HEDGE FUND NEWS
@ Tue 11 September 2007 : GMT

FINTAG COMMENT

Respects.

On this day of remembrance, today's Hedge Fund news is looking quite rosy. We are performing, we are raising more than ever, we are earning more than ever, we are the smartest, the best looking and are sorting out the mess that the Fed and ECB have brought onto the markets. But don't take my word for it because apparently only "real" journalists know what they are talking about.

Hedgie salaries on the decrease; and yet bonuses are increasing?

BarCap is just fine, says Bobby Geezer.

High SAT scores = High Hedge Fund Performance.

Quant hedge funds recover their losses.

Highbridge excels.

Hedge Funds are back.

Barrow Boy Buys Bear.

FiNTAG accused on being irrelevant and a tissue of lies.

Top Financial Blogs (High Net Worth Advisor Insights newsletter)
The Wall Street Journal's blog
Yahoo! Financial
The Motley Fool
Fidelity Investments
MSN Money.

Question - are these blogs?

"...blogs run by non-journalists are “just dangerous,” Mr. Ellis said. “You don't know about the credibility of the author, and you don't know the credentials of the respondents on the blog.”"

SAT NEWS

Credibility of financial blogs is questionable - FiNTAG excluded of course (investmentnews)

Credit squeeze grows to worst for 20 years as cost of borrowing hits new high (telegraph)

Merkel,Sarkozy Eye EU Effort On Financial Market Transparency (fxstreet)

Russia Emerging as Haven From Subprime Nine Years After Default (bloomberg)

Biovail Plans to Pursue Lawsuit Against Hedge Funds (bloomberg)

Swiss Re chief says Reinsurance Price May Rise As Hedgies Are Unable To Play(msnbc/ft)

Oil surges to $78 after Mexican pipeline attack (reuters)

Fed should cut rates by 100 bps by 2008, says PIMCO (reuters)

Market-Neutral Mutual Funds Fail To Deliver (thestreet)

Head And Shoulders

SEE THRU

Hedge salaries hit by credit crunch (hedgefundreview)
Hedge fund managers are earning more money than last year but have seen their salaries curtailed by this summer's credit crunch, according to the 2008 Hedge Fund Compensation Report, published by Glocap Search, Institutional Investor News and Lipper HedgeWorld.

Salary levels experienced single digit growth on 2006 levels, as increasing institutional allocations heightened demand for talented money managers. Bonuses grow by similar levels, though these fell short of the bonuses anticipated before the credit crunch, Glocap said.

Average total compensation for investment professionals with between one and four years of experience at funds with $1bn-$3bn in assets under management is estimated to come in at just over $330,000.

Average total compensation for investment professionals with 10 or more years of experience at hedge funds with $10bn or more in assets under management is estimated to hit $2.35m this year.

Fundraisers will earn average pay packages of about $730,000 this year, while senior analysts at fund of hedge funds will earn $325,000.

SMOOTH OPERATOR

Barclays Capital seeks to calm investors' nerves (independent)
Barclays' Bob Diamond tried to reassure investors about his investment banking business and the long-term prospects for credit markets yesterday.

Mr Diamond said Barclays Capital was profitable in August and that the business was positioned for further growth despite market turbulence.

"Barclays Capital traded profitably in August 2007, after full allocation of costs and the mark to market of all positions," Mr Diamond told a banking conference. "We have suffered pain in July and August... You will see we have managed our risk and our clients' risk effectively and we are well positioned."

After binging on a credit boom for years, investors have pulled back from buying debt after mortgages lent to risky borrowers showed rocketing defaults. Institutions are keeping their money in cash and government bonds, leaving banks with hundreds of billions of dollars of debt on their books that they would previously have parcelled up and sold on.

The credit crisis has focused attention on Barclays Capital because it is active in the debt and credit derivatives markets and has been a leader in structuring debt-related products that package up or invest in assets linked to US sub-prime mortgages. The business is the main driver of Barclays' profit, and concerns about its exposures have hit Barclays' share price at a time when it is trying to use its shares to pay for ABN Amro of the Netherlands.

Mr Diamond said Barclays had not bailed out any SIV-lites, the investment vehicles it had helped structure for clients. "These are not bail-outs - we're being paid market prices for providing liquidity," he said.

The freezing up of the money markets is about liquidity rather than credit quality and that requires confidence to return, Mr Diamond said. Credit as an asset class still has good prospects because company balance sheets are strong and default rates are low, and the problems in US sub-prime loans should not overshadow the overall picture, he added.

