Funds Hub
Money managers under the microscope
Myners’ let-off for hedge fund pay
There’s been plenty of confusion over who exactly will be hit by the ‘supertax’ on banker bonuses.
The wording of the Treasury’s clampdown last week suggested some hedge funds and traditional asset managers could be caught — PwC’s John Terry told me that of the 20 hedge funds he had spoken to, around half may have been caught in the net.
However, hedge funds are to fall outside the supertax, confirming a rumour doing the rounds among hedge fund executives.
Speaking at Reuters’ London offices this morning, City minister Paul Myners clarified that the tax would be focused on “the activities of banking”.
This is of course a relief to managers. Many hedge funds are still below their high-water marks, but 2009 has nevertheless been a far, far better year than 2008 for hedge fund managers and is likely to be reflected in pay packets. (Crispin Odey has already pocketed a reported 30.4 mln stg after some shrewd calls on the market and the banking sector).
And today we speculate on whether this will cause an exodus from banks to hedge funds.
* We wonder if Paul Myners himself may fancy posting a comment on Hedge Hub? This morning he told the audience at Reuters’ offices: “My office complains I spend too much time looking at blogs. But very interesting things are happening on online commentaries.” We wait with bated breath…
AIMA claims “broad consensus” on EU hedge fund directive
For UK-based opponents of the controversial EU hedge fund directive, there are signs the draft could be overhauled.
Hedge fund industry body AIMA said today “there is now a broad consensus among European policymakers that the directive does need a lot of work and that there will be significant revisions”.
The group has been campaigning vigorously against the draft law, which proposes controls on leverage, which service providers can be used and where funds can be sold, and says it should instead focus on three areas — registration and authorisation, reporting of systemically-relevant data and a workable passport.
Given UK-based hedge fund managers are already regulated by the FSA and AIMA has already put forward proposals on reporting hedge fund positions to regulators, this would be a much-watered down version of the directive.
Meanwhile, Ken Clarke, shadow business secretary for the UK opposition Conservative party, told The Times he didn’t think hedge fund managers were genuinely concerned about the proposed new rules as they would be diluted through ordinary negotiations, although AIMA said “to declare an early victory is very premature”.
Nevertheless, there is a marked change of tone in the UK. The next step will be to see if that change is reflected when supporters of the Directive such as Poul Nyrup Rasmussen next lay out their position.
(See also NAPF takes aim at EU AIFM draft and Onshoring the hedge fund industry)
Hedgies sit on the fence
There has been much debate about whether London’s hedge fund community, angry at plans for a 50 percent tax rate on top earners and the EU’s draft directive proposing tough controls on the sector (not to mention the usual problems of traffic, high property prices and quality in life in London that usually get raised), will head to low-tax Switzerland.
Our analysis today argues that, while a trickle have already left, there are far more who have upped the rhetoric but are simply waiting to see who wins the next election.
Polls point to a Conservative victory, traditionally viewed as being good for business, but so far the Tories have refused to commit to cutting the tax, which will come in next April and affect those lucky few earning over 150,000 pounds.
Tory leader David Cameron faces a tricky task — an early pledge to cut the tax could draw accusations of favouring bankers when we are still recovering from the credit crisis.
And whoever wins the election will have little room to manouevre, given a fiscal situation described by Investec chief economist Philip Shaw as “very serious”.
Meanwhile, Switzerland is hoping to profit. A representative from the Canton of Zug recently spoke at a “Moving to Switzerland” briefing I attended, pointing out the benefits of a lakeside life, while relocation specialists and lawyers are hoping to drum up business.
The eventual resolution, probably next year, of the EU draft directive will also provide more clarity on whether it’s better to leave, or stay in the EU.
Moonraker finds hedgies have a Goldfinger
With a headline like that, you’d think this would be a story about investing in Bonds.
But in fact a survey by boutique fund firm Moonraker Fund Management shows U.S. hedge fund managers are buying physical gold to protect their wealth against high levels of inflation.
A recent fact-finding tour by Jeremy Charlesworth, CIO of Moonraker and manager of the commodities and global opportunities funds, found 20 out of 22 had been buying gold out of concerns quantitative easing would fuel price rises.
Charlesworth sees further gains in the gold price – which has risen from just over $800 an ounce in January to $930 now — and plans to raise exposure in both his funds.
“Gold is the ultimate currency, performing best when economies are at extremes, whether this is inflationary or deflationary,” he said.
“The managers I met in the U.S. know that if the politicians get the quantitative easing programme wrong then the value of money relative to real assets will dwindle.”
Dale Gabbert: Drive-by shooting misses regulatory target
Guest blogger Dale Gabbert heads the funds group in the London office of law firm Reed Smith. His practice covers hedge funds, private equity and property funds and he is the author of Hedge Funds, a legal guide published by Butterworths Lexis Nexis.
The views expressed here are entirely the author’s own and do not constitute Reuters’ point of view.
Rather than take a sniper’s aim at systemic risk, the draft EU Directive on Alternative Investment Fund Managers is more of an ill-conceived drive-by shooting that injures the innocent whilst leaving the intended target unharmed.
Whilst few would dispute that radical steps need to be taken to control systemic risk, the directive is likely to cause widespread collateral damage to the financial services industry whilst failing to deliver significant regulatory benefits.
