Archive for the ‘Daily News’ Category
Tuesday, February 12th, 2013
Edward Lampert is one of the wealthiest people in America. He is the chairman of Sears Holding Corporation and the founder and CEO of ESL Investments, a hedge fund that is estimated to be worth more than $10 billion.
Up until last year, he brought most of his wealth to Greenwich, Conn. That changed as soon as the state raised its tax rates.
“When they did that, it forced out one of their wealthiest residents,” said Evan Rapoport, CEO of HedgeCo Networks. “Eddie Lampert was, I think, the fifth wealthiest person in Connecticut. He’s worth about $3 billion.”
For Lampert, “The jump in state taxes was one of the reasons that he moved out of Connecticut,” said Rapoport.
“Potentially he was a forward-thinker, as I think a lot of hedge fund managers are, and had the foresight to see this trend in increased taxation as a result of the large amount of debt we carry both as a nation and in certain states and municipalities,” he said. “Understanding that taxation was going to increase, by Eddie moving to Miami and relocating, he saved himself not only the state taxes, but of course any city taxes that would exist.”
Florida is not merely an alternative to Connecticut, however. It is also proving to be a popular alternative to New York.
“For a person that earns a million dollars, the difference in savings from someone that lives in New York versus someone that lives in Florida is $147,000 just from state and city taxes,” said Rapoport. “That’s 14.7 percent just in savings to live in Florida versus living in New York City.”
Best of all, financial professionals don’t have to be in Florida full-time. “You have to be here more than six months and have a residence here,” Rapoport explained. “But let me tell you, from saving $147,000, you could certainly rent a very nice house for over $10,000 a month or purchase a very nice house for over $10,000 a month and be down here and go back to New York when you need to.”
That, of course, is another benefit of being in Florida: the great accessibility to New York.
“If I need to be in New York City, I can hop on a flight from Palm Beach International Airportâ€”which is 10 minutes away from usâ€”and I can be in NYC in two-and-a-half hours,” said Rapoport. “I hop on a six-o-clock flight, I’m in N.Y. by 8:30, I’m in the city by 9:00 or 9:30 and I can start taking meetings. That’s very easy.”
“In fact, I would compare that to some commutes from people in Connecticut who have an hour-and-a-half to two-hour commute from door to door, maybe more,” Rapoport added. “It’s not that different.”
Like many financial firms located outside of New York, HedgeCo Networks has an office in NYC.
“What we do is, senior management and our headquarters are down here in Florida, but we still keep a sales office in New York City, and we come up to New York when needed,” said Rapoport. “I think that’s one of the better ways to play this, if you will, and still have the networking opportunities and the abilities to take multiple investor meetings in a single day.”
That said, there are some firms that would be better off in New York.
“There is no comparison relative to the investor base in New York City, especially the institutional investor base versus down here in Florida,” said Rapoport. “But if you’re a young, emerging fund that needs to get out there and spread the word, I think you’re better suited in New York than you would be down in Florida.
“But for those that are more established and can have multiple offices, it certainly is a huge benefit just to be down here from a taxation perspective.”
In addition to the tax benefits, Rapoport also praised the lower cost of living. “For fun, before I went on Fox Business the other night, I ran a cost of living calculator,” he said. “What I found was that someone that made $500,000 in Florida, the equivalent in New York City would be well over a million dollars. That’s a pretty big differenceâ€”almost double the cost of living (forgetting taxation, by the way, on top of that), to live in New York versus Florida.
“That is also another impetus behind people moving from New York to Floridaâ€”it’s simply more affordable. Property taxes are less, commercial real estate is less, so the operational expense of owning a business is less down here than it would be in New York City.”
Those who are looking ahead will also benefit.
“How about this: there’s no estate tax here in Florida,” said Rapoport. “So while we’ve talked about no state taxes, that also applies at the estate level. So if you’re estate planning, and if you’re thinking about your future, and God forbid you’re passing, when you’re planning you would save anywhere from six to 10 percent on your estate. That’s a big savings for your family.”
Rapoport also appreciates the access to Latin America, “Which is obviously enormous down here in South Florida,” he said.
