Tuesday, March 29, 2005

 

Another Candidate for Portable Alpha (P&I Daily 3/29/05)

Public Employees' Retirement System of Mississippi, Jackson, issued RFPs for a tactical asset allocation manager and a global all-cap equity manager to handle $75 million each, said Frank Ready, executive director of the $17.5 billion fund. The firms chosen will be the first for the plan's alpha fund, established to allocate up to 5% of the $9.24 billion equity portfolio to new, alpha-producing strategies. The RFPs are available at http://www.pers.state.ms.us/rfp_index.html and do not specify deadlines for proposals, but the fund is close to closing both searches, he said. Plan officials will likely make selections in June.

Separately, fund officials will review private equity strategies over the course of the year for possible first-time investments, Mr. Ready said. The state Legislature recently approved a bill allowing the system to invest in private equity. A target allocation has not been set; "the statute allows us to invest up to 10% to private equity, but I doubt it will be that high," Mr. Ready said. "Right now it's way too premature to say what it will be." Callan Associates is assisting.
 

Another Candidate for Portable Alpha (P&I Daily 3/29/05)

Public Employees' Retirement System of Mississippi, Jackson, issued RFPs for a tactical asset allocation manager and a global all-cap equity manager to handle $75 million each, said Frank Ready, executive director of the $17.5 billion fund. The firms chosen will be the first for the plan's alpha fund, established to allocate up to 5% of the $9.24 billion equity portfolio to new, alpha-producing strategies. The RFPs are available at http://www.pers.state.ms.us/rfp_index.html and do not specify deadlines for proposals, but the fund is close to closing both searches, he said. Plan officials will likely make selections in June.

Separately, fund officials will review private equity strategies over the course of the year for possible first-time investments, Mr. Ready said. The state Legislature recently approved a bill allowing the system to invest in private equity. A target allocation has not been set; "the statute allows us to invest up to 10% to private equity, but I doubt it will be that high," Mr. Ready said. "Right now it's way too premature to say what it will be." Callan Associates is assisting.

Monday, March 28, 2005

 

Protege Partners Insight/Grosvenor for IPO/Sale

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March 27, 2005
If I Only Had a Hedge Fund
By JENNY ANDERSON and RIVA D. ATLAS

T seemed like an ordinary evening at Crobar, the trendy Manhattan nightclub. Two weeks ago, as Counting Crows performed on stage, young women dressed in expensive jeans pushed toward the front with their khaki-clad, mostly older boyfriends. Few, however, were regulars. On this night, the very rich and the merely rich intermingled on the club's two floors - V.I.P.'s upstairs ($1,000 a ticket) and the rest down below ($250).

Most of the 1,250 people gathered for the event, the Robin Hood Foundation charity ball, were part of the city's unlikely new "it" crowd. Richer than Wall Street rich and more willing to take risks than their traditional money management peers, they are the managers behind the staggering growth in hedge funds, those private, lightly regulated investment vehicles aimed at the ultrawealthy, the run-of-the-mill wealthy and, increasingly, the not-so wealthy.

To critics, the frenzy has a very familiar ring. A flood of capital to the latest investment fad. Spectacular accumulation of wealth in a short time. New ventures created easily and often. Those, too, were the hallmarks of the dot-com boom, and, as everyone knows, the bursting of that bubble was far from pleasant. The stampede to hedge funds, some people fear, will be no different.

"It is completely obvious that this will end badly - for the firms, investors, everyone," said Seth Klarman, founder of the Baupost Group, which manages $5 billion. "No area of financial endeavor is immune from the effects of competition."

The numbers are mind-boggling: 15 years ago, hedge funds managed less than $40 billion. Today, the figure is approaching $1 trillion. By contrast, assets in mutual funds grew at an impressive but much slower rate, to $8.1 trillion from $1 trillion, during the same period. The number of hedge fund firms has also grown - to 3,307 last year, up 74 percent from 1,903 in 1999. During the same period, the number of funds created - a manager can start more than one fund at a time - has surged 209 percent, with 1,406 funds introduced in 2004, according to Hedge Fund Research, based in Chicago.

In a way, hedge funds are to mutual funds what Evel Knievel was to weekend motorcyclists. Unlike mutual funds, which are restricted in the ways they can invest, hedge funds can use leverage, trade derivatives and bet that stocks will fall, a technique called shorting. And unlike mutual funds, which generally try to beat a market average, hedge funds seek positive returns, even in down markets.

THE meteoric rise of hedge funds has had a huge impact on the markets, investment banks and investors, who increasingly include institutions like pension funds or endowments. A recent report published by Credit Suisse First Boston said that hedge funds were responsible for up to half of all activity in major markets, including the New York Stock Exchange and the London Stock Exchange.

Investment banks are tripping over one another to service them. According to the same report, Wall Street made $25 billion catering to hedge funds - lending them money, trading for them, helping to structure complex derivative transactions or lending them stock to bet against a company. That's one-eighth of the street's total revenue pool.

Signs that hedge fund managers have become the financial industry's new elite abound. Young, ambitious talent is fleeing Wall Street in search of hedge funds' overnight riches. In hedge fund offices, employees have perks like swimming pools and basketball courts. And in the wedding announcements of The New York Times, hedge fund managers are often well represented.

At cocktail parties throughout Greenwich, Conn. - the informal capital of the hedge fund world - investors sip apple martinis and discuss which funds are in vogue. Because few people outside the industry know exactly how they trade or what they trade, there is a certain mystique to the hedge fund set, which only adds to their allure.

Then there's the wealth effect. Billionaire hedge fund managers are pushing up the price of everything from luxury apartments to artwork. Kenneth Griffin, founder of the Citadel Investment Group, based in Chicago, dished out $60 million for a Cézanne. James G. Dinan, founder of York Capital Management, paid $21 million to buy the Fifth Avenue apartment of $6,000 shower curtain infamy, the one once occupied by L. Dennis Kozlowski of Tyco International.

Predictably, most people in the hedge fund world scoff at the notion of a bubble. "Hedge funds are not an asset class, so there is no asset class to burst," said Jane Buchan, chief executive of Pacific Alternative Asset Management, a fund made up of hedge funds with $7.2 billion under management. "It's not like real estate. Even if you think about people doing silly things for silly reasons, it's not a bubble. If you look at people traveling on the fringes, it might be a bubble."

Indeed, the so-called smart money - rich investors like Thomas H. Lee, the famed leverage buyout maven - could not seem less worried. "Every investment board I am in touch with is interested in hedge funds," said Mr. Lee, ticking off the names of such giants as Calpers and Harvard's endowment fund. Mr. Lee himself has invested a substantial portion of his estimated $1.2 billion net worth in a portfolio of dozens of hedge funds.

Yet, as Mr. Klarman said: "How many venture capital investors in 1999 said, 'We are doomed because of all the money flowing in?' "

Whether the hedge fund boom is a bubble may still be open to debate. But it is certainly not alarmist to wonder about the consequences of such torrid growth, built as it is on the leverage that banks provide managers to double or triple their bets. The Federal Reserve seemed concerned enough last fall, when it set up a group to examine what systemic risks had been created by the explosion of entrants into the market and the aggressiveness with which Wall Street was welcoming them.

The Fed also encouraged the revival of a high-profile watchdog group formed in the wake of the market-shaking 1998 collapse of the Long-Term Capital Management hedge fund. Called the Counterparty Risk Management Policy Group II, it will examine everything from narrow credit spreads - a result of low perceived risk - to the cavalier ways that Wall Street lends to hedge funds.

"Hedge funds are significant market players," Stephen M. Cutler, director of enforcement at the Securities and Exchange Commission, said in an interview. "They use leverage that mutual funds cannot, so the power of that $1 trillion is magnified. Your concern is not just the investors in the hedge funds but the hedge fund's impact on the market."

To impose a modicum of order on the industry, the S.E.C. has required that most hedge fund management firms register as investment advisers by February 2006, a move that an industry trade group has protested.

CONCERNS about hedge funds, however, extend beyond finding out where they are based and whether their managers are felons (two of the objectives of S.E.C. registration). Among other things, it remains a mystery - even to investors - what kind of bizarre financial products are traded by the funds, and how they value them. Given the potential returns, the incentives for investors to bet the house are huge. And many seasoned money managers have closed their funds, opening the door to newcomers to satisfy demand for ever more funds.

