Hedge Fund Crunch

Peter Bernstein, president of Peter L. Bernstein Inc., a consulting firm to corporations and institutional investors, died last Friday, June 5, 2009. Bernstein was the author of several books, including “Capital Ideas: The Improbable Origins of Modern Wall Street” and “Against the Gods: The Remarkable Story of Risk.” He was also the author of many articles and other books about investment management, risk, and the markets.

He was an economic consultant who strove to bring the ideas of modern investment down from the ivory tower of academia and into the hands of the practitioner.

Harry M. Markowitz, the 1990 Nobel laureate in economics and adjunct professor of finance in the Rady School of Management at the University of San Diego mourned Bernstein’s passing. “I’m slightly in a state of shock. Peter was a good friend. He had this fantastic way to explain mathematical concepts to non-mathematicians. I was surprised to learn he was a non-mathematician.”

Peter L. Bernstein graduated from Harvard University magna cum laude with a degree in economics.

Bruce I. Jacobs, principal of Jacobs Levy Equity Management said about Bernstein, “Whether it was Harry Markowitz’s theories of portfolio optimization, or Bill Sharpe’s capital asset pricing model, or the option-pricing theory of Fischer Black, Myron Scholes and Robert Merton, Peter seemed able to translate the most abstract, arcane ideas into language that was accessible to those of us not necessarily trained in physics and higher mathematics. And he was able to do so in a lively, informal style while keeping all the main points intact.”

As our financial crisis continues to become more complex and difficult to fathom, many different types of funds are being discussed in the news. One type of fund that is frequently discussed is the Taft-Hartley Pension Fund. These funds came into existence as a result of an act of congress in 1947 as part of an amendment to the famous Wagner act of 1935, the comprehensive and history making legislation giving workers many rights, especially to form unions and other benefits, also known as the National Labor Relations Act.

Today over 6% of all pension fund assets are of the Taft-Hartley variety, representing 420 billion dollars worth of investment capital. Since this is certainly a significant amount of money, it is worthwhile to learn a bit about what these funds are.

Taft-Hartley pension funds are the way companies provide benefits to their employees at retirement. The funds are composed of contributions which the employer makes on behalf of their employees, contractually negotiated by the union that the worker is a member of; and the gains or losses that the fund is subject to while it is invested by the fund’s trustees.

Trustees are appointed in equal number by both the union and the employer, and are responsible for overseeing the investment and deciding what benefits the plan can afford upon retirement.

Usually investment firms are given the responsibility of overseeing the fund’s investment strategy as the trustee. There are many firms which oversee Taft-Hartley pension funds, including EnTrust Capital Inc., Gregg Hymowitz, managing partner; McMorgan & Company, John F. Santaguida managing director, and consulting firms, such as Milliman, which advise trustees on how to focus on targeting the investment returns assumed by the plan.

The recent past has been full of ups and downs for investors. Many feel we are at a crossroads and are unsure what direction the economy and the various financial markets will be taking in the near future.

There are many advisors discussing the implications and ramifications of government policies, market trends and consumer confidence. One of the more widely acknowledged surveyors of today’s economic landscape its mountain peaks and pitfalls, is Harry Rady of Rady Asset Management.

Rady, whose investment firm is situated in San Diego, California, is almost daily interviewed on a variety of financial forums, including newspapers, on-line and hard copy, as well as live broadcasts. His opinion is considered newsworthy and is take quite seriously by his peers and financial analysts.

We encourage our readers to check out one of his more recent interviews concerning the recent stock market decline after 10 weeks of steady gains. Follow the link to Harry Rady’s “to-the-point” and incisive discussion in which he “makes sense of the markets” and become empowered to make the right investment decisions for the future.

Rady was also recently quoted on the on-line newspaper “WISHTV.COM”, about investing now in the market:
“Everything is overpriced,” said Harry Rady, chief executive and portfolio manager of Rady Asset Management. “A very long, protracted recession is still very much alive.”

Long Island is experiencing the same private equity boom which is influencing business takeovers as the rest of the country as other sources of capital dry up and companies continue to go, or consider going, private. As hedge funds look for investment opportunities in private industry, Long Island investment firms are ready to play their role.

The President of Northwood Ventures, based in Syosset, Long Island, Peter Schiff,  said the private equity boom is being keenly felt on Long Island.

“Overall, the private equity market is very active,” Schiff said. “Our marketplace is very active. We’re working with smaller companies.”

Corey Ribotsky, head portfolio manager of the NIR Group, of Roslyn, New York is also involved in the excitement. Having over ten years of experience in these types of investments makes the NIR Group especially well positioned to benefit from the current economic reality.

