London-based hedge fund executives saw their take home pay crumble as their base salaries and bonuses imploded in 2013. According to Emolument.com, a company which analyses salary levels, there has been a serious change in the volatility in what hedge fund professionals are paid, especially among the highest paid individuals.
Figures show that compensation packages have declined as much as half in 2013 compared with 2012. In 2012/2013 a managing director at a London-based hedge fund could expect a bonus of about £1,236,000. In 2013/2014 that number was slashed to £459,000. Added to the decimated base pay and managers are left with only £660,000, a decline of almost £1.
Despite this sharp reduction in take-home pay, hedge fund professionals still earn approximately triple what mid-level employees make. Vice presidents and directors of hedge funds today average about £226,000, compared to £307,000 two years ago. But this year is definitely better than last year, when the average person in that group said they took home £196,000.
Gabriel Plotkin, former employee of Steven A. Cohen, is now in the process of raising as much as one billion dollars for his as-yet non-existent fund which he has decided to name after his grandfather, Melvin Plotkin.
Plotkin, who is 35, has not discussed the reasons for his decision to name the fund after his grandfather in public, but it is definitely and unusual way to name a new hedge fund.
Cohen named what became his wildly successful SAC fund after his own initials. Daniel Loeb, also a billionaire investor was inspired by his hobby, surfing, to name his fund Third Point. This name refers to a particular place in Malibu Beach where the waves break the highest.
Plotkin’s grandfather was a small-business owner, but is now deceased. Melvin Capital is expected to begin trading this coming year, and observers of the hedge fund sector are anticipating it’s launching with excitement. Plotkin has been one of SAC Capital’s most successful traders in recent years. At one point Mr. Plotkin and his management team focused on a portfolio made up mostly of consumer product stocks whose value totaled about $1.3 billion. This summer he has been toning down his trading and increasingly focusing on setting up his own firm.
Plotkin and Cohen will maintain their relationship, just not as employer and employee. Cohen has agreed to invest as much as $200 million in Melvin Capital. It is expected that when the new fund is ready to launch that he will take his team of assistant traders and analysts with him. It is not yet known where Melvin will set up home. We will have to just wait and see.
Struggling to avoid its first-ever loss year, Brevan Howard’s flagship hedge fund was able to announce its first black month during the 2014 financial year.
Run by manager Alan Howard, the $26.5 billion Master Fund posted a modest gain of 0.7 percent in July. The announcement was made in a letter to the fund’s investors and reviewed by The Wall Street Journal. The fund is one of the world’s largest, and has not posted a single profitable month during the past six months. The upward movement this month of the fund will reduce the year’s losses down to only 3.7 percent to July’s end.
Compared to other funds, Brevan is doing well. The average fund across all strategies lost 0.6 percent during July. However, most funds, on average, are still up by 2.5 percent as of July.
Investors, although possibly worried, can still feel good about their choices. In 2010, 2012 and 2013 the Master Fund rose by small amounts and in 2007 and 2008 the fund posted gains over 20 percent. The fund has never ended the year in the red.
High fees and low returns are frightening some public pension funds away from hedge funds in recent days.
Among those having second thoughts about hedge funds are officials from America’s largest public pension fund, the California Public Employees’ Retirement System, known as Calpers. Analysts believe that Calpers stake in hedge funds will shrink by 40 percent, down to $3 billion this coming year. One spokesman refrained from commenting on the exact size of the downgrade, but did say that Calpers will be taking a “back-to-basics” approach to its investments.
The trend to get away from hedge funds has been building steam over the past few months and years. Officials who deal with pensions for Los Angeles’s police and fire department employees divested completely from hedge funds last year. The decision was made after a 7-year investment of $500 million yielded a very disappointing 2 percent, explained Los Angeles Fire and Police Pensions General Manager Ray Ciranna. Part of the low yield was attributed to the high fees paid to hedge fund managers. The hedge fund investment represented only 4 percent of the pension’s total portfolio, but the $15 million per year in fees paid to the hedge fund managers was 17 percent of the total fees paid by the pension fund.
“We were ready to move on,” Mr. Ciranna said.
Investors, hedge funds and other large speculators have cut their bets on higher prices for Brent crude oil by close to 25 percent during the week ending on July 15, according to an announcement made by ICE. Prices shrunk to their lowest point in three months.
ICE declared that managers lowered their net long futures and options positions in Brent crude to 151,981 down from 201,568. Prices fell to a three-month low of $104.39 per barrel, crashing from $115 a barrel in the middle of June.
The New York Mercantile Exchange (NYMEX) showed the same behaviors. Last week big investors shut down almost $6 billion worth of bullish bets, re-expressing the largest four-week fund exodus in history.
