hedge fund investors want their money back. Investors yanked $40 billion (S$59.59) out of hedge funds in October, according to Hedge Fund Research.

Those who got their money out were the lucky ones. In recent weeks, dozens of hedge funds have imposed 'gates' keeping investors from withdrawing their money, fearing a run on their assets that could drive them out of business.

As troubled funds throw up the gates, investors have little choice but to pull money from healthier funds, which then are forced to sell assets to raise cash.

'It's disappointing,' said Mr Robert Romero, manager at Palo Alto, California-based Connective Capital, a $120 million hedge fund that delivered a 3.5 percent return in 2008. He said he expects to lose about 20 percent of his capital from redemptions. -- AP

[iam802]

Madoff....the biggest scam of all.

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Madoff's fund may not have made a single trade

http://news.yahoo.com/s/nm/20090116/ts_ ... off_trades

BOSTON (Reuters) – Bernie Madoff's investment fund may never have executed a single trade, industry officials say, suggesting detailed statements mailed to investors each month may have been an elaborate mirage in a $50 billion fraud.

An industry-run regulator for brokerage firms said on Thursday there was no record of Madoff's investment fund placing trades through his brokerage operation.

That means Madoff either placed trades through other brokerage firms, a move industry officials consider unlikely, or he was not executing trades at all.

"Our exams showed no evidence of trading on behalf of the investment advisor, no evidence of any customer statements being generated by the broker-dealer," said Herb Perone, spokesman for the Financial Industry Regulatory Authority.

Madoff's broker-dealer operation, Bernard L. Madoff Investment Securities, underwent routine examinations by FINRA and its predecessor, the National Association of Securities Dealers, every two years since it opened in 1960, Perone said.

Madoff, a former chairman of the Nasdaq Stock Market who was a force on Wall Street for nearly 50 years, allegedly confessed to his sons the firm's investment-advisory business was "basically a giant Ponzi scheme" and "one big lie," according to court documents.

He estimated losses of at least $50 billion from the Ponzi scheme, which uses money from new investors to pay distributions and redemptions to existing investors. Such schemes typically collapse when new funds dry up.

Each month, Madoff sent out elaborate statements of trades conducted by his broker-dealer. Last November, for example, he issued a statement to one investor showing he bought shares of Merck & Co Inc, Microsoft Corp, Exxon Mobil Corp and Amgen Inc among others.

It also showed transactions in Fidelity Investments' Spartan Fund. But Fidelity, the world's biggest mutual fund company, has no record of Madoff or his company making any investments in its funds.

DISCREPANCIES

"We are not aware of any investments by Madoff in our funds on behalf of his clients," Fidelity spokeswoman Anne Crowley said in an e-mail to Reuters.

Neither Madoff nor his firm was a client of Fidelity's Institutional Wealth Services business, their clearing firm National Financial or a financial intermediary client of its institutional services arm, she said.

"Consequently, his firm did not work with our intermediary businesses through which firms invest their clients' money in Fidelity funds," she added.

There also appear to be discrepancies between monthly statements sent to investors and the actual prices at which the stocks traded on Wall Street.

For example, his November statement showed he bought software maker Apple Inc's securities at $100.78 each on November 12, about a month before his arrest.

But Apple's stock on that day never traded above $93.24. The statement also showed he bought chip maker Intel Corp at $14.51 on November 12, but Intel's highest price on that day was $13.97.

"You could print up any statements you want on the computer and send it out to a client and the chances are the client wouldn't know, because they are getting a statement," said Neil Hackman, president and chief executive of Oak Financial Group, a Stamford, Connecticut-based investment advisory firm.

To some, the numbers did not add up.

About 10 years ago, Harry Markopolos, then chief investment officer at Rampart Investment Management Co in Boston, asked risk management consultant Daniel diBartolomeo to run Madoff's numbers after Markopolos tried to emulate Madoff's strategy.

DiBartolomeo ran regression analyses and various calculations, but failed to reconcile them. For a decade, Markopolos raised the issue with the U.S. Securities and Exchange Commission, which has come under fire in Congress in recent weeks for failing to act on Markopolos's warnings.

[millionairemind]

The Ka Chuat is out of the closet

Florida’s Nadel Missing as FBI, SEC Investigate Funds (Update1)
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By Susan Decker and Saijel Kishan

Jan. 18 (Bloomberg) -- The FBI and securities regulators joined the investigation of Arthur Nadel, the Florida hedge-fund manager who disappeared four days ago, leaving clients concerned they may have lost as much as $350 million.