“Miami, surprising to some, has the second-largest concentration of international and national banks here in the country,” he added. “It has become a large hub not only for Latin America but for Europe and for Asia.”
But it’s not just about taxes, cost of living expenses and other savings. Florida also provides its residents with an incredible lifestyle.
“On top of taxes you also have a lifestyle down here that is very good, in my opinion,” said Rapoport. “What I mean by that is, if you’re someone that likes the outdoors — we’ve always had great weather, but the ability to play golf year-round, tennis, go boating, fishing — those are all tremendous benefits to being here in Florida.”
The corporate lifestyle is also very good. “It’s not uncommon to walk into a hedge fund manager’s office in Florida and find everybody in khakis and golf shirts,” Rapoport added. “In the summer, find those same people in shorts and golf shirts and sandals. Being comfortable and coming to work and having a relaxed corporate lifestyle is also a huge benefit to being down here.
“One of the reasons I enjoy being here, certainly, is that lifestyle. It’s one of the reasons I made that shift. Frankly I got tired of being in NYC and spending my weekends either taking long travels out to The Hamptons or the Jersey Shore in the summers or in the winters going to the stores and shopping and spending and not really enjoying some of those outdoor activities as much as I could down here.”
Rapoport said that he can sum up the benefits of Florida in just six words: “Affordability, availability, no snow, no subways.”
This content originally appeared on StreetID, a financial career networking, matchmaking and news site. To learn more about StreetID, visit StreetID.com. StreetID’s financial career news can be found on its blog, streetid.com/newsblog/.
Friday, January 25th, 2013
Here we take a look at December 2012 absolute performance for the top 5 equity market neutral funds in two categories - all funds and U.S.-only funds - as tracked by Lipper’s hedge fund database. To see more analysis, including assets under management and domicile information for the top 10 funds in each category, click here for all funds and here for U.S.-only funds. To be truly connected to all the Lipper analytics available on HedgeWorld, become a HedgeWorld Premium Plus member. To find out more about how to do that, visit hedgeworld.com/membership/.
Thursday, January 10th, 2013
NEW YORK (Reuters)â€”The U.S. government has objected to the reorganization plan of a group of bankrupt hotels owned by hedge fund Paulson & Co., saying it was an attempt to dodge taxes.
The MSR Resort group’s plan to sell itself to the Government of Singapore Investment Corp. creates tax liabilities of $331 million with no recourse for the Internal Revenue Service to recover them, Preet Bharara, U.S. attorney for the Southern District of New York, said in his objection filed on Wednesday [Jan. 9].
Mr. Bharara also objected to MSR seeking an injunction that bars the government from reviewing the tax consequences of the plan. The government has not had an opportunity to examine whether the plan is motivated solely to avoid taxes, which would disqualify it, he said.
The Government of Singapore Investment Corp. bid $1.5 billion for the hotels group, including the Arizona Biltmore Resort & Spa in Phoenix, Ariz., and Grand Wailea Resorts Hotel & Spa in Hawaii, in August. GIC is a sovereign wealth fund that manages Singapore’s foreign reserves and is a large real estate investor in the United States. The fund is a lender to MSR and made an offer for shortly after the group filed for bankruptcy protection.
The hedge fund, headed by John Paulson, bought the hotels from a Morgan Stanley real estate fund in January 2011 and put them into bankruptcy a month later, saying it planned to reorganize them.
Morgan Stanley Real Estate purchased the five hotels and three others in 2007 for about $4 billion. The hotels filed with $2.2 billion in assets and $1.9 billion in debt.
The case is In Re: MSR Resort Golf Course, case No. 11-10372, in U.S. Bankruptcy Court, District of Delaware.
Thursday, January 10th, 2013
SINGAPORE (Reuters)â€”A former portfolio manager at Tudor Investment Corp. who oversaw energy investing from Singapore for the giant hedge fund is setting up his own business with a handful of former colleagues, according to several people familiar with the matter.
Andrew McMillan is the latest among a growing number of hedge fund industry executives pursuing dreams to launch their own funds by spinning out from former employers.