It is hard not to view the directive as simply being a wish list of grievances with no real unifying theme other than a somewhat misleading title. The document covers a dizzying array of unthematic topics ranging from fund managers through to administrators (rather mysteriously called “valuators”), custodians, the disclosure of interests in unquoted companies and the origination of structured products.
It is also largely incorrect in its central assumption that managers of hedge funds are not regulated. All hedge fund managers in the UK are regulated – they are required to be by legislation that the government brought in nearly a decade ago. Since the UK has by far the lion’s share of European hedge fund managers, the central premise of the directive that there is insufficient regulatory oversight is incorrect – they are already regulated.
Likewise, the fund’s primary service providers, the “prime brokers” are all regulated entities operating out of onshore centres.
GAIM 2009: Paranoid? You should be…
It doesn’t take a genius to work out that the hedge fund industry has changed markedly over the past year — a quick glance at delegate numbers here in Monaco shows that.
But one means that shows quite how drastic the change has been is in the area of risk management — not normally the sexiest topic but now an area of real concern for investors.
Jonathan Feeney of Investcorp Investment Advisors, which allocates money to and conducts due diligence on underlying hedge funds, makes the point.
A hectic schedule
The hedge fund circuit can be exhausting.
Last Thursday saw the plush fundraising dinner of ARK, the charity headed by Arpad Busson, fiance of Uma Thurman, at London’s Waterloo International.
The next date in the European hedge fund industry’s diary is next week’s annual GAIM conference, held in Monaco (where else?).
From June 16th-18th top executives and managers will be gathered in the principality to discuss the outlook for the industry, which delivered record poor performance last year and which has seen waves of investor outflows.
The packed programme shows the industry is coming to terms with the new conditions in which it is operating.
Man Group CEO Peter Clarke and NewSmith Asset Management chairman Stephen Zimmerman will be among those debating “the criteria for the safe, smart alternative business of the future”, while a separate panel will examine the opportunities in ”emerging, transforming and deconstructing businesses”.
Maverick hedge fund manager Hugh Hendry of Eclectica will discuss “the crisis in capitalism”.
Levered out
With the finalisation of new EU laws on regulation of hedge funds and private equity likely 6 months away, we should be prepared for an awful lot of hand-wringing and much talk of an industry exodus to lakeside retreats in Switzerland.
The latest word on this is that some managers have warned the Treasury that funds are already looking around for alternative locales where their love of leverage attracts less concern.
But are there really that many funds using prohibitive levels of leverage? Average prime broker leverage in the UK fell to around 1.15 times in October 2008, according to the FSA, although European lawmakers may end up judging excessive what hedge funds feel is relatively low. Meanwhile, hedge fund execs routinely enjoy juxtaposing relatively modest aggregate hedge fund gearing against the excesses of the banking sector.
We’ve written before that some funds are finding the thirst for investor due diligence such that they are moving into London to become more accessible to the new jitterati.
And although lawyers and administrators will keep plugging away in pursuit of the fees that would accompany a wholesale shift away from Curzon Street, there are some that seek to play down the risk. City of London Mayor Ian Luder told Reuters last week he thought hedgies would want to stay where the action is, and John Schneider, managing director of Navigant Consulting’s financial services practice, told us today that he simply did not believe there was “sufficient economic case” for hedge fund managers to leave.
(See also Relocation, relocation and Quality Control)
Nickels and black swans
Some investors may not be fully aware of the risks they face as career-conscious hedge fund managers plump for strategies that build a convincing-looking track record but occasionally backfire badly.
According to a paper by Yale academic Hongjun Yan, hedge fund managers are far more likely to choose so-called ‘nickel’ strategies than ‘black swan’ strategies, even if returns are ultimately lower and they risk the occasional huge loss.
Nickel strategies are — rather like the contrived image of picking up nickels in front of a steamroller — those that yield small returns most of the time with the occasional disaster.
Yan says the carry trade, merger arbitrage and convertible arbitrage fall into this category.
The problem for unwary investors, as witnessed by last year’s big losses by some funds, is that these trades occasionally go wrong, especially if a lot of other funds are doing the same thing.
“Investors should be aware of the risk (of) potential large losses,” Yan tells me. “It is quite possible that many individual investors are not.”
‘Black swan’ strategies, named after best-selling author Nassim Nicholas Taleb’s credit crisis hit, take years of small losses but hit the jackpot when rare events — such as the credit crisis — occur.
Managing for the future
One thing that the credit crisis has demonstrated is that even performing well isn’t always enough to stop investors in need of cash from taking their money out of a hedge fund.
The industry had its worst year on record last year, losing nearly 20 percent in performance terms, but not everyone lost money.
Managed futures, which bet on trends in futures markets, was the top-performing strategy with a gain of 18.33 percent, according to Credit Suisse/Tremont, helped by the big trends (mostly downwards) in a whole variety of markets last year.
Plenty of funds of hedge fund managers think 2009 will see similar trends and think this strategy could do well.
So money is pouring into managed futures?
Well, not quite. According to a Lipper Tass report, managed futures, which tends to offer good liquidity terms to investors, saw the second-biggest outflow of any strategy in the fourth quarter of 2008 at $23.95 billion.
It seems that for some investors, the focus is so much on the short-term future that king cash wins out even when positive returns are on the table.