Perhaps topping the list of concerns is the proliferation of funds of funds, pools of hedge funds that are meant to lower risk but that also come with another layer of fees on top of what standard hedge funds charge. By the end of last year, assets in funds of funds had soared to $359 billion, from $84 billion just four years earlier. Traditionally, investors have needed a minimum of $1 million to get into a hedge fund; with the newest funds of funds, investors with as little as $25,000 to spend can gain entree.

Hedge funds may hit Main Street in other ways. At least one fund of funds, Grosvenor Capital, with $15 billion under management, is weighing an initial offering or a sale, people close to the company said.

Hedge funds are the new blackboards on which dreams of high finance are drawn. For Karim Samii, who enjoyed a successful career at the investment firm W. R. Huff of Morristown, N.J., the decision to start his own hedge fund came on a bright, snowy morning in December 2003, when he and his wife were visiting his in-laws in Hamburg, Germany. "I was jogging around the lake and I said to myself, 'Where do I want to be five years from now?' " he said.

His firm, Pardus Capital, will open for business on April 1. "It's a big bet," said Mr. Samii, 42. "But if you think you're good, you take the risk."

Philip Broenniman, a 39-year-old trader, spent five months in 2003 cobbling together $20 million to start Cadence Investment Partners in New York. In late October, a week before his firm was set to open, two investors pulled $13 million. "We opened our doors with just $7 million," he recalled. A year later, after posting 16 percent gains, the fund has grown to $119 million.

Managers of funds of funds and other entities that invest in hedge funds say they are overwhelmed by the numbers of start-ups. "We saw 600 pitches last year," said Ted Seides, director of investments at Protégé Partners in New York, which invests in new hedge fund firms. Of that number, he said, Protégé ended up backing just nine. "There are a lot of hopes and dreams," he said. Of course, not all dreams come true.

Ask new managers why they are starting funds and the answers often recall the late 1990's: to build something, to test the "pure art of investing," to be an entrepreneur. One two-year industry veteran with $60 million under management describes why he did it: "Because I could."

Even hedge fund experts who pooh-pooh the notion of an investment bubble acknowledge the possibility of a compensation bubble. Instead of just receiving a fixed percentage of the funds they manage, hedge fund managers generally make "1 and 20" - that is, 1 percent of assets under management and 20 percent of profits.

To put that in context, a mutual fund company managing, say, $100 million and earning 1 percent of assets under management makes $1 million. By comparison, a hedge fund making the 1 percent management fee and a 20 percent "carry" takes in $1 million for opening the doors, and an additional $10 million if the fund returns 10 percent. That's $11 million in revenue.

"Hedge funds are an innovation of compensation," said one fund-of-funds executive. "It's a compensation system, not an asset class." The comment is meant to be positive: in hedge funds, compensation is aligned with absolute performance. In the mutual fund industry, by contrast, compensation is usually tied to performance against a benchmark, like a Standard & Poor's index, or assets under management.

Will fees come down? Few people think so. "If you lower your fee, they think something's wrong with you," said one longtime manager who described the fees as "absurd."

In fact, fees have been moving higher. When Carl C. Icahn, the famed takeover trader, raised a $2 billion fund last year, he demanded 2.5 percent of assets and 25 percent of the profit.

In 2003, the 25 highest-paid hedge fund managers earned more than $200 million, on average, according to a survey by Institutional Investor magazine. The top-ranked manager, George Soros, took home $750 million that year. At No. 2 was David Tepper, manager of the $3 billion Appaloosa funds, who earned $510 million, according to the magazine.

The lure of hedge funds, of course, is not supposed to be the high pay but the outsized returns. Lately, the results have been less than compelling. Over the 10-year period that ended last December, hedge funds had an average annualized return of 12.57 percent, according to an index maintained by Hedge Fund Research. That is just slightly ahead of the 12.07 percent return of the S.& P. 500 during that period, though hedge funds earned their return with half the volatility.

During the market downturn, however, hedge funds did hold up well. In both 2000 and 2001, for example, the average hedge fund rose nearly 5 percent, according to Hedge Fund Research. That compares with declines of 9 percent in the S.& P. 500 in 2000 and nearly 12 percent the next year.

IN 2004, however, the average hedge fund rose around 9 percent, lagging behind the S.& P. by nearly two percentage points, Hedge Fund Research has reported. During the first two months this year, the latest data available, hedge funds were up nearly 2 percent, compared with a flat return for the S.& P.

Many in the industry say the sharp increase in both supply and demand won't destroy the fundamentals of the business. "It is so much the better way of managing money," said Julian Robertson, who got out of the business five years ago after forging a reputation at Tiger Management as one of the most successful hedge fund managers. Today, he keeps a hand in the industry by providing seed money to new hedge funds. "Hedge funds have had about a 10-year place in the sun," he said. "I don't see any reason for that to stop."

Many industry veterans say the party will continue, partly because of the shift in who invests in hedge funds. As recently as 2000, hedge funds were almost exclusively for the very rich. Now institutions want a piece of the action. Pension funds and other institutions are expected to invest as much as $250 billion in hedge funds over the next five years, according to a recent study by the Bank of New York and Casey, Quirk & Associates, a consulting firm. That would ultimately account for half of all money flowing into hedge funds.

But as the pension money comes in, hedge fund returns are likely to go down, as fund managers adapt their strategies to suit the new clientele. Pension funds prize predictability over outsized returns; the average pension fund is looking to make just 8 percent, net of fees, on its hedge fund investments, the Casey Quirk report concluded. That is a far cry from the 25-percent-plus returns generated by rock-star managers like Mr. Soros and Michael Steinhardt.

A possible check on hedge funds is the simple fact that while anyone can start one, the industry has a high casualty rate - especially for the smallest funds, which struggle to attract and keep investors. Untested managers whose returns languish often see their capital flee and are forced to shut down.

"There are very low barriers to entry but very high barriers to staying in business," said Philip Duff, chief executive of FrontPoint, a $4.3 billion hedge fund, citing the average annual life of a hedge fund of 3.5 years. "That's problematic for investors," he said - particularly institutional investors who do not relish moving money around.

"There's a reasonable probability a hedge fund will have a significant problem," Mr. Duff added. The fund, he said, "will be high-profile, and the question is, if and when that happens, does it materially change the growth in demand? My answer is no."

While new funds have flourished, seasoned managers are also absorbing the demand generated by institutions. "In 2004 we saw nine $1 billion-plus start-ups, and 2005 is on track to outpace that number," said Gerard Coughlin, a head of Morgan Stanley's prime brokerage services. "While the high-profile start-ups command great attention, many established managers are busy broadening their product offering and expanding their footprint. The capacity created by these proven managers and high-profile start-ups is effectively raising the bar on what it takes to be successful as a new manager."

Longtime hedge fund investors have faith in the power of Darwinism. "It will be survival of the fittest," said Michael Price, former manager of the Mutual Series mutual funds, who now invests $1.6 billion - a good chunk of it in hedge funds - on behalf of family, friends and two college endowments. "The guys who are not creative or don't know what they are doing won't last."

That is not to say that there is anything stopping them from starting up - and potentially losing investors' money. "There's zero shame involved in launching a fund and failing," said one fund of funds manager who, like many executives in the ultrasecretive hedge fund universe, asked not to be identified.

INDEED, it is not unusual for managers to get a second chance. William A. Ackman once ran Gotham Partners, one of the most successful hedge funds in the 1990's, boasting a list of blue-chip investors that included the Ziff family and Martin Peretz of The New Republic.

By the end of 2002, Mr. Ackman and his business partner, David P. Berkowitz, were forced to shut the fund after they became stuck in a private equity investment they couldn't sell, and some investors demanded their money back. Since then, Mr. Ackman has raised $410 million for a new firm, Pershing Square; he has promised investors in his new fund that he will not make private equity investments.

In the same way that there is no quelling the bulls, there will be no quieting of the critics. The Horvitz family of Cleveland, which made its fortune in road construction, media and real estate, started investing in hedge funds in the 1990's. A decade or so later, it has virtually no money in such funds, said Jeffrey Horvitz, who oversees his family's investments. Too often, he said, the funds produced disappointing returns.

"Hedge funds are no longer attractive," Mr. Horvitz said, noting the influx of start-ups. "I see no relief in sight, especially for taxable investors like us."

