HEDGE FUND NEWS
@ Thu 29 March 2007 : GMT

FINTAG COMMENT

An excuse often heard these days; "I'm stuck in traffic". Well today I am stuck in the swanky warehouse like airport lounge at Singapore with nothing but a blackberry to keep me company. Not wanting to suffer from RSI, my first draft newsletter is shorter than normal. Somewhere in this forest of news information there is a nugget to take away. Good luck in finding it.

Depressing Nuggets

Marc Faber Says U.S. Conditions Suggest `Start of Bear Market' (bloomberg)

Citigroup's Rhodes urges lending restraint - Crash Coming Soon (reuters)

Job Loss Fears - Will There Be A General Bloodbath? (hereisthecity)

Tasty Nuggets

Hedge Fund Assets Rise 30% to $2 Trillion Worldwide (bloomberg)

India To Open Door To Hedge Funds (forbes)

Cerberus Said to Offer Job to Home Depot Ex-Chief (dealbook)

Dutch bank favours Barclays bid (nytimes)

Rothschild family invests in Danish hedge fund (copcap)

Former Goldman Sachs exec sets up first hedge fund (hfmweek)

F&C welcomes proposals to allow greater access to alternative assets (easier)

Sapporo shareholders approve anti-takeover measures (reuters)

Former Delta trader launches China-focused L/S fund (finalternatives)

JP Morgan's Hailes to head up high-level risk group (legalweek)

Solengo plans to keep Hunter on short leash (finalternatives)

FED REMARKS

Wall Street reacts to Fed caution (bbc)
Uncertainty about the outlook for the US economy has increased, the US Federal Reserve chairman has said.

Ben Bernanke said that while troubles in the US housing market had not yet spread to the wider economy, the situation was being closely watched.

His comments unnerved investors, with the key Dow Jones index losing over 100 points on Wednesday.

That was despite figures showing US factory orders rising slightly in February, reversing January's fall.

'Uncertain'

"At this juncture ... the impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained," Mr Bernanke told Congress' Joint Economic Committee.

The troubles - which have hit some of the biggest mortgage lenders in the US hard - raised "some additional questions about the housing sector", he added.

"Near-term prospects for the housing market remain uncertain," Mr Bernanke said.

The Dow Jones index closed down 102.30 points, 0.83% at 12,294.99 while the tech-heavy Nasdaq lost 20.3 points, also 0.83%, to 2,417.10.

There are fears on Wall Street that both consumers and businesses will spend less as economic concerns take hold - with data from the New York-based Conference Board earlier this week suggesting consumer confidence had slipped in March.

However, Mr Bernanke noted that consumers had been "quite resilient" despite worries about house values and rising petrol prices.

And despite the uncertainty, the Fed felt that the economy would continue to expand at a "moderate pace", he said.

However he warned that while core inflation had slowed "modestly" in the second half of 2006, more recent readings were still "uncomfortably high".

Separately, Commerce Department data showed that orders for durable goods rose 2.5% last month, after January's steep 9.3% fall.

Despite the improvement, the latest figures were worse than expected and analysts remain concerned about the health of the US economy.

Factory orders are seen as a critical indicator of investment by firms, and a key way to measure economic growth.

Last month's orders were boosted by a 9.6% growth in orders for goods such as planes and cars.

A dramatic 88% rise in orders for commercial aircraft, including of Boeing, helped the strong figures.

HEDGE FUND MOVES INTO CAR PARTS

Cerberus pays $1bn for auto supplier (financialnews-us)
Cerberus Capital Management paid $1bn (€751bn) to buy an auto-parts supplier that just emerged from bankruptcy, adding to the hedge fund's empire of auto-sector acquisitions.

Cerberus bought Tower Automotive for $1bn. Lazard, which has specialized in restructuring troubled companies in the auto parts sector, was advising Tower on its restructuring.

Lazard also advised auto-parts makers Tower Automotive and Meridien on their restructuring plans. The bank worked with the United Auto Workers union in gaining concessions from General Motors and Ford Motor's auto-parts suppliers, including bankrupt Delphi Automotive which is owned by General Motors.

Last year, Cerberus led the consortium that bought a stake in General Motors Acceptance Corp. The firm has remained active in the automotive sector, last month co-leading an investor group that bought a $1.4bn private placement of Delphi stock. In February, Cerberus also bought the automotive flooring and acoustics business of Collins & Aikman.

