HEDGE FUND NEWS
@ Wed 03 January 2007 : GMT

FINTAG COMMENT

Following the Wall Street Journal's transformation into a freebie tabloid, FiNTAG does the same.

Hedgies are devil worshippers and Mutual Funds are the new saviours.

Distressed & Opportunity and Market Neutral are the in-strategy funds for 2007.

Hedge Funds manage to break into a sweat over double digit returns.

Private Equity VPs are sent to Camp X-Ray.

The USD is now officially a third world currency and gold is the new oil.

Hedge Fund Hotels were mentioned yesterday and are not covered again because it is old dull news and doesn't refer to Paris Hilton - which is a shame.

Women love debt more than men - so says Oppenheimer.

The SEC bans all hedge fund investors.

GLG refuses to pay up.

MARKET NEUTRAL

Please do not buy hedge funds (slate)
When the stock market crashed in 2000, it did not go unnoticed that one group of investors did just fine: those who had bet it would crash—or, at least, had not bet that it would keep going up. Soon it seemed that the only smart investment strategy was to be "market neutral"—to own good stocks and to short (bet against) bad ones. That way, you would make money regardless of what the market did. As rumors of spectacular bear-market hedge-fund results made the rounds, moreover, the excitement about this "new" strategy only grew. Hedge funds offered better returns and lower risk! They made you money even when the market dropped! Soon came the near-universal belief that everyone should own hedge funds.

When we ducks quack, the saying goes, Wall Street feeds us, and in the last few years, the number and variety of hedge funds has exploded. From a few hundred funds managing some $40 billion in 1990, there are now perhaps 10,000 funds managing more than $1 trillion. The funds pursue many different strategies: Equity market neutral. Long/short sector equity. Convertible arbitrage. Emerging markets. Merger arbitrage. Distressed securities. Global macro. Because hedge funds usually come with high risk and steep minimum investment sizes, moreover (circa $1 million per fund), vehicles designed to make it easier and safer to invest in them—aka, funds of funds—have also exploded in popularity. So now, even average investors are advised to take the hedge-fund plunge. But should you?

Not unless you are really rich, really connected, and really know what you are doing.
...
The good news, for hedge-fund investors, is that academics have recently begun to isolate the passive market factors that drive most hedge-fund returns, the same way they have isolated the factors that produce most stock-market returns. As the conclusions become more accepted, sophisticated investors should be able to benchmark hedge-fund returns more effectively and pay managers only for manager-generated returns above the market average. Eventually, Wall Street will also probably develop passive funds based on the major hedge-fund strategies, which should allow small investors to take advantage of their diversification benefits without today's costs and risks.

In the meantime, remember this: The "risk" of hedge funds is far greater for hedge-fund investors than hedge-fund managers, and this risk is bigger than you might think. As with the best mutual funds, the best hedge funds have delivered extraordinary risk-adjusted returns. As with mutual funds, however, to have identified these funds in advance would have required what one professor deems "almost supernatural" fund-picking talent. And the point of investing intelligently is to avoid needing occult help to succeed.

MURRAY MINTS

Distressed investing to climb in 2007 (financialnews-us)
Investing in distressed companies will become even more attractive to hedge funds in 2007 as markets conditions continue to favor the strategy and it has outperformed expectations.

Virginia Parker, founder and chief investment officer of hedge fund of funds firm Parker Global Strategies, said during the firm's 2007 Hedge Fund Outlook event that the strategy performed better than expected and that trend will continue into the new year. According to the Edhec Alternative Indexes, distressed strategies have returned 13.4% this year.

A low rate of defaults, expected to be between 2% and 3%, will favor distressed strategies, added Marti Murray, president of hedge fund Murray Capital Management. Distressed investing should also see strong returns as demand from corporate and private equity investors for mergers and acquisitions activity is likely to remain high.

Sectors where hedge funds can expect to see the most opportunities include auto suppliers, airlines, paper and packaging, home building, sub-prime lending and healthcare.

There are several factors that could have a negative impact on returns in distressed investing. These include a recession, severe losses in private equity or banking sectors or a spike in default rates, Murray said.

Investments in the global equities market is also expected to increase as investors are likely to make more investments in Europe, Latin America and Asia, Murray said. Parker said China should continue to be a hotbed for investments, as foreign investors continue to flood in.

Thailand is likely to see a drop in hedge fund investments as the government has passed legislation that will tax short term foreign investments in an effort to try to control rise of the Thai bond.

Parker said she expects a better year for currencies managers. There should be some weakness in the US dollar driven by US Treasury lowering interest rates in second half of the year, Parker said. Interest rates are likely to rise in Europe and Japan, strengthening the countries' currencies.