One source said the split was friendly between Mr. McMillan and Paul Tudor Jones‘ $11.6 billion firm, where the fund manager had worked for a decade. Mr. McMillan will take five ex-Tudor people with him.
Tudor partners have promised to invest with Mr. McMillan, said the source.
With Asia remaining a key focus for investors, Tudor has no plans to leave Singapore, however.
The firm has hired Ai Ning Wee from the Government of Singapore Investment Corporation, one of the world’s leading sovereign wealth funds, to work in its Singapore office. The focus will be on macro investing, the very bet that made Tudor famous in the three decades since Mr. Jones, a former cotton trader, founded the firm.
Like other funds bruised during the financial crisis, Tudor reorganized in the last few years, including a high-profile split from former star trader James Pallotta who ran the Tudor Raptor fund.
In 2012, the firm’s flagship Tudor BVI fund returned 6.27 percent, less than half the Standard & Poor’s 500 gain of 13 percent.
The spinout from Tudor joins the likes of Alp Ercil, the former Asia head of New York-based Perry Capital, who raised $940 million for his Asia Research & Capital Management in the biggest hedge fund launch in Asia last year.
Others such as Tybourne Capital, launched by the former Asia head of hedge fund firm Lone Pine Capital, Eashwar Krishnan, and Maso Capital, started by two former managing directors of Och-Ziff Capital Management, Manoj Jain and Sohit Khurana, also joined the fray last year.
By Svea Herbst-Bayliss and Nishant Kumar
Thursday, January 10th, 2013
WASHINGTON (Reuters)â€”The top U.S. derivatives regulator will listen to banks and exchanges in a public hearing this month to find out if its rules are unduly forcing clients out of swaps markets.
The Commodity Futures Trading Commission, which regulates both swaps and futures, is also considering a rule for block trades that could accommodate some of the concerns aired by the industry, a senior executive said.
“We’re going to have this discussion and get some of these topics up there,” Scott O’Malia, one of five CFTC commissioners told Reuters in a telephone interview. “It’s better that we have that discussion before we make a bad decision, than after.”
The meeting, which had not been announced before, is set for Jan. 24.
Regulators across the world are setting the first-ever rules for the $650 trillion swaps market, where trading is largely executed over the phone and data is hard to find, two factors that were blamed for aggravating the 2007-09 crisis. Banks such as Citi, Bank of America and JPMorgan dominate the market and fear that clients will instead start using futures â€” a similar type of derivative â€” because the new rules make them cheaper to use.
Futures exchanges, such as the CME Group Inc. and its much-smaller rival Eris Exchange have grabbed the opportunity, launching products that promise the same features as swaps, but at a far lower cost.
One concern of the banks is that the new rules unfairly favor futures markets by making it easier to do block trades, which allow dealers to delay the reporting of a transaction if it is above a certain threshold, so as not to show their hand.
A proposed new CFTC rule for swaps trading imposes stringent requirements on block trades for swaps, which does not exist for futures. The plan is to introduce a similar restriction for block trades in futures regulation.
“It is a concern that, depending on the block rules, the existing rules (may) create a disparity in regulation,” said Mr. O’Malia, one of the two members of a Republican minority on the CFTC’s five-strong board.
“The staff is developing a proposed rule on futures blocks,” said Mr. O’Malia, who is often critical of the CFTC.
Both futures and swaps can be used to protect or hedge against the effects of a change in anything from interest rates, foreign exchange rates, the risks of default of companies or governments, or commodity prices.
The CFTC’s public hearing was called on concerns about a shift out of swaps and into futures, a process known as “futurization,” Mr. O’Malia said.
At a similar hearing in November, Asian and European regulators vented their anger over the brusque manner in which the CFTC plans to impose its rules on foreign banks. U.S. politicians later chided the agency over the plan.
The CFTC is drawing up rules for public data reporting and to bring swaps trading on to exchange-like platforms, with clearing houses standing in between buyers and sellers to protect against the risk of default.
Derivatives brokers such as ICAP, Tullett Prebon and GFI are expected to run these new trading platforms, known as Swap Execution Facilities (SEFs), but are still in the dark about the rules.
