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Hedgeweek Commentary: Behind the hedge fund news

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The tricky conditions in major equity and fixed-income markets are giving a helping hand to a trend already underway, toward investment in assets uncorrelated with the core holdings in inv

The tricky conditions in major equity and fixed-income markets are giving a helping hand to a trend already underway, toward investment in assets uncorrelated with the core holdings in investors’ portfolios. This is evident in the surge of new funds focusing on esoteric new asset classes, such as vineyards and racehorses, and also in the increased focus on emerging markets including the Middle East and, especially, Africa.



Eggs in different baskets

The times are certainly changing. Even hedge funds, regarded as the investors of the Wild West with their alternative investment strategies, are playing by traditional rules and following the age-old dogma of diversification.

First on the menu is geographical diversification. This is certainly seen in Deutsche Bank’s annual alternative investment survey, which found that the investors surveyed plan to increase their hedge fund allocations to emerging markets, with the Middle East the top choice and North America coming off worst.

Around 45 per cent of investors surveyed by Deutsche’s hedge fund capital group think funds investing in the Middle East and North Africa will be the top performers in 2008. ‘[This] indicates a clear redistribution of capital toward emerging markets,’ said Sean Capstick, co-head of the group.

Funds are already getting into the action. For example Michael Spencer, founder of leading inter-dealer broker Icap, is ploughing tens of millions of dollars into a new hedge fund to profit from frontier markets in Africa and the Middle East.

At the same time a former director of UBS’s investment bank has set up an Africa hedge fund and expects to raise more than USD200m, making it one of the biggest of a number of recent launches of hedge funds investing in the region, taking advantage of investor appetite for emerging markets and positive impact of rising commodity export prices on the continent’s economies.

The Deutsche Bank survey said that cash levels among hedge funds are currently high as investors take a ‘wait and see’ approach to investing, but 53 per cent of investors holding cash now plan to spend it over the next 12 months. Funds that follow the diversification path can look forward to more than their fair share.



Managers offer flexibility in uncertain markets

Hedge funds have, to put it mildly, a mixed reputation. They were famously dubbed ‘locusts’ by one-time German labour minister Franz Müntefering after activist funds blocked Deutsche Börse’s bid for the London Stock Exchange and forced out its chairman and chief executive. Star managers’ remuneration running into 10 figures has stirred unease at a time of economic distress for many ordinary people.

But hedge funds can show a more attractive, less uncompromising face, too. In the face of tough economic conditions for their investors, several managers have demonstrated that when it comes to investment terms, they can be more flexible than they are often given credit for.

A number of managers are reported to be offering investors heavily discounted fees if they invest in their new funds. The USD3bn London hedge fund manager Endeavour Capital and USD2.5bn Drake Management of New York are offering to waive performance fees on new funds until they have made back the losses that led to the closure of their previous vehicles.

Meanwhile, GLG Partners is reported to have advised investors in its emerging markets fund, which represented USD5bn of the firm’s USD24.5bn in assets under management at the end of last year, that they may not be penalised if they withdraw their money following the departure of the fund’s manager Greg Coffey in October.

GLG has said it is considering waiving both the penalties and redemption gate provisions for the fund on its redemption date of November 3. It would be following Citigroup, which has announced it will allow investors in the USD4.5bn Old Lane multistrategy fund previously run by Citi’s now chief executive Vikram Pandit to redeem their investments without restrictions as of July 31.

A number of high-profile funds have encountered difficulties – or worse – in the face of the credit crunch. A number of managers have made clear that in troubled times, they are also ready to respond to investors’ concerns.



Funds may swoop as Microsoft drops Yahoo! bid

Over the weekend, software giant Microsoft dropped its three-month-old bid to buy internet firm Yahoo! because the two sides cannot agree on an acceptable price. But Microsoft’s withdrawal is now prompting Yahoo!’s shareholders – the majority of them large US fund managers as well as hedge funds and arbitrageurs who have bought significant stakes since Microsoft first tabled its original USD31-a-share offer in February – to rattle the Yahoo! board.

Hedge funds may now mount a proxy fight and seek several seats or even the full board. One shareholder, a hedge fund manager, was quoted as saying: ‘Yahoo’s current board definitely needs new blood.’

Shares in Yahoo! fell 15 per cent on the New York Stock Exchange on Monday following the withdrawal of Microsoft’s bid. This prompted speculation that existing hedge fund shareholders and new ones may buy into the internet company at these attractive prices.

Whether the hedge funds will be successful or not, the outcome will surely be more clearer at the next annual shareholders meeting, for which Yahoo! has yet to set a date.

If the hedge funds do get their way in replacing board members, the new directors could revoke Yahoo!’s poison pill clause, which prevents an investor from buying more than 15 percent of the company on the open market. This could leave Yahoo! vulnerable to a hostile takeover, and perhaps reignite the interest from Microsoft.



Hedge fund heads for the races

It is quite common for hedge funds to have an unusual or esoteric investment strategy. But in times of global uncertainty, hedge funds are certainly cementing their alternative image. Days after it emerged that hedge funds are buying into agricultural land to exploit rising food prices and commodity prices, in trots a company that could be the first to create a racehorse hedge fund.

International Equine Acquisitions Holdings, a New York-based corporation and a majority owner of Big Brown, the early favourite to win the 134th Kentucky Derby, is turning itself into a hedge fund, according to reports.

It is currently raising USD100m to buy, sell and breed horses, and will operate like a hedge fund, collecting management and performance fees. The founders want to take the company public before the end of the year. Under its new hedge fund-like structure, investors will each own a part of all of the firm’s assets. An independent auditor will value the fund each quarter, and it will offer investors quarterly liquidity.

Racehorses are a valuable enough commodity, but are they worth building a hedge fund around? Maybe. More than USD15.4 billion was bet on horses in North America last year, more than USD1.1bn was distributed in purses, and more than USD1.2bn was spent purchasing thoroughbreds, according to the Jockey Club, the American stud registry.

In theory, this could translate into a good opportunity for punters. And what better punters than hedge funds to become involved?

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