Copyright 2005 The New York Times Company

Sunday, March 27, 2005

 

Why Stan Wins in Picking Prop Traders

Barron's Online
Monday, March 28, 2005
FUND OF INFORMATION

Trading Places
Ex-hands of investment banks find running money on their own is a different game

By LAWRENCE C. STRAUSS

IF TOM WOLFE WERE WRITING Bonfire of the Vanities today, chances are his "master of the universe" character would be a proprietary-desk trader at a prestigious investment bank who launches a hedge fund.

Sherman McCoy, the investment-banker protagonist of that classic 1980s novel, would have a new title: general partner of the Distressed Event-Driven Arbitrage Opportunities Fund.

A few recent high-profile examples of people on the trader-hedge-fund-manager career path include Eric Mindich and Dinakar Singh, who both left Goldman Sachs to start multibillion-dollar hedge funds.

In many ways, it's a sensible move. Mindich and Singh offer considerable trading talent, not to mention the institutional knowledge they soaked up at a well-regarded firm like Goldman -- which has become perhaps the premier farm team for hedge-fund talent.

"Prop desks," as they are known, are "one of the few viable avenues to recruit talent for hedge funds," says Neal Berger, president of Apogee Asset Management, which runs a multi-strategy hedge fund.

The Goldman cubs aren't necessarily representative of this trend, which has been unfolding for a long time. For one thing, these two startups have tremendous scale. When a fund launches with billions of dollars under management, it has the resources to buy the necessary infrastructure, whether for monitoring risk control or compliance. As one hedge-fund manager who opted for anonymity, puts it, "You can afford to hire a lot of smart people."

Hedge-fund trade publications, however, are chock full of items about prop-desk traders launching hedge funds, many of them much smaller than Mindich's Eton Park Capital Management.

But investors considering plunging into a new hedge fund run by a former prop-desk trader should be cautious.

"There's great talent" working on prop desks, observes Cynthia J. Nicoll, chief investment officer at Tremont Capital Management, which invests in hedge funds on behalf of its clients. "But just because someone has run proprietary money doesn't necessarily mean they're going to run a great hedge fund."

There are big differences between trading money for an investment bank's house account and running an independent hedge fund.

"On a prop desk, it's not as if you have $1 billion or $5 billion in front of you every single day," says a hedge-fund manager who uses a long/short equity strategy. "The capital is allocated as the opportunities appear." But in running a hedge fund, there is the "pressure of earning returns on a static pool of assets," the manager continues.

"That very institutional infrastructure they have taken for granted is no longer available to them," says Joan Kehoe, head of international operations for PFPC, which handles administration for asset managers, including hedge funds.

Tom Ortwein, president of Highbrace Capital, a fund of hedge funds in Greenwich, Conn., notes that in a hedge fund, "you don't just lighten up and capital gets reallocated." Working on a prop desk, he says, is "not the same as having a single pool and a finite set of parameters in which you're operating." Ortwein was formerly head of capital markets at CIBC.

Apogee's Berger, a former prop-desk trader who went on to start his own hedge fund, notes that on a trading desk, "There's no concept of I'm up 1%."

He adds: "In investment-banking terms, you're really just talking about nominal profits and losses, with no regard to any type of capital base; it's very difficult to manage risk in the same way you would in a hedge fund."

Working at a large investment bank offers other advantages, including oversight of trading. But when you're working on your own, nobody's looking over your shoulder anymore to make sure you're not nuts.

Another advantage of working on a prop desk is getting a sense of a firm's order flow, which can provide a definite edge. "Like it or not, prop desks take advantage of that," explains Ortwein. "Certainly, they know which way the order flows are going."

Investment banks also have the benefit of numerous trading contacts, as well as proprietary research. For hedge funds, "It is a whole lot different to rely on a brokerage firm to find the other side of the trade for you," says Ortwein.

"Sitting on a prop desk, you have access to a very large organization, contacts and research," says Tremont's Nicoll. "Unless you can duplicate that at the hedge-fund level, it's not necessarily a good result."

She says that plenty of traders have done that, including Brevan Howard Asset Management, a firm launched in 2002 by Alan Howard, formerly Credit Suisse First Boston's global bond trading chief.

In vetting funds, Tremont and other funds of funds wrestle with these issues constantly. A key consideration, Nicoll says, is whether the traders founding a fund were "credible and meaningful decision makers at the prop desk."

That's not always easy to discern.

"As a trader at a bank, I am well aware of my trading performance," says Berger. "However, an employer looking at my track record will have a hard time verifying my claims."

Nicoll points out that as prop traders launch a hedge fund, they need to demonstrate that they can generate ideas in a new setting. And, she stresses, the fund's compensation scheme "has to make people want to work as a team and want to stay."

There are other contrasts between trading desks and hedge funds.

"Prop-desk traders have the benefit of trading flexible risk capital with strict guidelines and are judged over a yearly time horizon," explains Bruce Amlicke, chief investment officer of Blackstone Alternative Asset Management, a $9.3 billion fund of funds. "In a hedge fund, performance is scrutinized on a monthly basis. That's a lot of pressure, especially when you're building a business -- and the success of that new business is largely driven by those early returns." (Hedge-fund investors typically review returns each month.)

Amlicke maintains that it's a much easier transition coming from another hedge fund than from a trading desk. Assessing traders-turned-hedge-fund managers hinges on two questions, in his view: "Does the trader have what it takes to generate outsized returns outside of a structured institutional setting, and can that trader build and run a business?"

Running a business requires a different set of skills than trading does, often entailing outsourcing, which costs money.

PFPC's Kehoe estimates that startup firms need at least $100 million in assets under management "to sustain their expense base."

The startups she has seen close within 12 months of launching -- they weren't all founded by traders -- typically weren't able "to garner the assets quickly enough to sustain their expenses."

Investors can face a dilemma: A new hedge fund with a big-name trader has no track record. But if an investor waits too long, even a few months, to see a record develop, there's a risk the fund will be closed to new investors.

Ortwein says "there are a ton of talented" prop traders. But running $3 billion out of the gate is a daunting task. So "one does need to be cautious," Berger, the hedge-fund manager, avers. "The last chapter has yet to be written on whether these superstar guys spinning out of investment banks are going to live up to the hype."

Going Long

There's been considerable interest lately in long-only funds, which account for a tiny portion of the roughly $1 trillion of hedge-fund assets.

At least one hedge-fund firm is ditching that strategy, however. GoldenTree Asset Management, based in New York City, announced recently that it was returning $1.2 billion in long-only separate- account business to investors.

GoldenTree oversees $6.5 billion in bank loans, high-yield bonds, distressed stocks, real estate and other assets. In a statement, the firm's chief investment officer, Steven A. Tananbaum, said that "in the current environment for high-yield we believe we can offer the best value to our clients by being total-return managers."

The long-only accounts were hampered by not being able to short or use leverage, as well as being measured against an index, he said. Sound sort of like expensive mutual funds, don't they?

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Saturday, March 26, 2005

 

Hit Doug Shorenstein for 2nd Closing

The New York Times
March 23, 2005
COMMERCIAL REAL ESTATE
San Francisco's Goldilocks Market
By TERRY PRISTIN

SAN FRANCISCO - Once this city's largest office landlord, the privately owned Shorenstein Company has sold its interests in four properties over the last 18 months, including its flagship Bank of America Center, which is often described as the financial district's best address.

Disposing of a substantial portion of its office portfolio here is consistent with Shorenstein's new strategy as it evolves from a local business to a company that invests in commercial real estate throughout the country.

The company is also taking advantage of an investment market that seems surprisingly feverish for a city that has yet to recover from the collapse of the dot-com industry.

"Prices are staggeringly high relative to the returns and the underlying fundamentals," said Douglas W. Shorenstein, the chief executive of his family business, in an interview in his 49th-floor corner office at the Bank of America Center overlooking San Francisco Bay. "If somebody is willing to pay a lot more than I would pay, then we're a seller."

Shorenstein's role as the city's top landlord has now been assumed by Equity Office Properties, the nation's largest owner of office real estate. But Equity Office has put five of its buildings here on the market, in the hope of either selling them outright or forming joint ventures with other investors.

Nearly $2 billion worth of prime office buildings changed hands in 2004, exceeding the 1998 record of $1.92 billion, with some properties drawing as many as two dozen bids. The average price for all buildings in the central business district was $304 a square foot last year, up from $235 a square foot in 2003, according to Reis Inc., a New York research firm.

