Emerging Managers Fund

ABN AMRO Asset Management sees significant opportunitites in hedge fund sector
ABN AMRO Asset Management ('AAAM') is anticipating further expansion within the hedge fund sector, and believes hedge fund assets are likely to grow globally by as much as 40 percent annum over the next two years.
United Arab Emirates: Saturday, February 26 - 2005

ABN AMRO Asset Management has seen strong growth in its own hedge fund business, adding more than $500m to its total hedge fund assets in 2004, and in the space of just three years has seen total assets under management across all AAAM hedge fund products grow from just $40m to more than $2bn.

On the eve of the 'Hedge Funds World Middle East 2005 Conference', Gary Vaughan-Smith, Head of Alternative Investments, ABN AMRO Asset Management commented on the Group's plans for 2005: '2004 represented a landmark year in the development of the Alternative Investment Group. We saw significant growth in assets under management in our funds of hedge funds products, coupled with the launch of our first single-strategy funds - in Emerging Markets and in Currency. We will be looking to build on that success, launching products in both the funds of hedge funds and single strategy arenas, and have set ourselves the target of having hedge fund assets in the region of $3bn under management by the end of 2006.'

With an extensive private banking and institutional distribution network, the Company is experiencing significant client demand for hedge fund products. Vaughan-Smith sees ABN AMRO's strength as a distributor as key in building its hedge fund presence, and in attracting new fund management talent but is also keen to exploit the home-grown talent already present within the Company. Vaughan-Smith sees the hedge fund sector at an early stage in its development, and believes ABN AMRO is capable of becoming a dominant force within it.

Commenting, Vaughan-Smith said: 'ABN AMRO has always enjoyed a reputation for nurturing talent and we will be looking to incubate and develop some of our finest talent over the next 24 months, and, on the back of that, bring some exciting new products to the market.

'Hedge investors are looking for quality people and company pedigree, and these are attributes that ABN AMRO has in abundance. We believe we can become a growing force.'

Gary Vaughan-Smith will be speaking under the banner of 'Incubating hedge funds: the opportunities' at the 'Hedge Funds World Middle East 2005 Conference' in Dubai, from 28th February - 2nd March.


Related Information:
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Notes to Editors:
1. ABN AMRO Asset Management ('AAAM')
AAAM is the separately organised investment unit of ABN AMRO Bank N.V. With history dating back to 1824, ABN AMRO is among the largest banks in the world and ranks among the biggest European banks. ABN AMRO has more than 3,000 branches in over 50 countries and regions, with strong regional networks throughout Europe, the Americas, the Middle East, South East Asia and Australia. ABN AMRO holds a position of financial strength and stability in Euroland.

AAAM is headquartered in London and Amsterdam with other main money management units in Chicago, Atlanta, Hong Kong and Singapore. It has significant experience in managing money for over 2,000 institutional clients, such as central banks, pension funds and insurance companies. Besides this, AAAM manages money for thousands of private clients around the globe.

It employs over 2,000 people world-wide in over 20 countries, with portfolio managers and analysts located around the world. AAAM manages EUR 156 billion (as at 31 December 2003) in segregated accounts and in over 500 mutual funds.

AAAM offers investment funds in all major asset classes, both fundamentally driven and through more quantitative investment processes. All investment funds benefit from the valuable source of local expertise while portfolios are often managed locally. This local knowledge is used as input for international co-ordination of the investment policy.

AAAM has been a pioneer in sector research and sector investment approach in its investments for over a decade. Its investment groups are supported by internal buy-side and global research analysts, organised after industries.

2. Hedge Funds
AAAM runs six funds of hedge funds, with over $1bn under management, two single strategy hedge funds with $100m under management, and several 'notes' or structured products based on these funds, with approximately $600m under management. Three years ago the Company had just $40m in its hedge fund products.

3. Gary Vaughan-Smith
Gary joined ABN AMRO Asset Management in 2001 as Head of Alternative Investments and Third Party Funds globally. He is responsible for all Alternative Investment products at ABN AMRO Asset Management including funds of hedge funds and single-strategy hedge fund products. As Head of Third Party Funds, he is also responsible for long-only funds of funds products.

Gary began his career in 1986 in the pensions division of Southern Life Association in Cape Town and moved to Sedgwick Noble Lowndes in 1989. He worked in the investment consultancy division, advising pension funds on strategic policy and investment manager selection.

In 1990 he began working for Gartmore, initially heading the quantitative investment and risk consultancy teams, before heading the global portfolio team, where he was responsible for some $26 billion in assets under management. From 1998, he was also a member of Gartmore's six-member Global Policy Group, responsible for asset allocation policy for all actively managed funds at Gartmore.

Born in 1963, Gary holds a Masters degree in Finance from Cambridge University and a BSc (Hons) in Mathematical Statistics from the University of Cape Town (1985). He is also a Fellow of the Institute of Actuaries.

ABN AMRO
Netherlands-based ABN AMRO is a leading international bank with total assets of EUR 637.5 bln (as at 30 September 2004). It has over 3,000 branches in more than 60 countries and territories, and has a staff of about 104,000 full-time equivalents worldwide. ABN AMRO is listed on the Euronext and New York stock exchanges.

ABN AMRO operates through three Strategic Business Units, each responsible for managing a distinct client segment. Wholesale Clients provides integrated corporate and investment banking services to corporate, institutional and public sector clients worldwide. Consumer & Commercial Clients focuses on retail and SME clients in three home markets - the Netherlands, the US Midwest and Brazil and in a number of selected growth markets. Private Clients & Asset Management provides private banking services to wealthy clients and investment products to financial intermediaries and institutional clients.

