It’s an ill wind that blows nobody any good, they say, and that’s certainly the case for hedge fund manages.
It’s an ill wind that blows nobody any good, they say, and that’s certainly the case for hedge fund manages. In a tough economic environment that has already taken a number of notable hedge fund scalps, other managers are revelling in the opportunities offered by high levels of volatility and the opportunity to pick up investments at bargain prices from distressed or suddenly-cautious institutions. Two traders famous for different reasons, George Soros and Brian Hunter, are back in the news as they seek to turn unruly markets and depressed sentiment to advantage – how successfully, will only become clear later.
Private equity and hedge funds could make beeline for BAA
The UK’s biggest airport operator BAA may have to sell three of its seven airports in its home market (it also owns the airport at Naples in Italy) because of concerns about its market dominance, following a report from the country’s Competition Commission.
The watchdog is recommending that the airport operator should be obliged to sell two of its three airports serving London and south-east England – Heathrow, Gatwick and Stansted – and that BAA should not be allowed to continue to own airports in both Glasgow and Edinburgh.
BAA described the competition body’s verdict as “flawed”, while Spanish infrastructure company Ferrovial, which acquired BAA two years ago, said that dismembering the company would lead to poorer standards of services and a delay in the delivery of new runways.
But despite its opposition to the Competition Commission’s findings, Ferrovial’s shares rose as investors hoped a forced sale of some of BAA’s assets could bring respite to the company’s balance sheet at a time when the infrastructure and building conglomerate is struggling to refinance its heavy debt load.
Meanwhile, several bidders have signalled their interest in UK airport assets, including Manchester Airports Group, Frankfurt airport operator Fraport and German construction and utility company Hochtief. The Manchester group is prepared to join with US investors or private equity firms to buy a London airport, with Gatwick the most likely target.
It goes without saying that hedge fund managers will also be taking a close look at BAA’s assets, and they and private equity firms may well have a significant role to play when a final decision on the company’s future is taken next April.
Ex-Amaranth trader rakes in the money
Apparently unscarred by the Amaranth Advisors fiasco, the trader whose natural gas trades triggered the collapse of the Connecticut hedge fund manager nearly two years ago is back in business. A commodity hedge fund advised by Brian Hunter surged in July as energy, metals and agricultural prices suffered their largest fall in nearly three decades.
The Peak Ridge Commodity Volatility Fund launched in November last year and advised by Hunter returned around 24 percent last month, leaving it up at least 230 percent this year, according to Bloomberg.
Commodity prices fell 10 per cent in July, the biggest monthly decline since March 1980, as measured by the Reuters/Jefferies CRB Index, which has now plunged 19 per cent from its July 3 peak.
Rising inventories and slumping demand sent contracts from oil to soybeans tumbling, raising the prospect of an end to the six-year commodity boom. Commodities have continued their declines this month, dragging down the shares of companies in the mining, energy and agricultural sectors.
Peak Ridge Capital Group, a Boston-based alternative investment manager also active in private equity and real estate, hired 34-year-old Hunter last year to advise its commodity fund. Hunter appears to have put all his troubles behind him, but some investors will be wondering what kind of risks are being run by the man whose bets cost Amaranth as much as USD5bn in the space of just a week when the natural gas market moved against him.
Banks tighten lending grip on hedge funds
Investment banks are implementing tough internal rules, perhaps in a very practical way, to streamline the way they lend to hedge funds. Morgan Stanley and Goldman Sachs are among the institutions that are reported to have changed the way they assess lending to hedge funds by linking it to the market’s assessment of their own creditworthiness.
Morgan Stanley is understood to be evaluating the amount of leverage it will provide to hedge funds based on the price of its own credit insurance, while Goldman is said to be linking the availability of lending to hedge funds to its bond prices.
These changes would limit the ability of hedge funds to borrow from either firm if Morgan and Goldman themselves found borrowing becoming more expensive, as would be the case if the markets lacked confidence in their financial health.
The plans to link hedge fund leverage to the broader credit markets have reportedly been in the works for some time, but their implementation has been accelerated as investment banks seek ways to guard against the kind of sudden loss of confidence experienced by Bear Stearns, for example.