Several buildings have traded for $400 a square foot or more, including 555 California Street, which is no longer the national headquarters of Bank of America but has a roster of blue-chip tenants, including Goldman Sachs.

The 52-story reddish-brown granite tower and adjacent buildings were bought by a group of New York investors, led by Mark Karasick and David Werner, for $825 million, or about $487 for each rentable square foot. Mr. Shorenstein's father, Walter, acquired the building from the bank in 1985 and later sold a half interest back to the bank.

The investment market here is beginning to resemble that of Washington, where the average trading price last year was $363 a square foot, according to Cassidy & Pinkard, a local real estate services company. But the average vacancy rate in Washington was just 7.5 percent in the fourth quarter of last year.

In this city, by contrast, some brokers estimate that the top buildings have a vacancy rate of 19 percent, with most of the empty space on the lower floors. Employment has only just begun growing slowly after four years of job losses. Employment is expected to increase 1.2 percent this year, said Mark Zandi, the chief economist for Economy.com.

The spike in commercial real estate prices here has left many real estate specialists scratching their heads. Only two years ago, Tishman Speyer Properties was forced to sell Market Center, two buildings on Market Street that were 83 percent vacant, for $79.5 million, less than half of the $189 million it had paid for the complex in 1999.

For the last year and a half, landlords in San Francisco have gained more new tenants than they have lost, but new leases are being signed at 1997 levels, with owners paying $35 or more a square foot to help with remodeling.

"We're still seeing $50 worth of work and a year's worth of free rent," said Jacque Ducharme, a vice chairman at Studley, a real estate firm that represents tenants.

Although rents for the more desirable space on higher floors are slowly inching up - sometimes reaching $40 a square foot - space below is getting $25 to $30. On average, rents are 45.4 percent of what they were at their peak in 2000, according to Moody's Investors Service.

"What we are seeing is a further widening of the spread between rents for view space and nonview space," said Michael van Konynenburg, the chief executive of Secured Capital, which has represented landlords in several recent high-priced sales.

Jeanne R. Myerson, the chief executive of the Swig Company, a private company based in San Francisco that has real estate holdings across the country, has been looking for properties to buy here. But she said that the high prices suggest that many buyers are overly optimistic that there will be enough job growth to drive up rents. "It's hard to make the numbers work on a lot of the buildings right now," she said.

This is hardly the only real estate market currently attractive to investors, in light of low interest rates, the sluggish stock market and the widespread availability of cheap capital. With a lack of alternative investment vehicles, many people are willing to accept much lower initial returns than they were a few years ago, hoping for greater cash flow in the future.

Steel and concrete prices have been rising, adding to the cost of developing new buildings so that any price that is safely below the so-called replacement cost - as much as $450 a square foot in this city - can look like a good deal.

In a report issued last week, however, Moody's said the city is the riskiest major office market in the country. The ratings agency warned that many tenants here were still paying high rents negotiated during the technology boom and would expect a sharp reduction when their leases expire.

"The point is that rents could be stable for the next three years, and then cash flow could decline materially," said Sally Gordon, a vice president and senior credit officer. "We're alerting people to the fact that you might see an increase in defaults."

Few real estate specialists doubt that this city will rebound in the long run, both because it appeals to highly educated people willing to make sacrifices to live here and because it is hard to build here. An initiative approved in 1986 limits commercial high-rise construction to 875,000 square feet a year.

In fact, apart from a jazzy federal building rising at Seventh and Mission Streets, no office buildings are currently under construction, although the city is awash in residential projects and several lower-grade office buildings are being converted into condominiums. Owners with lots authorized for commercial construction say they will not build until they can charge $65 a square foot annually for rent, utilities and services.

No longer the financial capital it once was, this city now relies mainly on smaller tenants - advertising agencies, boutique law firms and hedge funds - to fill its office towers. Last year, three-quarters of the companies that signed new leases took 6,500 square feet or less, according to Newmark Pacific, a real estate services company here.

Unlike the corporate tenants of the past, who were willing to put their back-office employees on lower floors, many smaller businesses insist on giving everyone access to a view, making it hard to find takers for much of the ordinary space, said Jim Sullivan, an analyst at Green Street Advisors, a research company in Newport Beach, Calif.

Because of the growing premium paid for view space, a current owner of Market Center, Divco West Properties, a real estate firm based in Palo Alto, said it was not in a rush to lease the top floors of the building, which is now more than half full. "We're holding out for better rents on the upper floors," said Stephen J. Pilch, the chief operating officer.

Last year, the city's only sizable new tenant was Gymboree, a children's clothing retailer, which relocated its offices from Burlingame, Calif., to a new building at 500 Howard Street, south of Market Street. The building is in a once-seedy neighborhood, sometimes known as SoMa, that blossomed with new office buildings during the technology boom.

In moving to the city, Gymboree sublet space from Sun Microsystems, the building's sole tenant. Though this was a record deal in terms of price per square foot, Monica Finnegan, a managing principal of Newmark Pacific, said it was an aberration because Sun Microsystems had signed an unusually long lease, giving the new owner an assured income stream for the next decade. In 2003, Equity Office Properties sold 500 Howard to the Utah State Retirement System and Cottonwood Partners, a private investment firm, for $119.4 million, or $512 a square foot.

Equity Office, which has withdrawn from markets like Philadelphia, is not giving up on this city, although it wants to limit its holdings to properties it considers strategic, especially those with great views, said Jeffrey L. Johnson, the chief investment officer.

But Kevin Brennan, a senior vice president at the Staubach Company, which represents tenants, said that the sell-off by Shorenstein and Equity Office should serve as a warning to other potential investors. "We don't see where the market is going to be tightening anytime soon," he said.
 

Good Article on Why We'll See Manager Flow

Hot Managers Start New Funds

By HENNY SENDER
Staff Reporter of THE WALL STREET JOURNAL
March 22, 2005; Page C1

The boom in new hedge funds shows little sign of abating. And in recent months, many of the people starting new funds have come from other hedge funds.

One recent high-profile defection is Jeff Aronson, who racked up strong returns for the portion of Angelo, Gordon & Co.'s $11 billion fund dedicated to trading the bonds of companies in financial distress. Mr. Aronson earned a reputation for shrewd dealing in the competitive distressed-debt world, taking stakes in the bonds or loans of ailing companies and reaping rewards when the businesses returned to health. Mr. Aronson plans to start a fund focusing on distressed-company debt.

His departure underscores a challenge that hedge funds—loosely regulated investment vehicles that mainly cater to deep-pocketed institutions and wealthy individuals—have in holding on to ambitious money-managers and traders who aren't top partners: Once a fund achieves a certain level of success, how does it retain talent after it has matured beyond the entrepreneurial roots that attracted its star traders in the first place?

Examples of restlessness among hedge-fund traders abound. In recent months, John Lykouretzos left Viking Global Investors to start Hoplite Capital Management, Lee Hobson left Maverick Capital to start Highside Capital and SAC Capital lost a few folks who went to start their own funds.

Of course, departures aren't new to the hedge-fund world. Top hedge-fund traders often bolt to open up their own shops.

While defections from investment banks and mutual funds to set up hedge funds have gained a lot of attention, many new funds are being formed by restless underlings already in the industry. Of the 1,400 hedge funds launched last year, many were founded by eager No. 2s and No. 3s at existing hedge funds.

Given the ease of starting a new fund, there seems no easy answer to retaining star performers. Both sides "feel hemmed in by compensation issues," says David Moody, a lawyer with Pur rington Moody LLP who has a large hedge-fund practice.

Basically, the restless underlings want a bigger share of the profits. Typically, funds charge a management fee of about 2% and take 20% of the gains. For strong performers, the annual take can be significant. Unable to resolve the compensation issues, some hedge funds, like SAC Capital, seek to profit from talented departees by investing in them or setting up funds for them with shared back offices. But money, ego and control combine to discourage founding partners from making a trader, even a star trader, their equal.

Other hedge funds make it difficult for traders to leave by imposing onerous legal conditions. In many cases, departing managers agree not to give potential investors their track record, since that is considered confidential company information. Often, they also are prevented from soliciting investors in the original hedge fund. These measures aren't always effective.

By the standards of the youthful hedge-fund world, Angelo, Gordon is well into middle age. Mr. Aronson, now 46 years old, joined just a few months after its 1988 founding. But it was during a recent run of company failures—such as of WorldCom (now MCI) and cable-TV concern Adelphia—that Mr. Aronson's skill at trading the debt of ailing companies became evident. In the past 18 months alone, he was responsible for producing $3 billion in returns for investors, according to a presentation made by Mr. Aronson at a conference in January.