The credit rating agency Moody's yesterday warned that defaults on corporate debt were likely to rise substantially over the next year, but said that it was likely to remain below its historic global average of about 5 per cent as long as the US avoided a recession.

Barclays is competing with Royal Bank of Scotland and its consortium partners to buy ABN, and Barclays' bid has dropped in value with its share price, whereas the RBS cash-based offer has been less affected by the drop in banking shares.

Mr Diamond said that if market conditions stayed as they were, then Barclays' bid would be less than the RBS group's. Until now, Barclays has argued that when investors see the sense of the deal its share price would rebound, but the bank is running out of time and market jitters continue to drag down banking stocks.

Mr Diamond said that he expected to see the market for leveraged finance for private equity deals recover next year and that deals were being better priced with stronger covenants, which was welcome.

Negotiations between Kohlberg Kravis Roberts, the US private equity firm, and its bankers over the $24bn (£11.8bn) of debt needed to buy First Data, a US credit card processor, are being keenly watched as a barometer of debt market sentiment.

Having said it would not negotiate, KKR is now said to be willing to accept a covenant to maintain a certain level of earnings to make it easier for the banks to sell the debt to investors.

Central bankers met at the Bank for International Settlements, and Jean-Claude Trichet, the president of the European Central Bank, said the world economy was on a strong enough footing to cope with the crisis, although the US economy would determine the size of the effect.

He said that though the central banks had taken action to stabilise money markets, they were not prepared to rescue institutions that had made bad investments.

"It's certainly the sentiment of central bankers who are around the table that bailing out bad investors would be the worst thing to do," Mr Trichet said.

Moody's predicts levels of companies defaulting on speculative-grade debt will rise from current levels of about 1.4 per cent to 4.1 per cent in 12 months' time,

SMART COOKIES

What SAT Scores Say About Your Hedge Fund (nytimes)
F investors want a performance edge in their hedge funds, they may want to do a little background research on the managers: look for those who attended colleges with relatively high SAT scores.


Funds run by such managers regularly posted higher returns, according to a study, “Investing in Talents: Manager Characteristics and Hedge Fund Performances,” which has been circulating since May as an academic working paper. Its authors are Haitao Li, an assistant professor of finance at the University of Michigan; Xiaoyan Zhang, an assistant professor of finance at Cornell; and Rui Zhao, a research associate in the portfolio management group of BlackRock Inc., the asset management company. A version is at ssrn.com

To investigate the relationship between hedge fund returns and the academic credentials of their managers' colleges, the researchers focused on more than 4,000 hedge funds that operated at some point from 1994 to 2003. They built a database that included not only the performance of each fund, but also the average combined SAT score, verbal and math, of the undergraduate college or university of the fund's lead manager. After eliminating funds for which requisite data were unavailable, the database contained just over 1,000 funds.

The researchers found a “strong positive relation” between a hedge fund's performance and the average SAT score at its manager's school. To put the relationship into context, the researchers offer this illustration: “Everything else being the same, a manager from an undergraduate institution with a 200-point higher SAT — for instance, from Yale University, with an SAT of 1480 at the end of our study period, instead of from George Washington University, with an SAT of 1280 — can expect to earn 0.73 percent more per year.”

This higher return might not be all that noteworthy had it been produced with markedly higher risk. But the researchers were able to dismiss this possibility: the average hedge fund managed by someone who went to an institution with higher SAT scores incurred significantly less risk than one whose lead manager attended an institution with lower average scores.

So, on a risk-adjusted basis, the manager who went to the school with higher scores is even further out front.

What accounts for the researchers' findings? In an interview, Professor Zhang said it was possible that managers who attended more-elite institutions had better contacts in the business and investment arenas, giving them access to particularly promising opportunities. But, though she and her fellow researchers could not measure the effect of such better networking, she said she suspects that it plays only a minor overall role. “The dominant force,” she contended, “will be the superior talents and higher intelligence levels of the average student at higher-SAT institutions.”

One potential objection to the findings is that similar studies of mutual fund managers have found little correlation between their performance and their colleges' SAT scores. But this difference between mutual funds and hedge funds makes sense, according to Professor Zhang, because of the ways their managers are compensated.

THE pay of mutual fund managers is typically based solely on assets under management, she pointed out. So these managers have an incentive to let their funds grow beyond a size that they can manage profitably. This tends to eliminate the better performance that would otherwise be associated with attending a college with higher test scores, she argued.