Other areas, such as global energy and natural resources, are also expected to be attractive for investors this year, Parker said. The average price for oil is expected to be roughly $10 higher than current levels, which will make the market attractive for investors, added Leigh Goehring, managing director of Chilton Investment Company.

While the demand for oil is expected to remain high, the demand for renewable transportation fuels such as ethanol and biodiesels will cause global agricultural markets to perform well also, Goehring said.

MUTUAL FUNDS ARE THE NEW BLACK

Institutional business powers on for fund group (ft)
Robert Manning, chief executive of MFS, the oldest mutual fund company in the US, has his sights set on growth.

"We're scaling up and getting bigger," says Mr Manning, an MFS veteran who has been at the helm of the Boston-based company for two years.

"Margins are going up but we're also putting money back into the business so we can make sure that we grow our revenues and our assets under management," he says.

In October, Sun Life, the Canadian insurer that owns MFS, took the company off the auction block, saying it would hold on to the mutual fund group as "a valuable strategic asset".

Mr Manning says: "One of the commitments that Sun made to us is to allow us to invest to get better products on our retail platform, hire more people, spend marketing dollars and spend to build out our institutional platform."

Like some other mutual fund groups, MFS has suffered outflows from its retail funds after making big bets on growth stocks and settling allegations by regulators of trading violations.

For 2006, the company had net outflows in its mutual funds of about $4.5bn, according to Financial Research Corporation, the data company. "We're identified as a retail mutual fund company but that's been the area where we've struggled the most," he says. "We have so much else going on. This is not just a domestic mutual fund business that's in net outflows."

Indeed, over the past six years, MFS's institutional business has taken a bigger share of its total assets.

MFS has shifted from 64 per cent US mutual funds in 2000 to 43 per cent today while institutional business and managed insurance products have risen from 33 per cent to 52 per cent.

MFS has emerged as one of the largest variable-annuity managers in the US, where it manages portfolios buried inside variable annuities for some of the largest insurance companies such as ING and Hartford. While it is true that the company has suffered net outflows in its mutual funds, these have been offset by net inflows in its institutional business.

Net flows over the past seven quarters have been $6.7bn as institutional net inflows have exceeded retail net outflows.

Mr Manning said the opportunity for institutional business represents a $19,000bn market worldwide, about twice the size of the US retail mutual fund market.

"We're planning that is where our growth will be from," he says.

Over the next three years, MFS will double its 40-person London office and the 30-person Tokyo office.

The new hires will be evenly distributed between investment analysts, salespeople and service personnel.

In addition, MFS will beef up its Sydney office in the first quarter of next year.

But Mr Manning is not abandoning the retail side of the business.

His primary goal, he says, is to improve the performance of MFS funds.

"Our specific issue relates around the fact that in the late-90s - when we were really hot and raising a lot of money - it was all in growth equity. So when the bubble burst in 2000 and we ran into performance problems, the outflows really began to happen," he says.

In order to stem the outflows, Mr Manning said he is launching new asset allocation products as well as looking for potential fund adoptions - where the company buys a fund with a proven record and rebrands it - in areas where MFS has poor performance.

These adoptions may include growth funds in addition to funds where MFS does not currently have a product, such as small-cap value.

"The difference between us being in net outflows and net inflows is really just having one or two incremental products where we could raise a few billion dollars to offset redemptions happening in growth funds," he says.

Mr Manning is optimistic that mutual funds are going to come back in favour.

"Costs are coming down and we think we can generate active alpha," he says. "If we can generate 200 basis points of return per year in a category over the market given our fee structure, we're going to kill any hedge fund that could possibly compete.

"Long-only active management - if you have the right products and a disciplined repeatable investment process - will be a great place. People will see that."

GOOBYE LIBOR, WELCOME HOME PERFORMANCE FEES

Hedge funds back to double digit returns (financialnews-us)
Hedge funds generated double digit returns last year for the first time since 2003, with net gains of between 12% and 14% anticipated for the industry as a whole in 2006, according to preliminary estimates.

A banker said he expected December's returns would add about two percentage points to the gains of approximately 11% made during the first 11 months of 2006. This would be an improvement on the average annual returns in 2004 and 2005, when the hedge fund industry generated a net return of 9.6% and 7.6% respectively, according to data provider Credit Suisse/Tremont.

The banker said: "2006 was a good year for hedge funds, a welcome return to form."

Hedge funds lagged the main equity indices. The Dow Jones World index was up 18.9% for the year to December 29.