Anosh Ahamath
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Deira City Centre
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© 1996-2005 by AME Info FZ LLC. All rights reserved.
This story was posted by Lara Lynn Golden, Assistant News Editor
Saturday, February 26 - 2005 at 15:01 UAE local time (GMT+4)

Print Date: Tuesday, March 01 - 2005 - 01:07:41 GMT+4

Find this article at:
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Hedge Fund Services Heat Up

Feb 27, 2005
URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=60403806


In my view, prime brokers and [hedge] fund administrators will increasingly find themselves competing in the same space in terms of the services they can offer," says Rob Schultz, head of HSBC's alternative fund services for North America.

According to a Celent Communications report, "The Burgeoning Business of Prime Brokerage," "Global hedge fund assets will increase at an average annual rate of 16.5 percent over the next five years, doubling to $2.1 trillion by 2009." And as the industry grows, so will demand for support services, the report continues. But, while opportunities abound for service providers, competition will become evermore intense.

Hence the heightened focus from the hedge fund servicing community - prime brokers, third-party administrators (TPAs) and technology vendors - on product and service development. As each looks for revenue-generating opportunities and market share, the challenge is expanding core business areas through the addition of ancillary services. The upshot, says Denise Valentine, analyst with Celent and author of the October report, is increasing overlap between the service models.

"Prime brokers, fund administrators and technology providers are converging on hedge fund managers. The three groups are eagerly adding ancillary services or launching new or enhanced solutions for the hedge fund community. All three are encroaching on each other's traditional service or solution areas," states an earlier Celent report, "A Cottage Industry Goes Mainstream: Hedge Fund Technology in the Spotlight."

Traditionally, prime brokers' core business has focused on trading, clearing and settlement, and custody facilities, as well as the more lucrative aspects of financing and securities lending. However, prime brokers are offering a growing list of additional services, notes Valentine, including portfolio systems, partnership accounting, portfolio risk analytics, margin and cross margin, and aggregated reporting. But, she adds, "Many of these additional services can be duplicated by fund administrators, technology providers and even outsourcing firms."

Certainly, fund administrators are seeking to provide an evolving array of value-added services. Four or five years ago, all a third-party administrator did were month-end net asset values (NAV), while hedge fund managers looked to their prime brokers for portfolio reporting, risk-management systems, performance measurement and attribution systems, according to Stephen Hixon, chief operating officer for North America with BISYS Hedge Fund Services. "That is significantly changing," he says. "What you need to do now is provide what we call daily P&L, where you are posting all the trades on a daily basis, reconciling positions and cash every day, and pricing securities every day."

The driver, Hixon explains, has been the trend among managers to use more than one prime broker. Whereas prime brokers used to provide a lot of information, managers now are unable to get all the information they need from a single broker, so they are looking to their administrators instead, he relates.

Addition Through Consolidation

But, increasingly, being competitive means having the scale and resources to develop and support this expanding range of services, which is where market consolidation comes in. To date, a number of traditional administration firms have moved into the hedge fund space, buying up specialist providers with hedge fund administration expertise: BISYS has acquired Hemisphere and RK Consulting; The Bank of New York has snapped up International Fund Administration; State Street purchased International Fund Services; HSBC acquired Bank of Bermuda; JPMorgan bought Tranaut Fund Administration; and Mellon Financial announced in January its purchase of DPM, a Somerset, N.J.-based hedge fund administrator. Having an alternative-investment capability is another arrow in the mainstream fund administrator's quiver, while having a large parent, particularly a leading custodial bank, provides the hedge fund servicing unit with a lot of additional clout.

For example, as part of HSBC, Bank of Bermuda is able to sell more products to clients, from front- to back-end servicing, says HSBC's Schultz. So, while its core business remains fund administration, Bank of Bermuda has a range of add-on capabilities, including a front-end trade-order-management system. It also has the ability to reconcile daily positions, handle daily position valuations for products that include over-the-counter transactions, provide value-at-risk analysis so clients can do Monte Carlo simulations, offer FX facilities and credit, and provide trade execution for derivatives.

Brian Ruane, executive vice president with The Bank of New York, makes similar observations: "BNY offers a broad array of services to our hedge fund clients, with two of its lead products [being] administration and trade execution," he says. "In addition, we offer a full range of banking and securities services, including cash management, collateral management, clearance, custody, foreign exchange, private banking and corporate trust."

Peaceful Coexistence?

So, is the prime brokerage business under threat from fund administrators? Ruane thinks not. "Hedge funds rely on four key service providers: TPAs, prime brokers, attorneys and accountants. Each delivers distinct services," he relates. "While TPAs have expanded their offerings to include some services offered by prime brokers, they are generally operational in nature."

Seth Weinstein, president of the newly launched Morgan Stanley Fund Services and a former senior member of the firm's prime brokerage business, makes a similar point: "The two, while sharing many synergies, are stand-alone businesses," he says. "In many ways, the TPA picks up where the prime broker leaves off," he continues. "The market differentiation, from both sides, is in how well the respective services are integrated."

One area in which prime brokers continue to predominate, though, is in the servicing of start-ups. If you are working with start-ups, the idea is to get to market quickly, according to Celent's Valentine. The idea that a prime broker can offer a one-stop shop - office staff, administration, a room in a building, phones, a trading terminal - has been very attractive, she relates.

