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HEDGE

FUNDS

Definition:- Wikipedia:- A hedge fund is an investment fund that can undertake a wider range of
investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals

SEBi:- There is no exact definition to the term Hedge Fund; it is perhaps undefined
in any securities laws. There is neither an industry wide definition nor a universal meaning for Hedge Fund. Hedge funds, including fund of funds are unregistered private investment partnerships, funds or pools that may invest and trade in many different markets, strategies and instruments (including securities, non-securities and Derivatives) and are NOT subject to the same regulatory requirements as Mutual funds, including mutual fund requirements to provide certain Periodic and standardized pricing and valuation information to investors.

Investopedia - An aggressively managed portfolio of investments that


uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

INTRODUCTION
COMPARISON
1.

MUTUAL FUNDS: - It is similar to mutual funds in a way as they both diversify the investment and invest in a variety of assets(the range of activities of hedge funds is more than that of mutual funds) and use similar kind of investment strategies . The biggest difference between the 2 funds is that it is necessary for mutual funds to register itself with the regulator and thus is subject to regulatory

2.

3.

provisions whereas it is not necessary for hedge funds to register itself with the Regulator. Private Equity Funds:- It is similar to hedge funds as it doesnt need to register with a regulator and also deals with clients similar to that of the hedge funds but are illiquid and are long term investments in which the investors put in the money over the life of the fund. Venture Capital Funds:- Even they have the same class of investors but they invest in the start up or early stages of the company. Also venture capital advisors play a active role in the company . In contrast to a hedge fund, which may hold an investment in a portfolio security for an indefinite period based on market events and conditions, a venture capital fund typically seeks to liquidate its investment once the value of the company increases above the value of the investments.

FEW POINTS ON HEDGE FUNDS 1. are organized as private investment partnerships or offshore investment corporations; 2.use a wide variety of trading strategies involving position-taking in a range of markets; 3. employ as assortment of trading techniques and instruments, often including short-selling, derivatives and leverage; 4. have an investor base comprising wealthy individuals and institutions and relatively high minimum investment limit ( set at US $100,000 or higher for most funds).
4.

Hedge fund managers typically charge their funds both a management fee and a Performance fee.

Management fees are calculated as a percentage of the fund's net asset value and typically range from 1% to 4% per annum, with 2% being standard The Performance fee is typically 20% of the fund's profits during any year, though they range between 10% and 50%.

REGULATIONS
USA
The Dodd-Frank Wall Street Reform Act was passed in the US in July 2010, aiming to increase regulation of financial companies, including hedge funds.[5][59] The act requires advisers with private pools of capital exceeding $150 million or more in assets to register with the SEC as investment advisers and become subject to all rules which apply to registered advisers by July

21, 2011. Previous exemptions from registration provided under the Investment Advisers Act of 1940 will no longer apply to most hedge fund advisers.[84] Under Dodd-Frank, hedge fund managers who have less than $100 million in assets under management will be overseen by the state where the manager is domiciled and become subject to state regulation.[84] This will significantly increase the number of hedge funds under state supervision, as the threshold for SEC regulation was previously $30 million.[93] In addition to US hedge funds, many overseas funds with more than 15 US clients and investors, and managing more than $25 million for these clients, will also have to register with the SEC by July 21, 2011.[5] Mandatory registration of hedge fund advisers was supported by the largest hedge fund trade group, the Managed Funds Association (MFA), which announced its support for registration in testimony to a US congressional committee on May 7, 2009.[94] Additionally, Dodd-Frank requires hedge funds to provide information about their trades and portfolios to help regulators fulfill their obligation to monitor and regulate systemic risk. The aim is for this data to be analyzed and shared among regulators including the newly created Financial Stability Oversight Council and for the SEC to report to Congress on how the data is being used to protect both investors and market integrity.[93] Under the so-called "Volcker Rule", regulators are also required to implement regulations for banks, their affiliates and holding companies to limit their relationships with hedge funds and also to prohibit these organizations from proprietary trading, and limit their investment in, and sponsorship of hedge funds.[93]

EU
Within the European Union (EU), as with the US, hedge funds are primarily regulated through advisers who manage the funds.[35] In the United Kingdom, which is the hedge fund centre of the EU, hedge fund managers are required to be authorised and regulated by the Financial Services Authority (FSA), the national regulator.[72] Historically, there have been different regulatory approaches within each country in the EU. In some countries there are specific restrictions on hedge fund activities, including controls on use of derivatives in Portugal, and limits on leverage in France.[35] In 2010, the EU approved a law that will require all EU hedge fund managers to register with national regulatory authorities. The EU's Directive on Alternative Investment Fund Managers (AIFMD) was passed by the EU Parliament on November 11, 2010 and is the first EU directive focused on "alternative investment fund managers", including hedge fund managers.[72] According to the EU, the aim of the directive is to provide greater monitoring and control of alternative investment funds.[95] The directive requires managers to disclose more information, on a more frequent basis, to regulators about their investment strategies. The directive also introduces a rule that hedge fund managers should hold larger amounts of capital. All hedge fund managers within the EU will also be subject to potential limitations on the amount of leverage they can use.[59] Since AIFMD covers the entire EU, and individual countries have different rules for hedge fund marketing, the directive introduced a "passport" for hedge funds authorized in one EU country to operate throughout the EU.[59][72] The scope of AIFMD is broad and encompasses managers located within the EU as well as non-EU managers that market their funds to European

investors. Countries within the EU are required to adopt the directive in national legislation by early 2013.[59]

