Hedgeweek looks at the key issues for hedge funds during a week that saw managers called upon to embrace higher standards, particularly of transparency and valuation procedures, in order t
Hedgeweek looks at the key issues for hedge funds during a week that saw managers called upon to embrace higher standards, particularly of transparency and valuation procedures, in order to head off calls for tighter regulation of the industry.
Optimism in the face of uncertainty
Who better to show optimism in the light of a global crisis than hedge fund managers? Although the latest data indicates that the global hedge fund industry growth slowed in the second half of 2007 as the credit crisis began to bite, a new survey suggests hedge fund inflows will continue unabated.
According to HedgeFund Intelligence, while global hedge fund industry assets rose to USD2.65trn at the beginning of this year – representing asset growth of 27 per cent from a year ago – growth in the second half was a far more modest 6.6 per cent.
However, another survey released this week suggests that US hedge fund managers aren’t expecting the credit turmoil to have much impact on industry fundraising. According to Rothstein Kass, the hedge fund-focused accounting firm that sponsored the survey, over 90 per cent of more than 300 senior hedge fund managers surveyed say they expect the industry to attract ‘significant’ new money this year.
‘While nearly two-thirds of respondents have a generally negative outlook for the US economy during the balance of 2008, the vast majority of senior hedge fund managers are unfazed by ongoing volatility,’ says Rothstein Kass co-managing principal Howard Altman.
While this sentiment is not a surprise, it will be interesting to see whether or not that optimism be reflected in a positive second and third quarter for hedge funds. One thing is for sure: all will be revealed in due course.
Are hedge funds too reliant on stars?
The negotiations between GLG Partners and star manager Greg Coffey serve to illustrate an old bugbear often cited by institutional investors when grilling potential managers – do not rely on your stars, they will eventually fall to earth.
According to The Times, the London-based hedge fund hedge fund manager is ‘fighting to hold on to one of its star managers after Coffey moved to quit the USD24bn firm to set up his own business’.
The newspaper indicated that Coffey generated around 60 per cent of GLG’s performance fees last year, managing almost a third of GLG’s fund assets he looked after represent, and that his emerging markets fund returned 50 per cent last year.
To an outsider – and some institutional investors – the figures suggest that GLG places an undue reliance on Coffey. However, they may be missing a key point that has been somewhat lost in the move of hedge funds to the mainstream. Hedge funds were founded by stars, individuals with a passionate belief in the outcome of their investment strategies, who were prepared to bet their house along with their investors.
The business has changed somewhat since those early years, with the entry of large institutional investors and sizeable mandates. The resulting pressures of due diligence and compliance are now starting to hamper the stars and favour the method-men, resulting in many stars leaving to set up their own investment boutiques – albeit where they too, will inevitably join the mainstream.
As the hedge funds industry continues to evolve, there will be fewer stars and more method-men coming to the fore. The loss will be felt by all.
North-South balance in Ireland
Irish Finance Minister Brian Cowen and Peter Robinson, deputy leader of Northern Ireland’s Democratic Unionist Party, who holds the finance brief in the Stormont administration, have unveiled plans that could potentially see work from financial services firms based in Dublin carried out north of the border.
But despite the backing of Cowen and Robinson, who will take over the top jobs in their respective governments from Bertie Ahern and Ian Paisley respectively in the course of the next two months, the use of the word ‘potentially’ to describe the proposed transfer of financial services jobs to Northern Ireland indicates that the projects still has various hurdles to surmount.
As one economist notes, the political benefits of the financial services sectors of North and South moving closer together has little relevance to industry members. Financial services companies, especially fund administrators, are in Ireland for one major reason – low tax. However, the plan envisages that firms established in the Republic can establish offices in Northern Ireland to help them cope with the current skills deficit in the South.
A company will generally relocate or outsource to another country because the move is of benefit to it. For a fund administrator in Ireland to forego a corporate income tax rate of 12.5 per cent, there must something of greater value on the other side. Will skills, and perhaps lower costs, do the trick?
Another potential stumbling block is the ‘minimum activities’ rules for Dublin’s International Financial Services Centre operations, which require fund companies to maintain a certain amount of its activities within the republic. This is understood to be under review by the industry regulator, Ifsra.
For all its good intentions, the initiative may be nothing more than an announcement. Whether financial service providers will actually transfer part of their operations to Northern Ireland will depend strongly on whether they will be able to make significant savings – perhaps an unlikely scenario.
Regulatory action could take away essence of hedge funds
One would think that the ongoing global uncertainty would be enough to give any hedge fund manager a headache. But add to this a potential renewed effort by European Union heavyweights Germany and France to impose more stringent regulation, and things might get out of hand.
The reason for this potential trigger is a recent clampdown on short selling (an activity closely associated with hedge funds) in Australia, which, experts believe, will lead to a renewed piling of pressure on hedge funds by some big EU member states.
Early last year, when the pressure was growing on hedge funds in the run-up to the G8 meeting, a number of forward-thinking managers in the UK and US came up with a voluntary code of conduct to maintain the balance and, perhaps, head off the threat of further regulation.
But the crisis in sub-prime lending that has now spread across the global credit market has added to the trouble. When the world is unstable and sentiment is negative, there is a lot of blame to spread – and unfortunately, hedge funds are much on the receiving end.
The demand for increased transparency is problematical for hedge fund managers, not for any sinister reason, but simply because the success of so many funds depends on the manager being able to keep his positions confidential.
Not to be able to do so would reduce the manager’s ability to produce alpha, as other managers simply copied his strategy, and would also create the risk of other parties trading against short positions.
By imposing inappropriate regulatory measures to hedge funds, the entire essence of the fund itself could be lost.
Ucits IV delay may be justified
Reports that the Ucits IV project might be delayed or scrapped altogether should hardly come as a surprise to those following the financial crisis.
But what is the reasoning behind the delay? The EU has said that the deadline of April 30 to publish a draft directive outlining the new proposals will now be missed. This has created a widespread raft of displeasure, most notably among members of the European Parliament.
The concept of fund passporting and a pan-European single market for investment funds is, in general, a good one. Many if not all industry players are in favour of a full management company passport as it is perhaps the most efficient solution from the asset management side and it also poses no real problems from a servicing point of view. The industry desperately needs a single market to be competitive and wants this package finalised because of the many benefits to the funds industry.
But while there is a widespread belief that the European Commission might prefer a ‘partial’ management company passport, it’s also possible that Charlie McCreevy, the commissioner responsible for the internal market and services, might have deferred publication of the draft directive because of the continuing financial crisis and the potential spill-over effects from the launch of the new legislation. Determining the impact of the current financial uncertainly is not easy and might justify a decision to put the Ucits IV project on hold.
After all, McCreevy, an Irishman who as finance minister between 1997 and 2004 contributed to his country’s emergence as a European financial services hub, must be as well placed as anyone to make the right decision.