And other areas of prime broker service differentiation remain. "There is the balance sheet, the financing, the stock lending, the credit intermediation piece, which is still going to be the domain of the prime broker," says Marty Malloy, managing director, global head of equity finance, with Barclays Capital. "Those fund administrators that are not part of a large financial institution just don't have those types of raw materials the hedge funds require. So I see these two living in parallel with each other."

The big question mark, though, lies in the intentions of the big bank-cum-administrators: Will they decide to use their considerable resources to push further into the prime brokers' core activities? As BISYS' Hixon observes, "BISYS is not a bank, so in our current state we are not going to compete with prime brokers on their core business of trade execution, securities lending, financing, extending credit. But if you look at some of the other big third-party administrators, are they going to compete with the prime brokers at some point? I would think that some will."

Of course, political considerations will have to be taken into account in any decision. A lot of intertwined relationships exist among prime brokers, fund administrators and custodians, and whether a firm feels it is worth taking business away from one of its clients remains to be seen.

Meanwhile, on the flip side, some prime brokers have moved into the fund administration business, as a means to offer full soup-to-nuts service. The reason, says HSBC's Schultz, is that fund administration is central to the operation of a fund in terms of having responsibility for gathering all the fund's data, reconciling positions and holdings, and reporting the fund's NAV. Administrators are also in a better position to offer middle-office, risk and consolidated positions compared to brokers, he adds. "With so many hedge fund managers using multiple brokers and counterparties, only the administrator is in a position to see everything that is happening," Schultz explains.

By contrast, Barclays Capital prefers to work with external providers for administration services. It seeks to differentiate itself by extending prime brokerage services beyond traditional asset classes, says the firm's Malloy. "Funds are going to want to transact their business with whomever they like and be able to consolidate that with some of their core providers - and not just on the cash side, but on the synthetic side as well," he notes.

Going forward, then, success in this most dynamic of markets will not come without a struggle, whatever side of the fence a firm starts on. As BNY's Ruane concludes, "In order to meet the increasing demands of the hedge fund industry, service providers are going to have to continue to expand and improve their offerings. The technological capabilities of providers for all services will need to improve rapidly to keep pace with the industry's growth," he says. "Given the resources needed to remain competitive, we expect to see continued consolidation in the industry."

Global Netting from Prime Broker

posted by volkerx on Saturday 26 Feb 2005 15:43 GMT

Can anyone tell me what might (roughly) be the minimum level of AUM at which a prime broker would start to work with a seedling HF on the basis of Global Netting. We run an Equity Market Neutral strategy und would prefer to see our cash in a structured bond portfolio, thus contributing return to our basic HF strategy.

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Cross product margining systems

posted by freshfield on Friday 25 Feb 2005 11:27 GMT

Hello villagers. It appears that the strategic drive for prime brokers now is developing ever more sophisticated cross product margining sytems. Correlating and stress testing products from a variety of classes is the way forward. Does any one out there have direct experience of prime brokers capabilities in this space and able to prepared to comment on their experiences?

Merrill Lynch Plants A Hybrid Fund (II Hedge Fund Daily 2/28/05
The new Merrill Lynch Atlas Optimum Libor+Fund has gone where few firms have before it. Merrill Lynch Investment Manager’s latest offering, according to Joanna Cound, a Merrill executive, combines “the stability and liquidity of a money market fund with the enhanced returns of a diversified portfolio of hedge funds.”
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posted by vivaluca on Friday 25 Feb 2005 15:10 GMT Albourne Village

Merrill Lynch Investment Managers extends cash fund range

Merrill Lynch Investment Managers (MLIM) is further extending its cash fund range with the launch of the Merrill Lynch Atlas Optimum Libor+Fund.

Joanna Cound, Head of MLIM EMEA’s Institutional Cash Management Distribution said: “MLIM is one of the first investment houses to combine the stability and liquidity of a money market fund with the enhanced returns of a diversified portfolio of hedge funds. A pooled product with Atlas Capital will help provide our clients with a target return in excess of traditional money market funds, but with the added benefit of weekly liquidity and significantly lower volatility than equity and bond investments.”

The new Euro-denominated fund combines a money market fund with funds-of-hedge funds and is aimed at those investors seeking enhanced returns from their strategic cash balances (6 to 12 months+ duration) while also seeking to preserve capital and maintain liquidity.

The aim is to achieve a return of 1.00 per cent over seven-day Euro LIBID net of fees by investing 50 per cent in the Merrill Lynch Institutional Euro Liquidity Fund and 50 per cent in Atlas Capital’s Optimum Alternative. The fund is priced weekly and will offer weekly liquidity.

MLIM worldwide is a leading provider of institutional cash funds with over USD 80bn under management across its range, which comprises funds suitable for short, medium and longer-term investment horizons.

MLIM has chosen Atlas Capital as its partner for the Optimum Libor+ Fund because of the highly diversified nature of the Optimum Alternative Fund across investment strategies, asset classes, geographical regions and hedge fund managers.

Hervé Javice of Atlas Capital said: “Atlas has the resources, capability and capacity to deliver the returns and volatility required by this product. Our funds-of-hedge-funds have demonstrated strong performance with above average returns and below average risk going back over more than fifteen years.