HEDGE FUNDS HEDGE

Bad month for markets makes funds look good (financialnews-us)
Most styles collected falling money during a difficult period for traditional investors

“Be sure that your umbrella is upside down,” crooned Frank Sinatra in the song Pennies from Heaven, urging us to appreciate that raindrops help flowers to grow even if they make us wet. Most hedge fund managers collected falling pennies by the upturned umbrella-full during last month's market downturn, making a net return of 0.66% on average, while the Dow Jones world equity index fell 0.39% and other equity indices dipped further.

Long/ short equity outperformance



Hedge funds passed the test, according to Omar Kodmani, a partner at Permal, a fund of hedge funds manager with $30bn (€23bn) of assets under management.

But Tontine Associates' TFP fund, an $80m long/short equity fund focused on financial services, lost 12.12% of its investors' money last month and its general long/short equity overseas fund, with almost $1bn, lost 8.09%.

Managed futures funds, which rely on systems to determine their trading, lost 4.38%, according to data provider Credit SuisseTremont. AHL diversified futures, the flagship fund of UK-listed company Man Group, fell 2.4%.

A reluctance to use short selling caught out managers when the market correction began on February 27 and the Dow Jones investable long/short equity index fell 2.32%, only 0.18% less than the Dow Jones World index.

But consultants said they had seen no disasters among hedge fund managers. Those that lost money were aggressive funds where volatility was normal. Many had been waiting for a correction and made money.

Almost every hedge fund strategy generated positive returns last month. Those invested in distressed securities or emerging markets, or following an event-driven strategy trading on news of takeovers or restructurings, were unaffected by the downturn.

Kodmani was pleased with the performance. Hedge fund marketers have been disappointed by how slow institutional investors, particularly in the UK, have been to take up the asset class and three years of indifferent returns have not helped. If last month's pattern continues, investors might come to appreciate hedge funds in the same way they did in 2001 and 2002, when the funds made gains amid a sustained fall in equities.

He said: “I think it would take another three to six months of hedge funds making money in a bear market before people come to appreciate their value in the same way again.”

Jacob Schmidt, founder of investment consulting firm SFP International, said February's performance was not good enough: “Being up 1% or 2% in a market correction is not a lot. What are they going to do in March with the markets in recovery?” He blamed institutional investors, which tend to remove their capital if volatility is too high, driving many managers to pull in their horns: “Hedge funds have become a substitute for bonds. There are some fantastic hedge funds that made 30% or 40% last year, but they are not marketing to institutional investors. Many of them do not want more money - they want to preserve their returns.”

A fund of hedge funds manager said he regretted the losses made by managed futures funds: “Systematic traders were whiplashed. This was the only weak area in February. Volatile returns come with the territory of managed futures funds, but you want them to do well when everything else is going down and they didn't this time.”

He said managed futures funds had been hit by a high degree of correlation across the markets in which they trade, which itself was partly due to low liquidity.

David Harding, founder of $8bn Winton Capital, a managed futures firm that lost 5.5% last month, said: “Managed futures are volatile; we expect to go down 10% in a month once every two years and last month was business as usual. But the strategy has been around for 20 years and made money.”

A Man Group spokesman said it had sold its funds with an investment horizon of eight to 12 years.

ADMINISTRATORS GROW ...

LaSalle Global Fund Services launches in Europe (icf)
LaSalle Global Fund Services' European arm - based in Dublin's International Financial Services Centre - is now operational and open for business.

The announcement comes just weeks after LaSalle Bank, a North American subsidiary of ABN AMRO Bank, revealed plans to further expand its global structured finance services business with the launch of LaSalle Global Fund Services in the US.

As an established global Commercial Mortgage Backed Securities (CMBS) trustee and the second largest global provider of Collateralised Debt Obligation (CDO) trustee services, LaSalle Bank boasts considerable expertise in the structured products and securitisation industry.

Speaking with ICFA, Morgan Downey, managing director of LaSalle Global Fund Services Europe, said the move into fund services was a response to demand from existing clients, and identified the bank's long track record of working with CDO's and Collateralised Loan Obligations (CLO) as one of LaSalle's key differentiators. “The existing providers find it difficult to service CDOs and CLOs - they can be awkward to price, track and administer. We have a real depth of inhouse expertise that we can leverage with regards to these instruments,” he said.

“A growing number of hedge funds are looking at utilising CDOs, CLOs and asset backed securities within their portfolios, and I think we have an edge in this area,” said Downey.

