What You May Not Know about Hedge Funds

The enticement of hedge funds stems from the fact that they strive to earn profits regardless of where the market stands; they can borrow money to boost their returns; and they can use techniques to protect themselves. On the other hand, hedge funds can lose big too, as they did in 2008.
So, before you set out to invest in a hedge fund, review the following things you may not know:
1. Will your hedge fund hedge? Hedge funds originally got their name because they used to “hedge” themselves against the potential of a falling market by holding some short positions in which they bet against stocks they believed to be overvalued. But now “hedge funds” can be a general term for all kinds of managers with all kinds of strategies – some of which may not actually involve hedging.
2. Check it out: You need to check out the hedge fund more carefully than you would another investment because hedge funds are less regulated than other investments.
3. Only millionaires need apply: Hedge funds are open only to investors with $1 million in assets or an annual individual income of $200,000 or couples’ income of $300,000. The funds will make an exception if you will invest $150,000 into one fund – but that could lead to the risky situation of your having put all your eggs in a single basket.
4. Get to know your fund manager: Not all hedge fund managers have the experience you might expect. Find out the business and financial background of the manager of any fund your considering.

Good Times Ahead for Hedge Fund Managers

hedge-fundsWhile the U.S. is still very much in economic distress, the nation’s hedge fund managers are looking forward to receiving their holiday bonuses increase by 5% this year, after an average increase of 15% last year, according to new research released by Hedge Fund Research and Glocap headhunters.

According to the Glocap’s chief executive, Adam Zoia, the hedge fund industry has emerged from crisis.

This represents a contrast to Wall Street, investment firms, and major banks, which have been cutting back on their bonuses in light of the current financial and political situation. But for hedge fund managers, the future is bright: Even at a small hedge fund, portfolio managers can expect to be paid $1.23 million this year, while the top 25 hedge fund managers earned a total of $25 billion in 2009.

Even at these levels, however, hedge fund employees are still not earning as much as they did at the industry’s highest point.

US Based NIR Group Joining Journey to Asian Investment Strategies

According to the respected hedge fund tracker Eruekahedge, based in Singapore, hedge funds are investing in Asia like never before. Well established funds like those managed by the Long Island based NIR Group, have joined the record high number of 1,278 hedge funds investing in Asia in July, 2010. Just in the year 2009 there were only 1,200 hedge funds invested in Asia, and this year’s numbers beat out the previous high reached in 2007 of 1,240.

The NIR Group opened a new office in Singapore in 2009, appointing Shoham Cohen to head it. Asia has been a bright spot for hedge fund investors such as the NIR Group. These companies see strong economic growth and less regulation in places like Hong Kong and Singapore as an incentive to pour money into the Asian economy.  The positive characteristics in the Asian financial sphere look even better when compared to the increased regulation of hedge funds that Western countries are imposing on them in response to the financial crisis they are now experiencing.

The Eurekahedge report waxed positive on the trend they observed regarding hedge fund investments in Asia.

“The 125 Asian hedge fund launches in the first seven months of the year represent a return to the healthy growth seen before 2008,” Eurekahedge said in a report.

Many firms have jumped on to this financially booming band-wagon, including Artradis Fund Management, Man Investments, and the NIR Group, as mentioned above. Other reasons given for this movement to Asian investments are increased availability of complex financial products, less expensive costs to set-up shop in Asia compared to in the West, and the efforts made by local governments to induce global fund managers into the region.

P.S. from Prosecutors to the Galleon Hedge Fund Case

In 2009, US prosecutors charged Raj Rajaratnam, the founder of the Galleon hedge fund, and several others with illegal insider trading. Prosecutors described the Galleon case as the most significant probe of insider trading at US hedge funds.

This past Friday night, the prosecutors revealed the names of two additional defendants in the case. Former hedge fund manager Thomas Hardin and former trader Franz Tudor had pleaded guilty last year, Hardin on December 21st and Tudor on October 29th, of 2009.

Also on Friday night, the US SEC announced that they would be filing civil charges against Tudor and Hardin, as well as against Hardin’s company, Lanexa Management LLC. This brings to 23 the number of former financiers who have been charged either criminally or civilly in the Galleon case.

Global Hedge Funds Improve Performance

TrimTabs and BarclayHedge reported on November 8th that hedge fund performance had improved during the month of September. Nine out of ten managers reported a profit for the month; the average fund increased by 3.5%, and global hedge funds as a whole took in $3.8 billion.

This was “a good month for hedge-fund managers,” in the words of Sol Waksman, the founder and president of BarclayHedge. September marked the third successive month in which new money has been invested in hedge funds, with  $16.1 billion having been invested in hedge funds during this quarter, for a total of $1.6 trillion for the industry as a whole.