The Jan. 24 meeting would discuss the different rules for block trades between the two markets, Mr. O’Malia said, but it was not clear whether the new rule on block trades prepared by the CFTC’s staff would come up for discussion.
It was also still not clear when the CFTC would vote on the long-awaited SEF rules.
By Douwe Miedema
Thursday, January 10th, 2013
FRANKFURT, Germany (Reuters)â€”German regulator BaFin’s probe of Deutsche Bank over possible manipulation of interbank lending rates will be completed by the end of March, two people familiar with the matter told Reuters.
BaFin is conducting a so-called special probe â€” the most severe form of investigation it can undertake â€” into Deutsche Bank as part of a broader global investigation of interbank lending rates. Regulators in Europe, Japan and the United States have been examining more than a dozen big banks over suspected rigging of the London interbank offered rate (LIBOR).
Deutsche Bank, which declined to comment, has said previously it has been cooperating with the U.S. Department of Justice, Securities and Exchange Commission and Commodity Futures Trading Commission, and the European Commission on LIBOR. These inquiries relate to periods from 2005 through 2011.
An internal probe at Deutsche Bank found two former traders may have been involved in colluding to manipulate benchmark interest rates, sources told Reuters in July, adding there was no indication of failure at the top of the bank.
LIBOR rates, compiled from estimates submitted by large banks, are used to determine interest rates on trillions of dollars worth of contracts around the world.
British lender Barclays agreed to pay a fine of $453 million, and Swiss bank UBS agreed to pay $1.5 billion to regulators over its submissions of interbank rates.
As the credit crisis intensified from 2006-08, allegations started mounting that LIBOR no longer reflected the cost banks were paying for funds. Authorities have been examining whether traders tried to influence the rate to profit on bets on the direction it would go.
The daily LIBOR poll asks banks at what rate they think they will be able to borrow money from each other in 10 major currencies and for 15 borrowing periods ranging from overnight loans to 12 months.
LIBOR rates submitted by banks are compiled by Thomson Reuters, parent company of Reuters, on behalf of the British Bankers’ Association.
Thursday, January 10th, 2013
NEW YORK (Reuters)â€”Morgan Stanley plans to slash 1,600 jobs in what may be just the beginning of a new round of layoffs at large investment banks, this time driven by a deeper reassessment of Wall Street businesses in the face of new regulations and capital standards.
Morgan Stanley, the sixth largest U.S. bank by assets, plans to begin letting go of the employees, many of whom work in its securities unit, starting this week, two people familiar with the matter said on Wednesday [Jan. 9].
A third person who has been involved with plans to cut staff at Morgan Stanley and other large banks said that Morgan Stanley’s cuts had been in the works for months, and that more are expected in the future.
Large global investment banks have been cutting staff for the better part of five years, when the financial crisis pegged to the U.S. housing market began to seize up markets. Firms previously focused their job cuts on areas where activity had screeched to a halt, such as securitization of mortgages, or that were explicitly banned by new regulations, such as proprietary trading.
But banks are now making strategic decisions about businesses in grey areas where management teams do not see major profit potential, or realize that their individual banks are not competitive, the third source said.
“It’s hard to look at yourself in the mirror, and say: ‘I’m not good at this,’” said the source. But now that management teams are coming to those realizations, he said, they are beginning to make strategic decisions to exit businesses and cut more staff.
So far, the most prominent example of a bank making that kind of a tough decision is Swiss bank UBS AG, which said in October that it would exit bond trading altogether and eliminate 10,000 jobs.
Morgan Stanley has said it will not give up on the fixed income, currency and commodities trading business, known as “FICC” in Wall Street circles. The firm has said it wants to boost market share in FICC by two percentage points.
But Morgan Stanley is aiming to exit more complex realms of bond trading that require more capital under new regulations. The latest staff reductions will affect 6 percent of the institutional securities unit’s workforce, which includes the bank’s FICC business. The cuts will target salespeople, traders and investment bankers, the sources said. Support staff who work in areas such as technology will also be affected, the sources said.
