HEDGE FUND NEWS
@ Fri 16 February 2007 : GMT

FINTAG COMMENT

Today's theme is "Love" because despite months of relentless beatings by socialists, ill informed journalists, regulators looking to build their empires and chippy losers who wish they could be a Hedge Fund manager, today all the stories are nice and warm and show us to be what we truly are. Loveable.

A Hedge Fund buys its own supply of beer and asset-based loans are all the rage. The Fed and a nice economist have a post valentines day love fest with us Hedgies and returns for January are around 16% annualised. Nice!

Quants remove the stress from my job and hasten my departure out of the industry; my Fishing Tackle shop beckons. Not that my industry exists anyway, according to Citi. On this confusing and philosophical note, my PA has been told I will not be coming back this afternoon from my long lunch at the Square entertaining some nice people who look after the endowment funds at a well known Ivy League university. The same university that the quants were probably taught at.

If Only news:
Hedge Funds To Escape Regulation and Tax By Moving En Masse To Mars ... (bbc)

Hedge Funds Run By 40 Somethings Have Largest Leverage Issues ... (bbc)

BEERS ALL-ROUND

US hedge fund eyes Japan brewer (bbc)
A US hedge fund has submitted proposals to take a majority stake in Sapporo, Japan's number three brewer.

Steel Partners, which already owns 17.52% of the beer maker, wants to up its holding to 66.6%.

It said the move would reflect its confidence in the brewer, whose brands include Namashibori and Shizuku as well as the Sapporo label.

Last year, Steel failed in a bid to swallow up Japanese food firm Myojo in a hostile takeover.

Myojo was sold, but stayed in Japanese hands, thanks to a "white knight" approach by food giant Nissin, maker of Cup Noodle.

Considerations

"Steel Partners has high regard for the management and employees of the company and wishes to increase its stake to reflect its continued confidence in the prospects of the company," Steel said in a statement.

"We are not considering changing the business and human resources of the company, including its board members."

Sapporo, whose bigger Japanese rivals are Kirin and Asahi, said it would "respond after examining the content of their proposal".

ASSET BACKED SECURITIES

Look before you leap into risky asset-based loans (bostonherald)
There was a time when asset-based lending was considered to be the business equivalent of going to the corner check-cashing store.

The loans come with high interest rates and they're secured with fundamental necessities such as accounts receivable and inventory. Such loans were considered to be primarily a last resort for desperate companies.

But times have changed.

The loans are gaining respectability. They are being used not only for turnarounds but also as a financial strategy tool.

That has helped fuel phenomenal growth in the asset-based lending industry. In 2005, the number of outstanding loans hit $420 billion - 16 percent over the previous year. The early indications show growth was just as strong last year.

“There is an excess of liquidity in the market and there is a lot of activity by new players,” said Brian Cove, spokesman for the Commercial Finance Association, an industry organization for lenders.

Hedge funds and private-equity firms are moving into the market and so are more banks. That's good news for borrowers.

“Competition is always good,” said Dan Perkins, a counselor with SCORE, Counselors for America's Small Businesses.

It may seem like a good time to get such a loan, with rates down and an abundance of lenders looking for business.

But small businesses should still be cautious.

To get the loan, the borrower pledges as collateral assets that are part of the business. So getting behind or defaulting on the asset-based loan can be devastating.

The high interest rates also can take away a company's flexibility and make it harder to grow. The rates are often negotiable, but they are higher than a typical bank loan. Money that could have been pushed back into the business instead goes to the creditor.

Still, some may have few options.

“Sometimes it's a matter of survival. You need to get through a low period and this is a way to do it,” Perkins said.

The best time to think about it is before you really need it.

“A lot of companies wait until it's too late and then they become cash-starved and they start to deteriorate,” said Deborah J. Monosson, president of Boston Financial & Equity Corp.

If you're thinking about getting an asset-based loan, pull together your financials. Lenders will want to see what's coming in and going out. If inventory will be a part of the deal, you'll need to have complete lists.

Many lenders will send in their own auditors and ask for an accounting on a monthly or quarterly basis. In some cases, that actually can help a struggling company.

“An asset-based loan requires a good deal of discipline on the part of the company,” said Donald B. Lewis, senior vice president of Citizens Bank. “You have to collect your receivables and you can't let your inventory skyrocket.”

When evaluating lenders, start with rates but take into account other things such as their reputation, longevity and customer service.

For most companies, these loans are a short-term fix. Monosson said she doesn't write them for more than a year because she expects the businesses to improve enough that they can pay it off or get a regular bank loan.

No matter how desperately you need it, as with any loan, carefully evaluate the cost so that you know what you're getting yourself into.

SOMEONE LIKES ME

Bernanke defends hedge funds (financialnews-us)
Ben Bernanke, chairman of the US federal reserve, has warned US congressmen against overregulation of the hedge fund industry, saying it could lead to a stifling of financial innovation.

Bernanke told the Senate banking committee he was reluctant to see heavy-handed, direct regulation of hedge funds. He said their agility was good for the economy as it created market liquidity and spread risks more broadly.

He said: "A regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits."

His remarks counter calls by some European politicians for tighter control of hedge funds or their managers. Nicolas Sarkozy, French minister of the interior and a French presidential candidate, this week questioned hedge funds' morality and threatened to impose a tax on them for speculation - a threat French hedge fund managers dismissed as empty.

KISS MY LIPS

Bank-like rules are not justified for hedge funds (ft)
Sir, Wolfgang Munchau ("The Germans have the right idea on hedge funds", February 12) is seriously off base in his statement that the reason to regulate hedge funds is that they have become structurally similar to commercial banks, and therefore should be regulated for the same reason we regulate commercial banks.