This no-nonsense method of evaluating how much these banks can afford to lend to hedge funds is an abrupt break with the flexible approach that was prevalent in the sector up to a year ago. It demonstrates that investment banks have been forced to become much more conservative than in recent years, and hedge funds are set to pay the price.
Soros is buying
Global investor and philanthropist George Soros is back doing what he does best – making a fortune by exploiting financial turmoil. According to a regulatory filing last week, Soros Fund Management raised its stake in Lehman Brothers from 10,000 shares in March to 9.47 million common shares, representing 1.36 per cent of the total outstanding, at the end of June.
Lehman’s shares are down 75 percent so far this year as the beleaguered investment bank fights its way through the credit crunch and liquidity crisis. Soros probably thinks the time is right to pick up a bargain with the fourth-largest US investment bank, although the value of the stake has declined from USD187.7m at quarter-end to USD153.5m on August 15 following an 18 per cent fall in Lehman’s share price over the past six weeks.
But that’s not all. Soros Fund Management also bought a USD811m stake in Petroleo Brasileiro in the second quarter of this year, making the Brazilian oil company better known as Petrobras its largest holding.
Soros has been increasing his mining and commodities holdings and as of June 30, the stake in Petrobras made up 22 per cent of the USD3.68bn in stocks and American depositary receipts held by Soros Fund Management, according to the firm’s filing with the US Securities and Exchange Commission.
Soros is a renowned investor and his macro investing strategy is watched closely by hedge fund managers, some of whom follow his investment picks. But for all his reputation, Soros is not infallible; his funds were big losers (along with Long Term Capital Management) when Russia defaulted on its debt in 1998. Since the end of June, the Petrobras share price has fallen 28 per cent. Nevertheless, given Soros’s record, investments like those in Lehman and Petrobras make the market sit up and take note.
Pru drafts in hedge fund experience
UK insurer Prudential has appointed Harvey McGrath, former head of the listed hedge fund manager Man Group, as chairman in succession to Sir David Clementi, a former deputy governor of the Bank of England. The 56-year-old McGrath will join the Prudential board as a non-executive director on September 1 on a salary of GBP500,000 a year before taking the chair at the beginning of next year.
During a career with Man Group from 1980 to 2007 McGrath was variously treasurer, finance director, president of Man in New York, chief executive and then chairman. He has a stake worth GBP152m in the company after selling GBP5m worth of shares last year.
Prudential believes the former Man chairman’s expertise will help it to expand internationally. The insurer, which is suffering from a moribund share price and is regularly the subject of takeover rumours, is focusing on growth in Asia to offset the effects of a slumping UK economy and weakening sales in the US.
Chief executive Mark Tucker says of McGrath: “He will bring great insight and experience to the board of the company as we pursue our increasingly international strategy.” These days, it is to the hedge fund industry that traditional financial institutions look for leadership qualities.
Money talks
After the saga of Greg Coffey and GLG Partners, it is now the turn of US hedge fund manager Fortress Investment Group, which has lavished a USD300m share grant – thought to be at least one of the largest retainers of all time – on one of its star traders, 38-year-old Adam Levinson, in an effort to persuade him to stay with the company.
This giant slug of new equity in the New York-based Fortress gives Levinson, who runs one of the main funds for Fortress, a stake of up to 7 per cent in the company, correspondingly diluting the ownership of existing shareholders.
Perhaps Fortress believed that had they not tied him into the deal, he could have walked away and set up in competition with the firm. After all, Coffey walked away from a package of share options and other benefits worth USD250m when he decided earlier this year to quit GLG and start his own business.
Levinson is reported as justifying the award by arguing that he works 24 hours a day, with more than 12 hours at the office and calls through the night. He recently had his first child but says his work is more likely to wake him than the baby.
Whatever the justification of offering him such a mammoth incentive to stay, Levinson’s decision raises the question as to whether he is fundamentally more conservative than Coffey, reckoning that a bird in the hand is worth two in the bush, or whether the outlook for new hedge fund start-ups has deteriorated significantly since Coffey announced his departure from GLG in April.