"He had more cable than anyone," says Bennett Goodman, who until recently was in charge of alternative investments for the Credit Suisse First Boston unit of Credit Suisse AG. "And he cashed out at the absolute peak. He knew it would all come back."

One of Mr. Aronson's best bets in the recent past came with Exide Technologies, a battery maker. Mr. Aronson accumulated a large position in Exide's debt—at one point after the company filed for bankruptcy, he was the single largest holder of its bank debt. He made huge gains when the bankruptcy court came up with a higher-than-anticipated valuation for a reorganized Exide.

Write to Henny Sender at henny.sender@wsj.com1
URL for this article:
http://online.wsj.com/article/0,,SB111144680580085576,00.html

Thursday, March 24, 2005

 

Emphasis on Strategy Selection as We Build Portfolio

Case remains for investing in hedge funds -report
Wed Mar 23, 2005 03:23 PM ET

By Pratima Desai
LONDON, March 23 (Reuters) - A shortage of talent and too much money in some hedge-fund strategies means future returns could disappoint investors, but the case for investing in them is still intact, consultants Watson Wyatt said in a report.

That was because hedge funds were still likely to return enough to improve the efficiency of an institutional portfolio.

"We believe that there is still room for them (returns) to come down from historic levels before the case for investing in hedge funds is no longer supportable," the report said.

Institutional investors have piled into hedge funds since the 2000 equity market crash, looking to diversify from traditional assets, preserve capital and seeking absolute returns instead of relative returns based on benchmark indexes.

Watson Wyatt estimates that out of around 6,000 hedge fund managers, only 5-10 percent are highly skilled and able to add significant value after deductions of fees, however.

Hedge funds normally charge annual management fees of 1-2 percent and performance fees of up 20 percent.

Analysts estimate hedge-fund assets have doubled to around $1 trillion since 2000 and that average returns slipped to around 9 percent last year from more than 15 percent in 2003.

Large inflows mean returns in strategies in convertible bonds and fixed income which buy and sell mispriced assets have dwindled as managers chase the same opportunities.

One way to spot falling returns is to see whether the gap between the returns of the best and worst is narrowing.

"Only relative value strategies stand out as losing their potential," Watson Wyatt said. "Fixed income, statistical, convertible and merger arbitrage have all experienced lower returns or a decreasing manager spread or both."

However, Watson Wyatt thinks that global macro funds -- those which make directional bets in stock, bond, currency and commodity markets on the basis of economic trends -- have a much larger territory to play in and fewer capacity constraints.

They estimate hedge-fund activity represents about 1.5 percent of total stock-market capitalisation and about 10-30 percent of all equity trading.

"But this by no means make them dominant ... Hedge funds follow many strategies in the equity markets, which means that a particular niche is less likely to be crowded," the report said.

BEST AND WORST

The job of finding the best hedge funds for institutional investors such as pension funds has mainly fallen to funds of hedge funds, who undertake the due diligence and monitor the business and investment risks.

A survey of 18 funds of hedge funds carried out by Watson Wyatt found the return spread between the best and worst managers had narrowed and that absolute returns had fallen.

"We estimate that our top-rated fund of hedge fund managers account for roughly 8 percent of the market," the report said.

"Taking only our estimate of the assets of highly skilled hedge fund managers -- $225-$450 billion, these funds of hedge funds would account for about 15-30 percent of the top talent."

Watson Wyatt questions how much growth can be sustained without manager quality falling and said there is not much spare capacity available from existing managers. "Most of the capacity for fund of hedge funds will come from new managers," it said.

But given strong demand and assuming $50 billion of extra capacity a year with highly skilled managers, Watson said there was a limit to the growth of fund of hedge funds.

"We believe funds of hedge funds will run into portfolio management issues as they grow, similar to those that affected the traditional balanced managers," the report said.

"Looking ahead, we believe that a return of Libor plus 4-5 percent per annum -- net of fees -- is a reasonable expectation for a highly skilled fund of hedge fund manager that manages growth well."

That is probably enough to make a case for investing in funds of hedge funds.

Watson Wyatt used the example of an average portfolio with a 50 percent allocation to bonds and 50 percent to stocks. "A five percent allocation to hedge funds from equities would require a return ahead of cash of 2.5-3.0 percent per annum to improve the efficiency in the portfolio."
--------------------------------------------------------------------------------

Thursday, March 17, 2005

 

IDD on Sell Side Talent Exodus to HFs

This Trader Exodus Has Legs
Carolyn Sargent (carolyn.sargent@sourcemedia.com); Judy McDermott (judy.mcdermott@sourcemedia.com)
March 14, 2005

The dot-com world proved irresistible to many an ambitious Wall Street investment banker in the late 1990s, but another exodus currently under way is beginning to far outpace the Internet migration: that of big-name (and not so big) Street traders decamping for the potentially more lucrative world of hedge funds.

The latest emigre is Sal Naro, global co-head of fixed income for UBS, who resigned that post last week to launch his own hedge fund. Jeff Bersh, head of distressed credit trading at Credit Suisse First Boston, is also reportedly leaving the bank to start his own hedge fund (a CSFB spokesman declined comment). In perhaps the highest profile of such moves, Eric Mindich, a former Goldman Sachs trader, raised $3 billion for a new fund that opened last November. His former partner-Dinakar Singh-opened a similar-sized fund last month.

Traders who aren't starting their own funds are joining the funds of others. Last week also saw the resignation of Geoff Sherry, JPMorgan's co-head of trading for loans, bonds and credit-default swaps, who is said to be joining the hedge fund Caxton Associates.

Of course, the post-bonus season always sees its share of musical chairs, but this one has a different feel to it. Consider the happenings in high yield, for instance. In recent weeks, some 20 junk traders have left-some to other Street firms or retirement, but most to hedge funds, sources said. And the lure is not just the potential payday: Some traders were disappointed by their bonuses after such a big year in high yield, and some are simply concerned about where the sell-side junk market goes from here. Firms that suffered defections include Citigroup, Credit Suisse First Boston, Deutsche Bank, Goldman, JPMorgan, Merrill Lynch & Co., Morgan Stanley and UBS.

The end result is that hedge funds are luring some of the best and brightest traders away from the investment banking industry.

Naro is setting up shop with Mark Fishman, a director of fixed income at SAC Capital Advisors, to launch a credit-focused fund to be called Sailfish Capital. The new fund will be seeded by SAC, though it will not be an SAC affiliate. Fishman brings with him a team that helped him manage SAC's Genesis Fund.

It was just in December that Naro was named UBS's global co-head of fixed income, alongside Chris Ryan. Still, observers didn't find the move astonishing, given the potential payout Naro could reap at Sailfish.

How big could that payout be for Naro and others? First, consider the compensation structure at a top-tier global bank, where a head of fixed income or proprietary trading might make, all in, $15 million to $20 million annually or more. "There are a fair number of people-maybe 15 or 20-who are in that range, and a handful who are even higher," said Joe McCann, CEO of JH McCann & Co., an executive search firm. Not far behind are some 20-plus players in the $10 million to $15 million range. Still, McCann said, "if you are at a top-10 financial institution, it is highly unlikely that you're going to make more than $20 million."

For political reasons, it's hard for publicly traded institutions-essentially all of the global banks-to justify compensation levels that are any higher. That means these professionals have to be capped, when their real interest is in making even more money.

That's where hedge funds come in. While the explosion of funds means returns won't necessarily be in the 20% range that was commonplace in late 1990s, these funds still offer much greater potential for riches than investment banks. According to published calculations, at least 17 hedge fund managers made more than $100 million in 2003. "The very fact that there is a number out there like that makes all of these guys salivate," said one observer. Hedge funds typically charge fees of 2% of assets under management plus 20% of the fund's profits.

For traders, hedge funds offer a much higher percentage of their profits. While a high-yield trader at an investment bank might earn 10% of the profits from his trading book, a trader at a hedge fund could earn 15% of the book or even more, executive recruiters said. "A lot of [high-yield] traders are getting X% of the prop book, and they feel they can get more running their own book out of a hedge fund," said one junk trader.