FEBRUARY 28, 2005

NEWS ANALYSIS
By Steve Rosenbush


Gates Joins a Dream Team Fund
Microsoft's chairman and Nike's Phil Knight are among those buying into a new private-equity fund by Oak Hill Capital maven Robert Bass
The rise of the private-equity firm has been one of the great financial success stories of the last few years. After the stock market fell to earth in 2000, investors who had learned to take double-digit returns for granted had to go hunting for profits in unusual ways. Many turned to private equity, a financial term for stakes in privately held companies. By acquiring smaller, unlisted concerns in health care, auto parts, and other industries, private-equity players often generated returns of 30% or more in a few years' time.

In the private-equity world, few investors have been more influential, or successful, than Robert Bass. The billionaire oilman from Texas practically invented the industry, creating Oak Hill Capital Partners as a vehicle for himself and a small group of associates. Many of the people who worked for him -- including billionaire investors Richard Rainwater and David Bonderman, the founder of private-equity firm Texas Pacific -- went on to create powerful empires of their own.

"VERY SMART GUYS." Now, Bass is launching what could be his highest-profile fund. Microsoft (MSFT ) founder and Chairman Bill Gates and Phil Knight, Nike (NKE ) founder and chairman, have taken sizable stakes in Oak Hill Capital II. Out of their own money, Gates has ponied up $70 million for the fund, Bass has contributed $250 million, and Knight has kicked in $200 million, according to Kevin Max, a spokesman for the Oregon Treasury Dept., and Michael Larson of investment company BGI, which manages the Gates fortune.

The Oregon Investment Council, part of the state's Treasury Dept., has invested $150 million. "They're very smart guys at Oak Hill," says Larson.

As the tech sector matures, even investors like Gates are putting at least some of their money in small but successful companies focused on rather mundane businesses. Bass invests in a broad range of companies, many in need of turnaround. One of his most recent moves was the acquisition last year of drugstore chain Duane Reade.

LIMITED ALTERNATIVES. The new Oak Hill fund will focus on a similarly wide variety of industries. It's targeting business and financial services, consumer products, retail, distribution, health care, telecom, tech, and basic industries, according to Max, who heard a presentation by J. Taylor Crandall, the second-in-command at Oak Hill.

The fund is aiming for a return of 25% a year or more. So far, it has raised about $1.5 billion and plans to drum up $1 billion more. A spokesman for Crandall and Oak Hill declined comment.

The star power lined up behind Oak Hill II reflects the central role that private equity plays in today's financial world. It's appealing now because current alternatives are somewhat limited. Double-digit returns in the stock market can't be counted upon. Investing in IPOs isn't what it used to be. Even venture capital -- really a form of private equity aimed at startups -- is limited. Companies aren't being launched at the same pace they were seven or eight years ago.

AMBITIOUS TARGET. High-profile clients like Gates and Knight ratify the private-equity approach. Gates has invested $55 million in Oak Hill funds in the past. Oak Hill manages lots of money for Knight, who in January announced that he planned to sell up to 5.7 million shares of Nike, or 8% of his stake. A Nike spokesman wasn't immediately available for comment.

To maintain that confidence, Bass will have to make good on his plans to generate a 25% return. But given his track record, there's no reason right now to doubt he will.


--------------------------------------------------------------------------------

Rosenbush is a senior writer at BusinessWeek Online

Icahn, Seeking Hedge Fund Investors, Shows How He Made $2.8 Bln From Bloomberg.com: In his efforts to raise $3 billion for a hedge fund, corporate raider Carl Icahn revealed a secret to prospective investors: his winning and losing bets in the stock and bond markets.
The billionaire financier's 10 largest gains and losses over the past decade, including the $893 million he pocketed trying to break up RJR Nabisco Holdings Corp., are detailed in marketing materials that New York-based Icahn Partners LP distributed in July. The documents show his net investment gains were at least $2.77 billion during the period.

Icahn, who gained notoriety by taking over Trans World Airlines Inc. in 1985, occasionally discloses his positions because of regulatory requirements. To bring in outside investors for the first time in almost two decades, Icahn, 68, pulled back the curtain.

Monday, February 28, 2005
FUND OF INFORMATION

One-Stop Shopping

More hedging strategies are now accessible to more fund consumers
By LAWRENCE C. STRAUSS

FUNDS OF FUNDS have enjoyed explosive growth in the past few years, with good reason. To buy them, investors don't have to select individual hedge funds, a time-consuming and often difficult process fraught with risk.

Instead, they can invest in a product that has a collection of underlying funds, typically 15 to 25.

Last year, funds of funds had $33.2 billion in net inflows, down sharply from 2003's nearly $60 billion, but still a considerable chunk of change, according to Hedge Fund Research.

An emerging alternative to funds of funds is the multi-strategy hedge fund, a species that appears to be growing in popularity. These funds, which might, for example, focus on convertible arbitrage and distressed investing, attracted a net $14.1 billion last year, up from $5.2 billion in 2003, according to Rye, N.Y.-based TASS Research, which tracks alternative investments, including hedge funds. What's more, HedgeFund.net4 now tracks 180 of these funds, up from 107 a year ago.

"We're seeing more multi-strategy funds because people want the diversification and the one-stop shopping aspect of the structure," observes George A. Kellner, chief executive of Kellner DiLeo Cohen & Co., a New York hedge-fund firm with more than $500 million under management.

Likewise, John M. Kelly, president and chief executive at Man Investments in Chicago, says he's seeing more hedge funds turning into multi-strategy shops, albeit within a "somewhat narrow band" of strategies.