The Federal Bureau of Investigation and U.S. Securities and Exchange Commission are helping on the case, Sarasota Police Lieutenant Stanley Beishline said yesterday in a telephone interview. One of Nadel’s business partners, Neil Moody, said Nadel had spoken to his wife since taking off. Nadel, 76, is president of Scoop Management Inc. in Sarasota, which oversees funds including Valhalla Investment Partners LP.

Scoop’s claim to have managed as much as $350 million “may be high because performance results were exaggerated,” Moody said in an interview. He said he contracted with Nadel to manage three funds on his behalf, while Nadel alone had three others and did the trading for all six. Moody said he didn’t know anything was wrong until Nadel was reported missing.

[winston]

Long Article...

1. The $50 Billion Bernard Madoff Ponzi Scheme
2. Bernard Madoff’s Career History
3. The Money Management Arm Of Madoff
4. Madoff’s Supposed Investment Strategy
5. How Could Regulators Have Missed This One?
6. Lessons To Be Learned From The Madoff Fiasco

http://www.investorsinsight.com/blogs/f ... cheme.aspx

[millionairemind]

published January 23, 2009

Investors withdraw record US$152b from hedge funds

(WASHINGTON) Alternative investing these days seems to mean finding an alternative to once red-hot hedge funds.

Institutional investors and well-heeled investors yanked a record US$152 billion of their cash from hedge funds in the fourth quarter, and US$155 billion for all of 2008, marking only the second year with net withdrawals since Hedge Fund Research began tracking the industry in 1990.

Total industry assets shrank to US$1.4 trillion by year-end, from the mid-2008 peak of US$1.9 trillion, the Chicago-based research firm said.

The decline includes the effect of redemptions and the drop in the value of the funds' investments.

Another fund tracker, Hennessee Group, said that its preliminary data counted much larger net redemptions in 2008 - nearly US$400 billion.

In any case, the outgoing flow of money was not surprising, given the industry's dismal performance. Hedge Fund Research's primary hedge fund index skidded 18 per cent last year, and other research firms estimate that the average fund lost more than 20 per cent.

An 18 per cent loss was far better than the 38 per cent plunge in the Standard & Poor's 500 stock index. Many hedge fund investors might have been expecting their managers to protect them from any double-digit decline - particularly given the steep fees the funds levy.

Some hedge fund investors were fleeing even before markets suffered their worst losses beginning in October.

Those early redemptions helped fuel the markets' meltdown because they forced managers to sell assets.

Even fund categories that notched positive returns in 2008 suffered net redemptions, according to Hedge Fund Research.

The heavy pace of cash withdrawals last year demonstrates how hedge funds have quickly fallen from their perch as a trusted financial preserve of the monied class. -- LATWP

[millionairemind]

Hedge Fund Assets May Fall by $450 Billion This Year (Update1)
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By Saijel Kishan

Jan. 23 (Bloomberg) -- Hedge funds lost more money in 2008 than any year on record. It may get worse in 2009, forcing fund managers to overhaul investment strategies, reduce fees and make it easier for clients to withdraw cash.

The $1.2 trillion industry may shed as much as $450 billion in assets, or 37 percent, through market losses and client withdrawals this year, according to Morgan Stanley analyst Huw van Steenis in London. That’s on top of the $600 billion that disappeared last year and would leave hedge funds with $750 billion, the lowest since 2002.

“It’s hard not to be bearish in this environment,” van Steenis said in a telephone interview.

Investment returns fell an average of 18 percent last year, according to data compiled by Hedge Fund Research Inc., the most since the Chicago firm began tracking the industry. While that beat the 38.5 percent loss by the Standard & Poor’s 500 Index, many investors were angered when fund managers limited or froze withdrawals. Funds will have to reduce fees and loosen redemption rules to win back client confidence, said Craig Lilly, an attorney at Washington-based Squire, Sanders & Dempsey LLP.

“They will have to unilaterally cut their management fees in order to ensure the flow of capital from investors,” he said.

At least 20 percent of hedge-fund assets were subject to redemption restrictions last year, according to Peter Douglas, principal of Singapore-based consulting firm GFIA Pte.

Changes Underway

Some firms are already making changes. James Simons, who runs Renaissance Technologies Corp. in East Setauket, New York, told investors he won’t charge fees on the Renaissance Institutional Futures Funds in 2009. Cerberus Capital Management LP told clients last month it would waive 60 percent of the incentive fee on Cerberus Partners LP for a year after losses are recouped.

Investors are increasingly seeking to establish separately managed accounts, which mirror the investments of their managers’ hedge funds while providing more disclosure on assets and easier withdrawals, according to Simon Hookway, chief executive officer of MSS Capital Ltd. in London.