Investable hedge fund indices reported positive returns of about 1% for the month to 27 December, the most up-to-date figures available. Hedge Fund Research's investable index reported a month-to-date gain of 1.32% while Royal Bank of Canada's was up 0.84% and MSCI 0.8%

The investable indices generally record lower gains than their more established, non-investable cousins, which report a month in arrears.

Six non-investable hedge fund indices reported gains ranging from just over 10% to just under 12% for the first 11 months of 2006. Hennessee reported a gain of 10.06%, Van Hedge 10.5%, The Barclay Group 10.69%, Eurekahedge 11.36%, Hedge Fund Research 11.44% and Credit Suisse/Tremont 11.81%.

Hedge funds focusing on emerging markets were the best performers in 2006, gaining just over 20% in the first 11 months, according to Hedge Fund Research's non-investable index. The banker said these managers mostly take long positions in equities and benefit from general rises in the markets where they invest.

CREDIT CREDIT AND MORE CREDIT

Global debt supply surges to record (finanancialnews-us)
Booming mergers and acquisitions activity and corporate financing business propelled global bond supply to a record $6.9 trillion (€5.2 trillion) last year, boosting the coffers of the world's top underwriting banks.
Related Stories

Private equity industry becomes the keystone for financial markets 27 Dec 2006
Debt revenues hit all time high 06 Dec 2006
High yield issuance hits all time high 10 Nov 2006

Bond issuance increased from $6.1 trillion in 2005, according to data from investment banking research company Thomson Financial, which said the growth in debt volume was driven by corporate supply and securitisations, with double-digit rises in the high-yield, investment-grade and emerging market corporate sectors.

JP Morgan and Barclays Capital the chief beneficiaries of the boom in debt business.

JP Morgan leapfrogged Deutsche Bank and Lehman Brothers to claim second place behind Citigroup in the debt underwriting stakes. JP Morgan rose from fourth place in 2005, underwriting $459.7bn worth of bond deals and lagging only Citigroup in the debt stakes last year.

The bank pushed Wall Street rival Lehman Brothers, with $419.1bn of deals under its belt, down to fourth place from second in 2005, while Deutsche, which worked on $440bn of deals, retained third spot.

Citigroup maintained its top ranking in the debt markets, working on $606.2bn of deals last year.

While Deutsche was the top European house in the global debt underwriting rankings, which were dominated by Wall Street banks, Barclays Capital gained ground on its German rival, climbing four places to seventh and claiming a 5.1% market share. The UK investment bank posted the largest gain in market share among the top 10 debt underwriters globally last year.

BVCA DOJ KKR FSA

Are the regulators about to tame the takeover tigers? (telegraph)
Inquiries in Britain and the US could bring big changes, writes James Quinn

If 2006 was the year that private equity truly came of age, then 2007 is shaping up to be the year that private equity could begin to realise that it doesn't make all the rules.

It goes without saying that 2006 was a stellar 12 months for the private equity sector. It raised more money than ever before and hit the headlines in a way that belies the "private" in its moniker.

Takeover bid after takeover bid hit the headline, with the 18-year record of the largest ever leveraged deal held by KKR's takeover of RJR-Nabisco broken not once but twice - and within the space of a week.

And even in the UK, where the level of public-to-private activity slowed somewhat, the sector was not quiet, with record fundraisings and a number of old friends reappearing after time in private equity hands, such as Debenhams, which did not have the easiest of stock market returns.
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Despite the strong seeds that have been sown in 2006, a strong and potent 2007 bloom is not a given, with a number of regulatory pressures on the cards on both sides of the Atlantic.

Here in the UK, the industry is part-way through a probe by the all-powerful Financial Services Authority into the sector, following on from an earlier, similar investigation into the hedge fund industry.

Two months ago, Hector Sants, the FSA's managing director of wholesale markets and institutions, published a discussion paper as the first step on the long road of the review.

The aim of the paper was to get the industry talking and thinking about where it is at in a regulatory sense, and where it could be.

The paper held little surprises, with many focusing on Mr Sants's warning of the likelihood of a large corporate collapse in the sector.

But it did point to a number of key areas of concern, including the risks of increasingly leveraged debt, market abuse and the effect on public markets of an increasingly private merger and acquisitions marketplace.

What it also did was to fire the starting pistol on a long drawn out process which will end at some stage later this year which could eventually culminate in policy decisions which would not go down well with the sector.

The industry itself has until the end of this month to comment on the paper, with the BVCA, the British Venture Capital Association, heading the charge.