Hedge fund managers, by contrast, typically earn much more from sharing in their funds' profits than from asset-based fees, according to Professor Zhang, at least when their funds are performing well. As a result, they have a strong incentive not to let their funds grow too big, so the test-score effect is not eliminated.

The investment implication of the new research goes well beyond the hedge fund arena to the choice of any investment adviser.

As the researchers conclude their study, “a manager's talents and motivations should be important considerations” in deciding whether to let him or her invest your money.

REVENGE OF THE QUANTS

Quant hedge funds recover their losses (telegraph)
The majority of computer-driven hedge funds, which were blamed for large-scale market fluctuations that wiped billions of pounds from global stock markets last month, have emerged largely unscathed.
# Subprime crisis in full in our special section


Quantitative funds, which use complex algorithms based on historical trends to invest, managed to recover more than 65pc of intra-month losses in August by the end of the month.

Data from Hedge Fund Research (HFR) shows that in spite of a lot of the negative commentary surrounding the sector, many hedge funds managed to avoid the horrors that beset some of the prominent casualties.

Goldman Sachs recapitalised its Global Equity Opportunities fund to the tune of $3bn (£1.5bn) in August, while earlier in the summer Credit Suisse closed down its Dillon Read Capital Management.

Overall, hedge funds lost 1.31pc of their value in August, with global macro, high yield and emerging markets strategies all showing declines.

Ken Heinz, the president of HFR, said: "While a number of strategies posted losses for the month, much of these aggregate, intra-month losses were pared into month end."

On quantitative funds, Mr Heinz believes that due to the very varied nature of "quants", some observers may have got carried away. "It's important to remember that quant funds are not a strategy but a type of investing, and there can be a quant fund in anything."

The sharp correction in late August by many funds, Mr Heinz asserts, is something that some have already noticed.

Fund strategies which had a particularly bad August include fixed income, due to the exposure to sub-prime mortgages, and macro strategies, off 2.18pc.

Over the year, however, HFR's HFRI Fund Weighted Composite index is up 6.2pc on the year, having risen 0.14pc in July.

Some funds have had particular success - such as Paulson's $20bn Credit Opportunities fund which returned 26.67pc in August, meaning it has risen 410pc so far in 2007.

The party's over (breakingviews)
MBO: Management-led buyouts can irritate public shareholders who often feel unfairly compensated. Shareholders want their managers to maximise the price they receive for their company. But they suspect that managers want to buy the company as cheaply as possible. Nonetheless, management buyouts proliferated over the past two years.

But the turn in the buyout market may be changing all that. Not because corporate chieftains have suddenly become more altruistic. Rather, there are fewer incentives for them to rush into the arms of buyout barons.

First, easy leverage has gone away. Without the ability to load companies up with debt, private equity firms will be more focused on improving operating performance. Managers will have to work harder.

And they could be paid less. The pay packages of managers at companies owned by private equity firms are often directly linked to performance. And they usually get a slug of equity in the company they help take private. With stratospheric returns looking harder to achieve, running a company owned by a buyout firm might not be as lucrative.

Managers might also come to find that buyout barons are tougher bosses than public shareholders - especially in hard times. They have higher return expectations and are a notoriously demanding bunch. Company managers may decide that working for pesky public shareholders isn't such a bad gig after all.

NASTY

Tokyo urged to reconsider foreign tax (ft)
Japanese regulators are putting pressure on the government not to expose foreign-backed hedge funds to a punitive 40 per cent tax regime, under a feared state crackdown on the legal status of foreign funds.

Japan's Financial Services Agency is asking the Ministry of Finance, which sets tax policy in the country, to amend legislation to ensure that overseas investors in funds investing in Japan are not subject to Japan's high tax rates.

The FSA is keen to attract foreign skills to Japan, which it believes is crucial to improving Japan's attractiveness as a financial centre. It is therefore asking that overseas investors be exempt from the so-called permanent establishment rule, under which they could be subject to a 40 per cent income tax if the fund is considered to have a permanent establishment in the country.

Under Japanese law, an offshore fund with a fund manager in Japan would be considered to have a permanent establishment in the country and its investors would be subject to Japanese taxes.

But most funds get around the problem by locating only investment advisers - who purportedly do not make investment decisions - in Japan.