These funds offer several notable advantages over funds of funds, one being fewer fees for investors. A fund of funds has the underlying funds' fees, first of all. And then the fund of funds charges its own fees -- 1% annually for management and a 10% performance fee, for example.

For an investor in a multi-strategy fund, there is only one layer of fees.

In fact, some of the biggest hedge funds these days -- including Citadel Investment Group and Renaissance Technologies -- are multi-strategy shops. (Of course, they almost have to pursue that course, given how much money they run, typically well into the billions.)

Indeed, some other managers have followed suit.

"We're seeing a greater amount of demand on behalf of investors for these multi-strategy funds," explains Neal Berger, president of Apogee Asset Management, a New York multi-strategy shop with about $150 million under management. "The investor is really the customer, and they're driving the supply."

Berger maintains that the multi-strategy setup has considerable advantages over funds of funds, partly because they are able to "monitor traders and positions in real time." He can also keep an eye on investment-style drift that occurs in house.

Tables: Investing Globally5
Slow Start to '056



These multi-strategy funds, he adds, can "act much more seamlessly as far as getting out of one strategy and into another," while "a fund of funds has to deal with redemptions and lockups."

Apogee runs 12 strategies, including its biggest weighting, international statistical arbitrage, which can entail pairing a long position against a short holding in companies around the globe. Other strategies include closed-end fund arbitrage -- buying such a fund at a discount to its net asset value and shorting its components -- arbitraging securities of companies based in India, and even buying environmental credits from companies and then selling them.

It's neither the easiest nor the cheapest fund operation to manage, however. It is, to say the least, labor intensive, considering all the trading talent and back-office operations the firm needs.

"It's almost like running 12 hedge funds under our umbrella," Berger says.

The fund was up 9.6% last year, net of fees, in line with the CSFB/Tremont Hedge Fund Index.

International statistical arbitrage, closed-end arbitrage and two other strategies -- equity volatility arbitrage and capital-structure arbitrage -- account for nearly two-thirds of the portfolio.

"The challenges we face as multi-strategy funds are identifying, attracting and retaining our trading talent," says Berger. "We're only as good as the people we have working here. If people that work for you are really good, they have options -- i.e., starting their own hedge funds."

So far, that hasn't happened to Berger in the two-plus years he's run Apogee, but the industry is rife with tales of traders bolting for potentially more lucrative opportunities running their own hedge funds.

Although multi-strategy funds have gained traction, they are not considered a serious threat to funds of funds.

Kellner asserts that multi-strategy funds "are less diversified than funds of funds and have a generally different client focus -- more sophisticated and less risk averse."

Timothy S. Jackson, a partner at Rocaton Investment Advisors, a Norwalk, Conn., firm that advises institutional investors, allocates capital to single multi-strategy funds and to funds of funds.

"I wouldn't say you need to go one way or another," Jackson says. "For certain investors, a fund of funds might be the only thing that makes sense, because they have a very small staff to monitor the investment."

"We advocate both [styles]," he continues. ""It just depends on the client's objectives."

The downside of a multi-strategy fund, he says, is "more manager- specific risk."

David Basner, managing director, portfolio-management group at TAG Associates, which works with very wealthy investors, says the firm allocates capital both to single- and multi-strategy managers.

One of the advantages of multi-strategy portfolios: "They can shift their capital between strategies a lot faster than we can."

Investing in multi-strategy funds, however, requires checking that these firms are making quality hires in expanding their asset-management talent, Basner adds.

Barry Colvin, president of Tremont Capital Management, which allocates about $9 billion into funds of funds, maintains that multi-strategy funds "have the advantage of one less layer of fees and mobility of capital, although this last advantage is overstated due to various internal agency conflicts."

"You have constituencies that run each of those desks," he says, referring to the various investment styles that hedge funds can deploy.

He adds: "And each of those constituencies doesn't want capital to be pulled away."

In contrast, funds of funds, he says, can allocate "to what they perceive to be the best in class across all strategy disciplines, although lockups and redemption terms may restrict the flexibility of capital to areas of opportunity."

Multi-strategy versus funds of funds is definitely not an either/or situation. Yet it will be interesting to see what kind of assets flows they generate in the coming years.

Not Quite Oscar-Worthy

By most accounts, several published in this column, 2004 was a so-so performance year for hedge-fund returns at best. The CSFB/Tremont Hedge Index posted a 9.6% gain, compared with 10.9% for the Standard & Poor's 500 Index.

Cliff Asness, managing and founding principal of AQR Capital Management in Greenwich, Conn., has another view. With a doctorate in finance from the University of Chicago, Asness brings an academic bent to his views, not to mention a healthy dose of skepticism.

In his most recent quarterly letter to clients, Asness holds forth on several topics, including industrywide hedge-fund performance in 2004.

When compared with cash, in this case Treasury bills, 2004 hedge-fund returns were 1.5 or percentage points above their historical average, as measured from 1994 to 2003, Asness points out. Here's the math: A 9.6% 2004 return for hedge funds minus 1.3 percentage points, or the Treasury bill rate, equals 8.3%. That compares favorably to a historical performance of 6.8 percentage points over cash.

"The only way to measure the skill of an investor, or return to a risk premium, is versus the risk-free alternative," Asness notes. "And on that scale, hedge funds had a pretty good year."

Far from a Pollyanna about hedge funds-a commodity that's not in short supply within the industry -- Asness agrees "with the argument that a lot of new money in hedge funds has lowered the outlook for future returns."

But just not in 2004, in his view.