Hookway’s firm has formed a joint venture with hedge-fund adviser IGS Group, also based in London, to help investors set the accounts. Unlike hedge funds, managed accounts allow an investor to keep money separate from other investors and to make withdrawals at will.

Power Shift

“The whole basis of the industry has gone from managers having the overriding power to investors having overriding power,” Hookway said.

Managers also will dump illiquid assets that have killed returns and prompted the redemption surge, said Rishi Narang, founder of Telesis Capital LLC, a Los Angeles-based investor in hedge funds.

Tudor Investment Corp., the Greenwich-based firm run by Paul Tudor Jones, told clients in November it planned to sell off hard-to-sell investments, mostly corporate bonds and loans from emerging markets, after segregating them into a separate account. Ellington Management Group LLC of Old Greenwich, Connecticut, plans to follow a similar strategy, people familiar with the matter said in December.

“Hedge funds need to rid themselves of the garbage in their books by selling assets such as private equity and real estate,” Narang said.

Emphasis on Liquidity

As investors pull money from hedge funds, some are looking to managers who are able to sell securities quickly, enabling them to return money at short notice.

For that reason, Altedge Capital Ltd. in London may allocate more money to macro hedge funds, commodity trading advisers and funds that bet on the direction of equity markets.

“Liquidity is paramount at the moment,” said Cem Habib, a portfolio manager at Altedge, which invests about $350 million in hedge funds.

Macro funds, which typically invest in highly liquid markets such as currencies and bonds, returned 5.6 percent last year, according to Hedge Fund Research.

“The stars appear to be aligning for macro,” said Joe Paul, a director at Corazon Capital, a Channel Islands-based investor with about $1 billion.

Commodities Defense

Commodity trading advisers, which rely on computers to decide when to buy and sell securities, returned 13.9 percent last year, according to Fairfield, Iowa-based BarclayHedge CTA Index. Investors in CTAs normally are able to take their money out on a monthly basis, while some hedge funds lock investors in for as long as two years.

“We are looking at them not because of their returns but because they are a defensive play,” said George Chacko, chief investment officer in New York for Auda International LP, which oversees $5 billion. “Such investments allow us to stay liquid, and that’s important in this environment.”

The Standard & Poor’s 500 Index has slumped 8.4 percent this month while U.S. Treasuries have declined by 1.5 percent, according to Merrill Lynch & Co. indexes. Commodities, as measured by the UBS Bloomberg Constant Maturity Commodity Index, have declined 4 percent.

“Financial dislocation is likely to persist across many asset classes and geographies for some time,” New York-based Perry Capital LLC, which manages $8.3 billion, said in a Jan. 20 letter to investors. “We believe we are entering a period with an abundance of mispriced securities.” The firm’s Perry Partners International fund lost about 26 percent last year, according to the letter.

Slow Recovery

The average hedge fund has gained 0.84 percent so far in 2009 as measured by the HFRX Global Index, while the S&P 500 is down 8.3 percent, including reinvested dividends.

Citadel Investment Group LLC in Chicago has returned 6 percent this month through Jan. 13, according to investors. Waterstone Capital Management LP of Plymouth, Minnesota, has gained 10 percent through Jan. 16, according to a person familiar with the firm. Cantillon Capital Management LLC, a $4.5 billion firm in New York, returned 9 percent this month through Jan. 19 from its European fund, according to a person familiar with the firm.

The industry may be marked by “big winners, more failures, and slow recovery,” in 2009, Sean Simon, chief executive officer of Ivy Asset Management LLC, a Jericho, New York-based firm that invests $7.2 billion in hedge funds, said in a Jan. 15 letter to clients.

[kennynah]

actually...i have always been very curious and would greatly appreciate anyone educating me on this following ....

how do hedge funds generate profits for themselves and their clients? who are usually their clients?

[millionairemind]

Don't say educate lah.. Da Ge.

Just a little bit of what I know (very little)

There are hedge funds and there are Fund of Funds. Unlike Mutual funds which are mandated and must go Long or Short (bear fund), Hedge funds can do both Long/Short (and hence the words Hedge). They typically charge 2% of assets under management and 20% of profits. Their claim to fame is that they can make money, no matter what kinds of market.

In the 80s, there are only a handful of hedge funds like Quantum (run by Soros) and only open to wealthy investors. However, since the late 90s, this has changed dramatically and now boutique funds are sprouting like mushrooms and open to retail investors. Any Tom, d**k and Harry with a HBS MBA can run a "Hedge Fund" just by pure association with HBS.

Key Characteristics of Hedge Funds

1. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.

2. Hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.).

3. Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business.

Hedge Fund Strategies
The predictability of future results show a strong correlation with the volatility of each strategy. Future performance of strategies with high volatility is far less predictable than future performance from strategies experiencing low or moderate volatility.