However, the movement hasn't been all one way, and the Street still scores a victory of its own now and then. Lehman Brothers announced last Thursday that Jolyne Caruso, the president and a founder of hedge-fund giant Andor Capital Management, will join Lehman as head of its global absolute return strategies business.

The junk exodus

Bonuses were a particularly nettlesome point in high yield this season, as opposed to last year, when high-yield professionals across the board did exceptionally well and many chose to stay just where they were. Firms this year were much more selective in doling out the big bonuses, headhunters and market sources said.

Junk traders had another concern, as well. "They're concerned about the outlook for fixed income as it relates to sell-side business," a portfolio manager said. "Where does the market go from here?" Perhaps staffers are going to the buyside because the same technicals don't apply to the buyside as they do to the sellside, he added.

In addition, distressed trading desks are seeing less business these days as defaults continue to stay extremely low. "With defaults going on where they are, distressed is very quiet," the portfolio manager said, predicting that the situation will last well into 2006. One buzz last week had the co-heads of distressed debt at UBS-Drew Doscher and Jeff Horan-leaving the firm. However, a spokeswoman said both are still currently working for UBS, declining further comment.

Even those who don't go to hedge funds are finding a way to leverage their positions. With so many leaving the sell side altogether, some who remain are capitalizing on the resulting trader shortage by jumping ship to another bank that pays a bigger package. "[And the] banks are willing to write some big checks" to get them, one high-yield trader noted.

High-yield staffers said to be jumping ship for another bank include Deutsche Bank's Scott O'Callaghan, managing director and head of the high-yield sales team, and Joe Faughnan, trader, who both were said to have left the bank for positions at Banc of America Securities. A Deutsche Bank spokesperson did not provide comment by press time. JPMorgan's Jerry Lee, a managing director and crossover credit trader, was also said to have left for BofA last month, while Goldman welcomed an ex-Citigroup high-yield staffer last week: Rohit Bansal started a week ago as a vice president in high-yield trading.


(c) 2005 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.

http://www.iddmagazine.com http://www.SourceMedia.com

Wednesday, March 16, 2005

 

Morningstar on Historical Market Trend Analysis

Outsmarting Market Trends
by Curt Morrison, MD, FACC | 03-16-05 | 06:00 AM
Shortly before the stock market crash of 1929, Yale economist Irving Fisher famously declared that stocks had reached what appeared to be a permanently high plateau. Undoubtedly, Fisher was neither the first person nor the last one to believe that prevailing conditions would never change. Those ideas appear to be as common at market bottoms as they are at market tops. Yet if history reveals one permanent feature of business conditions or stock returns, it is this: They change.

In fact, they tend to change cyclically. If the cycles lasted only one week at a time, then no one would be fooled by them, but bull markets, bear markets, and business cycles can last for years, and their relative durability seduces investors. Among other reasons, I think this occurs because many investors lack a historical perspective, and many more have a short-term focus. Patient, knowledgeable investors can avoid this pitfall by valuing securities and the broad market based on normalized results.

This sort of analysis warns investors away when market prices imply that peak performance will be sustained over the long term, and it invites them to take advantage of a sort of arbitrage opportunity when prices imply that adverse conditions will never improve. That is, patient investors can profit on the arbitrage between their long-term horizon and the short-term focus of many other market participants.

Estimates of normalized results can be made with moderate confidence for mature companies, and with greater confidence for entire industries. Because we have more than 130 years of data on the broad stock market, and because it represents a major portion of the entire national economy, we can estimate its normalized results with the highest degree of confidence. I've described some examples below.

Be wary when peak operating margins are projected over the long term.
Aetna AET, Humana HUM, and UnitedHealth Group UNH have all posted rising operating margins during the last several years, and all three companies have enjoyed a sharply rising stock price. However, the same could be said for most of their peers. In my opinion, managed-care companies have enjoyed an optimal environment between 2002 and 2004, but industry conditions have been cyclical in the past, and there are signs that the cycle peaked in 2004. Despite this, current stock prices appear to discount a continuation of recent peak or near-peak operating margins and organic sales growth rates over the long term.

Drug companies have stumbled, but long-term prospects probably haven't changed.
Contrarily, opportunities are created when short-term industry difficulties lead to lower long-term expectations. Last year's headlines were full of bad news for pharmaceutical companies, and their stocks fell to valuation levels last seen a decade ago (you can read more about the subject here and here). Although the research labs have been relatively unproductive at a number of these companies in recent years, the pharmaceutical industry has been extremely profitable for decades. Dry spells have always been followed by a new wave of discoveries, and it seems unlikely to me that the progress of medicine will slow in the decades ahead. Ground-breaking drugs create their own demand, and as long as the normalized productivity of future pharmaceutical research approximates that of the past, these companies should continue to post stellar growth and profitability in the decades ahead.

In bear markets, investors expect bad times to last.
In a similar vein, Warren Buffett wrote an article in 1979 explaining that the broad stock market offered excellent value. Inflation was high then and stock returns had been poor for seven long years. That was also the year that BusinessWeek famously ran a cover story titled "The Death of Equities." Irving Fisher described a permanently high plateau in 1929, but 50 years later, investors thought they saw a permanently low valley. Although it's possible for individual companies or even whole industries to suffer a permanent impairment, investors can be much more certain about the future of the entire market.

Measured by the normalized P/E or the Q ratio (read more about these metrics here), the stock market sold at only 60% of fair value in 1979, but over the very long term these measures must revert to fair value as long as markets function freely. Insightful investors had an opportunity to profit on the arbitrage between their long-term outlook and the shorter term gloom reflected in market prices. As it turned out, a long-term outlook was required because the market's valuation fell to only half of a fair level by 1982. As Buffett is quick to admit, he has no idea what the market will do in the short-term--and three years is a short period in the stock market. Nevertheless, conditions did change eventually, and 1982 marked the beginning of the greatest bull market in history.

Today's prices assume peak margins and high valuations are permanent.
Unfortunately, I think that today's stock market is a polar opposite of 1979. It is markedly overvalued by the normalized P/E or Q ratio, as well as by Buffett's favorite metric, the ratio of total market capitalization to GDP. That ratio was recently about 1.3 against a long-term average near 0.62 and a long-term median of roughly 0.56. There are probably many contributing reasons for this unhappy state of affairs (unhappy because it means that prospective returns are low), but one might be analogous to the situation described for managed-care companies.

Jeremy Grantham calls corporate profit margins the most reliably mean-reverting series in finance, and Buffett wrote that the margin (total aftertax corporate profits as a percentage of GDP) generally remains between 4% and 6.5%. He remarked that it's rare for the rate to go above 6.5%. However, that margin reached 7.92% last year, according to a report by Arnold Van Den Berg. That value was exceeded only once during the last 80 years--in 1929. Given that profit margins are mean-reverting, investors ought to assign low P/E ratios to high-profit margins and vice versa. In this way, investors could properly account for normalized long-term results. Yet, according to data presented by Grantham, they tend to do just the opposite.

Investors in 1979 shared the outlook of their peers from 1932, a terrible year in the stock market, but today's investors have more in common with those of 1929, in my opinion. Too much importance has been assigned to unsustainable current conditions, and too little attention has been given to normalized estimates of profit margins, interest rates, and earnings growth. Just as independent-minded investors with a long-term focus profited by recognizing that bad conditions were likely to improve in 1979, like-minded investors today should heed the warning flags the market is waving: The normalized P/E, Q ratio, and market-capitalization/GDP ratio are unsustainably high.



Curt Morrison, MD, FACC, is a stock analyst with Morningstar. He can be reached at curt_morrison@morningstar.com.

Friday, March 11, 2005

 

Thai Capital Fund

Stock Of The Week
Pad Thai Profits
Matthew Schifrin, 03.09.05, 6:00 AM ET

Carlton Delfeld, editor of ChartwellAdvisor.com, an investment advisory devoted to global investing using closed-end funds and exchange-traded funds, is recommending Thai Capital Fund, a closed-end mutual fund that trades on the American Stock Exchange. At a recent price of $10.63, Thai Capital Fund trades at a 7% premium to its net asset value. As of the end of February, the fund's three-year average annualized total return was 38%.

Click here for Forbes Wireless Stock Watch's special investment report, "Cashing in on China's Wireless Revolution."
According to Delfeld, Thailand's stock market, Bangkok SET, is currently trading at only 8 times earnings, compared to 14 times earnings for Malaysia's market, 15 for Singapore, 19 for Philippines and 27 for Japan. After a stellar 2003, the Thai market had a tough year in 2004 and is now trading 15% below its 2004 high.

