.........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

By: for
| 21 Jan 2009 | 02:04 PM ET

Investors pulled a record $155 billion out of hedge funds last year, punishing the once red-hot asset class for delivering its worst-ever returns, according to numbers released on Wednesday.

Hedge funds around the world now manage an estimated $1.4 trillion, the same sum they managed in 2006 and far less than the $1.93 trillion they invested in the middle of 2008, Chicago-based tracking firm Hedge Fund Research said.

This is only the second time since 1990 that the exclusive and often secretive hedge fund industry suffered net outflows for the full year, HFR said.

Consulting firm Hennessee Group, which also tracks performance and asset flows, said last year was the worst for the industry in terms of performance and redemptions since 1987.

HFR reported that investors simply wanted their money back last year, paying little attention to the size of the hedge fund they were invested with, its particular strategy, or how the hedge fund was performing.

"Investor risk aversion remained at historically extreme levels through year end, even as implied and realized asset volatility moderated,'' HFR president Kenneth Heinz said in a statement.

At the end of the year many hedge fund firms, including industry powerhouses Tudor Investment and Citadel Investment Group, took an unusual step and told their investors they could not get their money back just yet as they suspended redemptions.

Worst-Ever Returns

Despite many managers' promises to make money in all markets, the average hedge fund lost 19 percent last year, marking the industry's first full year loss since 2002 when the average fund slipped 2.9 percent, Hennessee Group data show.

Hedge funds can sell securities short and use leverage, trading techniques that are off limits at most other portfolios.

"2008 hedge fund losses were widespread, with 70 percent of the funds that report to us ending the year in the red,'' said Sol Waksman, founder and president of BarclayHedge, another industry research group.

As a group, hedge funds outperformed the average stock mutual fund's 38 percent drop, but many of the industry's stars suffered losses far steeper than the average 19 percent decline, investors and managers said.

Faced with a worsening financial crisis, the collapse of investment bank Lehman Brothers and gyrating stock markets, and steeper hedge fund losses, wealthy individuals and many endowments and some pension funds raced for the exits in the third quarter.

They stepped up their calls to exit in the fourth quarter, pulling out $152 billion in the last three months alone, HFR data show.

Investors added $16.5 billion in the first quarter of 2008 and put in another $12.5 billion in the second quarter. In the third quarter, they pulled $31.7 billion out, HFR data show.

Hedge funds, unlike most mutual funds, lock up assets for months and sometimes years, often requiring their investors to give 45 days' notice before getting their money back. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Two senior senators introduced legislation on Thursday to impose government oversight of hedge funds. Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee, plans hearings next month to more tightly regulate the financial markets.

Morning Call: January 30

The legislation by Senator Carl Levin, Democrat of Michigan, and Senator Charles E. Grassley, Republican of Iowa, was filed as the Obama administration was preparing a broader legislative overhaul of the regulatory system, including an effort to more tightly regulate hedge funds.

State regulators and a panel created by Congress to oversee the $700 billion Troubled Asset Relief Program issued separate but similar regulatory proposals on Thursday. The proposals also seemed to closely mirror many of the provisions that administration officials say will be part of their plan.

The regulatory overhaul is one piece of the administration’s effort to restore confidence in the financial system.

Other pieces include a stimulus bill that the House passed on Wednesday and that is moving through the Senate, and an overhaul of the financial assistance program for the nation’s largest banks.

___________________________________________________________________________________________________________________________________


By STEPHEN LABATON for
Published: January 29, 2009

WASHINGTON — Two senior senators introduced legislation on Thursday to impose government oversight of hedge funds.

Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee, plans hearings next month to more tightly regulate the financial markets.

The legislation by Senator Carl Levin, Democrat of Michigan, and Senator Charles E. Grassley, Republican of Iowa, was filed as the Obama administration was preparing a broader legislative overhaul of the regulatory system, including an effort to more tightly regulate hedge funds.

State regulators and a panel created by Congress to oversee the $700 billion Troubled Asset Relief Program issued separate but similar regulatory proposals on Thursday. The proposals also seemed to closely mirror many of the provisions that administration officials say will be part of their plan.

The regulatory overhaul is one piece of the administration’s effort to restore confidence in the financial system.

Other pieces include a stimulus bill that the House passed on Wednesday and that is moving through the Senate, and an overhaul of the financial assistance program for the nation’s largest banks.

Senior administration officials have been in discussions this week with Wall Street executives over proposals for managing the remaining $350 billion in the troubled assets program. A new plan is expected to be announced soon.

At the same time, the administration is preparing to propose tighter regulation of credit rating agencies, new federal oversight of mortgage brokers and greater supervision of credit-default swaps, the unregulated financial instruments that experts say contributed to the economic crisis.

Lawmakers have also signaled that they intend to take up legislation to more tightly regulate the markets. Meeting with reporters on Thursday afternoon, Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee, outlined an ambitious schedule for hearings next month on regulatory issues.

They will feature testimony from Treasury Secretary Timothy F. Geithner, Federal Reserve Chairman Ben S. Bernanke and Paul A. Volcker, a former Fed chairman who is an adviser to President Obama.

