Unstructured Finance

Although most investors have been pleased with the steadily rising U.S stock market over the past six months, funds that profit when markets are convulsing are licking their wounds.

With market stress at multi-year lows, volatility hedge funds returned just 1.16 percent in the first quarter, compared with 3.7 percent for the broader hedge fund group.

Some of the volatility specialists are doing better than others by capitalizing on major market moves in Japan, for example. And some are doing better simply because they are ‘short’ volatility funds – they tend to perform better when markets are calmer. But those funds are now few and far between.

“If I were to turn the clock back there were a lot more short volatility funds than long in 2004,” said Joshua Thimons, a portfolio manager at PIMCO. “There are fewer now – 2008 wiped most of the face of the map.” Short volatility funds earn a risk premium by selling volatility in the markets, capitalizing on the fact “that some managers use it as tail hedging,” he explained. “These funds have done better this year, but there are fewer of them.”

The problem the long volatility funds face right now– and long vol funds now make up the lion’s share of the strategy – is that, quite simply, there’s not a lot of volatility. Even the short volatility funds require some degree of movement in the market for there to be a relative value opportunity to exploit.

Sometimes it seems that insider trading cases are all about hedge funds. After all, the overwhelming majority of the federal government’s multi-year crackdown on insider trading has netted dozens of traders and analysts working in the $2.25 trillion hedge fund industry.

But this week’s escapades involving a former top audit partner at KPMG and his golfing buddy are reminder that the temptation to profit from inside information exists in many industries and professions.

Still, senior hedge fund reporter Svea Herbst-Bayliss reminds us in the following post,  a recent survey found a good portion of people who labor for hedge funds harbor private doubts about the integrity of their colleagues. If the numbers expressed in this survey are anything close to accurate, law enforcement should be busy for quite a while longer.

The SkyBridge Alternatives Conference – the annual hedge fund blowout better known as SALT, is a month away. And the official agenda for the three-day bacchanal, which sees thousands of hedge fund investors, allocators and hedge fund hangers-on descend on Las Vegas in the second week of May, has been released.

Many regular SALT-goers will tell you, of course, that as the event has grown in popularity its official agenda has become but one part of the conference. A sideshow to goings-on inside the Bellagio are the unofficial meetings going on outside, in the hotel’s poolside cabanas.

But SALT gate-crashers – a growing group of people who don’t pay for tickets to the conference but rock up to the Bellagio to network poolside with SALT’s paying guests – will be disappointed to know that the cabanas are a costly and official part of the event this year. The bungalows were all scooped up by SALT organizers, according two people familiar with the plans, and offered to guests for $20,000 for duration of the conference, as part of a sponsorship package that includes branding and passes to attend the event.

By Matthew Goldstein

SAC Select may not have been one of SAC Capital Advisors’ best-known portfolios during its brief trading history. But the computer-driven trading program may have been one of the more controversial at Steven A. Cohen’s hedge fund.

Setup by a number of SAC Capital’s algo- savvy traders, including Neil Chriss, who left SAC in 2007 to found Hutchin Hill Capital, SAC Select was designed to piggyback on the trades on some of the hedge fund’s top portfolio managers. SAC Select, which at its peak in 2008 managed about $4.2 billion in hedge fund assets, was discontinued sometime in 2009 or early 2010. The strategy was intended as an added investment benefit for long-time SAC Capital clients.

But SAC Select was always controversial within Cohen’s empire because portfolio managers essentially viewed it as a platform simply copying some of their best ideas, say several people familiar with the strategy. Two people familiar with it said it “pissed off” the human traders at SAC.  Cohen is said to have countered that the computer program was not much different then PMs at SAC being regularly required to share their best “high conviction” trading ideas with Cohen each week.

Something must be in the water over at 399 Park Avenue, where Daniel Loeb’s hedge fund Third Point is headquartered. His Third Point Ultra fund has already gained 12.42 percent this year through the 13th of March, according to data from HSBC’s Private Bank.

The portfolio added 3.3 percent alone between March 1 and March 13. By comparison, hedge funds have returned about 4 percent year-to-date, according to HSBC.

The roughly $1.7 billion Ultra portfolio is a levered version of the firm’s flagship Offshore fund, which manages about $5.7 billion and has gained 8.5 percent over the same period.

