Funds Hub

Another year of losses for hedge funds?

Are we heading for another down year for hedge funds?

I ask because after a choppy six months or so, during which the FTSE 100 is down 3.6 pct, hedge funds have also lost 1.12 pct.

Some commentators are predicting a rebound in equities and other assets, but others expect further volatility, which could be harmful to funds’ returns.

Our stablemate Lipper, the fund research firm, is sticking its neck out for a better H2, arguing that earnings will surprise on the upside, double-dip fears will fade, and commodity investing will continue to throw up arbitrage opportunities. You can read Lipper’s latest report here.

I remember, at the Reuters Hedge Fund & Private Equity Summit in spring 2008, asking outspoken fund manager Hugh Hendry whether hedge funds might finish 2008 in the red after a tricky start to the year and losses of 4.4 pct in Q1.

Hendry’s emphatic response was that they could. With the benefit of hindsight, and the subsequent deepening of the credit crisis, that might seem obvious, but at the time the consensus view, in the hedge fund industry at least, was that funds would soon recoup their losses.

In the event Hendry was proved right and hedge funds slumped to their worst ever calendar year of performance with losses of around 20 percent.

Markets could be derailed again, warns Soros

Railway porter-turned-billionaire financier George Soros delivered a stark warning last night that the financial world is on the wrong track and that we may be hurtling towards an even bigger boom and bust than in the credit crisis.

The man who ‘broke’ the Bank of England (and who is still able to earn a cool $3.3 bln in a year) said the same strategy of borrowing and spending that had got us out of the Asian crisis could shunt us towards another crisis unless tough lessons are learned.

Soros, who worked as a porter to pay for his studies at the London School of Economics after emigrating from Hungary, warned us to heed the lesson that modern economics had got it wrong and that markets are not inherently stable.

“The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods,” he told a meeting hosted by The Economist at the City of London’s modern and impressive Haberdashers’ Hall.

“Unless we learn the lessons, that markets are inherently unstable and that stability needs to the objective of public policy, we are facing a yet larger bubble.

“We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”

One crumb of comfort could be the 10-year period between the 1998 Asian crisis and the 2008 credit crisis. If the pattern is repeated, it should at least mean we have another 8 years to go before the next crash…

from MacroScope:

Press that reset button…

Mohamed El-Erian, CEO and co-CIO of the world's biggest bond fund PIMCO, says 2010 is the beginning of the multi-year resetting of the global economy.

In the period up to the crisis, there were two labels that dominated the world -- Great Moderation and Goldilocks. Not too cold, not too hot. 2009 was about crisis management -- the label was 'whatever it takes'. The 2010 label is post-crisis. It's not just about post-crisis. In our view, 2010 is about multi-year resetting of the global economy. It will be a bumpy journey to the new normal.

Speaking in London ths week, he warned that migration of wealth and growth dynamics of advanced economies to systemically important emerging economies must be on top of investor radar screen in 2010, as well as sovereign risks.

It is the year of sovereign risk. Everyone has to recognise sovereign balance sheets themselves (as) an issue. Sovereigns are called sovereigns for reasons. Everyone gets influenced.

A question of trust?

Signs of big-ticket investments from pension funds — New York State Common Retirement Fund has backed emerging market debt manager Finisterre Capital with $250 mln.

Despite 2008′s losses, pension funds are obviously keen to invest, perhaps because equity mutual funds lost them even more money than hedge funds during the crisis.

Just as interesting, however, is one of the possible reasons why the $126 bln NYSCRF chose Finisterre (whose assets fell as low as $420 mln in the crisis).

Performance aside, Finisterre claims one of the reasons it’s been able to attract money is because it didn’t put up gates, barring investor exits, during the crisis.

It’s still early, but maybe we’ll begin to see investors starting to shun those funds seen as having locked up their money just when they needed it most.

(Picture: Luke MacGregor. Investors are assessing how hedge funds behaved during storm of the credit crisis)

(Another) Paulson payday

A large (and not entirely unexpected) payday for John Paulson’s European arm.

Four members of Paulson Europe LLP shared 50.8 mln stg for the year to March ’09, up from 37.1 mln stg the previous year, company accounts show.

The highest paid member was likely to be John Paulson’s own company, Paulson Limited. But a tidy 22.2 mln stg was nevertheless divided between fellow members Nikolai Petchenikov, Harry St. John Cooper and Mina Gerowin Herrmann.

The payouts (not subject to the banker bonus supertax) are hardly surprising — Paulson has been one of the big winners out of the credit crisis, earning a reported $3.7 bln in 2007 (according to Alpha Magazine) betting on the subprime meltdown and then reaping huge gains in 2008 betting on the broader crisis.

Those hoping to emulate a small amount of this success may be interested to know that his $33 bln hedge fund is now bullishly positioned with long positions in both fixed income and U.S. and European stocks, while he has also been buying the debt of distressed and bankrupt companies.