Mr. Dodd acknowledged that the administration was hoping to complete many of its proposals before a meeting of the Group of 20 nations in London on April 2.

Administration officials have expressed a particular interest in tightening regulation over hedge funds, a move that was opposed by the Bush administration even though William H. Donaldson, chairman of the Securities and Exchange Commission under President Bush, tried to force the funds to register as investment advisers.

His effort was successfully challenged in 2006 when the United States Court of Appeals for the District of Columbia ruled that the commission’s regulation had exceeded its authority.

The Levin-Grassley legislation would correct that problem by giving the commission the unambiguous authority to regulate hedge fund advisers.

“If the events of the last year have taught us anything, it’s that we need to regulate firms that are big enough to destabilize our economy if they fail,” Mr. Levin said. “It’s time to subject financial heavyweights like hedge funds to federal regulation and oversight to protect our investors, markets and financial system.”

Mr. Grassley said he believed the political winds had shifted since he made a similar proposal two years ago. It was never considered by Congress.

“The wizards on Wall Street figured out a million clever ways to avoid the transparency sought by the securities regulations adopted during the 1930s,” Mr. Grassley said. “Instead of the free flow of reliable information that markets need to function properly, today we have confusion and uncertainty fueling an economic crisis.” .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

As if I had anything else to be gloomy able from here until April 15th, February is now here.  Well, what's so bad about February?  Well, I should add that most of the SEC-related regulation changes are often revealed in February.  And not to mention the fact that I, personally, am inches away from my own fund.

So what's a future fundie to do?  Pray...or find another line of work.  And here's why.

If you've had a pulse in the last 90 days, you should at least be at least aware of the fact that the government has been on the verbal warpath to tighten regulation in the capital markets.  As early as last year, legislation passed to merge the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) into one body.  That may not sound like much, but it's more or less like bringing two distinct cultures together and binding them under one set of rules in which to operate.  But again, I had a year in order to "prepare" for the changes to come.

But from an outsider's standpoint, there's really only so much preparation possible.  Plus, the changes are actualy coming from legislators; people who I honestly think don't have a clue about what's really going on in the industry.  And for that same point, I don't thnk that th point is to do something constructive that actually allows the capital markets to mature and evolve.  The goal for legislators is often to appease the masses such that they can be remembered for enacting "change" of some sorts.  After all, they are beholden (to some degree) to their constituents; constituents that have been battered financially by unemployment, shrinking retirement portfolios, bouts of inflation and even deflation, and an uncertainty that was inherited from the media and associated analysts.  The problem, from this perspective, is simple: stop the blatant losses in asset value ASAP.

The problem from the industry standpoint is more or less as complex as it gets.  How do you develop a regulatory body that is transparent enough to supply legislators and officials with enough information as to be "informed" while simultaneously allowing certain aspects of the industry (commodity and currency funds) to remain largely unregulated?

I honestly am wary about the result of Senators pushing for "sweeping" regulatory pressure on the bodies simply because I think that they will overshoot the "functional" level of regulation in favor for something that is either 1) more of the same nonsense or 2) simply too stiffling to allow for continued growth in the industry.

Hundreds (if not thousands) of funds have closed their doors in the last few months.  This leaves a pretty large absense that needs to be filled.  And unbeknownst to the general public (yes, most of the voters), the mid-tier market is much like the middle class economic strata: necessary for a healthy and functioning market environment. 

Yet the regulation that comes down from Capitol Hill will most likely favor the larger existent funds, since many of the advisors to the legislators currently comes from the big names in the financial industry.  If you don't believe me, just look at how Treasury Sec. Henry Paulson hand picked the TARP management directly from his financial alma mater, Goldman Sachs (GS).  Expect more of the same simply because I strongly doubt that Washingtonians lack a sense of rational direction.  All they know is that they need to act. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

Portfolio.com

It's becoming increasingly clear that the standard hedge fund incentive model breaks when a fund plunges in value.

If the value of a hedge fund is rising, then 2-and-20 works as intended: the fund manager gets paid more the more that the value of the fund goes up. And if the value of the fund falls a little, then the high-water-mark system stops the fund manager from being paid twice for getting to the same spot. But if the value of the fund falls a lot, then suddenly the fund manager loses pretty much all of his incentives, things start going rather pear-shaped, and there's a good chance that fund investors will end up getting shafted by their fund manager.

Consider the fight between Carl Icahn and fund manager Warren Lichtenstein. Lichtenstein had a bright idea when his hedge fund -- full of illiquid assets -- faced a lot of redemption requests: he'd take it public, and investors could then sell their investments at whatever price the market put on them, without the fund itself having to liquidate. Investors might have to take a very low price -- but Lichtenstein himself would continue to collect his management fee in perpetuity.

And there's no shortage of fund managers with underperforming funds who have announced that they're going to set up new funds: both John Meriwether and Michael Zimmerman are in the news today planning to do just that, following the lead of Jeffrey Gendell.