INDIA
A concept paper has been published by sebi on august 01,2011 on regulations for alternative investment funs which has categorized hedge funds under its strategy fund category . some of the proposed regulations are as follows:1. It would be mandatory for all types of private pools of capital or investment funds to seek registration with SEBI. 2. The regulations would require that the fund manager/ asset management company or trustees of the fund be specified, and change of such entities be reported to the regulator. 3. Fund size can be revised upward up to XX% giving SEBI suitable reasons. Minimum investment amount would be specified as 0.1% of fund size subject to a minimum floor of Rs.1crore. 4. Any alteration to the fund strategy shall be made with the consent of at least 75% of unit holders. 5. Adequate disclosures at the time of fund raising though a information memorandum and continuous disclosures to investors of the fund at periodic intervals as provided in contractual agreement. The relationship between the investor and the fund would be governed by the contractual agreement between them. Standard disclosure documents would be provided by the respective industry associations. Any departure from the documents will be required to be highlighted.

CHINA
Hedge funds currently play a limited, almost zero, role on the mainland, at least legitimately. There are two distinct markets. On the one hand there are the big asset management companies running domestic hedge fund strategies approved by the China Securities Regulatory Commission, the state regulator, which are legally entitled to raise money from wealthy individuals on the mainland. Then there are the unregulated private fund managers operating in the shadows. Roughly 100 or so are sunshine private funds that are created through trust companies (which themselves are regulated); but there are also unknown numbers of fund managers, many of whom are finance industry professionals, running a classic two guys in a garage operation.

HEDGE FUND STRATEGIES

1. Aggressive Growth:- a style of management that focuses primarily on equities that are expected to have strong earnings growth. Investments held in these funds are companies that demonstrate high growth potential, usually accompanied by a lot of share price volatility. These funds are only for non risk-averse investors willing to accept a high risk-return trade-off. Aggressive growth funds have large betas, which means they have a large positive correlation with the stock market. They tend to perform very well in economic upswings and very poorly in economic downturns. Many aggressive growth hedge funds specialize in specific sectors, for example: technology, banking, biotechnology etc. 2. Distressed Securities:- Distressed securities may be an attractive investment option for sophisticated investors who are looking for a bargain and are willing to accept some risk. Distressed securities are securities; most often corporate bonds, bank debt and trade claims, but occasionally common and preferred stock as well, of companies that are in some sort of distress. Typically, that means heading toward or in bankruptcy. Many of these types of funds due extensive fundamental research analyzing the book value, balance sheet, strategic partners, suppliers, and creditors of a company before investing their money. These types of hedge funds usually have relatively low volatility but without exception require someone with deep bench strength and fundamental research experience. 3. Emerging Market:-An emerging market hedge fund is a hedge fund that specializes its investments in the securities of emerging market countries. As a result, emerging market countries include a wide range of nations. China and Russia, two of the world's economic powerhouses, are lumped in the emerging market category with Peru, a much smaller country with fewer resources, because all have recently embarked on economic development and reform programs, and have thus emerged onto the global financial scene. Emerging market hedge funds offer one significant advantage over emerging market mutual funds. While mutual funds typically invest only in stocks and bonds, hedge funds can offer exposure to more sophisticated investments, including commodities, real estate, currencies and derivatives (which are contracts to buy or sell another security at a specified price, and include futures and options). Additionally, investing in the emerging markets has some unique risks, including a lack of transparency, which makes it hard to evaluate investment opportunities; relative illiquidity; and extreme volatility.

4. Fund of Hedge Funds:- A fund of hedge funds is a fund of funds that invests in a portfolio of different hedge funds to provide broad exposure to the hedge fund industry and to diversify the risks associated with a single investment fund. Funds of hedge funds select hedge fund managers and construct portfolios based upon those selections. The fund of hedge funds is responsible for hiring and firing the managers in the fund. Some funds of hedge funds might have only one hedge fund in it, this lets ordinary investors into a highly-acclaimed fund, or many hedge funds. Funds of hedge funds may have survived the worst but the industry took some heavy damage, causing many FOFs to shut down. Investors started pulling out their money in the middle of 2008 and, apart from a small respite at the end of last year, they continued taking it away for the next 21 months and counting, according to data provider Hedge Fund Research. 5. Income:- A fixed income hedge fund is a hedge fund that invests into fixed income securities, also called fixed interest securities. These securities are issued by companies and entities that need to borrow funds for longer time periods. Fixed income securities can be issued by a government, corporation, or even a bank. The default rate for businesses had more than doubled in 2008, and this is bad news for any investor who has fixed income securities investments in the companies who default. This is where the risk part comes in, because if a company goes under, you could end up losing all your investment capital. Prices of fixed interest securities are impacted by a number of factors, including the creditworthiness of the issuer; the general level of market interest rates; the coupon size and structure of the underlying security. 6. Macro:- Macro events are changes in global economies, typically brought about by shifts in government policy which impact interest rates which, in turn, affect all financial instruments, including currency, stock, and bond markets. Macro investors anticipate such events and shifts and profit by investing in financial instruments whose prices are most directly influenced by these trends. Macro investing is perhaps the most publicized of hedge fund strategies, even though only a small percentage of hedge funds are macro funds. That's because macro hedge fund managers such as George Soros, Julian Robertson, and, formerly, Michael Steinhardt have made headlines for making highly leveraged, highstakes investments, often with great success. Most notable is when Soros bet $10 billion, much of it borrowed, in 1992 on the proposition that the British pound would be devalued. His investors reaped a $2 billion profit (and some believe his shorting of Sterling caused its drop and subsequent pullout of the European Monetary Union). 7. Market Neutral Investing:-An hedge fund investing strategy wherein the manager will take established positions in the market to take

