Just like any other industry, competition combined with poor results is forcing hedge funds to charge less for their services to entice customers.
The current fee structure, known as 2-and-20, for the 2 percent fee charged on the total number of assets managed, and for the 20 percent of return managers take as their share of the profits. These high fees have long been a bone of contention between managers and their clients, but as more funds close and performance of these funds is in the doghouse, many investors are demanding more reasonable fees.
“Looking forward, you’ve seen this huge trend on average fee-collecting for hedge funds declining. That trend is strong and it’s going to continue going forward,” said Donald Steinbrugge, managing partner of Agecroft Partners, an industry marketing firm. “There’s going to be pressure on new funds coming out to be in line more with a 1½-and-20 model than a 2-and-20 model.”
The National Pension Service of South Korea, the third-largest pension fund in the world, chose to US-based funds to invest their money. The funds are BlackRock Inc and Grosvenor Capital Management, to manage investments in funds of hedge funds this year.
NPS will give each firm as much as $500 million, according to the pensions fund’s investment management office.
“The upcoming hedge fund investment is expected to contribute to the generation of stable profits by diversifying risk for the fund’s entire portfolio,” NPS Chief Investment Officer Kang Myoun-wook said.
The NPS is valued at about $415 billion in AUM as of December, 2015.
The decision of Britain to leave the EU has left uncertainty and confusion in its wake. This is especially true of financial firms, such as hedge funds, which rely heavily on the opportunities investing in the unified marketplace of Europe afford.
A survey done by the research group Preqin tried to gauge the reaction of alternate asset managers to the British decision to exit the EU. They asked 142 such firms and found that 7 percent are considering a move out of Britain. An additional 17 percent have not yet decided if a move would be a good idea or not.
London has always been a popular city to headquarter hedge funds and private equity groups interested in trading in the European marketplace. Managers are worried that if the UK ends up leaving the EU without making a deal in which they can easily participate in the single market of Europe, that they will have compromised their businesses.
Head of executive reward for Europe at Hay Group Carl Sjostrom, said a large number of alternative asset managers were thinking about expanding their presence in the EU so that they can continue distributing funds in Europe.
“It is probably healthy for asset managers to be broader in their marketing efforts. They have relied too much on [investors] coming to London with their money. I think Brexit will dampen the London marketplace so British firms need to become more agile and innovative,” Sjostrom said.
Putting his money where his outspoken mouth was, British hedge fund manager Crispin Odey reaped the benefits of his lonely position when his compatriots voted to leave the European Union.
“I feel fantastic. It’s a fantastic decision by the electorate,” Odey said when he heard the news that the UK voted to exit the EU.
Odey was not shy about his support for the Leave campaign, and he backed up his opinion with many short positions. Those positions paid off quite well as the markets began falling in response to the news.
His most important shorts were intu Properties and Berkeley Group, which fell by 11 percent and 27 percent, respectively on the day of the vote, profiting Odey with a nice payoff of £220 million, and including a 30 percent fall in his fund, leading up to the vote.
He had a clear strategy in mind: He put about 65 percent of his funds assets into gold, which rose after the vote when investors took to safety in the storm. He put the rest of his fund into shorting sterling and Japanese bonds.
“This is a good day for me. I was brave. I had a lot of clients who were angry with me but they won’t be quite so angry this morning. Life is not about being un-brave at the right time. We in the City have certain skills,” Odey added.
Today’s graduates of MBA programs are avoiding hedge funds as their next step. Instead they are choosing private equity firms and startups to make their mark on the business world.
In a survey conducted by Training the Street, a company that gives technical training to Wall Street firms and business schools, startups and private equity firms are seeing a larger number of MBA students naming them as their preferred work choices upon graduation. There is a simultaneous decline in MBA grads choosing hedge funds as their go-to work destinations.
Part of the decline could be due to less aggressive recruitment of MBAs by hedge funds. The survey showed that there was a 3 percent decline in hedge fund recruitment from the previous year. Recruitment by private equity and startups increased by 4 percent and 6 percent respectively.
In general, the newly minted students seem to feel confident that their futures are bright. Over 85 percent said they were at least a little bit optimistic about job prospects when they were finished with school. Since the majority said that they had more than one job offer with starting salaries at six figures, it is easy to see why they are feeling happy.
As we arrive at the end of 2016’s second quarter some hedge funds are rethinking their positions on the direction of the US dollar. The early days of the year brought precipitous falls in the value of the dollar, sending many investors to unload their stakes in greenbacks.
Recent data have shown a serious sea-change in investor confidence in US currency, with bullish bets by macro hedge funds. Funds with both long and short term strategies which are based on broad economic or political expectations on individual countries have increased their bets to the highest level since early February this year.
Investment on continued improvement of the strength of the dollar has risen by about $12 billion, says the Commodity Futures Trading Commission.
“The medium- to longer-term dollar trend is still likely higher, particularly against other developed currencies, as opposed to many of the [emerging-markets currencies], which have already been beaten to a pulp,” said Philip Simotas, chief operating officer at ROW Asset Management.
The same hedge fund firm that successfully sued Argentina has now set its sights on Mossack Fonseca, a law firm Elliot Management accuses of helping their Argentine clients hide money while they were going after Argentina to pay up on their defaulted bonds.
The law firm has been the center of the Panama Papers scandal, and now it is facing a new attack on a new front.
Elliot filed their lawsuit in a Nevada court at the end of May. The suit accuses Mossack Fonseca of setting up anonymously-owned firms and trusts for their clients who often look to hide their funds off-shoe from tax collectors and other government bodies.
