As established hedge fund strategies suffer from the fallout of the US sub-prime debacle and the credit crunch, some managers are adjusting their investment approach, typified by the growi
As established hedge fund strategies suffer from the fallout of the US sub-prime debacle and the credit crunch, some managers are adjusting their investment approach, typified by the growing number of activist funds ready to take on company executives in their search for shareholder value. Others are taking advantage of a fresh wave of enthusiasm for listed closed-ended fund vehicles to raise ‘permanent capital’ that is not vulnerable to outflows at times of market stress.
Activism on the rise
Hedge fund activism is on the rise. On Wednesday the long-running battle between US railway operator CSX Corp and two hedge funds intensified further with both sides seeking support from shareholders ahead of a vote on the composition of the company’s board.
The funds – Chris Hohn’s The Children’s Investment Fund and 3G Capital Partners – claim their plans, the latest move by the funds in a crusade to shake up the CSX board and press for operational changes, could boost CSX’s annual earnings by an extra USD2.2bn within five years.
However, executives at CSX, which in March sued the two funds for alleged violation of securities laws, have written to shareholders urging them not to vote for the slate of five directors put up by TCI and 3G for the company’s annual shareholders’ meeting on June 25.
Other ongoing hedge fund activist campaigns are led by Pardus Capital Management, which is seeking changes at several companies whose stocks it holds, notably Delta Air Lines and United Airlines’ parent UAL, and New York-based Nanes Delorme Partners, who last month told the board of directors at Vaalco Energy that the company was undervalued and that it should consider strategic alternatives, including putting itself up for sale.
Essentially, activism is about devising ways to generate greater shareholder value. Hedge fund managers who want to boost the value of an equity investment are increasingly turning to activist tactics as a way to boost their returns, and it’s a strategy that is gaining increasing traction among investors.
Most company executives loathe admitting that the activists often come up with eminently sensible ideas. But the fact remains that activism is one of the best catalysts these days to boost a company’s performance.
Hedge funds banking on IPO route
Many hedge fund and fund of fund managers have been analysing the IPO route lately. Just days after fund of hedge funds manager FRM disclosed plans to offer its flagship diversified strategy through a listed fund, Brevan Howard, one of Europe’s largest hedge fund managers, unveiled long-mooted plans to proceed with a London fund flotation that seeks to raise USD500m.
Earlier this year, Marshall Wace announced plans to list its USD2bn MW Tops fund in London, a year after its debut in Amsterdam. And although BlackRock missed its USD500m target for its fund of hedge funds feeder vehicle, it still managed to attract at least USD275m from European and UK institutional investors and wealth managers in an uncertain market.
Why this sudden explosion of IPOs? One reason is easing of the rules for listing on the London Stock Exchange’s Main Market, including a provision allowing dual listings. But mostly fund IPOs are becoming an attractive route for managers to increase assets and diversify their revenue streams.
With increased competition and global uncertainty, a listed vehicle is a good way to capture investor interest. As one hedge fund manager puts it: ‘It is basically a move toward permanent capital.’
The fact that many funds are following the IPO route is an indication that investor interest is out there, which goes to show that even in the current investment climate, well-founded IPOs will attract solid support.
In search of common standards
A fortnight ago, two private-sector committees set up under the auspices of the President’s Working Group on Financial Markets released sets of best practice in the US for the hedge fund industry and its institutional investors. While the changes suggested in the reports are self-regulatory in nature, the groups argue that they are necessary to limit systemic risk, foster investor protection, and set standards for the oversight of hedge fund investments.
The report of the hedge fund industry committee highlighted five areas of business practice that hedge fund firms need to focus on – disclosure, valuation, risk management, trading and business operations, and compliance, conflicts and business practices.
Critics of the reports may well doubt whether self-regulatory standards are likely to be implemented on a large scale. Hedge fund managers are hardly going to ‘disclose’ investment strategies, as the industry report recommends, because that is how they make money. And many hedge fund executives believe they are sufficiently regulated already in the areas of risk management and the handling of conflicts of interest.
However, an interesting point in the industry report involves the accurate valuation of assets. While many hedge funds have accurate measures of valuation, the concern might be that there is no valuation standard in place. Valuation is important because it brings in consistency and, more importantly, additional investors – the fund of funds due diligence checklist always has a mention of correct pricing and valuation.
Aima and the Managed Funds Association in the US have already come out with proposals on valuation standards, although they vary slightly. But whether or not they will become ‘standards’, however, is anybody’s guess.
Hedge funds go back to the land in search of alpha
The silent tsunami has arrived. The global food crisis is sending prices of everyday items such as rice and cheese soaring and economists predict that the world is entering a new era of steadily rising prices.
But while many families are facing further pain at supermarket checkouts, hedge funds have increasingly been placing speculative investments and are pouring billions of dollars into commodities such as grain for relief from sliding equity markets and the credit crunch.
Rising agricultural prices, growing consumerism in emerging markets and the growing demand for biofuels are prompting hedge funds not just to invest directly in the physical commodities market but also to buy agricultural land.
Reports suggest that hedge funds and investment banks are betting on rising food prices by buying farms. This new breed of investors in farmland believes the world is entering an era of high food prices where farming will once again become profitable.
Their timing is right. Experts have warned of price increases of up to 50 per cent on food staples before the end of 2008. Take for example wheat prices, which has risen 130 per cent over the past year to new all-time high last week.
History does repeat itself. This large-scale shift clearly illustrates how even pure financial players are transferring investment from paper-based markets into real assets.