advantage of mispricings of correlated or semi-correlated assets. Using this strategy for equity funds, the manager will have a portfolio equally divided between long and short positions. Statistical arbitrageor stat arbis an equity trading strategy that employs time series methods to identify relative mispricings between stocks. One technique is pairs trading. Pairs of stocks whose prices tend to move togetheri.e. they are cointegratedare identified. If the historical price relationship between them is ever violated, a long-short position is established in the two stocks in anticipation of the relationship being reestablished. The rationale is that the abnormal price move was a liquidity effect caused by a large buy or sell order for that stock, and it will reverse over time. Individual pairs will generally not be market neutral, but the overall portfolio of pairs can be managed to be market neutral. 8. Market timing:- It is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. This is an investment strategy based on the outlook for an aggregate market, rather than for a particular financial asset. Market timing is the source of at least half the alpha generated by hedge funds, according to a proprietary study* by investment management company Spring Mountain Capital (SMC) which is understood to manage around $2 billion in client assets. "The fund managers with the strongest long-term track records tend to be the ones that minimise the damage during big market declines. 9. Market Neutral - Securities Hedging:- Invests equally in long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns. Usually low or no correlation to the market. Sometimes uses market index futures to hedge out systematic (market) risk. Relative benchmark index usually T-bills 10. Opportunist:- An approach that seeks to produce the greatest possible returns by making aggressive investments in the most-efficient products at a given time. Such funds typically hold their investments for five to 30 days, based on the momentum of the investments' values. They usually experience low volatility. This style is similar, but not identical to the multi strategy style, in which the manager employs various predetermined strategies to diversify his approach to the market. The various strategies are employed simultaneously in the fund, but allocations to each of the various styles can vary over time. 11. Multi Strategy:- The investment objective of multi-strategy hedge funds is to deliver consistently positive returns regardless of the

directional movement in equity, interest rate or currency markets. In general, the risk profile of the multi-strategy classification is significantly lower than equity market risk. By definition, multistrategy funds engage in a variety of investment strategies. The diversification benefits help to smooth returns, reduce volatility and decrease asset-class and single-strategy risks. Strategies adopted in a multi-strategy fund may include, but are not limited to, convertible bond arbitrage, equity long/short, statistical arbitrage and merger arbitrage. Shifting risk to more than one fund and/or strategy reduces the risk of the overall investment programme. The value in multistrategy funds is providing the hedge fund manager with the flexibility to capitalise on the best opportunities in his varied skill set. Peter Rosenbauer, a managing director at BlackRock, which runs multi-strategy hedge funds and funds of funds, said: Multi-strategy funds tend to be bigger than single-strategy funds and therefore better resourced. They may have better relationships with the street, which may improve idea generation and pricing. In august 2011, assets in multi-strategy hedge funds crossed US$300 billion to reach record highs. 12. Short Selling:- short selling or "shorting" is a way to profit from the decline in price of a security, such as a stock or a bond. In contrast, investors who "go long" with an investment hope the price will rise. Including short only in a total portfolio smooths volatility and reduces total risk, EVEN if the long term performance from the short only component itself is poor. A few countries dont allow short selling by hedge fund managers.