The BVCA will, in the next few weeks, host a consultation between the FSA and chief executives of BVCA member firms to discuss the paper and to talk over its key points.

In addition, it will file a written consultation document based on responses from members, as well as encouraging individual members to write in themselves.

At the time the FSA paper was published, Peter Linthwaite, the BVCA chief executive, was largely supportive, largely agreeing with the risk areas highlighted and saying it was keen to work with the FSA.

What the BVCA is hoping for is a light touch, much as the hedge fund industry has received, to ensure that member firms are not forced offshore by the heavy hand of regulation.

But while the future UK regulatory environment may be fairly visible, the situation "across the pond" is less so.

In a nation such as the United States, where everything is open to litigation, it is perhaps no surprise that in 2006 the private equity industry came under the legal spotlight.

In October, the US Department of Justice (DoJ) wrote to five of the major global private equity houses asking them to co-operate with a probe into potentially anti-competitive behaviour.

The probe, which at the moment is at an informal stage, involves houses as well known as KKR and Silver Lake Partners and saw the DoJ write to them to ask them about their business practices.

The five houses are under no obligation to hand over anything, but the DoJ has asked for a look-see on information which in some cases dates back to deals completed three years ago.

It is understood the interest was sparked by industry itself, following the number of high-profile, big-ticket deals completed in the sector in the last 36 months.

One of the areas of focus is thought to be the surge in contested auctions for businesses, in which some houses compete against one another and which in others they compete together - the latter is known as a "club deal".

There is a concern among a very small number in the market that some private equity houses may be tempted to collude at times as to who might drop out of an auction, only to benefit in an auction elsewhere.

One senior official within one of the big US houses not being investigated said the industry's response is clear. "There is no collusion. Why would there be? We are all incentivised by largely beating our competitors on deals, not by helping them out."

In addition, the official pointed out that none of the five houses involved, all of whom refused to discuss the probe publicly, have any reserves to pay any potential fines as they firmly believe they have done nothing wrong.

But try telling that to class action lawyers who are now swarming around the sector like bees around a honey pot. The most recent deal on which a class action has been filed is that of HCA - which was only completed in October - with small investors claiming that KKR, Carlyle and Blackstone shortchanged them by stifling competition.

The suit follows a number of others in the sector and as a phenomenon such filings are only going to increase - partly fuelled by the DoJ probe.

While the outcome here is unknown, and the DoJ has set no timescale for its work, it is clear that its focus is a concern.

In the US, rules regarding private equity houses' behaviour in auctions for companies is informal, unlike in public auctions, where, in the UK, the Takeover Panel is the adjudicator.

A BVCA spokesman said: "We're watching the DoJ situation, but it isn't clear at this stage that there will be any ramifications for the UK and the European market. We mustn't forget that the US industry is not regulated in the way we are."

What is of more pressing concern to the BVCA is the change of government expected this year on this side of the Atlantic.

With the Prime Minister committed to stepping down at some stage before the year is out, and Chancellor Gordon Brown the most likely to take his place, the BVCA, the industry's key voice, must work hard to ensure the goal posts are not moved.

"We're confident of the Government's ongoing support but we need to make the relationships with new ministers really sound," said the BVCA spokesman.

"Because from the tone and tenor of government flows everything else," he argued.

In this case "everything else" includes a long list, from overall regulation to the view on buy-outs and leveraged deals at the top end to support for the venture capital community at the bottom end.

On this note, Patrick Booth-Clibborn, of KBC, is clear on what he would like from a change at the top.

"I am disillusioned with the private equity market in Europe, and my big concern is they're recycling businesses and leveraging them up."

Instead Mr Booth-Clibborn, a director in corporate finance at KBC, would like a focus on venture capitalism, where he argues it is increasingly difficult to raise funds in the £3m to £7m funding bracket.

"Despite tax breaks for Enterprise Investment Schemes and Venture Capital Trusts, banks are going for low-risk models and it is still a huge problem trying to fund really good businesses."

If whoever takes over from Mr Brown this year can do that - while ensuring the climate for large-scale buyouts is unharmed by any new regulatory pressures, then the new inhabitant of Number 11 Downing Street will have got off to a good start at keeping one of the country's most powerful financial sectors happy for now.

USD IS THE NEW SOUTH AFRICAN RAND

Dollar dips further against pound (bbc)
The US dollar has fallen further against sterling and other major currencies as analysts await a slew of economic data due out later this week.

The pound was worth $1.9736 in late New York trade on Tuesday - up from $1.9613 when last traded on Friday, as the dollar's recent weakness continued.