Recently, however, there have been heightened concerns that the tax authorities are set to crack down on funds by claiming they have a permanent establishment in Japan.

“The nuclear bomb scenario for every hedge fund is to find themselves taxable in Japan,” says Stan Howard, at Teneo Partners, a hedge fund marketing company.

“Recently, we've seen more Japanese nationals setting up in Singapore,” says Douglas Peterson, principal of GFIA, Asia's oldest hedge fund consulting firm.

Many Japan-focused funds are also based in Hong Kong.

The FSA is also requesting that foreign investors in a fund established in Japan, be completely exempt from the 40 per cent income tax.

Foreign investors investing in a Japan-based fund are subject to a 20 per cent withholding tax and must file a tax return and pay taxes of up to a total of 40 per cent on the profits they make.

The FSA's request to the MoF's budget bureau “is quite radical”, says Chris Wells, a partner at White and Case, the law firm, in Tokyo.

It highlights the FSA's efforts to try to make Japan a more investor-friendly market, amid concerns the country is losing competitiveness as a financial centre.

If foreign fund managers can be encouraged to work in Japan, their presence will stimulate the financial sector and bring in additional tax revenue in the form of income tax and consumption taxes on their purchases in the country, he says.

How companies have made funds less than welcome

Japan's FSA has been at pains to send the message that it welcomes foreign funds, but hedge funds, in particular, have not received a warm reception in the country over the past year.

A widespread campaign among Japanese corporations to adopt poison pills thwarted the attempts of many activist hedge funds to realise value from their Japanese investments.

Companies are also increasing cross-shareholdings to discourage unsolicited takeovers by funds and business rivals.

When managements have been criticised by foreign funds for poor performance, most domestic shareholders have rallied behind their countrymen to vote against proposals to raise dividends or otherwise improve returns.

Meanwhile, the courts have taken an unsympathetic view of the most aggressive funds.

Steel Partners, which had sought to take over BullDog Sauce, a condiment maker, was labelled an abusive investor by the Tokyo High Court.

SUPER

Hedge fund losses thinly spread (ft)
Early results from hedge fund index compilers on Monday suggested that big losses at some of the world's largest funds last month were not repeated across the industry, with the average fund down only 1.3-1.6 per cent, far less than expected.

Chicago-based Hedge Fund Research said that, with almost half of funds reporting August results by Monday, its equal-weighted index was down 1.31 per cent last month, with Russian and eastern European funds leading the decline. Barclay Hedge, based in Iowa, said that with more than 1,000 funds reporting, the average was down 1.56 per cent.

The results are still the worst since May last year, when corrections across many markets caught hedge funds unawares and led to sharp falls.

However, there was no sign of mass investor withdrawals in July, the latest month covered by asset flow data. HFR calculates the industry took in $17bn in the month to manage $1,760bn by the end of the month.

Investors are closely watching hedge fund redemptions in case heavy withdrawals lead to more collapses or forced sales of their investments, both of which could hurt stock market sentiment.

Data from hedge fund indices is often questioned by academics, who point out that many poorly performing funds choose not to report or report late. Both HFR and Barclay Hedge indices are equal-weighted, meaning small funds contribute as much as the largest, and both will restate their figures as more funds report.

However, the indices are closely watched as being the best available measure of performance, along with parallel “investable” indices of hedge funds willing to accept new money. These investable indices show worse drops, but only of about 2.5 per cent after a sharp recovery in the final two weeks of the month.

Ken Heinz, president of HFR, said there was a wider than usual dispersion between the best and worst performers in August.

“Performance volatility increased at the end of July and has persisted into September, driven in part by investor concern about continued deterioration in the subprime mortgage sector and the corresponding impact on access to liquidity by both consumers and corporations,” he said in a statement.

Many of the biggest hedge funds lost more than 5 per cent in the month, according to investors including flagship funds from Tudor Investment, Moore Capital, Atticus and Tewksbury. But some profited handsomely from bets against US subprime, with the best performers including Paulson & Co, which took extensive short credit positions across its funds.

UP UP AND AWAY

JPMorgan fund in $20bn first-half boost (ft)
Highbridge Capital Management, JPMorgan's hedge fund business, ballooned in the first half of this year, raising a fresh $20bn to take its total assets under management to $37bn, according to new data.

Aside from the likes of Man Group, whose assets under management include funds of funds tallies, JPMorgan is now the biggest hedge fund manager in the world with $56.2bn.