The Panama Papers, which were stolen from the law firm and published in April, the law firm was shown to have created such under the radar accounts for over 200,000 clients.
The lawsuit states that while Elliot was tracking down its claims against Argentina in 2014, NML Capital, Elliot’s division, tried to solicit help in identifying and tracing assets that were tied to some shell companies registered in Nevada.
The documents “reveal that MF Nevada and Mossack Fonseca knowingly, willfully, and wrongfully obstructed NML’s discovery efforts and attempted to impede the court’s proper exercise of its jurisdiction,” the lawsuit said.
The lawsuit was filed only weeks after Argentina gave up its 15-year-old fight against NML and other hedge funds. Argentina agreed to pay off their bonds in a multi-billion-dollar deal which earned NML large profits. Argentina called NML a “vulture” since it bought its defaulted debt at a huge discount, and then sued the embattled country for full payment.
Some hedge funds have reason to celebrate after a year of bad news. A deal valued at about $1.5 billion was cut between Jazz Pharmaceuticals and Celator Pharmaceuticals. Dublin-based Jazz agreed to purchase the Ewing, New Jersey-based Celator for $30.25 per share. As a result of the announced deal, Celator stock climbed a respectable 70 percent, last trading at about $29.93.
Compared to some other deals, this biotech merger and acquisition deal is small, but it means a lot to the hedge funds that placed their bets earlier in the year.
Celator was on the top of Goldman Sachs’ list of stocks that had “the largest increase in hedge fund concentration” during this year’s first quarter. Ranking number one means that 18 of the 841 hedge funds which Goldman tracks had a stake in the stock.
Celator became notable when its lead product, VYXEOS, a treatment for acute myeloid leukemia, went to clinical trials. Soon thereafter, in mid-March, the company announced it saw “statistically significant improvement in overall survival” after Phase 3 trials. Currently the company is getting ready to submit a New Drug Application at the US Food and Drug Administration.
Some of the hedge funds with shares in Celator (according to 13F filings) are:
- Visium Asset Management: 1,450,000 shares
- venBio Select Advisor: 1,416,257 shares
- Ra Capital Management LLC: 1,414,114 shares
- Perceptive Advisors: 1,100,000 shares
- Adage Capital Partners: 850,000 shares
- BVF Inc.: 800,000 shares
- First Eagle Investment Management: 741,000 shares (added 128,400 in Q1)
- Millennium Management: 643,802 shares
- Cormorant Asset Management: 620,000 shares
- EAM Investors: 549,455 shares
In a controversial move Connecticut is offering one of the world’s largest hedge funds, Bridgewater Associates, $22 million in exchange for the firms promise to invest $525 million in the state through job creation and facilities upgrades.
The incentive is part of the Connecticut Department of Economic and Community Development’s First Five program, which is designed to stimulate investment by major employers in the state.
“I still think that if we look at this from a taxpayer perspective and I view myself as a fiduciary of their dollars, that they’re going to get a great return on this investment” said Catherine Harris, the Commissioner of DECD.
The $22 million includes $2 million for job training, $3 million for renewable energy development, and $17 million in a loan, in the form of bonds. In exchange Bridgewater must keep the 1,402 jobs they already support at their Westport headquarters plus create 750 more jobs by 2021.
Also part of the deal is the company will be eligible for $30 million in Urban and Industrial Sites Reinvestment Tax Credits over the next ten years.
Republicans were not pleased with the deal, saying that it is not necessary for the government to give money to a company that manages $150 billion in assets globally.
“People have just had enough with ridiculous decisions that government makes and this is beyond the pale,” said state Senate Minority Leader, Republican Len Fasano.
Attendees of the lavish SkyBridge Alternatives (SALT) Conference are starting to endorse Donald Trump for president, not just with words, but with money, too. This is despite the fact that Trump has accused hedge fund managers of “getting away with murder” when paying (or not) their fair share of taxes. Trump is also unhappy with the manager’s belief in free-trade.
The SALT conference is run by Anthony Scaramucci’s SkyBridge Capital. Scaramucci is one of the first of his kind to get behind Trump, explaining to his fellow managers that he is expecting Trump to radically change his campaign style. Others who are leaning towards supporting Trump said they expect he will most likely gather experienced advisors around him to help him navigate the complex world of the US economy and business.
Part of the leanings towards Trump is the fear that Clinton will need to go to the left to attract supporters of Bernie Sanders. Trump supporters and others did agree that he would have to make drastic changes to his style if he does manage to win the White House.
Scaramucci said that Trump is “playing to an electoral base that he knows he needs to garner to win the nomination.” He added that, even though some of Trump’s comments seem alarming to financiers and businessmen, his comments are “100 percent premeditated” tries to “tweak” the establishment.
“He walked it back, as he does a lot of these crazy statements. He is dismissing the establishment, academia, ivory tower, snobby, salon-oriented bourgeois, and he is tweaking them by saying this nonsense, to the great enjoyment of the middle and lower class.”
Jokes abounded at SALT when Trump was discussed. Energy investor and hedge fund manager T Boone Pickens announced his support for Trump at SALT, saying he is “willing to take a chance.” Pickens added that “People will say, well hell yes, you’re 88, you won’t be here if it’s a mistake.”
Pickens said that Trump’s entry into politics was not so different than starting a business: “People are fed up and he seized on an opportunity. He is a man with a new idea and a big mouth,” he said.