While acknowledging the bank's expertise with structured products, Downey says LaSalle will service the full range of fund types and strategies. He sees an initial opportunity to establish LaSalle as a premium brand administrator for small to mid-sized funds with anything in the region of $200-300m in assets under administration, though there is no lack of ambition.

LaSalle has chosen Advent's highly regarded Geneva and Partner platforms to support investment accounting, administration and reporting, and raided rival service providers to recruit an experienced management team. In addition to Downey, previously a managing director with Fortis Prime Fund Solutions Bank, LaSalle Global Fund Services Europe's top team is comprised of Fortis alumni Suzanne Keane, head of fund accounting and client management; Joanne Gill, head of operations; Barry O'Brien, head of business development; and Peter Igoe, head business analyst. Marion Moran, head of shareholder services, joins from HSBC, where she was responsible for transfer agency services in Ireland.

The organisation currently employs 14 people in Dublin, with plans to double that figure both this year and next to reach a head count of 70 by the end of 2008. Commenting on the business, Downey said: “We have the clout and financial muscle to invest in both technology and personnel, and are able to service large and complex fund structures from day one. Our intention to build a robust and scalable business focused on client service and product delivery.”

In addition to operations in Europe, LaSalle Global Fund Services offers fund administrative services in Chicago and is planning to launch an Asian operation later in 2007.

...AND SO DOES ADVENT

Advent Forms Marketing Alliance With J.P. Morgan FCS for Geneva(R) (pr)
dvent Software, Inc., , the leading provider of solutions to the global investment management industry, today announced a new alliance with J.P. Morgan FCS Corp. (FCS), the leading provider of technology solutions to the leveraged loan market, to complement the credit derivatives support functionality of Geneva(R). The two companies have agreed to jointly develop and market technical integration between Geneva(R), Advent's investment management and accounting platform, and Wall Street Office, FCS' suite of products for the administration, accounting and reporting of bank loans.

Advent is firmly committed to keeping Geneva(R) at the forefront in supporting complex derivative instruments, and the use of bank debt in alternative investment strategies has grown enormously over the past several years," said Chris Momsen, Vice President and Co-Head, Advent Global Accounts. "The integration of Wall Street Office, along with recent enhancements to Geneva(R)'s core bank debt functionality, will provide our clients with a comprehensive system for the accounting and administration of these instruments."

As part of the agreement, Advent is developing a Wall Street Office integration component within Geneva(R)'s workflow management toolset, allowing clients to automatically assimilate all bank loan activities directly from Wall Street Office into Geneva(R) to produce consolidated reporting and full financial accounting. Geneva(R) clients benefit from complete straight- through processing (STP) and validation for bank debt trades, including trade processing and settlement, reconciliation, documentation and loan maintenance.

"We have many clients and prospective clients in common with Geneva(R), and this agreement will ensure that the integration between our systems is easy for our joint clients to implement and manage," said Mark Murray, President of J.P. Morgan FCS. "We are excited to be working with Advent, a leader in the alternative investments space, to create a best-of-breed integrated offering for bank debt."

The collaboration is part of Advent's ongoing commitment to provide the industry's leading and most complete integrated suite of products for investment managers.

About Wall Street Office

Wall Street Office is a suite of products for the administration, accounting and reporting of bank loans, bonds and other investments. This comprehensive system is designed to facilitate the management of portfolios and structured deals more efficiently and effectively, with functionality tailored to the asset types found in structured deals, as well as compliance reporting specific to each structure. The software is currently used to manage more than $300 billion in assets and provides access to real-time data.

About J.P. Morgan FCS

Headquartered in Dallas, J.P. Morgan FCS Corp. provides software and services that help increase the efficiency and accuracy of trading, tracking and managing more than $300 billion of syndicated bank loans, high yield bonds, and equities. The company operated under the name Financial Computer Software until its acquisition by JPMorgan Chase Bank in November 2003. For more information please visit http://www.fcsoft.com/

About Geneva(R)

Geneva(R), a global investment management and accounting platform, is a proven solution for asset managers, hedge funds, fund administrators, prime brokers, and mutual funds that require a high level of operational efficiency and easy access to real time data. Geneva(R)'s comprehensive instrument coverage, full financial general ledger, and industry-standard integration tools enable firms to manage complex investment vehicles, multiple investment strategies, and tiered fund structures. Geneva(R) has over 100 clients globally, including eight of the top ten global prime brokers, eight of the top ten fund administrators, 15 of the world's largest hedge funds, and many of the largest and most prestigious financial institutions in the world.

