According to Frank Packard, the representative for Triple-A Partners Ltd, which is a provider of start-up capital for hedge funds,
“Hedge funds that are surviving and prospering will see an increase in their assets under management going forward. Hedge fund investors tend to be more long-term than month-to- month and we may be seeing some people taking money out of the equities market to invest in hedge funds.”
Eurekahedge, the Singapore-based research firm declared that the global hedge fund benchmark is up 16% so far this year, and if this trend continues then hedge funds will experience their best yearly performance since 2003. This is a great positive trend, especially considering 2008 was the worst year in history for hedge funds, due to the world-wide financial crisis.
There was a net loss of number of hedge funds, with 150 new funds begun and 150 old funds closing shop, according to Eurekahedge.
According to the research firm Eurekahedge Pte, hedge fund assets increased in the month of October by $7.8 billion, making it the sixth consecutive month in which assets did so. The gain was led by European managers in response to their regions emergence from the global recession, according to the Singapore based research firm.
Dollars flowed into hedge funds to the tune of $10.2 billion, while losses totaled $2.4 billion in October. Taken together the funds represent over 1.45 trillion dollars of assets under management.
Despite the fact that hedge funds performance was not spectacular due to the international stock market drops, the funds were still deemed attractive in investors. The Eurekahedge Hedge Fund Index actually lost 0.3% last month, putting the brakes on a seven-month long rise in value. Another index, the MSCI World Index, also fell, by 1.9% in October, putting an end to a three-month gain of 17%. Investors concerned that stocks have already outpaced the prospects for continued economic upturns drove the market downwards.
The past couple of years have been challenging for investors, to say the least. But proving once again that the saying, “What goes down must come up” is true , hedge funds are about to recoup all the losses they sustained in the most recent critical credit crunch of the past year and a half. Many funds are now placed in positions to earn performance fees, and the average fund only needs a mere 2% gain to reach the value it had as of June 30, 2007, which was the summit of the last boom.
If things continue as they have been going recently, by the time the end of next month rolls around, the hedge fund industry will reach above the highest level of two years ago. This comeback is due to average returns of 18.3% this year as of October 21st, almost completely counterbalancing the crushing 19% downturn which made 2008 so difficult for investors.
Optimism has taken hold of hedge fund managers lately as the major indexes, such as the Eurekahedge Fund Index and MSCI World Index show gains in the month of July. This month’s gain continues a 5 month upward trend for hedge fund managers.
According to the Eurekhedge Index, July posted a 2.1 percent gain, while the MSCI showed a remarkable 8.4% rise. The year to date improvement comes to 12 percent for the Eurekahedge and 14 percent for MSCI.
Hedge fund managers are feeling relief to finally be leaving the difficult times of the 2008 financial markets. They are hopeful that the rest of 2009 will leave the recession behind in the dust bowl of history. Many analysts view 2008 as the worst economic downturn since the Great Depression of late 1929 and the 30’s.
We expect some of the hedge fund managers we have been covering to react to the hopeful news, and we will keep you posted as to what Gregg Hymowitz of EnTrust Capital and Corey Ribotsky of NIR Group have to say about the current economic trend.
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.”
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 CornellUniversity and an MBA in Finance from ColumbiaBusinessSchool.