Commercial banks are regulated, not because they borrow money from a central bank with leverage, and not because of some vague standard of network externalities.

Banks have special privileges: access to central bank discount windows, coverage under deposit insurance schemes and generally direct access to the payments system. In return for these special privileges and recognising the potential moral hazards involved, commercial banks are regulated.

It is true that some activities of investment banks today are difficult to distinguish from those of hedge funds, which was why the Financial Stability Forum 2000 working group on which I served investigated "highly leveraged institutions", not just hedge funds. However, this fact strengthens the core case of supervision and regulation of banks. It does not establish the case for supervision and regulation of hedge funds.

After all, the logic of Mr Munchau's view is that we should regulate every sector that borrows extensively from financial institutions on the basis of concern about the safety and soundness of the financial system - car dealerships, grocery stores, internet service providers. There may be other social reasons to regulate such entities, and transparency may be one of them, but those reasons do not justify bank-like regulations.

Edwin M. Truman,

Senior Fellow,

Peterson Institute for International Economics,

Washington, DC 20036, US

C#

Goldman Sachs eyes daily trade ability for quant funds (financialnews-us)
Goldman Sachs Asset Management is working on a project that will see its $103bn (€79bn) in quantitatively managed equity funds gain the ability to trade daily.

While daily execution can have the aura of a hedge fund or proprietary trader, GSAM remains a long-term investor, said Bob Litterman, director of quantitative resources at GSAM. The divide between trader and long-term investor is blurring as trends move through markets more quickly and investors diversify the time frames over which they trade.

As hedge funds move to lower frequency trading strategies money managers are moving in the opposite direction to trading more frequently to benefit from faster moving signals. GSAM currently trades most of its quant equity funds on a monthly basis, which means it does not participate in fast-moving trends, such as short-term mean reversion. Monthly trading also means it can take a long time to build a position.

Litterman believes monthly trading is a constraint, which has the potential to hurt performance. He said GSAM will continue to be a low frequency trader and will not necessarily trade on a daily basis.

The quantitative equity group uses a set of six investment criteria: analyst sentiment, valuation, momentum, profitability, earnings quality and management impact. Whereas valuation is slow to change, momentum is a fast-moving factor.

“Moving to daily trading will allow us to take advantage of faster moving factors. Although the valuation signal is slow to change, other factors such as short-term mean reversion, happen much faster,” said Litterman.

Transaction cost analysis has been a prominent feature of the project to move to daily trading. Although execution costs continue to fall, liquidity is not constant. Trading once a month can mean it takes months to build or sell a position. Daily trading will allow GSAM to be less predictable and it will be able to spread trades over days or weeks, rather than months.

“Going to daily trading will give us better control of what we trade and with which venue. We think we'll be able to trade more, with less impact,” said Litterman.

The move will also mean GSAM will have the ability to grow its capacity because it will be able to better manage the market impact of its trades. As part of the project, GSAM is upgrading its optimisation engine using new software from Axioma.

I DO NOT EXIST

The route to alpha/beta clarity: sack index-huggers (ft)
It's a simple idea, but devastatingly attractive: alpha/beta clarity will surely come when we let traditional asset managers track indices, on the cheap, and let the hedge industry get on with the job of actively managing assets.

Bin old style “long-only active management” and we can all get on with our lives, secure in the knowledge of what's alpha, what's beta, and how much they are likely to cost.

That (hopefully) is a crunch summary of a thoughtful piece in the most recent edition of the Citigroup Alternative Investments Journal, a fully copy of which is available here via Opalesque (if you are a subscriber).

But let's briefly run through the thoughts of Neil Brown, Citigroup Alternative Investments MD, and his top researcher, Rui de Figueiredo.

1. The hedge fund “industry” is not really an industry at all. Instead, hedge funds simply represent a particular business model and governance structure within the broader active management industry. So questions about capacity and the like need to be examined in this larger context. When you do that it is difficult to find any problems.

2. Asset management is experiencing an unbundling of value-producing services and is creating more choice for investors. In short, we are seeing the emergence of separate delivery mechanisms for alpha and beta — and it's pretty clear that hedge funds, unlike traditional long-only funds, are more focused on the delivery of alpha.

3. In the active management industry (long-only as well as hedge) competition has developed over what approach offers the best governance and structure.

Unsurprisingly perhaps, given that this report comes courtesy of Citigroup's alternative management division, the authors conclude on this latter point that the hedge fund structure, although imperfect, is ultimately better suited. Providing beta returns is a commodity affair, while providing alpha is anything but — even if the costs associated with supplying the latter remain opaque and volatile.So half-way houses are out. Index-huggers are clearly a thing of the past.

UP, UP AND AWAY

Greenwich Index Up 1.32% In January (finalternative)
The Greenwich Global Hedge Fund Index was up 1.32% last month, according to preliminary figures from Greenwich Alternative Investments, while the Greenwich Investable Hedge Fund Index returned 1.29%.

“January performance is attributable to positive returns across all hedge fund strategies,” Greenwich General Manager Ben Rossman said, adding that roughly 90% of the 1,068 funds covered by the index where in positive ground in January.

Still both indices trailed the Standard & Poor's 500 Index, which returned 1.51% in January.

Not all strategies trailed the S&P: Greenwich's Market Neutral Group rose 1.53% in January posting its 15th consecutive positive month. Long/short equity, directional trading and special strategies returned 1.33%, 1.21% and 0.99%, respectively.