Highbridge's inflows - part of a broader trend of record inflows in the first six months of this year - came just before spikes in volatility as a result of concerns about problems in the US subprime mortgage markets caught out many of the most celebrated names in the hedge fund world.

Recent losers include Tudor Investment Corp, Moore Capital, Caxton Associates, DE Shaw and Goldman Sachs Asset Management.

Quantitative hedge funds, which were among those that have suffered the most during recent volatility spikes, dominate the top of the list of the largest US hedge funds compiled by Absolute Return Magazine, the trade publication and data provider.

Absolute return tracked inflows to the largest US funds until the end of June this year. JP Morgan Asset Management tops the list, largely as a result of Highbridge's growth, with a total of $56.2 bn under management.

Of the top 10 hedge fund groups, only one, Farallon Capital Management, failed to add to its assets under management in the first half.

Goldman Sachs Asset Management expanded its assets to almost $40bn to the end of June to take second place in the list of US managers, according to Absolute Return magazine.

Goldman experienced problems with its Global Equity Opportunities fund and its Global Alpha fund as concerns about problems in the US subprime mortgage market led to spikes in volatility in July and August.

DE Shaw, another firm famed for its quantitative techniques and which also suffered at the hands of market volatility, was third with $34bn in assets under management at the start of July.

Rounding out the top five were Bridgewater Associates and Och-Ziff Capital Management with $32.1bn and $29.2bn in assets under management respectively.

Och-Ziff's assets grew almost 40 per cent in the first half.

The fastest-growing firm in the first half was Paulson and Co, one of the funds that performed best during the market turmoil, more than doubling assets from $7.1bn in January to $15.4bn in July.

RIGHT AGAIN

Tycoon builds Bear Stearns stake (ft)
A Bahamas-based British billionaire has amassed close to a seven per cent stake in Bear Stearns in a bet that the investment bank will bounce back from its 34 per cent fall in its share price this year.

Joseph Lewis, a currency trader and investor, is now the investment bank's single largest shareholder after a stake-building operation which began two months ago.

The disclosure of his stake comes after weeks of speculation that a big investor would take a stake in Bear to help shore up the bank's finances and slow the rapid decline in its shares - which plunged after bad mortgage bets caused two of its proprietary hedge funds to collapse this summer.

However, most of that speculation focused on large financial institutions, including perhaps a Chinese bank, rather than an individual investor.

Analysts on Monday said that while the investment represents a vote of confidence in Bear - and investment banking shares in general - it does not provide the kind of balance sheet support that Bear might need if is forced to record major losses on mortgage backed securities it continues to hold on its books. Bear reports third quarter earnings on September 20.

Bear shares closed 2 per cent higher at $107.50 in New York trade on Monday, indicating that the investment by Mr Lewis did not dispel investor concerns about the bank's future. Bear shares are down 34 per cent this year. The bank suffered a major embarrassment over the summer as two of its mortgage-related hedge funds collapsed, costing investors over $1bn.

The collapse, driven by an increase in defaults among subprime mortgage borrowers, helped propel a wider crisis in the credit markets that has seen investors shun risky debt, especially securities backed by mortgage loans. Other investment banks have also seen their shares decline as leveraged buyout activity has stalled and securitisation revenues have declined.

Bear is viewed as especially vulnerable because it still derives close to half of its revenue from the fixed income markets and gets only about 20 per cent of revenue from outside the US. Some analysts suggest that if Bear shares continue to fall the banks could soon be a takeover for a larger, global institution.

Mr Lewis, who left the UK in 1979 to avoid higher tax rates and whose other investments include a controlling interest in Tottenham Hotspur, the English premier league soccer club, through his co-ownership of Enic, could not be immediately reached for comment on his investment in Bear Stearns. Bear had no comment on the stake.

In a filing with the Securities and Exchange Commission on Monday, Mr Lewis disclosed that he began accumulating his stake in August through five investment vehicles he controls.

The filing said Mr Lewis now owns 8,096,942 Bear shares, or 6.97 per cent of the outstanding float. Mr Lewis made his most recent purchase of 1.2m shares on September 7, paying $104.93 per share, according to the filing. The filing also said Mr Lewis has options that could give him additional long exposure to 791,500 Bear shares and short exposure to 706,500 shares.

Mr Lewis is now the largest Bear shareholder, vaulting past Putnam Investments, which owned 7m shares as of June. Jimmy Cayne, Bear chief executive, is the fourth-largest holder, with 5.7m shares.