As companies go private they are not only in need of investment forms to ease the way. Law firms and accounting firms are also benefiting from the trend, and many Long Island firms are participating.

For the curious among us, here is a brief history of hedge funds.

A man named Alfred W. Jones is credited with creating the first hedge fund in the year 1949. He was not only a financial journalist but an author and sociologist as well. Jones’ understanding of price fluctuations of individual assets considered two separate components, the performance of the asset itself and the movement of the market as a whole.
Keeping these two separate components in mind he structured his fund in such way as to neutralize the effect of the overall market movement on his assets. He created a balanced, conservative portfolio by purchasing assets whose price he expected to perform better than the market ‘selling short’ assets which he expected to be weaker than the overall market performance. In this way Jones was able to reduce the risk of his fund’s loss in value due to market fluctuations since if the market goes down, his shorted assets’ value will increase even though his assets purchased long would go down; And if the market goes up, the gain in the ‘long’ assets would be cancelled by the loss of the ‘short’ assets value.

This type of fund became known as a ‘hedge’ fund, because by covering the risk of the market going either up or down you have ‘hedged’ your bets, so to speak- protected them on both sides.

Aside from a few notable exceptions Jones’ hedge fund approach to investing was not widely known until an article appeared in 1966 by Carol Loomis in Fortune magazine. Loomis praised Jones’ fund, coining the term ‘hedge fund’ and noting that his fund had outperformed the best mutual fund’s performance by 44% over the past five years and by 87% over the past 10 years.

Over the following three years over 130 hedge funds were begun.

On Oct 29, 2008 the charity organization, Hedge Funds for Habitat-NYC, was honored at the NYSE. Stuart Feffer, Co-CEO of LaCrosse Global Fund Services rang The Opening Bell together with hedge fund manager and leader Corey Ribotsky who is the Founder and Managing Member of The N.I.R. Group. These two men were honored in recognition of Ribotsky’s N.I.R. Group’s collaboration with the charity Hedge Funds for Habitat-NYC.

Hedge Funds for Habitat-NYC is a wonderful initiative founded by the hedge fund community in order to provide hardworking N.Y. City families with home ownership opportunities through the activities of Habitat for Humanity - New York City.

For the story on the NYSE Euronext site and to see the video of Feffer and Corey Ribotsky, go to www.nyse.com/events/1225189881392.html.

The Children’s Medical Fund of New York (CMFNY) aims to be able to provide all of the children of the greater New York area with all the medical care that they may require.

Corey Ribotsky of The NIR Group LLC. is the President of the CMFNY, and he devotes time and funds in this philanthropic pursuit.

As one of the philanthropy events the CMFNY held, Ribotsky and others were involved in golf day (here) that benefited the Children’s fund.

Opalesque Exclusive: As illiquidity is cited as the greatest risk for further economic crisis, asset based lending funds step in to provide liquidity for firms caught in the credit pullback

This week The Bank of International Settlements (BIS) released its 78th Annual Report reviewing the financial markets. Providing an overview of the 2007-2008 year the BIS notes the hedge fund industry which at first felt much of the blame for market problems has shown itself to be a point of stability in the midst of the credit crisis. “Even though the first signs of strain to emerge were problems in hedge funds associated with large investment houses, the performance of the industry as a whole initially proved relatively robust. During 2007, returns on most hedge fund strategies compared favorably to those recorded in 2006. The main exception was the performance of fixed income funds, which slipped during 2007. Over the calendar year, net investor inflows to all fund sectors remained at levels comparable to those of the recent past.”

Providers of needed liquidity
In an industry that has grown to oversee the investments of approximately $1.8 trillion of the world’s wealth, hedge funds as well as other alternative assets have the potential to further serve as a driver towards the recovery of the global economy.  Corey Ribotsky cites the largest risk for worsening financial conditions to be “linked to the response of aggregate demand to the weakened position of banks and tighter lending standards.” It remains to be seen if non-financial firms have the ability to withstand the combination of tightening credit conditions and the possible downturn in profits expected to occur with the consumer’s weakened ability to maintain previous levels of consumption. But the chances for survival for these firms are dependent on the nature of the external credit available, and asset based lending (ABL) funds are stepping into the void created by the credit crisis to provide this liquidity.

As we enter what the BIS has determined is the sixth stage or, “the crest” of the credit crisis it remains unclear “whether liquidity supply and risk appetite [have] recovered sufficiently to help maintain this improved credit market environment on a sustained basis.” ABL funds have come to provide some of the few options for companies looking to raise capital for growth, or to survive temporary profit downturns. Opalesque recently spoke to Josh Zegen at Madison Realty Capital and about the ABL space and the changes they have seen over the past few months as bank credit options have dried up and the opportunity set for ABL funds has grown immensely.