More research was published today showing that the honeymoon is over for American hedge fund managers and technology giant Apple. The iPhone maker was one of the top two most sold stocks by hedge funds in the fourth quarter, according to an analysis of regulatory filings by Bank of America. (The other stock was  Tyco International).

This industry-wide ditching of Apple came as AIG  replaced the iPhone maker as hedge fund land’s most loved top-10 stock holding in Q4. It was the first time Apple had been knocked out of pole position in three years. For a list of some of the big names that ditched Apple, see this story by Aaron Pressman.

Meanwhile, BofA analysts found that the top two stocks purchased by hedge funds in the three months to December were  Facebook and Citigroup. The AIG and Citi buys were part of a larger move into financials by hedge funds in the fourth quarter, the BofA Hedge Fund Monitor report showed, and away from technology companies.

By Matthew Goldstein

Don’t be surprised if President Obama includes a line or two in his State of Union address this evening about the need for a plan to allow millions of struggling homeowners whose mortgages are packaged into so-called private label mortgage-backed securities to get a chance to either refinance their loans or restructure them.

The Washington Post is reporting today that mortgage refinancing may be one of the laundry list of items Obama will talk about tonight. And for several months now, investors in private mortgage-securities–deals issued by Wall Street banks and financial firms and not guaranteed by Fannie or Freddie–have been quietly bracing for the Obama administration to move forward with a new refinancing effort.

Up until now, the federal government’s main attempts at trying to help homeowners take advantage of the Federal Reserve’s efforts to keep pushing interest rates to zero has been to prod banks and mortgage servicers to refinance home loans held in so-called agency debt guaranteed by Fannie and Freddie. But programs like HAMP and HARP have provided little relief to the millions of homeowners whose loans are held in private label securities.

Mortgage funds roared home with returns of almost 19 percent last year, trouncing all other hedge fund strategies and beating the S&P 500 stock index, which rose 13 percent.

BTG Pactual’s $245.5 million Distressed Mortgage Fund, which invests primarily in distressed non-agency Residential Mortgage-Backed Securities (RMBS), returned about 46 percent for the year, putting it at the top of HSBC Private Bank’s list of the Top 20 performing hedge funds and making it one of 2012′s best performing funds.  Bear in mind the the average hedge fund gained only 6 percent last year.

HSBC’s hedge fund platform features hundreds of funds, including many of the industry’s biggest and best known managers, and the bank releases regular performance updates throughout the year.

By Matthew Goldstein and Svea Herbst-Bayliss

The WSJ is out today with a big story saying Stevie Cohen and SAC Capital are bracing for up to $1 billion in redemptions, or roughly 16 percent of the $6.3 billion it manages for outside investors. That’s a lot of money but sources are telling us redemptions will likely come in lower than that—think more in the $500 million range.

And more important, no matter what the figure is, don’t look for it to put much crimp in Cohen’s operation.

The deadline for submitting redemptions is Feb. 15, so there is still plenty of time for outside investors make a decision about sticking around or leaving. And even if an investor puts in a redemption notice now, those requests to withdraw money can get pulled at the last minute if the investor has a change of heart.

By Matthew Goldstein

Every time the insider trading investigation thrusts Stevie Cohen back into the spotlight, there’s always speculation about whether the billionaire trader will simply give back money to his outside investors and convert his $14 billion SAC Capital into a family office in order to avoid the unwanted headlines. But as tempting as that might be to the publicity-averse Cohen, the well-known trader has a big financial incentivel to keep managing money for his outside investors.

SAC Capital’s fee structure–one of the highest in the $2 trillion hedge fund industry–probably pays for a good chunk of Cohen’s overhead, say people in the hedge fund industry. These sources say that by charging a 3 percent asset management fee and skimming off as much as 50 percent of the firm’s trading profits, SAC Capital’s outside investors provide Cohen with a rich source of cash to pay his 900 or so employees.

Now sure, if Cohen were to return the roughly $6.3 billion in outside money that SAC Capital manages, he could reduce his workforce dramatically and move his operation out of its spacious offices at 72 Cummings Point Road in Stamford, Conn. But with billions of his own money invested in SAC Capital, Cohen would still need to employ a healthy crew of analysts and traders to manage his personal wealth in order to get the kind of double-digit returns he’s accustomed to. Last year, SAC Capital was up a little over 10 percent after accounting for fees–compared to the industry average of about 5 percent.