Asness makes another interesting observation -- this one about how closely long/short equity hedge funds were linked to the overall equity market last year. In previous work, Asness and his colleagues have demonstrated that hedge funds tend to have more beta -- that is, more net long exposure in equities -- when the market has been going up over the last six to 12 months.

Take 2003, a very strong year for equities, with the Standard & Poor's 500 up 28.7%.

Asness took a look at how much exposure long/short funds had to the overall equity market. And he found that in 2004, long/short equity hedge funds, on a monthly basis, had a correlation to the S&P 500 of 0.85%, on average. A correlation of 1.0 would mean these funds had moved in lockstep with the S&P. So at 0.85%, it's pretty close.

And it's considerably higher than the 0.58% average monthly correlation from 1993 to 2002. In other words, a lot of long/short managers had significant long exposure to the broader equity market last year.

To be fair, the art of long/short investing is knowing how to balance the longs against the shorts, and there are certainly times when it makes sense to overweight on the long side, as evidenced by last year's returns.

Indeed, 2004 was a good year for long/short equity managers; the CFSB/Tremont index tracking that category gained 11.6%. "That's the good news," Asness avers. But "it was also a year that dramatically shows that 'hedge' is sometimes a misapplied label."

At the same time, Asness calls this approach "a clearly dangerous strategy that is very exposed to bear markets, and in particular quick bear markets -- a time when many investors might look to their hedge funds for protection." (He points out that a lot of long/short funds, to their credit, reduced their market exposure in 2001 and 2002, thereby saving investor's money.)

He also notes that significant long-only exposure to equities is available elsewhere, notably index funds or actively managed mutual funds -- and those funds don't charge a 1% management fee, along with 20% of profits.

"The point is not to avoid these funds," Asness tells Barron's.

Since 1994, these funds have generated some "positive alpha," meaning they outperformed the market, even with their risk exposure to the market, Asness observes. Investors, he says, should "know what role" these funds play in their overall portfolios.

"Many investors think of these funds as 'hedged,' thus providing diversification versus the market," he says. "But if the crash comes, they may be sorely disappointed."

Smart Moves?

U.S. educational endowments allocated on average about one-third of their portfolios to alternative assets, including hedge funds, in the 2003-2004 fiscal year, a survey shows. That was about in line with 2002 levels, and a big jump from 2000, when the dollar-weighted allocation to those strategies averaged 24%.

Those were among the findings in a recent survey conducted by the Commonfund Institute, which advises endowments on investing and also runs many internal funds of funds for those investors. The survey polled 707 endowments, including Harvard and Yale.

The endowment community was an earlier entrant to the hedge-fund world, in many cases ahead of pension funds.

In terms of alternative strategies, about half the allocations (48%) went into hedge funds, compared with 14% for private-equity funds and 11% for private equity real- estate funds. Smaller endowments tended to invest more heavily in hedge funds than larger endowments -- largely because hedge funds, their lockup periods notwithstanding, are generally more liquid than private-equity or venture-capital funds.

The most popular hedge-fund category among these endowments was multi-strategy, including funds of funds and single-manager funds that invest in several strategies.

John S. Griswold, executive director of the Commonfund Institute in Wilton, Conn., says hedge funds have "been a positive" for endowments, "but there are increasing concerns." Those include excessive expectations for hedge-fund performance. "Fifteen to 20% returns is probably unrealistic," Griswold says. "Return expectations ought to be tempered." And he cautions that endowments, especially smaller ones with fewer investment staffers, will have to pay more attention to assessing the performance and operations of hedge funds in which they've invested.


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Splitting alpha/beta doubles returns – SSGA

IPE.com 22/Feb/05: EUROPE – Separating the management of alpha from beta could lead pension funds to doubling their expected returns, according to State Street Global Advisers’ Alan Brown.

He called it the “future of fund management”.

SSGA investment chief Brown told delegates at the Institute of Economic Affairs fund management conference that once the two activities were separated, beta generation for pension funds would be done by specialists at “a very low cost”.

In addition, pension fund sponsors would be able to commit their alpha generating risk budget, unconstrained by a strategic benchmark.

Brown backed his theory giving the example of a defined benefits scheme that was invested in equities and bonds 60:40 and with an active/passive strategy 50:50.

Implementing a traditional alpha/beta strategy, the fund would post a net value added of 0.33% or 33 basis points, while separating alpha from beta would double expected returns to 0.74% net value added.

Brown confirmed the estimate to IPE on the sidelines, saying: “I believe our assumptions are conservative.”

“It seems to me that the intellectual case for doing this is so compelling that we will see funds moving in this direction. This is the future of fund management.”

He said it was likely that US fund management firm would take the lead in alpha/beta splitting in the future, but added “the leadership in terms of consultancy could well be coming from UK firms”.

He conceded that to bring about the change would require a thorough education programme, but he added trustees should be given time to grasp the new issues.

But he added that the timeframe would not be too long as the new regulatory environment in the Netherlands as well the implementation of the FRS17 accounting standard in the UK would act as catalysts.

Brown explained to IPE that he already knew of one UK and a couple of Dutch pension funds which had already split alpha from beta – although he declined to identify them.

His observations echoed remarks made by Mark Anson, chief investment officer for the $182bn California Public Employees' Retirement System, CalPERS. Anson said earlier this month that pension funds should stop trying to get excess returns from their beta portfolio.