The `debtquity` fund from Corey Ribotsky, providing liquidity to the backbone of the economy
According to a NY Times article we recently carried in the AMB (Source) hedge funds in the asset based lending arena have quadrupled over the past three years, holding approximately $13bln in assets. “This is really the perfect storm for a firm like ours,” Pollack said. “Banks that traditionally lend to the micro caps typically have a knee jerk reaction and these small businesses are typically the first ones shut out. These types of companies have been and will continue to be the backbone of the US economy. A lot of them are really good companies that will flourish and grow and are having a difficult time getting the capital to do so.”

Many are focused on micro cap companies whereby they evaluate a fund for an abundance of tangible collateral as well as a growth orientation. This is due to the two pronged strategy in which, “Our transaction typically have both a debt and equity component. We will provide companies with debt intervention through 3 year amortizing loans with a coupon of somewhere around 11-12%. There is this debt piece and we are usually senior secured…But with our transactions, companies also provide us with an equity stake.” In this way, they are  providing capital for growth opportunities in micro cap companies, is protected on the downside with hard assets and further rewarded through equity stakes when their financing fuels growth for the borrower.

Asset flow
Companies recently launched a Japan Yen Fund to address interest in the fund and reduce currency risk for Japanese investors, and the manager says ABL lending has come of age. “We are in a business where even though we are a hedge fund, we operate more like a specialty finance company. We are getting more and more interest not only from Japanese investors, but also from the Middle East and even traditional Europe, because it is a straightforward strategy with a model that we have perfected over the years” commented Corey Ribotsky.

Corey Ribotsky cites both Greenspan’s and Paulson’s bearish outlook on the “inordinate amounts of losses which still need to be taken. We see that it will remain difficult for these smaller companies to get financing and are positioning ourselves to find the right companies to invest in and believe we can continue with strong returns.”

Laurus-Valens, the New York based investment advisory firm, announced the launch of the Valens Yen Fund. Valens, which currently oversees approximately $1.6 bln in assets and runs a variety of funds, launched the yen fund with assets of 1 bln JPY.

The Fund has been designed specifically in response to Japanese investor interest in the Valens investment strategy and it will provide qualified Japanese investors with access to a mirror image of the Laurus Offshore Fund, with minimal currency exchange risk. “Our yen denominated fund provides our Japanese investors with access to investments in U.S. micro cap and late stage private companies and makes their investments more stable for them, as they won’t be susceptible to the value of the dollar sinking or spiking at any time,” said Dennis Pollack, Partner and Senior Managing Director.

By; Kirsten Bischoff, Opalesque New York:

Dennis Pollack, partner and senior managing director at Laurus-Valens, an investment management firm specializing in investments in small and micro cap companies, announced that Jay Drezner has joined Laurus-Valens as a senior investment analyst. Mr. Drezner has an extensive 9 year background in the finance and investment banking industry.

“I am truly pleased that Jay will be a part of our team. Jay’s background in both domestic and international investment banking will offer Laurus-Valens new insight and opportunities as we seek sound and profitable investments for our portfolio,” said Dennis Pollack.

Mr. Drezner will be responsible at a senior level for analyzing, structuring and executing new transactions as well as working with existing Laurus-Valens portfolio investments to maximize value and return potential. Prior to joining Laurus-Valens, Mr. Drezner spent nine years at Credit Suisse Securities (USA) LLC, most recently as a director in the Leveraged Finance Group where he covered companies in the aerospace and defense, satellite services, and air transportation sectors and executed a broad variety of leveraged finance transactions.

Prior to moving to the Leveraged Finance Group, Mr. Drezner was in the Buyside Insights Group at Credit Suisse, where he worked with corporate clients in the consumer products, business services and mid-cap industrials space to enhance equity values through the use of value-based management consulting techniques. Other roles Mr. Drezner had at Credit Suisse included serving as a vice president in Credit Suisse’s Australian investment banking operation, covering media and telecommunications companies, and two years as an Associate in Credit Suisse’s New York office in the Media & Telecom coverage group. Mr. Drezner began his professional career in the early 1990’s with D’Arcy Masius Benton & Bowles, Inc., an advertising agency, as an assistant media director handling major corporate consumer product clients. “I am thrilled to join Laurus-Valens and look forward to the challenges ahead. I am eager to work with such a knowledgeable and esteemed group of finance and investment professionals,” said Mr. Drezner.

Mr. Drezner holds a BA in Psychology from Cornell University and an MBA in Finance from Columbia Business School.