* Aggressive Growth: Invests in equities expected to experience acceleration in growth of earnings per share. Generally high P/E ratios, low or no dividends; often smaller and micro cap stocks which are expected to experience rapid growth. Includes sector specialist funds such as technology, banking, or biotechnology. Hedges by shorting equities where earnings disappointment is expected or by shorting stock indexes. Tends to be "long-biased." Expected Volatility: High

* Distressed Securities: Buys equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or reorganization. Profits from the market’s lack of understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below investment grade securities. (This selling pressure creates the deep discount.) Results generally not dependent on the direction of the markets. Expected Volatility: Low - Moderate

* Emerging Markets: Invests in equity or debt of emerging (less mature) markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many emerging markets, and, therefore, effective hedging is often not available, although Brady debt can be partially hedged via U.S. Treasury futures and currency markets. Expected Volatility: Very High

* Fund of Funds: Mixes and matches hedge funds and other pooled investment vehicles. This blending of different strategies and asset classes aims to provide a more stable long-term investment return than any of the individual funds. Returns, risk, and volatility can be controlled by the mix of underlying strategies and funds. Capital preservation is generally an important consideration. Volatility depends on the mix and ratio of strategies employed. Expected Volatility: Low - Moderate

* Income: Invests with primary focus on yield or current income rather than solely on capital gains. May utilize leverage to buy bonds and sometimes fixed income derivatives in order to profit from principal appreciation and interest income. Expected Volatility: Low

* Macro: Aims to profit from changes in global economies, typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and bond markets. Participates in all major markets -- equities, bonds, currencies and commodities -- though not always at the same time. Uses leverage and derivatives to accentuate the impact of market moves. Utilizes hedging, but leveraged directional bets tend to make the largest impact on performance. Expected Volatility: Very High

* Market Neutral - Arbitrage: Attempts to hedge out most market risk by taking offsetting positions, often in different securities of the same issuer. For example, can be long convertible bonds and short the underlying issuers equity. May also use futures to hedge out interest rate risk. Focuses on obtaining returns with low or no correlation to both the equity and bond markets. These relative value strategies include fixed income arbitrage, mortgage backed securities, capital structure arbitrage, and closed-end fund arbitrage. Expected Volatility: Low

* Market Neutral - Securities Hedging: Invests equally in long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns. Usually low or no correlation to the market. Sometimes uses market index futures to hedge out systematic (market) risk. Relative benchmark index usually T-bills. Expected Volatility: Low

* Market Timing: Allocates assets among different asset classes depending on the manager’s view of the economic or market outlook. Portfolio emphasis may swing widely between asset classes. Unpredictability of market movements and the difficulty of timing entry and exit from markets adds to the volatility of this strategy. Expected Volatility: High

* Opportunistic: Investment theme changes from strategy to strategy as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim earnings disappointment, hostile bids, and other event-driven opportunities. May utilize several of these investing styles at a given time and is not restricted to any particular investment approach or asset class. Expected Volatility: Variable

* Multi Strategy: Investment approach is diversified by employing various strategies simultaneously to realize short- and long-term gains. Other strategies may include systems trading such as trend following and various diversified technical strategies. This style of investing allows the manager to overweight or underweight different strategies to best capitalize on current investment opportunities. Expected Volatility: Variable

* Short Selling: Sells securities short in anticipation of being able to rebuy them at a future date at a lower price due to the manager’s assessment of the overvaluation of the securities, or the market, or in anticipation of earnings disappointments often due to accounting irregularities, new competition, change of management, etc. Often used as a hedge to offset long-only portfolios and by those who feel the market is approaching a bearish cycle. High risk. Expected Volatility: Very High

* Special Situations: Invests in event-driven situations such as mergers, hostile takeovers, reorganizations, or leveraged buy outs. May involve simultaneous purchase of stock in companies being acquired, and the sale of stock in its acquirer, hoping to profit from the spread between the current market price and the ultimate purchase price of the company. May also utilize derivatives to leverage returns and to hedge out interest rate and/or market risk. Results generally not dependent on direction of market. Expected Volatility: Moderate

* Value: Invests in securities perceived to be selling at deep discounts to their intrinsic or potential worth. Such securities may be out of favour or underfollowed by analysts. Long-term holding, patience, and strong discipline are often required until the ultimate value is recognized by the market. Expected Volatility: Low - Moderate

A fund like the well known SAC Capitol Advisors run by Steve Cohen would be a multi-strategy fund. They reputedly return 90% for >10 yrs in a row and they adopt a trend following system across ALL MARKETS.