Fri, 06/06/2008 - 06:59
In an uncertain investment climate and tricky global economic environment, a flight to perceived quality on the part of investors has shored up the asset base of larger hedge fund groups but left start-up and spin-off managers struggling to raise a viable level of capital. That makes it a timely moment for the investment arm of AIG, in partnership with Old Mutual's alternative investment subsidiary, to launch a new venture that will seed start-ups, spin-off groups of traders and hedge funds in need of restructuring.
What a novel idea. The asset management arm of giant insurer AIG is forming a partnership with a hedge fund investment group to seed emerging hedge funds.
AIG Investments is teaming up with Larch Lane Advisors, an alternative investment affiliate of UK-based Old Mutual Asset Management, to invest between USD50m and USD200m with hedge fund start-ups, teams of traders leaving established management groups and more mature hedge funds that need restructuring.
Larch Lane chief executive Mark Jurish says: 'Talented investors are leaving large hedge funds to start their own businesses, but many of them have not been able to reach their capital targets. The current supply/demand imbalance for start-up hedge fund capital represents the best seeding opportunity I've ever seen.'
There is no doubt that the fast pace of hedge fund asset growth has slowed. The credit crunch and liquidity squeeze has put a dampener on hedge funds in recent months and some managers have gone out of business. At the same time, many executives have left their firms to set up hedge funds on their own.
While larger managers have weathered the storm, smaller and start-up firms are struggling to attract investors. For some of them, AIG's seed money might just prove to be the key - for start-ups to develop, and for AIG to benefit from the outsized returns that studies show early-stage managers deliver. Other large players should follow AIG's example and step up to the mark.
The Children's Investment Fund Management seems to have its fingers in many, many pies. It has been rumoured that the London-based hedge fund manager headed by Chris Hohn has been building a stake in Royal Bank of Scotland.
Edinburgh-based RBS, Britain's second-biggest bank, gained 8.3 per cent in London trading on Tuesday, fuelling speculation that investor demand is stronger than expected for the new shares offered in its GBP12bn rights issue.
But the rumour is that TCI is taking a stake of about 1 per cent to agitate for a break-up of RBS, in the same way that it helped to trigger the sale of ABN Amro - now, coincidentally, part-owned by RBS, whose outlay on the Dutch-based banking group was one of the factors that has forced it to go cap in hand to its shareholders.
TCI has extensive form as an activist hedge fund prize. It has already engaged with US railway operator CSX, waging a proxy battle to get its nominees elected to the company's board. The fund has also intensified its battle with Japanese nuclear energy group Electric Power Development, saying it intends to gather shareholder support to push through a series of proposals at next month's annual general meeting.
Now the word is that it may be the turn of RBS. Activist hedge funds seek to act as a catalyst, shaking up the target company's management and strategies to generate greater returns to shareholders.
MF Global Securities analyst Simon Maughan told Bloomberg: 'They've made a series of strategic errors,' and shareholders would gain if RBS's investment bank were split off. It would be par for the course for TCI to initiate the process.
Speculative net long positions fell to 25,867 contracts on the New York Mercantile Exchange in the week ending May 27, from a record 127,491 on July 31, according to a Commodity Futures Trading Commission report released on May 30.
The figures emerged as part of an official probe into how much of the oil price surge is due to market speculation. The Senate Committee on Homeland Security and Governmental Affairs, which is scrutinising the role of financial speculators in the commodities markets, has heard testimony from hedge fund managers on how speculative investment by institutional investors and hedge funds in commodity indices may be contributing to food and energy price inflation.
But the latest revelations may now complicate this probe, along with a similar investigation by the CFTC, as the authorities try to determine how much of the rise in oil to more than USD135 a barrel last month was caused by speculators or by market manipulation.
This is both good and bad news. The good news is that the figures suggest that oil prices may have peaked. But the bad news is that the authorities, who lacked a convincing explanation of the oil price spike and were trying to make a scapegoat of hedge funds and other speculative investors, still haven't found an explanation - and that is disturbing.
But the main news was that hedge fund veteran Stanley Fink was stepping down as deputy chairman a little more than a year after assuming a non-executive role. Fink, the previous chief executive of the FTSE 100 company and an influential figure in the European hedge fund industry, will be leaving the company in July after 21 years.
Meanwhile Fink's successor as chief executive, Peter Clarke, says Man plans to use its cash stockpile to buy smaller rivals and hire new talent to expand its offerings in Asia and in multi-strategy funds. He sees buying opportunities as hedge fund management company prices come down, while the credit crunch has knocked out potential rival bidders.
Man Group is doubling its annual dividend and recommencing a share buyback programme that was suspended last July. The latest profits, which beat analyst expectations by around 5 per cent, are a strong indication that alternative investment strategies can achieve good returns despite the financial crisis.
And while Fink has signalled his exit, he is still understood to own directly 9.5 million shares of the group, worth GBP58m. With takeovers on the horizon, it could be that Fink will have some input on future transactions - because for hedge funds, or hedge fund executives, it's all about alpha.
These managers, somewhat more dynamic investors than the traditional investment firms, have been eyeing Asian opportunities for some time. For example, Blackstone's newly-established Altius Advisors business is reported to be launching its inaugural standalone Asia fund in October.
Hong Kong-based Altius is understood to be seeking to raise between USD500m and USD1bn for the fund, which will seek returns from investment in Asian companies involved in M&A, bankruptcies and restructurings.
It's not only Blackstone that is showing interest in Asia. Tribridge Investment Partners and HSBC Halbis Capital Management have unveiled plans for new hedge funds, while ADM Capital plans to raise almost USD1bn for existing funds. KGR Capital has also indicated that it is mulling a launch and fundraising drive.
A recent Deutsche Bank survey said that cash levels among hedge funds are high as investors take a 'wait and see' approach. For some at least, the wait now seems to be ending.
At the end of March, the fund held 57 per cent of its assets in equities, 36.8 per cent in bonds, 1.8 per cent in property and 4.4 per cent in cash. In April last year, the US firms Pension Consulting Alliance and EFI Actuaries compiled a report for the pension fund that recommended allocating up to 6 per cent of its assets in alternatives, although they noted that investing in these asset classes would require significant resource and procedural adjustments from the fund itself.
The lack of response from the UN fund is surprising, as these investment classes are easily accessible and available. However, there are signs that the UN fund may take a step towards alternative investment. Media reports earlier this year indicated that the pension fund had requested help from external investment consultants on alternatives.
Over the first quarter of the year, the fund suffered negative returns of 2.7 per cent. Perhaps now would be a good time for the fund to speed up its research.
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