Although all staff levels will be affected, the likely targets will be more senior employees who take in the biggest paychecks, and about half of the cuts will come from the United States, one of the sources said.
The cuts are also notable because, unlike its chief rival Goldman Sachs Group Inc., which culls the bottom 5 percent of its workforce each year to improve performance, Morgan Stanley does not have such a staff reduction program.
Some analysts have questioned Morgan Stanley’s plans to gain market share in the bond trading business.
JPMorgan analyst Kian Abouhossein â€” who earlier said that Morgan Stanley should give up that goal â€” expects Wall Street banks to report a 10 percent decline in revenue for the fourth quarter, compared with the previous period.
Bernstein Research analyst Brad Hintz, a former Morgan Stanley treasurer, said in a report on Wednesday that layoffs are expected in capital-intensive areas of Morgan Stanley’s fixed-income trading business, such as asset-backed securitization, synthetic products, structured credit and correlation trading.
“Investors continue to wonder how Morgan Stanley’s fixed income business will be able to generate steady returns and beat its cost of capital without massive changes to its business model,” Mr. Hintz said.
Restructuring Wall Street
Morgan Stanley Chief Executive James Gorman has pledged to cut costs, and said in July that he planned to reduce overall staff 7 percent in 2012. The new job cuts are in addition to that plan, the sources said, and come just a week after Colm Kelleher took over as the sole president of the securities unit on Jan. 1.
The cuts represent less than 3 percent of Morgan Stanley’s entire estimated workforce at year-end, following other staff reductions in 2012.
“This continues the steady drumbeat of negative news from banks,” said Greg Cresci, a Wall Street recruiter with New York-based Odyssey Search Partners. “It’s hard to tell where the bottom is, given how many banks have made similar announcements.”
Altogether, U.S. financial firms announced plans to reduce payrolls by 38,135 jobs last year, in addition to 63,624 job cuts that were detailed in 2011, according to employment consulting firm Challenger, Gray & Christmas.
“We are seeing a redrawing and restructuring of the industry,” said John Challenger, CEO of the firm. “The map continues to be redrawn in terms of regulation, who the competitors are, and the resources banks are willing to commit to the investment banking business.”
In addition to earlier job cuts at Morgan Stanley and UBS, Goldman Sachs cut 700 jobs during the first nine months of 2012 as part of a plan to reduce annual expenses by $1.9 billion.
Citigroup Inc. announced plans last month to cut 11,000 jobs, including some in investment banking and trading, to save $1.1 billion in annual expenses. Credit Suisse Group AG is also cutting securities jobs to reach an annual cost-savings target of 1 billion Swiss francs ($1.1 billion), while Bank of America Corp. is in the process of cutting 30,000 jobs across the firm in a plan unveiled in 2011 to save $5 billion in annual expenses.
Morgan Stanley shares fell 0.2 percent to close at $19.62 on Wednesday. Its shares are up 15 percent over the past 52 weeks, part of a broad rally in financial stocks.
By Lauren Tara LaCapra
Thursday, January 10th, 2013
NEW YORK (Reuters)â€”A former hedge fund consultant who cooperated with the government’s sprawling insider trading probe was sentenced to two years probation on Wednesday [Jan. 9] by a federal judge.
U.S. District Judge Jed Rakoff sentenced Wesley Wang in an afternoon proceeding during which the judge said, “the extent of Mr. Wang’s cooperation goes beyond that of most cooperators.”
Mr. Wang, who is required to continue to assist authorities as part of his sentence, pled guilty in July to two counts of conspiracy to commit securities fraud.
Prosecutors used testimony from Mr. Wang this past summer in the insider trading trial of a former employer, money manager Doug Whitman, who ran Whitman Capital in Menlo Park, Calif. Mr. Whitman was convicted in August on securities fraud and conspiracy charges.
Prosecutors said Mr. Wang provided them with information on as many as 20 people who may have been involved in improper trading. Another person he named was Dipak Patel, a former portfolio manager at Steven A. Cohen’s $14 billion hedge fund SAC Capital Advisors.
