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Hedgeweek Commentary: Behind the hedge fund news

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Alternative investment managers may be under pressure from politicians keen to regulate the industry more closely, US investigators suspecting insider trading or accounting regularities, a

Alternative investment managers may be under pressure from politicians keen to regulate the industry more closely, US investigators suspecting insider trading or accounting regularities, and tax authorities determined to squeeze more revenue out of a high-profile industry, but even in tough economic times there’s no shortage of optimism among able managers ready to go it alone or investors who continue to see value in alternatives.



Optimism suggests better times ahead for alternatives

Greg Coffey, GLG Partners’ star emerging markets fund manager, has walked away from a handsome fortune in share options and other bonus payments to start his own business. Can he earn more money by setting up his own fund – especially in these difficult current global circumstances? Is it a sign that a turn is afoot?

Coffey’s decision came alongside this week’s announcement by US-based buyout firm Warburg Pincus that it has raised USD 15bn for its new global private equity fund. This proves that investors are continuing to allocate money to the alternative investment industry despite the credit squeeze and economic slowdown.

In Coffey’s case, it’s far from a reckless punt. Surely the best performing manager at GLG and one of the top performing hedge fund managers in the world – the GLG Emerging Markets Fund was up 51 per cent last year and 60 per cent in 2006 – has a firm grasp on investment opportunities in current market conditions.

More importantly, it suggests that there are interesting opportunities ahead. Take the FTSE 100 index as an example. It has been more or less stable in the past few months, after the heavy fall it sustained last year. Still, prices are at low levels, and this makes sense for investors. Funds raised when financial markets are down can generate significant returns.

Is now a good time to invest? High-flying investors certainly seem to think so.



Supporting Barack or Hillary – it’s all about investment

Yesterday, the battle for the Democratic Party US presidential nomination resumed in Pennsylvania, and with it came a report on how many of the wealthiest hedge fund managers have been putting money on senators Barack Obama and Hillary Clinton.

According to the Center for Responsive Politics, which tracks campaign contributions, Obama has received money from many of best-paid hedge fund managers, including Blue Ridge Capital founder John Griffin, Stephen Mandel of Lone Pine Capital and George Soros. Clinton, meanwhile, got donations from Renaissance Technologies’ James Simons, while SAC Capital’s Steven Cohen has donated to both candidates.

Looked at from a broad perspective, this move is all about investment opportunities. As productive and open-minded hedge fund managers, their job is to look at long-term, lucrative and opportunistic ways to invest – and to seek alpha. By showing their support for one or other candidate, they may unlock a door leading to a network that offers more ways to make money.

It was also noted in the New York Times’ DealBook column that much of the money was going to Obama. Why is he such a popular choice, DealBook editor campaign contributions wondered?

‘In a word, access,’ Sorkin wrote. ‘Unlike McCain and Clinton, Obama is relatively new to national politics and is therefore open to bringing new people – and new money – into the tent. For money types who want a table, or at least to look involved and get an invitation to the right parties, Obama is the candidate.’

Indeed. Whether it be Barack or Hillary, it’s all about investment opportunities.



It’s more than just the money

Brevan Howard, one of London’s biggest hedge fund managers, is reportedly considering a relocation of its headquarters abroad. Apparently, the investment house, which manages USD22bn in hedge fund assets and employs 250 people in London, has told the Financial Services Authority that ambiguity over taxation as well as the Treasury’s crackdown on non-domiciled individuals has caused much unease among its managers.

This must be one of the bigger warning signs to authorities that London, a favoured hub for multinationals and the world’s leading international financial services centre, is in danger of losing its edge. And while the UK keeps tinkering with its tax system in ways that make it less attractive to the financial industry, competing jurisdictions such as Switzerland, Jersey and Guernsey are putting out the welcome mat to alternative fund managers.

The loss of hedge fund managers would be an appreciable blow to the country’s revenues, but this is not just about tax take. When a sophisticated investment house moves away from London, it also takes with it other, less quantifiable but perhaps more important elements such as skills, experience and reputation.

Word has it many other hedge fund managers are also reassessing the environment in London. Suppose alternative managers decided move out in droves? They certainly can, because they have very mobile operations. How will the city combat the loss of skills, revenues and reputation?

The credit crunch already presents a major problem for London. But take away its talent and reputation as a friendly jurisdiction to high-achieving individuals and businesses, and the UK will be in a bigger mess. Those responsible for the financial services sector at government level must treat Brevan Howard’s disquiet as a harbinger of things to come and act decisively – before it is too late.



Show me your X-files

Calling agents Mulder and Scully. At a time when scrutiny of hedge fund and private equity activity is at record levels, the Federal Bureau of Investigation, the primary investigative arm of the US Department of Justice, has joined the fray. It seems that the FBI may delve into the dealings of some alternative fund managers as part of a fraud investigation into the US mortgage meltdown.

FBI director Robert Mueller says the agency’s investigations into the sub-prime loan meltdown may uncover financial crimes such as possible insider trading by investment managers at hedge funds and private equity firms. It is also reviewing whether hedge funds improperly hid losses on securities tied to sub-prime mortgages.

Is this something inevitable? Hedge funds now have had everything but the kitchen sink thrown at them – German ministers calling for extra regulation, the Australian and Icelandic crackdowns on short selling, and now a potential FBI investigation. It sounds like a plot for a Hollywood blockbuster.

Will heightened scrutiny lead to a knee-jerk reaction by authorities with regard to increasing regulatory and disclosure requirements? That is the last thing the industry needs.

The US authorities appear to be searching for a scapegoat for the sub-prime loans fiasco. The truth is out there. But we suspect it has less to do with hedge funds than with the banks that loosened their credit controls and lent money irresponsibly.

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