There are many reasons to be bullish on Thailand's prospects. Delfeld cites potentially stabilizing oil prices, a stronger currency and a backlog of public offerings as signs that overseas investors are returning. He also mentions that the strengthening of Prime Minister Thaksin Shinawatra's ruling party in last month's general election should help the Thai stock market and release large infrastructure projects currently on hold. Thailand has long been one of the world's fastest-growing economies. The Southeast Asian nation has a population of roughly 64 million people, 95% of whom are Buddhists.


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While the Indian Ocean tsunami in December damaged some of Thailand's coastal areas, its economic impact will be muted due to large inflows of capital aid and rebuilding activity. According to its most recent filings, Thai Capital Fund's (amex:TF) portfolio manager, Cholathee Pornrojnangkool, had invested 20% of the fund's assets in the energy sector and 19% in communications. Delfeld says Thai Capital Fund is his top pick for total return in 2005.

For more information and analysis from ChartwellAdvisor.com, click here.

The investment above was recommended in Forbes Newsletters' free Stock of the Week e-mail. To receive Stock of the Week next Monday morning, click here.

Send comments and questions to newsletters@forbes.com.

Thursday, March 10, 2005

 

New BofA Private Bank Head (Where's Rappaport?)

B of A Private Bank Eyes Broader Sales to Clients
Thursday, March 10, 2005
By Jenna Gottlieb

Bank of America Corp.'s private bank is satisfied for now to operate in its parent's multistate footprint, where its new president perceives "the biggest area for growth is penetrating the existing client base."

The private bank has more than $170 billion of assets under management and 150 offices.

Jane Farley Magpiong, the newly appointed president, said there is "always a possibility" to open more offices but does not "see any immediate gaps in the bank's footprint."

"Clients have multiple needs and are looking for a way to simplify their financial affairs," she said, and the private bank can be a one-stop-shopping experience for its wealthy customers. "We want to attract new people and get them inside the doors, but the biggest area for growth is penetrating the existing client base," she said.

The bank also is reaching out to existing clients with new products and services.

In July, B of A combined the private bank's aircraft finance unit with the aircraft leasing unit in its global corporate and investment banking division. The move allowed the private bank to offer clients the option of leasing aircraft through B of A instead of a competitor.

Also last year it created a recreational real estate lending group, which finances purchases of ranches, fishing retreats, hunting preserves, or vineyards by high-net-worth clients.

The global wealth and investment management division of B of A, which includes the private bank, announced Ms. Magpiong's promotion to president on Monday. Previously she was the private bank's Northeast region president, and she is to remain the parent company's Massachusetts market president.

Ms. Magpiong succeeded Brian Moynihan as president of the private bank; he still heads the global wealth and investment management division.

The private bank targets people that have more than $3 million of investable assets with services like financial planning, brokerage, lending, estate planning, and traditional banking products. "If you're wealthy and involved financially, we have just about any product you're looking for," Ms. Magpiong said.

Wealth management is an attractive business line partly because the population of wealthy people is growing so. "The baby boomers are a sweet spot" for the bank, she said.

The global wealth and investment management division administers more than $708 billion of client assets and manages more than $450 billion. Its deposits total $111 billion and loans, $50 billion; it generates more than $6 billion of revenue a year. Ms. Magpiong declined, however, to say how much revenue the private bank contributes.

Her immediate goal is to familiarize herself with her new team and to develop long-term growth goals, Ms. Magpiong said. Before joining the company in 2003, she had spent 14 years at Wells Fargo & Co. where she most recently was managing director for private-client services in the San Francisco Bay region.

Bank of America also announced Monday that Timothy P. Maloney had been named the president and chief executive officer of Banc of America Investment Services Inc., the company's brokerage arm. He succeeded Michael Santo, who left the company to pursue other interests.

Mr. Maloney is to oversee the supplying of investment advice and brokerage services in 34 states; his unit has more than $130 billion of assets under management. He previously was the private bank's central region president.


© 2005 American Banker and SourceMedia, Inc. All rights reserved.

Tuesday, March 08, 2005

 

Barclays for Portable Alpha

The ETF Industry's 800-Pound Gorilla
by Dan Culloton | 03-08-05 | 06:00 AM
In my previous ETF column, I profiled PowerShares, one of the newest and smallest exchange-traded fund shops. This time, I'll take a look at industry-behemoth Barclays Global Investors.

In a sense, San Francisco-based Barclays is the McDonald's MCD of the ETF world. McDonald's didn't invent hamburgers and Barclays didn't create ETFs, but the companies each exploited and popularized their industry niches to a greater degree than anyone else. Barclays' family of 99 iShares is the undisputed 800-pound gorilla of the growing ETF market. IShares has grown from a few funds and $2 billion in assets in 2000 to a complex of 99 domestically available ETFs that cover virtually every major asset class and have about $115 billion in assets. It's now difficult to assemble an ETF portfolio without an iShare. The firm claimed more than 80% of all ETF flows in 2004.

That's not an accident. Barclays' strategy has been simple: Launch ETFs tied to as many of the most popular benchmarks available and market them relentlessly. It doesn't ask if seven broad-based large-blend funds or six technology offerings are too many for one category or sector, and it doesn't try to tell investors which of the indexes are the best. The firm just wants to make it impossible for investors who want a broad-based, style-specific, regional or sector ETF to ignore iShares.

Because of their low costs and trading flexibility it seems natural to pitch ETFs to do-it-yourself individual investors. Barclays takes its cues from financial planners, though. Demand from financial advisors, which Barclays considers iShares' primary market, determines what kind of ETFs the firm launches as much as anything else. Advisors also indirectly influence iShare expense ratios. Barclays factors in the costs of spreading the gospel of ETFs through seminars, white papers, and other services when pricing its funds. This is not a build-it-and-they-will-come business model. The firm is an aggressive evangelizer.

This is not to say iShares is all shake and no bake. The more than 30-year-old Barclays Global Investors is one of the largest institutional asset managers in the world with more than 2,000 employees and more than $1 trillion in assets under management in index funds. It obviously has some redoubtable resources and capabilities.

About a dozen portfolio managers work on iShares. Five split up the family's 57 domestic equity iShares, four run its 35 international ETFs, and three managers are dedicated to the fixed income ETFs. While not graybeards, most of the managers have at least five or more years of experience with Barclays as well as prior industry experience.

Like most index-fund managers, the iShares jockeys play close attention to tracking error, transaction costs, and taxes. Unlike some rivals, such as Vanguard's Gus Sauter, however, the iShares managers will not attempt to add value at the margins by opportunistically buying futures contracts or other tactics. Even though the risks of such stratagems are small, the iShares managers argue they would rather not chance increasing tracking error. Furthermore they contend many iShares clients use ETFs to hedge their portfolios and are more interested in replication than outperformance. The managers, however, are willing to diverge slightly from their benchmarks to harvest tax losses. When Hewlett-Packard HPQ bought Compaq a couple years ago, for example, the iShares funds sold Compaq and bought Hewlett-Packard just before the deal consummated, which gave them almost the same returns as well as tax losses because Compaq performed poorly even after the merger was announced.

It's clear Barclays knows how to run an ETF. Most of its largest funds trail their benchmarks by no more than their expense ratios, which indicates they're doing a good job tracking their bogies. It also has been four years since any iShares ETF has distributed a capital gain (though the funds have paid out dividend income), which shows the firm has delivered tax efficiency.

The low costs, tax efficiency, and competent management of iShares make many of them compelling choices, but competition is increasing. State Street Global Advisors is a distant second in terms of assets under management, but last year cut the expense ratio of its S&P 500 SPDR SPY and some of its sector ETFs. Its StreetTracks Gold GLD fund also was one of the most successful ETF launches ever. Vanguard now offers a family of ETFs with compelling costs and methodologies. And traditional fund families such as Fidelity Investments are making it harder to justify switching to ETF by cutting their traditional index fund expenses.

For now Barclays claims it feels no pressure to enter into a price war with Fidelity. Even with the cuts the iShares S&P 500 Index IVV remains the cheapest index fund tracking that bogy. And even though Barclays doesn't price its fund at the level of their cost (as rival Vanguard does), iShares still are a pretty good deal with a weighted average expense ratio of about 0.30%.

