Funds Hub

Cheyne Capital on leverage…

European lawmakers are watering down their proposals for an across-the-board cap on hedge fund leverage, says Cheyne Capital Chief Investment Officer Chris Goekjian.

Hedge funds found not guilty

Interesting research from the FSA out today, giving us the reassuring conclusion that hedge funds don’t seem to pose a systemic risk to the global financial system.

The two surveys, from October, show that funds were running a “relatively low level” of leverage relative to the assets investors have put into the funds and that risks were largely contained.

(They even contained a handy definition of systemic risk for those who were wondering: “A risk which, if crystallised without any form of intervention by the authorities, would mean a high likelihood of major, rapid disruption to the effective operation of a core function of the financial system (and so leading to wider economic impact).”)

The news is surely a boost to those — particularly the majority of the UK hedge fund industry — who oppose the EU AIFM directive, but it is far from enough to end the debate.

For a start, supporters of the draft plans can ask what the risks were at the height of the crisis — hard to assess as one of the two surveys is new. And they can point to issues such as investor protection and varying standards in different countries as reasons to bring in what has (controversially) been termed ‘a level playing field’.

Nevertheless, the surveys do seem to back up what many in the hedge fund industry have argued for years — that the really high levels of leverage were taken by the banks themselves.

It’s not just the leverage

If private equity is anything to go by, there is plenty of hope for hedge funds operating in the new, post-Lehman world of lower leverage.

A study by the Center for Entrepreneurial and Financial Studies and Capital Dynamics, out today, finds that two-thirds of private equity’s value creation is down to improving companies it owns or rising market multiples.

Leverage, in contrast, accounts for just one-third.

Hedge funds used leverage extensively in the run-up to the credit crisis and whilst it has crept up from the very low levels seen this year, some executives say it will never again reach some of the very high levels we saw.

However, many managers say they don’t need such high levels of leverage anyway as investment opportunities are still so good, even after a bumper 2009 where returns were boosted by rising market multiples.

The CEFS/Capital Dynamics study doesn’t cover hedge funds, which obviously use a different business model to private equity. But it does suggest that alternative investment funds are not simply reliant on high levels of borrowing to generate a decent return.

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.

From Reuters TV: PB’s fishing, but are Hedgies biting?

In a desperate attempt to win market share, prime brokers are courting blue-chip hedge funds with offers of cheap credit. But are hedge funds biting?

Morning Line-up

Hedge fund stories from the past 24 hours from Reuters and elsewhere:

Swedes plan to scrap hedge fund leverage limits – WSJ

More than one witness in Galleon case - Reuters

Ex-UBS bankers plan Tufton tranport fund - Bloomberg

Touradji dismisses employee claims as lies – Reuters

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.

The morgue after Christmas

He said at the Reuters Restructuring Summit in London that by the end of the year banks will issue “in patient”, “out patient” or “morgue” judgements as they go about the business to decide who gets much needed loans and who does not.

Dale Gabbert: Swedish massage hits the spot

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.

After the controversy surrounding the draft directive some perspective has returned as the Swedes take control of the EU Presidency and attempt to untangle the issues and build some consensus.

The Swedish intervention is timely and comes as the row gathers pace, with the UK government having finally entered the fray and accused the directive’s proponents of having “pandered to prejudices” and “tilted at mythical windmills”.

Considering the level of invective flying around, the Swedish paper is measured and concise. It identifies eleven main areas of focus and elaborates on the problems and some possible solutions (many of which are framed as alternatives).

Myners sets his sights on EU directive

There has been no shortage of people lining up to lambast the EU’s draft directive on hedge funds and private equity.

But today the UK’s Financial Services Secretary Lord Myners stepped up the attack, criticizing the draft rules on leverage caps and where funds can be sold and promising a blitzkrieg of lobbying.

“It is perhaps easy for other European countries to make political capital out of demanding intrusive regulation of an industry of which they have little or no direct experience,” he told a meeting organized by the Alternative Investment Management Association this morning. “But it is woefully short-sighted, bordering on a weak form of protectionism.”

Declaring that the draft required “major surgery”, Myners set out plans to “leverage natural alliances” and also to win over other countries.

“Officials will lobby in more than a dozen key capitals over the summer. I myself will be engaging directly with my opposite numbers in key member states.”

To add to the broadside, IMA chairman Robert Jenkins said regulators had got the wrong industry.

“When the banks ran out of liquidity, our customers for whom we act as agents helped supply it. When the banks ran out of capital, the funds we manage contributed to the take-up of new debt and equity issues.