MAJOR HEDGE FUNDS


BRIDGEWATER ASSOCIATES

Bridgewater Associates is an American investment management firm founded by Ray Dalio in 1975. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments and central banks. It utilizes a global macro investing style based on economic trends, such as inflation, currency exchange rates, and U.S. gross domestic product. Bridgewater Associates began as an institutional investment advisory service, graduated to institutional investing and pioneered the risk parity investment approach in 1996. It manages approximately 120 billion dollar in global investments. According to Dalio, Bridgewater Associates is a "global macro firm".It uses "quantitative" investment methods to identify new investments while avoiding unrealistic historical models. Its goal is to structure portfolios with uncorrelated investment returns based on risk allocations. The company divides its investments into two basic categories: 1) Beta investments, whose returns are generated through passive management and standard market risk, and 2) Alpha investments, whose goal is to generate higher returns that are uncorrelated to the general market and are actively managed. The principle of separating alpha and beta investments was introduced by Dalio in 1990 The firm offers three hedge funds to its clients: the Pure Alpha fund, the All Weather fund and the Pure Alpha Major Markets fund. It also publishes a white paper, called the Daily Observations, which is read by investors worldwide on a subscription basis.[44] In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the worlds largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewaters rivals, the firms flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well. Pure Alpha Bridgewater Associates launched its flagship fund, Pure Alpha, in 1989. The fund is described as a "diversified alpha source" that invests across a group of asset classes.[5] It was designed to balance risk amongst a variety of non-correlated assets through active management.[45] It includes 30 or 40 simultaneous trading positions in bonds, currencies, stock indexes and commodities to avoid affecting prices by concentrating funds in a single area.[46] After placing some of the company's excess cash into the Pure Alpha hedge fund to increase its "investing discretion".[8] The fund was closed to new investors in 2006 when it reached its pre-determined, maximum funds level.[47] As of 2011, the fund is reported to have lost money in only three of its 20 years of existence and had an average annualized return of 18 percent.[9] The success of Pure Alpha is reportedly due to a portable alpha management style that trades among many asset

classes. It has generated outstanding returns in the last twenty years with especially impressive performance since the Fall of 2008. All Weather A second fund, called All Weather, was launched in 1996 and highlighted low fees, global inflation-linked bonds and global fixed-income investments. The fund began as the founder's personal trust fund and was subsequently opened to clients.[33] The goal of the fund was to create "high, risk adjusted returns" that exceeded the return of the general market.[33][48] The All Weather fund contains more than $46 billion and is one of the largest funds in the U.S. as of 2011.[49] In April 2009, after the collapse of Lehman Brothers, the fund moved into "safe portfolio" mode which included nominal and inflation-linked bonds and gold instead of equities, emerging market debt, and commodities. The fund is reported to contain 40% inflation-linked bonds, 30% Treasury bills, 20% Treasury bonds and 10% gold.[50] According to Morningstar research, in three recent down markets Bridgewater's active All Weather 12 percent fund had returns ranging from 5.31 percent to 9.85 percent.

Pure Alpha Major Markets Under the guidance of co-CEO, Jensen, the firm created the Pure Alpha Major Markets in 2011 with $2.4 billion from existing clients.[51] In the summer of 2011 the fund was opened to a group of outside investors who had made a total advance commitment of $7.5 billion. At that time, it was reported to be the largest hedge fund launch. The fund was established to provide an investment vehicle similar to the company's Pure Alpha fund but with enhanced liquidity by focusing on the major markets such as European bonds.[13] The launch of this fund in 2011 brought the companys total assets under management to more than $100 billion.[52] The new fund has returned about 11% so far this year, the same as the older Pure Alpha fund, while the average hedge fund returned 2%, according to Hedge Fund Research Inc.

Soros Fund Management


Soros Fund Management LLC is an American, privately held, hedge fund management firm founded in 1969 by George Soros. In 2010 it was reported to be one of the most profitable firms in the hedge fund industry averaging a 20% annual rate of return over four decades. Soros Fund Management is the primary adviser for the Quantum Group of Funds; a series of funds dealing in international investments. In the week leading up to September 16, 1992 or "Black Wednesday", Quantum Funds earned $1.8 billion by shorting British pounds and buying German marks. This transaction earned Soros the title of "the Man Who Broke the Bank of England". It owns stakes in oil exploration firm Hess Corporation and Ford Motor Company. Other investments include containership owner Global Ship Lease, retail site Bluefly, and Lattice Semiconductor. In 2011 Soros Fund Management announced that it would close itself to outside investors and focus solely on managing the money of Soros and his family.

BREVAN HOWARD

Brevan Howard is a global alternative asset manager, managing significant institutional assets across a number of diversified strategies. Brevan Howard has offices in St Helier, London, Geneva, Hong Kong, Tel Aviv, Washington and So Paulo. It was founded in 2002 by former members of the Credit Suisse First Boston Developed Market Rates trading team, led by Alan Howard, former head of interest-rate derivative trading at CSFB. Investor Information: Total AUM ($MM): 32,000 Equity AUM ($MM): 264 Investment Style: Global Macro Orientation: Active Brevan Howard Asset Management's Top 10 Equity Holdings (as of 2011-06-30)

Company (Ticker) iShares MSCI Emrg Mkt Income (EEM) Barrick Gold Corp (USA) (ABX) Microsoft Corp (MSFT) Intel Corp (INTC) Berkshire Hathaway Inc (BRK.A) iShares FTSE/Xinhua China 25 (FXI) Newmont Mining Corp (NEM) Cisco Systems Inc (CSCO) CME Group Inc (CME) Google Inc (GOOG)

Value ($MM)

Shares

Change % Out 660,000 0.12 560,000 0.08

51.41 1,080,000 34.14 753,900

32.37 1,245,000 1,245,000 0.02 32.28 1,456,750 1,010,000 0.03 26.94 19.65 17.02 8.12 5.98 4.81 232 457,500 315,389 520,000 20,505 9,500 0 0.01 267,500 0.05 172,000 0.07 520,000 0.01 20,505 0.03 9,500 0.00

