Hedge Funds Climb Along with Moods on Wall Street

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.

Peter L. Bernstein, Proponent of Effecient Markets, Dies In New York

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.”

What are Taft-Hartley Pension Funds?

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.; 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.

Hedge Fund History

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.

NEW Yen fund to invest in US with minimized currency risk – Laurus-Valens – Eugene Grin

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:

 

JAY B. DREZNER JOINS LAURUS-VALENS AS SENIOR INVESTMENT ANALYST

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.

House Crunch effecting Hendge Fund Farallon Capital Management

TCM reports:

“The housing crunch continues. The Los Angeles Times Land Blog has a stunning report on just how bad real estate prices have fallen in California during the past year. According to the California Association of Realtors press release, the median sales price of an existing home fell by a whopping 26.2% from a year earlier. The unsold inventory reached 14.3 months compared with 8.2 months for the same period in February 2007. Nationally, prices fell over the past year at a rate of $338 per week; in California, prices apparently fell at a rate of $2,788 per week. Such declines do not yet show signs of decelerating or even bottoming.

According to  WSJ article, “The credit crunch and market volatility have roughed up other multibillion-dollar hedge funds, which on average have lost about 3.35% this year, according to Hedge Fund Research’s daily global performance index. Platinum Grove Asset Management, the $6 billion hedge-fund firm run by LTCM alumnus Myron Scholes, has lost 13% this month on credit trades, putting it 10% down for the year, according to a person familiar with the fund.

Also, Farallon Capital Management LLC in San Francisco, which manages about $36 billion, has lost 5.6% this year through last week in its flagship Farallon Capital Partners fund.

Hedge Funds Getting Through The Credit Crunch of 2008

Bridgewater Associates comment on the credit crunch effecting the hedge funds;

For the most part, hedge funds have gotten through the credit crunch relatively unscathed. For example, the average hedge fund generated a return of 12.5% last year and 2.5% in the fourth quarter. And private equity funds generated an average return of 11%. The main reason that these two groups held up as well as they did is because the equity market has not fallen nearly as much as the bond markets (i.e., spreads), and the majority of the risk allocation of these funds is in the equity market. And because their performance held up, they have not been forced into much asset liquidation to speak of. But stock market action is beginning to pressure the hedge funds and private equity players.

Hedge funds used to be a lot more hedged than they are today. Today, just about anyone who wants higher fees based on total return calls themselves a hedge fund, even if they are just a buyer of assets. And the fat cash flow yields in global stocks have also attracted a number of hedge funds into net long equity positions. As a result, hedge funds are now heavily long the equity market. Based on fund by fund holdings data we estimate that hedge funds are net long about $150 to $200 billion in U.S. equities (foreign equities are not included in this figure).

Hedge funds are also highly leveraged. Losses raise a fund’s leverage ratio, which requires asset liquidations to bring the leverage ratio back to normal.

Laurus – Valens Hedge Fund Adds partner – Kendall Raine

Laurus-Valens, a New York-based firm specializing in hedge funds that make private investments in publicly traded small and microcap stocks has hired a managing director from A.G. Edwards.

These private transactions typically give the Laurus funds warrants for the right to purchase stock at a discount to market prices. The funds seek double digit returns with lower volatility than the broader markets.

Dennis Pollack, senior managing director of Laurus-Valens, said Thursday that veteran investment banker Kendall Raine has joined the firm as a partner and senior managing director.

“Kendall‘s background will offer Laurus-Valens new insight and opportunities during this volatile time in the market,” said Pollack.

Raine, who will oversee a variety of strategic and capital markets initiatives, joins from A. G. Edwards, where he was managing director in the investment banking department. At A.G. Edwards, he was responsible for more than 100 advisory and capital markets transactions for business development, mortgage, and consumer finance companies, private equity firms and other specialty finance companies.

Prior to Edwards, Raine worked for Bear Stearns as associate director responsible for investment banking relationships with Midwest depository institutions. Before that, he was chief executive officer of Los Angeles-based United Pacific Bank and senior executive to the banks’ parent company.  Raine began his banking career as a calling officer in the Asia division of Chemical Bank.

Laurus-Valens, one of the nation’s largest investors in penny stocks, has approximately $1.7 billion in assets under management.  Laurus invests in private investment in public equity, or Pipes, a financing vehicle for small, cash-strapped companies. Hedge funds use Pipes to buy shares at a discounted price and can quickly resell them.

Last March, Laurus Capital Management LLC launched Valens Fund to invest in publicly traded small and micro-cap companies seeking cost effective growth capital.

Laurus-Valens Plucks MD From A.G. Edwards

Laurus-Valens, a New York-based firm specializing in hedge funds that make private investments in publicly traded small and microcap stocks has hired a managing director from A.G. Edwards.
These private transactions typically give the Laurus funds warrants for the right to purchase stock at a discount to market prices. The funds seek double digit returns with lower volatility than the broader markets.
Dennis Pollack, senior managing director of Laurus-Valens, said Thursday that veteran investment banker Kendall Raine has joined the firm as a partner and senior managing director.
“Kendall’s background will offer Laurus-Valens new insight and opportunities during this volatile time in the market,” said Pollack.
Raine, who will oversee a variety of strategic and capital markets initiatives, joins from A. G. Edwards, where he was managing director in the investment banking department. At A.G. Edwards, he was responsible for more than 100 advisory and capital markets transactions for business development, mortgage, and consumer finance companies, private equity firms and other specialty finance companies.
Prior to Edwards, Raine worked for Bear Stearns as associate director responsible for investment banking relationships with Midwest depository institutions. Before that, he was chief executive officer of Los Angeles-based United Pacific Bank and senior executive to the banks’ parent company. Raine began his banking career as a calling officer in the Asia division of Chemical Bank.
Laurus-Valens, one of the nation’s largest investors in penny stocks, has approximately $1.7 billion in assets under management. Laurus invests in private investment in public equity, or Pipes, a financing vehicle for small, cash-strapped companies. Hedge funds use Pipes to buy shares at a discounted price and can quickly resell them.
Last March, Laurus Capital Management LLC launched Valens Fund to invest in publicly traded small and micro-cap companies seeking cost effective growth capital.

By Natasha Gural, Editor