In all these cases, investors in the old flagship funds end up getting either liquidated or ignored, while the fund manager concentrates on the new fund where he has a much greater chance of earning a performance fee.

What's more, hedge-fund investors are well aware of this dynamic, and that's one reason why they tend to issue redemption requests when a hedge fund falls more than about 10%, even if that fund has significantly outperformed something like the S&P 500. They know that the high-water mark means their fund manager has lost a lot of his incentive, and/or is now incentivized to take reckless risks in order to get back to the high-water point. So they bail.

I'm not sure how to fix this broken system, but there's clearly something very wrong with the way that things are set up right now. Most likely the total amount of money invested in hedge funds is simply going to shrink dramatically: it was an experiment which didn't work out very well. Which is fine. But anybody interested in seeing the system live on indefinitely will need to come up with some way of ensuring that investors don't get doubly shafted when a fund falls sharply in value.
.........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

October 14, 2009

Hedge funds, which suffered one of their worst-ever years in 2008, are on pace to enjoy their best year in six in 2009, according to one index.

Eurekahedge said the average hedge fund rose 2.5% in September. The Eurekahedge Hedge Fund Index is up 16.1% on the year, which is poised to be the industry’s best since 2003. The returns are based on preliminary figures from about half of the index’s more than 2,000 funds reporting.

Hedge funds are on pace to match 2003’s return of 21%, Eureakhedge said. All of the firm’s strategy subindices rose in September, with event-driven funds leading the way with a 4.6% return. Fixed-income funds rose an average of 1.8%.

Six of Eureka’s seven regional indices were in the black last month, with only Japanese-focused hedge funds losing ground, down 1.1%. Russia and Eastern Europe funds soared 10% on the month, while emerging markets funds added 3.6%.
_________________________________________________________________________________________________________________________________


Doesn't seem so appropriate that just about everything bounces?

Much like the hedge fund traders themselves, I do think that there's a sound practice in migrating back to towards the areas that were hardest hit.  Financials, energy, retail, emerging markets, etc.  The only risk comes in coordinating the timing of the "bounce" itself...but that's no greater risk than at just about any given turn in the market. .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

October 30, 2009

Citadel's Kenneth GriffinCitadel Investment Group has lifted its redemption suspension 10 months after barring withdrawals, making good on a promise it made last month.

The Chicago hedge fund giant imposed redemption gates in December to close a year in which its flagship funds lost more than 50%. By the end of last year, investors have sought to withdraw more than $1.5 billion from the firm.

But like many of its peers, Citadel has had a big bounce-back year. The Kensington and Wellington funds, so hard-hit last year, have soared 57% this year.

That improved allowed the firm to fill $250 million in redemption requests earlier this month. Last month, the firm said it would return the remaining $1 billion in outstanding redemption requests by the end of the year. In February, Citadel founder Kenneth Griffin promised to ease or lift the redemption restrictions “as our balance sheet continues to strengthen and the liquidity of our investment portfolio continues to improve.”

The lifting of the gates was first reported by The Wall Street Journal.

In his letter to investors yesterday, Griffin said Kensington and Wellington would focus on greater diversification and liquidity going forward.

“Unquestionably, some of our core strengths became liabilities last fall, including perhaps a degree of overconfidence in our ability to weather almost any market catastrophe,” Griffin wrote .........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand

December 1, 2009 — 9:12am ET | By Jim Kim


You've likely heard of the January Effect, that stock market old saw that holds that stocks tend to rise in January because people sold in December to lock in capital losses and seek to reinvest for the new year. The Hennessee Group has noticed something of a corollary: A December Effect, which holds that stocks--and hedge funds-- tend to rise in December because investors hang onto stocks to defer paying taxes until the new year.

The Hennessee Group recently took a look at the historical performance of the equity markets and hedge funds when we enter the final month of the year with positive year-to-date gains. Starting from 1995, the S&P 500 has generated positive returns through November in 10 calendar year periods and experienced additional gains in December in 70 percent of those cases. In comparison, hedge funds managed to generate gains in 9 of those through-November periods and rose in the subsequent December in all cases (see chart).

When the S&P 500 is up through November, the index goes on to gain on average 2.1 percent in December and hedge funds go on to gain nearly 2 percent. So one could make the case that this effect is real.

Which brings us to the point: Hedge funds may be on the verge of a spectacular year--perhaps the best in a decade. If the industry can achieve a 2 percent gain in December, which is entirely possible, it will end up with the highest average returns since 2003, reports Financial News. 

Even if funds dip a bit in the final month of the year, bucking the December Effect, it will still have been a good year. One in which they again thoroughly trounced the S&P 500. Warren Buffett is certainly losing his high-profile bet against a fund of hedge funds. For now anyway.
.........................

"A trader is a man who earns what he gets and does not give or take the undeserved. He does not treat men as masters or slaves, but as independent equals. He deals with men by means of a free, voluntary, unforced, uncoerced exchange—an exchange which benefits both parties by their own independent judgment. A trader does not expect to be paid for his defaults, only for his achievements. He does not switch to others the burden of his failures, and he does not mortgage his life into bondage to the failures of others." - Ayn Rand