In 2010, Brevan Howard had safely navigated the credit crunch and boosted assets under management to surpass $32 billion, retaining its lead among European single manager hedge funds and pushing it to number four globally. In 2011,the $26.4 billion Brevan Howard Master Fund Ltd. returned a solid 10.8 percent for the 10 months ended Oct. 31, ranking the fund No. 20 in the Bloomberg Markets ranking of the 100 best-performing hedge funds. The firm had three other funds on the large-fund list: the $1.7 billion Brevan Howard Asia Master Fund Ltd., at No. 31 with a 7.2 percent return; the $1.3 billion Brevan Howard Multi- Strategy Master Fund Ltd., tied at No. 43 with a 5.5 percent return; and the $2 billion Credit Catalysts Master Fund Ltd., tied for No. 74 with a 3.2 percent return.

The master fund has the flexibility to invest in a wide range of instruments, including but not limited to, debt securities and obligations that may be below investment grade or not rated, bank loans and listed and unlisted equities. It also can invest in other collective investment schemes, currencies, commodities, futures, options, warrants, swaps and other derivative instruments.

Long-Term Capital Management


Long-Term Capital Management L.P. (LTCM) was a speculative hedge fund[2] based in Greenwich, Connecticut that utilized absolute-return trading strategies (such as fixed-income arbitrage, statistical arbitrage, and pairs trading) combined with high leverage. The firm's master hedge fund, Long-Term Capital Portfolio L.P., failed in the late 1990s, leading to a bailout by other financial institutions, under the supervision of the Federal Reserve. Initially successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis requiring financial intervention by the Federal Reserve Bank, and the fund closed in early 2000. The company used complex mathematical models to take advantage of fixed income arbitrage deals (termed convergence trades) usually with U.S., Japanese, and European government bonds.

NEWS
Hedge funds launches surged in 2011
* Year saw most hedge fund launches since 2007 * Average hedge fund lost 5 pct last year * Liquidations slightly higher By Katya Wachtel March 13 (Reuters) - The number of new hedge funds surged last year to the highest level since 2007, despite one of the most miserable annual performances in the industry's history, according to data released on Tuesday. The number of new hedge funds totaled 1,113 in 2011, according to fund tracker Hedge Fund Research. While that figure did not eclipse the 1,197 launches in 2007, it was the most openings since the financial crisis.

"Despite performance volatility and macroeconomic uncertainty in the second half of the year, investors maintained a strong commitment to hedge funds," said Kenneth J. Heinz, president of HFR. In a year when the average hedge fund lost about 5 percent - only the third calendaryear decline for the industry since 1990 - liquidations rose slightly, from 743 in 2010 to 775 in 2011. The S&P 500 index ended the year roughly flat. Many equity hedge funds, which bet on stock prices rising and falling and lost about 8 percent in 2011, shut down last year. At 293, it was the highest number of closures of that type of fund since 651 in 2008. Despite those losses, the majority of 2011's launches were in funds that specialize in stocks. With 479 new equity hedge funds, it was the most launches in that strategy since 2006. Other than equity hedge funds, most new funds launched in the macro space - betting on price moves in equity, currency, interest rate and commodity markets. Such launches totaled 265, the most in that strategy since HFR began keeping track in 1996. (Reporting By Katya Wachtel; editing by John Wallace) .

Few hedge funds gain in Greek bond saga


By Sam Jones It was a high-risk, speculative bet in Greeces tumultuous bond market: a wager that would pay off if the Greek government faltered in its landmark bond restructuring at the final hurdle. The gamble was thought to have been popular among the hedge fund denizens of wellheeled Mayfair and leafy Connecticut that Greece would be forced into an embarrassing repayment of its 14.4bn March 20 bond. But it was taken, at great cost, by Teaypoik, a Greek pension fund, overseeing the retirement funds of, among others, white-collar workers in the ministry of finance.

For hedge fund managers, who for months have been said to have had their fingerprints all over the Greek crisis be it through bond market machinations such as buying the March 20 bond, or efforts to drive up prices on credit default swaps it is something of an ironic, if grim, vindication.