General Growth Finding Success in a Stalled Economy

General Growth Properties, based in Chicago, is the second-largest owner of malls in the United States, with 183 shopping malls in 43 U.S. states. Its properties include such tourist favorites as Boston’s Faneuil Hall Marketplace, Baltimore’s Harborplace and Chicago’s Water Tower Place.

However, in today’s difficult economy, even these assets were not sufficient to assure the company’s success, and in April 2009, after tight credit conditions left them unable to refinance billions of dollars in maturing debt.

However , General Growth has now successfully restructured and emerged from bankruptcy. As part of the restructuring, General Growth spun off the Howard Hughes Corp, a company named for the late eccentric billionaire, whose properties include another tourist attraction, the South Street Seaport in Lower Manhattan, under the chairmanship of William Ackman. In addition to serving as chairman of Howard Hughes, William Ackman runs the Pershing Square hedge fund. He had viewed filing for bankruptcy as the best way to enable a sustainable restructuring for General Growth.
Howard Hughes Corp is slated to begin trading on the New York Stock Exchange on November 10th, 2010. Its ticker will be HHC.

New EU Directives Impact Asia Hedge Funds Too

As the European Parliament gets ready to review the EU Alternative Investment Fund Managers Directive, Asian hedge fund and private equity managers are realizing just what this new law will mean for them.

The Directive, which goes before the European Parliament on Thursday, will require any fund manager with clients in the EU to follow Europe’s new regulations on pay and leverage – regardless of where the fund is actually based. This means that companies in such countries as Singapore and Hong Kong, which have until now benefited from a greater regulatory freedom than their European counterparts, will now be subjected to the same rules.

Asian hedge fund managers have over four years to deal with the ramifications of the new bill, however, as the directive will take effect only in the year 2015.

Market to Continue to Rise Under the Republicans

Financial experts are now predicting that the changeover in the midterm elections will sustain the current bull market that began in March 2009 during the nadir of the nation’s financial crisis. It will also, they predict, enable U.S. stocks to continue to rise, since the Republican Congressmen, who will now control the house, will probably impede any Democratic plan to raise taxes or more strictly regulate business.

Specifically, while President Obama had intended to let the tax cuts “legacy” of former President George W. Bush expire, the new Republican-dominated House may now stand in his way. Democrats may compromise by extending the tax cuts for one or two more years, or perhaps by restricting the expiration solely to those who earn more than $1 million each year.
The new make-up of the House will likely also enable the legislation of a raise in rates on dividends and capital gains. It is also doubtful that the post-elections Congress will follow through on the Democratic plan to raise taxes on the carried interest – investment profits – of private-equity and hedge funds.

Financial experts see these as possibilities that would increase investor optimism, and thus create financial improvements in the business world, and the national economy as a whole.

Ex-Derivatives Trader Starts New Chinese Backed Hedge Fund

Solaris Asset Management, co-founded by Thomas Tey the former head of equities derivatives at Oversea-Chinese Banking Corp., is starting a hedge fund with money from investors in China.

The Solaris Capital SPC Equity Arbitrage Fund will start trading with S$30 million ($23 million) on Nov. 8, Tey said. Thomas Tey is a 24-year trading veteran with banks including Singapore- based Oversea-Chinese’s treasury division and Credit Suisse First Boston in Tokyo.

Tey’s aim is for the fund to grow to S$100 million by the end of 2011. He is actively targeting investors in Asia since raising assets in the U.S. and Europe has become “very, very tough.” About 50 percent of assets in Asian hedge funds come from Europe, while 40 percent are from U.S. investors, according to Eurekahedge Pte.

“This is not a very conducive environment to be raising money, but we expect to get to our target,” Tey, 49, said in an interview on Oct. 22nd.

The Solaris fund aims to trade stocks and derivatives including futures. The fund will be focused on arbitrage opportunities where it can profit from price differences between related securities, according to Tey.

Europe Set to Ease Rules on Hedge Funds

European Union Hedge FundsFinance ministers across the European Union have come to an agreement on rules to allow foreign hedge funds to do business throughout the 27 member states of the EU. This deal comes as a relief to Britain, home of the European hedge fund industry, according to The New York Times.

The agreement on hedge funds was reached on Tuesday, yet still requires final approval of the European Parliament. The deal helps senior European Union officials show unity ahead of a meeting of finance ministers of the Group of 20 nations.

Earlier versions of the rules were set to cause funds to register in each member state of the Union. Britain stood opposed to the initial draft as it  raised concerns that firms would leave London, lowering its importance as a financial hub. The newer bill safeguards London’s status.