Mr. Wang, who once worked for Mr. Patel at SAC, said he passed on inside information to Patel about several technology companies, according to a sentencing filed by prosecutors before the proceeding.
“I am disappointed in myself and I am trying to contribute back to my society,” Mr. Wang said during the proceeding. Mr. Wang currently lives in northern California.
Mr. Patel recently surfaced in a letter filed by federal prosecutors in connection with Wednesday’s sentencing. Mr. Patel, who left SAC Capital in February 2011 and has not been charged with any wrongdoing, could not be reached for comment.
An SAC Capital spokesman did not return a request for comment.
The case is U.S. v. Wesley Wang, case No. 12-cr-00541, in US District Court, Southern District of New York.
By Emily Flitter
Thursday, January 10th, 2013
Agecroft Partners predicts that the hedge fund industry will set a new record for assets in 2013 despite the lackluster investment performance for the industry over the past two years. This will be driven by pension funds increasing their asset allocations to hedge funds, and a broadening of the hedge fund investor base due to the passage of the JOBS Act. This conclusion is based on several dominant and emerging trends Agecroft has identified through their contact with more than 2,000 institutional investors and 300 hedge fund organizations during 2012. Below are the eight leading trends that were identified for the hedge fund industry for 2013.
1. Pension Funds will continue to be the largest contributor to growth in the hedge fund industry in 2013
We will continue to see a strong trend of pension funds increasing their allocations to hedge funds in order to enhance returns and reduce downside volatility in their portfolios and help manage their massive unfunded liabilities. As a result of declining interest rates, forward-looking return assumptions are currently around 3% for fixed income portfolios managed against the Barclays Aggregate Bond Index which currently represents approximately 30% of pension funds’ total assets. With current actuarial return assumptions averaging approximately 7.5%, we will see pension funds shift more assets from fixed income into hedge funds as long as interest rates stay low.
2. Pension funds’ hedge fund investment process will evolve at an accelerated pace
As pensions struggle to enhance returns to meet their actuarial assumptions, we will also see an increase in the speed of the evolution of pension funds’ hedge fund investment process. Historically, many pension plans started with an investment in hedge fund of funds, followed by hiring a hedge fund consultant and investing directly in typically the largest hedge funds with the strongest brands. As they increased their knowledge of the hedge fund industry and added to their internal research teams, they began to make more independent decisions and focused on “alpha generators” which include mid-sized managers. Finally, they evolved into the “endowment fund model” or best-in-breed strategy of investing. In the final stage, hedge funds are no longer considered a separate asset class, but are incorporated throughout the pension fund portfolio. This whole process use to take over a decade, however recently, some of the larger pension funds have begun to skip the first step of investing in hedge fund of funds by investing directly in individual hedge funds. This will have long-term implications for the hedge fund of fund industry. In addition, we are seeing an increasing number of pension funds utilizing hedge funds in different areas of their asset allocation.
3. Hedge fund of funds industry continues to evolve
The hedge fund of fund market place is approximately 25% smaller than at its peak in the third quarter of 2008. In addition, fee income has declined by over 50% due to downward pressure from large institutional investors. In 2013, the hedge fund of fund market place will experience slight net redemptions where withdrawals by the largest pension funds choosing to make direct investments in hedge funds will be partially offset by smaller and mid-sized institutional investors increasing their allocations to hedge fund of funds along with new high net worth individuals entering the space. We will continue to see a bifurcation in the industry where a few firms will successfully grow their asset base while others will experience large net redemptions. The successful organizations will fall into two categories which include: 1. Large multi-strategy hedge fund of funds with strong performance that can justify their fees by clearly articulating their differential advantage over hedge fund consulting firms. 2. Niche oriented hedge fund of funds that differentiate themselves by either focusing on a specific strategy, region, fund structure or investor type. Those fund of funds that can clearly articulate their differential advantage will be able to not only grow their assets, but command premium fees.