(See also John Paulson gains Buffett’s Midas touch)

Hedge funds, take heart!

Many commentators have written the obituary of the hedge fund industry, or of some of its more esoteric or leverage-dependent strategies, during the credit crisis.

So it may be of some encouragement to see a new launch by Invesco Perpetual, announced today.

It’s not a hedge fund, but instead a split-capital investment trust, a type of fund that was the subject of its very own investment scandal earlier this decade.

After millions of pounds of investor losses the name of splits became so downtrodden — even though many such funds were relatively well-run vehicles — that it seemed unlikely the sector could ever amount to much again.

If a new split-cap trust can be launched, then there is surely hope even for the most despised hedge fund strategies.

Hedge funds “a good thing”, says Taleb

Regulators are going after the wrong target by trying to impose stricter rules on hedge funds, according to Nassim Nicholas Taleb, high-profile author of credit crisis hit The Black Swan.

Taking a decidedly negative view of banks, Taleb told the Hedge 2009 conference in London today that a bank is essentially “a utility with a compensation scheme”, which the public has to bail out if it fails.

In contrast, “hedge funds are a good thing” (not a phrase that is heard very often).

With the possible exception of LTCM, taxpayers haven’t had to bail out hedge funds which, when they have failed, have generally done so quietly with relatively little effect on the general public, he says.

“They’re a great way for risk to be diversified … and they have the beauty that they’ve learned to fail fast. People in the street know about Lehman, but they don’t know about (which) hedge funds (have failed).

“The model of transferring risk to hedge funds needs to be favoured by governments. Now it’s being hampered by goverments, which are cracking down on hedge funds, not banks. I don’t understand.”

HFSB sees risk in leverage rules

There’s no shortage of resentment in London against the EU’s planned directive on hedge funds, but the Hedge Fund Standards Board on Monday said the rules could actually create one of the problems they’re set up to avoid.

At a CSFI debate at the beautiful Innholder’s Hall in the City, HFSB executive director Thomas Deinet pointed out that, as seen all too often in the credit crisis, in falling markets a fund’s leverage automatically rises.

Imposing leverage limits could mean funds breach these levels, forcing them to sell assets to reduce borrowing and exacerbating the market problem, hence exacerbating systemic risk.

“There’s a systemic concern,” he said. “A lot of managers will be hit by leverage limits and will be forced to sell, which is when you want people to hold onto assets.”

However, there seems a growing consensus that the draft will be watered down. Both the HFSB and AIMA think a “moderately satisfactory” (in the words of AIMA CEO Andrew Baker) compromise is achievable.

And at a Katten Muchin Rosenman Cornish breakfast briefing today (this time at the Capital Clubin the City), Martin Cornish said areas of the rules covering valuators and capital requirements could be eased.

However, given that U.S. proposals could cover managers with $25 million or more in assets, he sees scope for the directive to be exteneded to cover much smaller funds.

A “remote, silent whirlwind”?

We may have just lived through the biggest financial crisis in 80 years, but its impact may still not have been big enough for people to learn the right lessons for next time.

Philip Wood, special global counsel at Allen & Overy, told today’s Reuters Restructuring Summit in London’s Canary Wharf that the effects on the Western world’s populace of the credit crisis, while large, have simply not reached the proportions of 80 years ago.

“Do people remember (the lessons from a crisis)? Sometimes they do.”

It took 140 years for the British to get over the South Sea Bubble of 1720 and introduce the Companies Act in 1862, he said.

“German inflation of the 1920s still casts a shadow over the German folk memory,” he added.

“(But) I’m not too sure people will remember much about this one. Apart from a few unpopular people losing their jobs, it’s not hit the population in the same way the Great Depression has, where people were hungry… it was catastrophic.

“We’ve lost a year’s GDP, but for most people it’s been a remote, silent whirlwind.”

No defence

Sheltering from the credit crisis in so-called defensive stocks could prove a disappointment to investors and a great opportunity for short-sellers, according to Liontrust hedge fund manager James Inglis-Jones.

Inglis-Jones, who runs a hedge fund for Liontrust and who recently took on the First Income fund after the departure of star manager Jeremy Lang, has short positions in sectors such as tobacco and pharmaceuticals and has recently added more.

“It’s an interesting opportunity when something is seen as safe,” he told me. “When the company delivers a disappointment the payoff can be pretty good.”

In February Hedge Hub reported Crispin Odey saying defensives were becoming “interesting shorts” and that he “certainly wouldn’t own them”.

However, with markets having bounced so much recently – the FTSE 100 is up by a quarter since March — and many defensives having missed out on most of the rally, are defensives still expensive or do they offer better relative value now?

Much of that depends on whether the rally has legs or is a dead cat bounce. Barclays Wealth came out today saying it is ”shifting to the tactical offensive”, adding, “The big question now is whether the pick-up is temporary or the real thing. We suspect the latter.” Several big names have already pointed to a new bull market, but after a 25 percent rally where do we go from here?