Few winners have emerged from the world of trading in Greek bonds, where some of the speculators have turned out to be banks, insurance companies and even pension funds, and the cash-keen risk avoiders, for the most part, the high-rolling hedge funds. The completion of the bond restructuring on Monday has been welcomed in all quarters, but with an overriding sense that disaster has been averted, rather than fortunes made. [The outcome] is pretty much as expected [Greece] should fade as an issue for a period of time, says the head of one multi-billion dollar macro hedge fund, a specialist in trading around global economic events. [The restructuring] has gone more or less as expected, echoes another hedge fund manager, who focuses more narrowly on trading debt. Obviously the triggering of the CDS, which wasnt certain, was pretty eventful, he adds. Though it looks like thats going to go smoothly too. So where were all the hedge fund sharks? One clue lies in the data on the total net notional value of CDS written against Greek bonds. A value of zero would indicate that, overall, the credit default market where CDS are traded as protection against such an event was balanced, with an equal value on contracts betting for and against default. The total net notional CDS on Greek bonds has been on a steady downward slide for the past two years, having peaked in late 2009. In aggregate, the CDS market has gone from being directionally short Greece, to being more neutral. Part of the reason would appear to be that hedge fund managers, who had driven the speculative spike in CDS positions in 2009, began to close their shorts in 2010 and 2011 by either buying Greek bonds, or else writing CDS protection to new, less far-sighted investors who had suddenly woken up to their over-exposure to potentially toxic peripheral eurozone debt. More recently, however, it has been market volatility that has kept hedge funds away. Managers havent really had the ability to put on significant directional positions, explains Andrew McCaffery who runs a $5bn portfolio of investments in hedge fund managers for clients at Aberdeen Asset Management. Where anyone has made any money, it has been incremental.

One trade that has worked for some hedge funds has been in exploiting the difference between Greek bond and Greek CDS prices. In January there was a very decent basis between CDS and some bonds, says Galia Velimukhametova, head of GLG Partners European distressed debt fund. The arbitrage has since closed. Longer-dated bonds were trading for significantly less than shorter-dated bonds, reflecting the views of investors such as Teaypoik. Prices were inverted, says Ms Velimukhametova, allowing some funds to construct low-risk trades designed to profit from them equalising in the event of the restructuring playing out to schedule. Beyond the Greek market itself, Greek bonds, trading at highly distressed prices, have also become attractive as a hedge for funds looking to profit from further deterioration in the prospects of other peripheral European bond markets. Most hedge funds have moved on from any directional trades on Greek debt some time ago, says Jeff Holland, managing director at fund of hedge funds Liongate, but there are funds buying them for trades between Greek debt and other European sovereigns, he adds. Greek bonds offer short-term protection for traders looking to express negative views about the pricing of other European peripheral debt, such as that of Portugal, Spain or Italy. Having fully priced in a restructuring, Greek bonds are unlikely to sink further in price, traders reason. Holding them alongside a short position against, say, Portuguese bonds, protects against Europe-wide upside risks, without limiting the downside opportunity. In the long term, however, few in the hedge fund community have any doubt that Greeces travails are far from over. Greece has undertaken its first debt restructuring, but there may well be more.

Hedge funds
Jan 31st 2012, 12:01 by The Economist online

TOTAL hedge-fund assets under management ended 2011 a smidgen over $2 trillion, according to Hedge Fund Research, having fluctuated around that figure throughout the year. Net capital inflows were over $70 billion, half of which was allocated to relative-value strategies (mostly based on fixedincome instruments). The tough economic climate prompted investors to adopt a risk-averse attitude and seek quality assets. Relative value was the best-performing strategy, but even so it only managed to eke out a return of 0.5% (net of fees). Total returns in the composite index fell by over 5% in 2011, the second-worst year since records began in 1990. Equity hedge, macro and event-driven indices declined by 8.3%, 3.8% and 2.8% respectively. They attracted net inflows of $27.9 billion. A recent survey by SEI, a financial-services firm, found 38% of institutional investors expect to increase their allocations to hedge funds this year, down from 54% in 2010. Redemption notifications in January were at their lowest since 2008, when records began, according to GlobeOp, a hedge-fund administrator. This could be because they cannot get better returns elsewhere, or they learned a lesson from 2008 and decided not to liquidate at what they think might be a trough before a rebound. Alternatively, it may simply be a calm before the storm. Redemptions, which tend to occur on a quarterly basis, might not be reflected in asset flows for another few months.

Asia hedge fund startups falter, backers pull cash


Bloomberg / Mar 07, 2012, 00:05 IST

Asia-focussed hedge funds that were started with the help of a major backer after the 2008 credit crisis are shutting down as a shrinking pool of key investors makes it harder for them to raise capital. Isometric Investment Advisors Ltd decided in December to close after its largest startup investor said it would withdraw its cash. Black's Link Capital Ltd closed after its biggest investor, a USbased fund of hedge funds, pulled its capital last year, said two people with knowledge of the matter. New hedge funds that began trading after the collapse of Lehman Brothers Holdings Inc, including those run by refugees from investment banks, were expected to lead a revival for the industry. Instead, managers with more than $5 billion have lured the bulk of allocations, while a more recent crop of large startups are diverting investors from smaller competitors.