4. Passage of the JOBS Act will change how many hedge funds market themselves
The JOBS Act will help level the playing field within the hedge fund industry by giving investors greater transparency. We will see many hedge funds provide on their websites detailed information on their organization, investment team, investment process, risk controls, performance and information on service providers. In addition, more managers will participate in industry databases making it easier for investors to indentify and compare managers within a strategy. Investors will also benefit from more hedge fund managers being interviewed in the media relative to their hedge fund strategies and investment ideas.
The JOBS Act will benefit the hedge fund industry by broadening out the hedge fund investor base and increasing net flows to the industry. Those firms that implement effective marketing strategies to take advantage of new changes in legislation by the JOBS Act will have a distinct advantage over their competitors.
5. Rise of long short equity
At the turn of this century long/short equity managers managed over 40% of hedge fund industry assets. Since 2008, a significant amount of long/short equity assets have been reallocated to other hedge fund strategies which has caused total assets in the strategy to decline to approximately 25% of the industry. This decline has been driven by a combination of investors increasing allocations to strategies not correlated with long only equity and fixed income benchmarks, for example CTAs, to strategies with better perceived relative valuations of their underlying securities, and because of poor performance from a majority of long/short equity managers as a result of fundamentals playing a secondary role to macro events in driving stock valuations. These last two trends should begin to reverse because relative valuations of equities based on price/earnings ratios look very attractive compared to fixed income now that interest rate spreads have declined to five year lows. In addition, at some point fundamentals will drive stock valuations which should significantly benefit l/s equity managers. As a result we expect to see more assets allocated to long/short equity in 2013.
6. Blurring of the lines between hedge funds and private equity funds
Back in 2008, the main difference between hedge funds and private equity funds was the structure of the fund and often not the liquidity of the underlining investments. This was especially the case with illiquid fixed income instruments where many hedge funds that focused on these strategies offered monthly liquidity. This created significant liquidity mismatches for many hedge funds which caused them to impose gates, suspend redemptions or liquidate their fund. Today many sophisticated investors understand the benefits of illiquid investments, but are demanding fund liquidity provisions that match the underlying liquidity of the portfolio. We will see longer locks ups, longer redemption notice periods, gates and private equity structures for illiquid strategies.
7. Continued concentration of hedge fund flows into a small percentage of managers
The hedge fund industry is highly competitive with some estimates as high as ten thousand funds in the market place. In 2013, we will see 5% of funds attract 80% to 90% of net assets within the industry. It will not just be the largest hedge funds attracting assets. Some small and mid-sized hedge funds will rise above their peers by effectively raising significant assets. In order to achieve this they need to excel in three areas which include: having a high quality product offering, a marketing message that clearly and concisely articulates their differential advantage across all the evaluation factors investors use to select hedge funds, and finally, a best-in-breed sales strategy. This sales strategy can be achieved by either building out an internal sales team, leveraging a leading third party marketing firm, or a combination of both. Firms that do not excel in each of these three areas will have a difficult time raising assets.
8. More hedge funds focused on the retail market
As raising assets for hedge funds becomes increasingly difficult more hedge funds are beginning to target the retail markets that are less competitive and from which it is easier to raise assets. In Europe we have seen the assets in UCITS funds expand significantly with more growth expected in 2013. In the US we are seeing a large growth in 40 Act hedge funds and hedge fund of funds, with many more expected to launch in 2013. We are also seeing hedge fund replication strategies utilizing ETFs. All of these have their strengths and weaknesses and could create more regulatory scrutiny
Don Steinbrugge is Chairman of Agecroft Partners, a global consulting and third-party marketing firm for hedge funds. Don was a founding principal of Andor Capital Management, which was formed when he and a number of his associates spun out of Pequot Capital Management. At Andor he was Head of Sales, Marketing, and Client Service and was a member of the firm’s Operating Committee. When he left Andor, the firm ranked as the 2nd largest hedge fund firm in the world. Don is also a member of the Investment Committees for The City of Richmond Retirement System, The Science Museum of Virginia Endowment Fund and The Richmond Sports Backers Scholarship Fund. He is also a member of the Board of Directors of the Hedge Fund Association, Lewis Ginter Botanical Gardens and the University of Richmond’s Robins School of Business. In addition, he is a former 2 term Board of Directors member of The Richmond Ballet (The State Ballet of Virginia).