Pension funds buying innovation - Watson Wyatt

IPE.com 16/Feb/05: GLOBAL - Pension funds have become buyers of innovation as they seek to meet their liabilities, according to Roger Urwin, global head of investment consulting at Watson Wyatt.

Writing in the firm's new Global Investment Review, Urwin said he saw a change in that pension fund sponsors have become more engaged in the "pension fund investment challenge".

"The second big change is that pension funds have become buyers of innovation," he added. "The new solutions they are considering - increasingly derivatives-based, frequently absolute rather than relative return in character - are more aligned to meet pension liabilities."

"At the cutting edge, funds have departed from traditional divisions and constraints in strategies by separating market-based from skill-based returns - in the jargon of the day they are 'porting' alpha and beta."

Urwin said this last change is in its infancy "but will be big".

"It is possible that pension funds, in employing professional specialists, will divide the responsibilities for managing risk and return differently in future."

He pointed out that investment banks are edging into the space traditionally occupied by investment managers while consultants are exploring new strategies. "More competition is healthy. What funds need, though, is a better joined-up proposition from their line-up pf providers - in short, better teamwork."

The firm said that pension liabilities represent over 30% of the market capitalisation of a typical German company and around 20% for typical UK and Japanese companies. And for a typical US or Swiss company, pension liabilities represent around 15% of market capitalisation.

Watson has researched around 1,600 mid and large-cap companies.

"The burden of debt is weighing increasingly heavily on corporate finances, affecting credit ratings and analysts forecasts and making takeovers, re-financing and capital-raising more problematic," Urwin said.

Earlier this week Watson Wyatt said that UK pension funds have continued moving to alternative and unconstrained investment. It said that in 2004, UK pension funds that it advises awarded 32 alternative investment mandates - double the 16 awarded in 2003.

By Daniel Brooksbank

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Bear Stearns Trading Head Robik Leaves, Plans Fund

posted on Tuesday 8 Feb 2005 07:43 GMT
From Bloomberg
According to Bloomberg, Bear Stearns & Co.’s, senior managing director and head of structured equity-products trading in New York, Kevin Robik has left the investment bank after 14 years and plans to start his own hedge fund.

Wendy de Monchaux, head of structured-equity products at Bear Stearns in New York, wrote in an internal memo last week that Robik “has decided to leave the firm to pursue his dream of running his own hedge fund.”

Deutsche Hedge Fund team to set up own firm
WSJ reports, according to people familiar with the matter, a hedge fund team at Deutsche Bank AG is leaving to set up its own firm in Hong Kong. The group of 12, led by Davide Erro plans to start Gandhara Capital in April with $1 billion. The fund will concentrate on investments in Asia and Europe.

February 10, 2005
Eaton Vance Seeks Acquisitions
--

Westy Saltonstall
Eaton Vance Investment Counsel in Boston is aggressively seeking to buy high-net-worth boutiques this year. The acquisitions would help the firm reach its long-term goal of comprising 10% of its parent's, Eaton Vance Management's, $95 billion in total assets, said Westy Saltonstall, president and ceo, underscoring that it will take longer than a year to achieve.


"We are looking for firms that have HNW clients who are long-term investors that want a truly customized portfolio," said Saltonstall. Boutiques and smaller companies with principals and founders looking for an exit strategy are a good fit, he said. It is open to firms outside the New England region. The Investment Counsel has a minimum account size of $1 million and 14 investment counselors. Organic growth will come from client referrals, he said. Hiring and expansion outside of Boston depends on business flow, said Saltonstall.

The Investment Counsel has tripled its assets under management from last year to $3 billion. Last year it acquired Scudder Private Investment Counsel's Boston office from Deutsche Bank Private Wealth Management (PAM, 7/04), which contributed about $2.5 billion in assets. After the Scudder Boston acquisition in September the Investment Counsel, formerly a unit of Eaton Vance, became a wholly owned subsidiary. "We carved out the investment counseling business to make a statement--dedication and commitment to the business," said Saltonstall. It sponsored a few events last year such as the Nantucket Antique Show and will continue to market locally in a move to raise its identity as a separate entity, he said. It is also seeking a dedicated marketing and sales official to spearhead these efforts. "Right now we are still riding on the coattails of our parent," said Saltonstall.

Pension Fund to diversify mix of assets

posted on Thursday 10 Feb 2005 07:21 GMT
From Irish Independent (subscription required)
According to the Irish Independent, the National Pensions Reserve Fund (NPRF) is to switch some of the funds now allocated to bonds and cash to commercial property, infrastructure projects, private equity and commodities.

The value of the National Pensions Reserve Fund rose by 9.3pc last year - compared with a benchmark result of 11.3pc - bringing the total value of the fund to €11.69bn.


The pensions reserve fund was set up to help fund Ireland's pension costs from 2025, particularly pensions for State workers and social welfare recipients.

The fund would have performed better if it had not held over 10pc of its resources in the form of cash at year end. This stemmed from concerns that the bond market would see falls in value as a result of rising interest rates in the US.

Yesterday NPRF chairman Donal Geaney detailed the changes in the way the fund will allocate its investment portfolio to managers over the next five years. Up to 18pc of the fund's value will be invested in property, private equity and commodities by 2009. Approximately 69pc will be held in the form of public equities, with the remainder in bonds. The initial strategy of the fund when it was set up was to have 80pc in public equities and 20pc in government bonds (excluding Irish bonds).

Mr Geaney said the new approach was aimed at increasing the fund's prospective returns without substantially changing its risk profile.