"Funds of funds have traditionally been early-stage investors," said Sam Tabar, head of AsiaPacific capital introductions at Bank of America Corp's Merrill Lynch & Co unit. "As this sector has retracted somewhat, it has made it more difficult for some managers to move from startup phase to critical mass." Institutional investors such as pensions, endowments and government bodies now account for two-thirds of hedge fund assets, instead of less than one-fifth in 2003, according to a Deutsche Bank AG hedge fund investor survey released last month. Assets managed by global fund of hedge funds shrank 21 per cent to $629.6 billion at December 31 from their peak in 2007, according to Chicago-based data provider Hedge Fund Research Inc. Funds of funds act as middlemen, pooling clients' cash and investing it with hedge fund managers they select. They have lost favor after many lost money in Bernard Madoff's Ponzi scheme, raising concern that they didn't adequately screen managers, and as investors sought to avoid paying another layer of fees. More than half of the fund of fund assets were controlled by 18 firms, each managing more than $10 billion, a Bank of America Merrill Lynch report said last month, citing data from Londonbased Hedge Fund Intelligence. This concentration benefits larger hedge funds, because funds of

funds and institutional investors allocating directly to single managers usually don't want to account for more than 10 per cent of the assets of the managers they choose. Investors allocated more than 70 per cent of the $70 billion new capital they added to the hedge fund industry last year to managers with more than $5 billion, HFR said in January. About 281 Asia-focussed hedge funds have been set up since the end of 2008, 95 per cent of which started with less than $100 million, according to Singapore-based data provider Eurekahedge Pte. About 74 per cent of them have failed to "significantly" expand assets and 14 per cent have since shut, it said. Criteria used by Eurekahedge to define "significantly" include average assets growth of at least $5 million a month, or total capital raising in excess of $100 million. Asia-focussed funds tracked by Eurekahedge oversaw $124.1 billion at the end of last year, 29 per cent less than the peak in 2007. They lost an average 8.5 per cent in 2011, underperforming the 4.1 per cent loss for hedge funds globally, according to Eurekahedge indexes. "All the smaller funds of funds who used to help and family wealth who used to help early managers grow are just not there," said Richard Johnston, Hong Kong-based Asia head of Albourne Partners Ltd, a consulting firm that advises investors on hedge funds, private equity and other alternative assets. "The gap between seed capital and getting to a good meaningful sustainable size of $500 million plus is a hard gap to plug." Albourne counted 22 Asian startups founded since early 2009 by experienced hedge fund managers and traders with at least $50 million of capital, said Johnston. Of those, four have closed because they failed to raise capital beyond that provided by initial investors, he said. Among funds still operating, five are "stuck at the launchpad" with less than $200 million and one dominant investor, five have raised more than $500 million, and four have more than $1 billion, he added, declining to identify the companies. "A lot of the seeders have got their timetables," said Johnston. "If you don't get big, they are probably just happy to cut their losses and move on." Asian hedge funds started last year by both new and existing managers raised $4.43 billion, the highest amount since 2007, according to a survey by trade journal AsiaHedge. The number included large startups such as former Goldman Sachs Group Inc proprietary trader Morgan Sze's Hong Kong-based Azentus Capital Management Ltd, which raised $1.06 billion when it started trading in April. Hedge fund liquidations in the third quarter last year reached the highest level since the final three months of 2008, according to a report last month from Eurekahedge. FRM Capital Advisors Ltd in London, which provided startup capital to Isometric in 2009, notified the Hong Kong-based fund of its intention to invest its money elsewhere after the

expiration of their two-year agreement, said Isometric's Chief Investment Officer Sanjiv Bhatia and Patric de Gentile-Williams, FRM's London-based chief operating officer. FRM accounted for about 80 per cent of Isometric's assets in December, said Bhatia. The fund, which wagered on Asian securities affected by mergers and reorganizations, lost 3 per cent since its inception in December 2009, said Bhatia, who was formerly head of Goldman Sachs's Asia equity trading desk and later ran Deephaven Capital Management LLC's Asian investments. De Gentile-Williams declined to comment on Isometric's performance. Black's Link Black's Link shut its fund in April, said the two people familiar with its operations. It was founded by former employees of Polygon Investment Partners LLP and managed about $90 million, with the biggest investor accounting for about 75 per cent of that, said one of the people familiar with the company. The event-driven fund made a single-digit loss in the year it traded, said the people, who asked not to be identified because the fund is private. Black's Link's co-founder Anthony Correa didn't reply to e- mails seeking comment. Hani Abuali, another co-founder, declined to comment. Pangu Capital in Hong Kong returned money in the fourth quarter and shut its fund 22 months after its inception following a decision by its main investor to redeem a large portion of its capital, a person with knowledge of the matter told Bloomberg in January. Assets of the fund, which traded stocks, convertible bonds and bonds in Greater China, peaked at $23 million, with the main investor representing the bulk of it, said the person. Man, FrontPoint Stanley Ku, former Hong Kong head of Fortress Investment Group LLC shut his own Minerva Macro Fund 10 months after its start in 2010, people with knowledge of the matter said at the time. He lost money on investments and its backer RMF Global Emerging Managers, a unit of Man (EMG) Group Plc, pulled its capital John Foo closed the first of his funds in 2009, said a person with knowledge of the matter, after Man, amid an internal reorganization, pulled its $50 million seed money. That investment had accounted for the bulk of the fund's peak assets of $70 million. He then moved on to run a more than $200 million Asia event-driven fund for FrontPoint Partners LLC from August 2009, with half of the money coming from the U.S. firm. The fund was closed in June after FrontPoint decided to liquidate most of its funds amid insider trading probes, the person said. Senrigan Succeeds Foo is starting another hedge fund under Kingsmead Asset Management Pte in Singapore that will trade stocks affected by company events such as mergers, privatization and divestiture of assets in Asia outside of Japan. He will start the new fund without a seed investor this time, said a person familiar with the fund's assets. Hubert Yong, Kingsmead's chief operating officer in Singapore, declined to comment.