Friday, January 4th, 2013
NEW YORK (Reuters)â€”U.S. financial regulators are pushing to turn hedge funds into informers on the white collar crime beat.
The Financial Crimes Enforcement Network (FinCEN) is working on a rule that would require U.S. hedge funds to file formal reports notifying U.S. authorities of any suspicious trading by employees or outside parties, the regulatory agency said.
The rule being crafted by FinCEN, part of the Treasury Department, would force the $2 trillion hedge fund industry to police itself in much the same way banks, brokerages and mutual funds are required to do by filing suspicious activity reports (SARs) with the unit.
Steve Hudak, a FinCEN spokesman, said a proposed rule for the hedge fund industry could be filed for public comment sometime in the first half of this year. But the rule, which would cover activities such as insider trading and money laundering, will force funds to spend more money on building out their compliance and legal departments.
Hedge fund lawyer Ron Geffner said he expects many in the industry will oppose the new rule as being both intrusive and costly.
“Anytime there’s any regulatory hook into a firm, it’s like a domino,” said Mr. Geffner, a partner at the law firm Sadis Goldberg in New York. “When taken together, all of the rules and regulations, both new and revised, serve to intimidate entrepreneurs.”
A spokesman for the largest hedge fund trade group, the Managed Funds Association, did not respond to a request for comment.
The measure also could heighten tensions in the hyper-aggressive hedge fund world as it could put firms and their employees in a position to snitch on their competitors.
FinCEN’s move is not entirely new. In 2003, the agency began looking at imposing a SARs requirement on hedge funds, but eventually withdrew a proposed rule in 2008 after deciding it was too hard to define a hedge fund and enforce the requirement. The agency now believes the new mandate in the Dodd-Frank financial reform law that requires U.S. hedge funds to register as investment advisers gives it the ability to require hedge funds file SARs.
James Freis, a former FinCEN director, said the new rule is long overdue and would require hedge funds to do more due diligence on their employees and customers. He said it also would require hedge funds to hire staff who are well-versed in anti-money laundering procedures, which is one of the main reasons banks are required to file SARs.
“Suspicious activity reporting would put an affirmative obligation upon investment advisers, including certain hedge funds, to notify the authorities of suspected illegal activity,” said Mr. Freis, now an attorney with the law firm Cleary Gottlieb in Washington.
Mr. Freis served as the director of FinCEN until September, when he was forced out over disagreements with Treasury officials over FinCEN’s priorities, according to a person familiar with the matter. During his tenure he was an advocate for a hedge fund reporting requirement.
The filing of SARs reports took on new urgency for the financial industry in the wake of the Sept. 11, 2001, attacks on New York and Washington as federal lawmakers moved to require banks to become more aggressive in tracking money flows by terror groups.
The SARs reporting requirement is one that banks and brokers do not take lightly.
Jay Hack, a partner at Gallet Dreyer & Berkey in New York, said many banks file a “defensive SAR” when they see something even remotely suspicious to keep the regulators satisfied.
In the brokerage world, the SARs requirement has provided securities regulators and federal prosecutors with leads about investment scams and insider trading rings, securities lawyers said.
From 2003 to 2011, securities firms filed more than 110,000 SARs, with most of those involving incidents of money laundering or unusually large transactions, according to FinCEN. Roughly, 3,500 of those SARs involved a suspected insider trading incident. Final numbers for 2012 are not yet available.
But the agency reports that the number of SARs filed involving insider trading was up 34 percent in 2011 from 2010. The increase came at a time when U.S. authorities were engaging in a massive crackdown on insider trading in the hedge fund industry that has led to more than 70 convictions.
Many hedge funds maintain relatively small compliance and legal departments, often preferring to hire outside contractors to perform that work.
SAC Capital, the $14 billion hedge fund with 900 employees that has drawn scrutiny in the insider trading investigation, is rarity in that it has more than 30 people working on compliance matters. People familiar with SAC Capital, which declined to comment, said the firm’s compliance team is one of the largest in the hedge fund industry.
By Emily Flitter