About Advent Software

Advent Software, Inc., a multi-national company, has been providing trusted solutions to the world's leading financial professionals since 1983. Firms in more than 60 countries use Advent technology and manage investments totaling more than US $14 trillion. Advent's quality software, data and services enable financial professionals to improve service and communication to their customers, allowing them to grow their business while controlling costs. Advent is the only financial services software company to be awarded the Support Center Practices certification for being a world-class support organization.

MANAGED ACCOUNTS FOR MORONS

Hedge Funds and Managed Accounts: A Discussion (informationarbitrage)
My friend and fellow blogger Yaser asked me the following question: "I would love to hear your opinion on Managed Accounts and whether they improve transparency and other pros/cons of HF investing." While I find it flattering and humorous that anyone would "love" to hear my opinion on anything, I think the question is deserving of a response, for what it is worth. Yaser also forwarded me the results of an August 2006 survey from Terrapinn Ltd. concerning managed accounts, and suggested I take a look at it as well. The results of this survey are predictable: many Institutional Investors don't invest in hedge funds due to lack of transparency; many would be more inclined to do so if there was greater transparency; and a significant number are considering investing in hedge funds via managed accounts in the future. Yeah, whatever. So what is the straight dope on managed accounts? Here it is.

So what is a managed account, exactly? A classic hedge fund managed account has the following characteristics:

The investor owns actual assets via the managed account, not simply LP interests in a pool of assets;
The hedge fund manager is an advisor to the managed account;
The investor has full transparency into the assets being managed;
The investor generally has liquidity superior to the LPs in the main fund;
Running a managed account is an operational and logistical hassle for a hedge fund manager; and
Most hedge fund managers will require a sizable capital commitment in order to accept a managed account.
This presumes, however, that a hedge fund manager is willing to run a managed account under any circumstance. Many top managers simply won't, or only run managed accounts for legacy investors for whom they do it as a courtesy (as they may have originally helped them get their start, etc.). Why are managed accounts viewed with such disdain by managers, while they are clearly desired by Institutional Investors? Principally, because:

They are an operational pain, requiring discrete resources for their proper management which reduces returns;
They often provide a window (read: transparency) into a portfolio and trading strategies that managers find undesirable;
They often come along with preferential liquidity rights for their owners which managers don't want to give;
They often create asymmetry with the main fund, as managed account holders may want portfolios run pursuant to their unique portfolio objectives and/or risk parameters; and
They create unnecessary and unwanted complexity in to manager's operations when they simply are not needed.
There is a supply and demand imbalance for top hedge fund managers, where the demand for their product far outstrips supply. Therefore, there is absolutely no incentive for these managers to take on managed accounts. And they won't. So which managers are offering managed accounts? Not the top managers. Frequently emerging managers or those for whom asset gathering has been a problem. Remember the S&P investable hedge fund index? It failed. Managed account platforms run by big banks are challenging by their nature, because frequently the only funds willing to accept the rigid parameters of the program are, quite simply, not the best. Therefore, there is, to a degree, structural adverse selection when it comes to managed accounts. Those who are willing to run them are simply not the best, because they need to accept them to raise assets. Top managers don't, and want all their investors to be fund investors with homogeneous (and painfully rich) terms. This makes life easy.

So ultimately it is up to the Institutional Investor to vote with their feet:

Is gaining transparency worth the possibility of giving up returns? or
Is it best to simply avoid hedge funds altogether and accept that the asset class won't be available to me? or
Should I sacrifice my transparency guidelines on a small portion of my portfolio in order to gain exposure to top hedge fund managers in the hope of generating true alpha?
While 1 is clearly stupid, either 2 or 3 are perfectly reasonable and valid choices, IMHO. But the punch line remains:

Those who think the flood of Institutional assets into the hedge fund space wanting greater transparency will force the use of managed accounts on top managers are on crack. It just won't happen.

I think transparency can be a beautiful thing - depending on the context. But for most high quality hedge fund managers (and for many investors as well), transparency is NOT considered a good thing, and it will be those most in need of assets (read: novices or B-type managers) who capitulate to such demands. Now is this any way to invest? Maybe if you are seeding new funds. Otherwise, choose another asset class.