Not all startups since 2008 have struggled. Senrigan Capital Group Ltd. (SENGRZ) in Hong Kong, founded by Nick Taylor, former head of Citadel LLC's principal investment business in Asia and Europe, started trading in 2009 with 67 per cent of its initial $150 million capital from Blackstone Group LP. (BX) Senrigan oversaw more than $1 billion at the end of last year from more than 50 investors, said a person with knowledge of the matter. Chris Nash, Senrigan's chief operating officer, declined to comment. Dymon Asia Capital, a Singapore-based manager, started its macro hedge fund in August 2008 with $113 million, the bulk of which from Tudor Investment Corp., the Greenwich, Connecticutbased hedge fund company founded by Paul Tudor Jones. Dymon's assets have grown to $2.5 billion from about 90 investors, said Willy Ballmann, its chief operating officer. The size and longer-term nature of institutional investors' allocations restricts the universe of funds they can pick from, said Max Gottschalk, Hong Kong-based co-founder of Gottex Fund Management Holdings Ltd. (GFMN) The Swiss company, which allocates $7.4 billion to hedge funds, invests about $300 million across 25 Asia-focused managers, he added. "The tolerance for under-performance is greater for larger managers than for smaller managers," Gottschalk said.

Chidambaram, the Hedge Fund Manager


February 23, 2010 02:22 PM

Home minister Chidambaram claims to have suggested that SBI should have bought Citibank in 2008 when its shares were going at $1. Wonder why he has

decided to dedicate his life to harassing tax payers and Naxalites, when we could have easily run billion-dollar hedge funds with his superb sense of timing. According to the finest minds in finance, you cannot time the market. Of course, there are exceptions. George Soros is one. He can ride up when a bubble is blowing and flip over when the bubble bursts. However, the market-timers are a rare breed, and run their own billion-dollar hedge funds. To this rare breed, one should now add Palaniappan Chidambaram, legal eagle, former finance minister and currently home minister of India. Speaking at a momentous occasion like the 54th Foundation Day of the All-India Management Association in New Delhi, he claimed to have told OP Bhatt, chairman of State Bank of India, in late 2008, Why dont you buy Citibank? Apparently, he had made this suggestion thrice. Citibanks shares were going at $1 a share. That is the time when we should have bought, he announced.

This is news to us and shows an unknown side of the home minister. In late 2008, when the largest of funds were struggling for survival; when the smartest of brains were worried that the world was headed for a second Great Depression; when the most liquid and deepest markets in the world were frozen and paralysed, the then finance minister was asking the SBI chairman, not once but thrice, to buy Citibank. This is a remarkable transition for someone who once famously said: I know Khan market. I dont know anything about the stock market.

Well, you can say hindsight is 20/20 (how right he was!), or you can admire the prudence of State Bank or you can wonder why Chidambaram has decided to dedicate his life to harassing tax payers and Naxalites, when he could have easily run billiondollar hedge funds with his superb sense of timing. But beyond that, several issues arise from Chidambarams statement. India does not have a liberal banking regime.

Foreigners cannot easily buy into Indian banks (ask Hong Kong and Shanghai Banking Corporation about its strategic stake in Axis. It had to sell the stake after a period of frustration). Well, for that matter, even Indians cannot easily buy into Indian banks. There are severe restrictions on ownership and voting rights. And here is the former FM suggesting that an Indian bank should buy Citibank when it was seen to be drowning in a sea of toxic assets! Indeed, can State Bank simply buy a major foreign bank even under normal circumstances? Would the prudent Reserve Bank of India have allowed it? By the way, under Chidambarams tenure as the FM, there were hardly any financial sector reforms. His regime will be better remembered for maddeningly complicated taxes and massive loan waivers.

Chidambarams suggestion to Bhatt was bold. But boldness in financial business is not necessarily prudent. After all, as the old Wall Street saying goes: There are bold traders. There are old traders. But there are no bold, old traders. But who can tell that to a Home Minister? Links referred:-
Wikipedia

www.Magnum.com http://richard-wilson.blogspot.in/2007/11/distressed-securities-hedge-fund.html http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategydefinition/hedge-fund-strategy-distressed-securities.html http://www.hedgefund-index.com/d_distressed.asp


www.opalesque.com/files/ManDistressed_investing_Final.pdf http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategydefinition/hedge-fund-strategy-emerging-markets.html http://richard-wilson.blogspot.in/2010/07/funds-of-hedge-funds-financial-crisis.html http://www.biostockspro.com/financial-crisis-cause-and-effect-on-fixed-income-hedgefunds/ http://www.hedgeindex.com/hedgeindex/documents/Credit%20Suisse%20Tremont%20 Research%20Reveals%20Resilient%20Emerging%20Markets%20Research%20Paper. pdf www.eurekahedge.com/news/03aug_archive_fixed_income.asp

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