The NPRF says it will invest in public private partnerships (PPPs) in Ireland 'on an opportunistic basis'. Mr Geaney said suitable PPP projects had been slow to materialise. He said that in future the fund would make finance available to winning bidders for projects, rather than joining a consortium itself as it has done in one of the consortia bidding for the M50 upgrade.

The NPRF has ruled out investing in ethical funds and in hedge funds. Mr Geaney said it was impossible to determine which investments were ethical and which were not.

"Can we invest in British Government bonds while that country is at war in Iraq?" he rhetorically asked.

Och-Ziff Capital's spin-out to set up London office

posted on Thursday 10 Feb 2005 07:12 GMT
From Reuters
Reuters reports, a spin-out of U.S. hedge fund Och-Ziff Capital, Cyrus Capital Partners Europe, has set up in London, taking $600 million of managed assets and aiming to raise new funds.

According to familiar sources, the fund plans to invest in multi-strategy situations, including stressed and distressed, and in the whole spectrum (of securities) from bank debt to equity.

Steve Freydheimm, who previously co-managed with Och-Ziff founder Dan Och the $600 million of assets, will head up the new fund from the United States while three managers, including former Lazard debt restructuring banker Dan Bordessa, have set up a London office.

The Times of London
February 10, 2005

Barclays profits soar despite hiring spree
By Mike Verdin, Times Online

Barclays has announced a 20 per cent rise in profits despite a lacklustre UK high street performance and a hiring spree that undermined growth at its investment banking unit.

Barclays, the UK’s third-largest bank, said that pre-tax profits hit £4.60 billion last year as its wealth management business staged a "strong recovery" and earnings at the Barclays Capital investment banking unit rose by one-quarter to pass £1 billion.

"Barclays had a record year with strong profit growth across the group," John Varley, the Barclays chief executive, said.

"Looking back at it, growth was what 2004 was all about."

However, he said it that Barclays needed to "lift the performance" of its UK retail banking operation, where profits fell by 1 per cent. Net mortgage lending fell by £100 million to £1.9 billion despite a record year for the home loans market.

He also admitted the role played, amid a low interest rate environment, by reduced levels of bad debt which allowed provisions to be cut by 19 per cent to £1.09 billion.

"We must acknowledge that 2004 was a very benign year for provisions," Mr Varley said, adding that the charge was "lower than it would be reasonable to expect in 2005".

Analysts took further caution in Barclays’ reliance on hiring and pay rises to support investment banking profits. While the unit’s income rose by 24 per cent, bonuses and an extra 2,000 staff took running costs 37 per cent higher.

"They have beaten expectations, but they have done it through the provisions line. Normally people like expectations to be beaten on the revenue line," Bruce Packard, an analyst with ING, told Reuters.

Barclays shares stood 7p lower at 587p in afternoon trade.

Vega Chief Economist: Bush tax reform favorable to stock market, warns money flows `much quicker` today Matthias Knab reports from the 10th Mar/Hedge conference in Geneva: David Mullins, Chief Economist of the Vega Group and former Vice Chairman of the US Federal Reserve System, said the Bush tax reforms will be favorable to the stock market, but due to the large deficits unfavorable for bonds. He pointed out all of the reforms sunset after 5 years, saying the deficit “gets worked on”. His long term outlook for the dollar is bearish.
With Yale leading the way (70% in alternatives and 15% each in stocks and bonds), corporate and public pensions are now focusing and investing in hedge funds. Currently the estimated $50 trillion institutional assets have maybe a 0.5% allocation to hedge funds; if the institutions decide to up their stake to let’s say 3% this means trillions of additional assets.

An important consideration for institutions is that within alternatives, hedge funds are less correlated to the equity market than private equity (.69) and venture capital (.52). Manager selection is most important when investing in hedge funds. Compared with mutual funds, buyout and venture capital funds (as an analysis of the top quartile vs. bottom quartile returns), hedge funds boast the largest gap between these two quartiles. Mullins explained the different roles hedge funds have in today’s environment:

less regulated form for traditional banking activities
information discovery
soldiers of market efficiency
drivers of trading momentum and market turning points
market makers and providers of liquidity

Mullins outlined a medium term outlook for the following hedge fund strategies:

Favorable:
Macro: volatility increasing in FX, stock, bonds
event driven: increased merger activity
equity L/S: volatility, sector changes

Less favorable:
fixed income arb – tight spreads, flatter curves
credit – tight spreads
statistical equity arb – excess capital for opportunity
emerging markets – tighter spreads
convertible arb – tighter spreads

Mullins explained that today money flows much quicker into “windows of opportunities”. On the other hand, these windows tend to be open a much shorter time than previously. As a consequence, Mullins recommends only to under weigh strategies (versus completely getting out) in order to remain in touch with the market and maintain the ability to react.

Looking for Emerging Hedge Fund Managers

posted by cvbb on Tuesday 15 Feb 2005 17:03 GMT

We are looking for emerging hedge fund managers that can manage institutional funds on a managed account basis and can consistently realize 100-150 basis points per month. Preferably, the manager should have


1) at least 12 month track record, 2) AUM of $3- $25 million, 3) drawdown less than 7%, 4) consistent and low volatility of returns - annualized standard deviation less than 10%, 5) and trading publicly traded securities only (no PIPES, derivatives limited to listed futures and options only).

If you feel that you fit the profile of the manager that we are looking for, please send your marketing material to hfmanagersearch@yahoo.com . Thank you.