After about one year of negotiations Kohlberg Kravis Roberts purchased close to 25 percent of the Houston-based hedge fund BlackGold Capital Management LP. The deal is part of KKR & Co’s strategy to solidify their hedge fund bets.
BlackGold is a $1.4 billion credit firm, investing in natural resources and energy.
George Roberts, who is a co-founder of KKR and is from Houston, had heard about BlackGold and brought it into the discussion at KKR. The deal will allow KKR to share in the management of BlackGold and to be a partner in the incentive fees that BlackGold collects.
Erik Dybesland and Adam Flikerski, co-founders of BlackGold, explain that they will reinvest most of the money they will receive for the buy-in from KKR back into their funds. They say that they will continue to operate independently as well.
Entering the hedge fund sector is a way for KKR to diversify its investment portfolio, which is generally more dependent on corporate buyouts and related deals. But such deals have become a smaller part of KKR’s revenue. Analysts expect that the hedge fund industry will continue to grow as pension funds increase their stakes in alternative investments.
The investment in BlackGold is KKR’s second venture into the hedge fund space. Last year KKR also purchased a 24.9 percent stake in the Bermuda-based Nephila Capital Ltd.
Well-known for their ventures in leveraged buyouts and other private equity investments, the Blackstone Group is considering the launch of an aggressive hedge fund.
The fund will take off with about $500 million AUM and several teams of managers. Although this is a shift in strategy for Blackstone, this should not prove too daunting since Blackstone in the largest investment manager of hedge fund-fund of funds.
Blackstone says that the fund will be making “big, bold bets” and will “fund several teams of traders with hundreds of millions of dollars to place a relatively small number of large, highly concentrated wagers”.
Private equity firm Blackstone Group has decided to go against the trend and start a hedge fund whose strategy will be to make a small number of large investments. This behavior has been less popular of late as many hedge funds are currently refrain from making such concentrated, over-sized bets.
Blackstone is setting up a few teams of traders stocked with hundreds of millions of dollars to place a relatively small number of high-value investments. Taken together the investments will create one multi-strategy hedge fund which will be made available to the firm’s wealthier clients. Blackstone believes this strategy will hedge the overall risks.
What make hedge funds seductive to set up are the fees that are charged to manage them. There is usually a 2 percent annual maintenance fee and a 20 percent share in the profits. That is twice the amount even the most expensive fund of funds charge.
Blackstone is of course anticipating big rewards from this move, but it does not mean there are no risks, even big ones.
“This puts them more deeply in the equity long/short business, which they are not particularly famous for,” said Bob Olman, of Alpha Search Advisory Partners in Manhasset, N.Y.
Eamon Javers of CNBC reported last week about a un-precedented cyber-attack on a hedge fund which was thwarted by BAE Systems Applied Intelligence.
The report stated that the attack was complex, disrupting the company’s trading strategy and sending information about its trading to offsite computers. The report does not mention the name of the company; however it is a client of BAE Systems.
“Paul Henninger, global product director at BAE Systems Applied Intelligence, said the hack represents one of the most complex he’s seen in a new wave of attacks designed to extract business strategy information from firms in a range of industries… ‘It’s pretty amazing,’ Henninger said in an interview Wednesday from London. ‘The level of business sophistication involved as opposed to technical sophistication involved was something we had not seen before.’ He said BAE technicians in recent weeks have also spotted a cyberattack that used malware to take over a large property and casualty insurer’s underwriting system. Using the compromised system, the criminals created fake insurance policies and filed claims against them, he said.”
-statement from CNBC.
According to Javers’ report it is not known if the hedge fund reported the event to the FBI or to the SEC. It did say that BAE guessed that the cost to the firm of the attack was in the “millions.”
The attack is reminiscent of the huge attacks reported by Target during the holiday shopping season last year, which involved a giant breach in their credit card security system. This most recent attack should be just one more in many wake-up calls directed at the financial industry.
As major sugar producers around the world face drought, hedge fund managers are betting on increased sugar prices by raising their net-long positions on this crucial commodity.
Hedge funds were bullish on sugar in anticipation of prices climbing to their highest point since last October due to the lack of rain from Brazil to India.
Continued dry weather in Brazil is only adding to the already bad yields from drought conditions during the first quarter of 2014, according Sao Paula researcher Job Economia & Planejamento.
In India, the second biggest producer of sugar after Brazil, the prospect of reduced rainfall is also putting sugar crops at risk for damage. Bruno Lima, a senior risk-management consultant at FCStone do Brasil, is expecting that global production will not be able to meet demand in the year ending on September 30, with things only getting worse next season.
“The drought in Brazil will probably have some impact,” said Peter Sorrentino, who helps manage $3.8 billion at Huntington Asset Advisors in Cincinnati. “We’ll see pretty decent agricultural price movement through the balance of the year, just because of weather-related issues.”