The dollar also slipped against the euro and the yen, although trading was thin on US markets.

Economic concerns saw the dollar fall 14% against the pound last year.

The minutes from the US Federal Reserve's last interest rate meeting, to be published on Wednesday, could provide some indication of whether a interest rate cut is in the offing.

Suggestions that the Fed may cut rates in response to a slowdown in the US economy, allied to the fact that rates are rising in the UK and Europe, has pushed the dollar lower in recent months.

SEC BANS INVESTING

More Surprises Up SEC's Hedge Fund Sleeve (dailyii)
Ever since the Securities and Exchange Commission lost its hedge fund registration rule court battle last summer, the agency has been looking for ways to exercise authority over the industry and to fix some of the "incidental damage" the court inflicted.

It may have found them. With little fanfare, the SEC took the opportunity of a slow holiday week to formally release proposals that are likely to have a major impact on certain hedge funds, including requiring that hedge fund investors have at least $2.5 million in investments. The 67-page document details earlier-announced proposed revisions to anti-fraud rules and the accredited-investor requirements, aimed at pooled investments, such as hedge funds. The anti-fraud proposal would allow the SEC to bring an enforcement action against advisers, registered or not, who make false or misleading statements to investors. Steven Felsenthal, general counsel of Millburn Ridgefield Corp., explains that one result of the Goldstein decision, which threw out the registration rule, had been the court's holding that these duties were previously owed only to managed account investors and funds, but not to individual investors in hedge funds.

However, as the SEC points out, unlike Rule 10b-5 of the Exchange Act, which puts such statements in the context of a transaction, the proposed Rule 206(4)-8 of the Investment Company Act of 1940 would make false and misleading statements a violation "regardless of whether the pool is offering, selling or redeeming securities." Felsenthal points out that the effect of this distinction is that it would apply to marketing materials used to solicit investors even if the solicitation does not result in an actual investment. In addition, the SEC "would not need to demonstrate" that the offender "acted with scienter" to bring an action. "There would be no private cause of action against an adviser under the proposed rule," writes the SEC. Further, this provision would extend beyond statements regarding investment strategies to "the experience and credentials of the adviser (or its associated persons), the risks associated with an investment in the pool, the performance of the pool or other funds advised by the adviser, the valuation of the pool or investor accounts in it, and practices the adviser follows in the operation of its advisory business such as how the adviser allocates investment opportunities." In addition, the proposed rule 206(4)-8(a)(2) would take misleading behavior one step further by applying it "more broadly to deceptive conduct that may not involve statements."

The SEC also, rather than redefining the term "accredited investor" in an effort to provide protection to those individuals who may want to invest in hedge funds, proposed to add a new requirement to be known as an "accredited natural person." This new standard would be in addition to the current accredited investor standard and would only apply to individual investors in so-called 3(c)(1) pools (loosely defined as those with a limit of 99 accredited investors). Accordingly, the new standard would not apply to those who get "indirect exposure" to pooled investments as participants in pensions plans managed by others. The SEC is proposing a "two-step approach" to provide additional protection to investors in 3(c)(1) pools, similar to the two-step approach already applicable to so-called 3(c)(7) pools.

GLG WRIGGLE AND JABRE ESCAPES

Jabre, Out Of GLG Picture, Being Framed? (dailyii)
U.K.-based hedge fund GLG Partners appears to be trying to get out from under a $1.6 million fine imposed by French regulators by shifting blame for trading irregularities on former star Philippe Jabre.

France's Autorite des Marches Financiers slapped GLG silly with the fine after the agency determined that the hedge fund as employer of the traders were considered insiders of French telecom Alcatel (now Alcatel-Lucent) and therefore should not have traded shares and had been warned about a 2002 bond issue by the company.

A GLG spokesman say it is appealing the decision and the fine, but sources told Financial News that the hedge fund claims that Jabre, one of those allegedly involved in the Alcatel trade, was acting on his own without telling his firm. Jabre has denied any involvement, and to wit, the AMF hasn't investigated him or even questioned him about it. The latest international fine mess for GLG appears to be the rubber match in a year in which it faced regulatory issues in three different countries. Earlier in 2006, GLG and Jabre both were hit with €1.1 million ($1.5 million) fines in connection to securities issues four years ago involving Japan's Sumitomo Bank. Jabre was fined for market abuse, the firm for not supervising him properly. Then in December, Spain's Comision Nacional del Mercado de Valores cleared GLG for investment decisions involving a 2002 bond issue by Ebro Puleva, but fined Deutsch Bank €1 million for its alleged role.

Time will tell how charming a third decision will be for GLG.