To be sure, Barclays still sets the pace for the industry. Though growth in terms of new offerings will be slower in the future, the firm still plans to roll out more ETFs. It offers most flavors of equity funds several times over, but iShares hopes to expand its fixed-income lineup, which now consists of six funds. It also wants to extend ETFs to other asset classes such as real estate, energy, metals, and timber. Barclays is also interested in actively managed ETFs, which won't get regulatory approval as easily as equity funds. Each commodity, for example, has its own unique pricing and settlement issues to work out. If the approval process for iShares' recently launched gold fund is any indication, it could take years to secure the Securities and Exchange Commission's blessing. It's also not clear how an actively managed ETF would work or who would be interested in one.

In the end Barclays' may resemble McDonald's in another way. The restaurant's founder Ray Kroc once said, "I don't know what we'll be selling in the year 2000, I just know we want to be selling more of it than anyone else." There's a good chance that whatever ETFs are popular in the future, iShares will be selling a lot of them. That's a source of strength and concern. Many of Barclays' vast array of ETFs are good for the firm's business, but not necessarily good for the average investor's portfolio. An ill-considered bet on a single country or sector offering, for example, could do a lot of damage to one's wealth. The iShares family has a lot to offer, but investors don't have to buy everything Barclays is selling.


Disclosure: Barclays Global Investors (BGI), which is owned by Barclays, currently licenses Morningstar's 16 style-based indexes for use in BGI's iShares exchange-traded funds. iShares are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in iShares.

Dan Culloton is a fund analyst for Morningstar.com. He welcomes e-mail but cannot give investment advice. He can be reached at daniel.culloton@morningstar.com.
 

NY Life - Natural for Portable Alpha (P&I Daily 3/8/05)

Philadelphia Board of Pensions and Retirement hired New York Life Investment Management to run $145 million in a domestic large-cap equity enhanced index strategy that seeks to beat the Russell 1000 index, said Christopher McDonough, investment officer. The investment is new for the $4.3 billion fund. Funding came from reducing existing passive equity investments, Mr. McDonough said. No managers were terminated. Fiduciary Investment Solutions assisted with the shortlist search.
 

ABN Amro - Competitor or Strat Partner?

ABN Amro Plans to Seed New Funds

By Chidem Kurdas, New York Bureau Chief
Monday, March 07, 2005 8:55:41 AM ET

NEW YORK (HedgeWorld.com)—Encouraged by fast growth in its hedge fund business, the investment management arm of ABN Amro Bank NV expects to launch fund of funds and single-strategy vehicles in 2005 and 2006.

ABN Amro Asset Management, headquartered in London and Amsterdam, added more than US$500 million to its hedge fund assets in 2004, bringing the total to US$2 billion from only US$40 million three years ago. About half the current assets are in funds of funds, and the rest are in emerging markets and currency hedge funds and structured notes.

"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 US$3 billion under management by the end of 2006," commented the firm's head of alternative investments, Gary Vaughan-Smith, in a statement.

He particularly is interested in starting funds to be managed by talent already present within ABN Amro but also may recruit managers from outside. "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," he said.

The company indicated that there is significant demand for hedge fund products from the clients of its private bank and institutional distribution network. Mr. Vaughan-Smith sees the hedge fund sector at an early stage of development and believes industry assets are likely to grow by as much as 30% annually over the next two years.

Monday, March 07, 2005

 

Why We're Unique in MF PM Recruitment

Barron's Online
Monday, March 7, 2005
FUND OF INFORMATION

Not on the Short List
Hedge funds show little interest in long-only mutual-fund managers

By LAWRENCE C. STRAUSS

WITH HEDGE FUNDS booming, there are lots of openings for portfolio managers. But recruiters aren't knocking on many mutual-fund shops' doors, because they think the best talent lies elsewhere.

"There's a high degree of skepticism among the hedge-fund general partners that the guys from the mutual-fund industry can comfortably and effectively migrate to their world," says Peter Gonye, co-head of the private equity and investment banking specialty practice group at Spencer Stuart, the executive-search firm.

All of this is quite ironic, given how much fuss the mutual-fund industry has made about losing its best managers to hedge funds.

Of course, over the years there have been some very high-profile defections from traditional mutual funds to hedge funds -- one of the most prominent being Jeffrey Vinik, who, under pressure because of his portfolio's performance, left Fidelity Magellan in 1996 to run a hedge fund, Vinik Asset Management. (He closed it in 2000 after a successful four-year run.)

Vinik's move was emblematic of that era, when mutual funds boasted more star managers than they do today. And that was a great era for long-only managers, whose returns seemingly went up every week.

"In the mid-to-late 1990s, it was the mutual-fund guys who came out to start hedge funds," says Stephan P. Vermut, president and chief executive of Merlin Securities and the founder of Montgomery Prime Brokerage Services. In the past two or three years, he says, hedge funds have focused more on recruiting managers from other hedge funds or from trading desks at investment banks. Perhaps the most high-profile example is Eric Mindich, a former Goldman trader who recently launched a hedge fund, Eton Park Capital Management, with more than $3 billion in assets.

"Mutual funds have almost exclusively long-only mandates," explains Ken Marma, who handles hedge-fund recruiting at Wall Street Options in New York. "Managers from long-only funds tend to perform poorly in long/short settings. The dynamics of the short side tend to be a little trickier," he says. So, Marma doesn't think mutual-fund managers make good candidates for running hedge funds. "It's basically two different games entirely," he contends.

Indeed, long-only managers usually don't have much experience shorting stocks, or betting on a price decrease.

"As with other fields where you really need a couple of special skills, having done it before goes a long way, especially considering the risk" of running a hedge fund, observes Randy Shain, president of BackTrack Reports, a New York firm that conducts research for clients on potential managers.

A lack of experience on the short side doesn't necessarily preclude long-only managers from learning and mastering that strategy, however.

Cynthia Nicoll, chief investment officer at Tremont Capital Management in Rye, N.Y., points out that some "very good long-only managers have become good" at shorting stocks. Still, "it takes a while for someone from the long-only side to really understand how to short securities," she says.

Nicoll and others say it's more likely for hedge funds to recruit junior analysts at mutual funds, as their backgrounds can dovetail better with the skills used at a hedge fund. Hedge funds also raid mutual funds for employees with technological expertise.

James Riepe, vice chairman of the mutual fund firm T. Rowe Price, says the firm has lost four or five analysts to hedge funds in the past few years. But he doesn't sense "this great outflow of people" to hedge funds. "You can lose some good people, but I don't see it as a widespread threat," he adds.

Brian Posner, a former fund manager at Fidelity who now works for hedge-fund firm Hygrove Partners, maintains the fund industry has realized that hedge funds are "a viable alternative and competitor for talent."

Another potential threat: long-only hedge funds. "If they were to catch on, and investors were crazy enough to pay hedge-fund fees for a long-only product, that could be a bigger problem for us," says Riepe, who is chairman of the Investment Company Institute, the mutual-fund industry's trade group. Long-only funds account for a tiny sliver of the roughly $1 trillion of hedge-fund assets.

Unlike mutual-fund advisers, which rely solely on a management fee, hedge funds typically charge a management fee of 1% to 2%, plus 20% of annual profits.

With the additional regulation that has come down the pike, from Sarbanes-Oxley to tougher SEC rules in the wake of the mutual-fund scandals, there is the possibility of more mutual-fund managers leaving for less-regulated sectors like hedge funds, Riepe says.

Over the years plenty of mutual-fund managers have left to start hedge funds, most recently John Schneider, who had success running the Pimco PEA Value and the Pimco Renaissance funds. Last month, he started JS Asset Management outside of Philadelphia. (He also ran a small hedge fund for his previous employer.) Schneider, a value manager, plans to run separate accounts, subadvise mutual funds and, yes, launch a hedge fund.

When will the next wave of mutual-fund managers come into hedge funds? Whenever they can produce better returns, as they did in the 1990s. Still, while the migration into hedge funds has slowed, "I don't think it's over," says Vermut of Merlin Securities. "If you're good at managing money, you want to have your own shop."

URL for this article:
http://online.barrons.com/article/SB110998060875871124.html

Saturday, March 05, 2005

 

See if McCarron Can Get Us to Santander/LUNCH re Emilio Botin

Santander offshoot Optimal eyes global offering
Optimal Investment Services, the US$4.5 billion hedge fund firm owned by Spanish banking mammoth Santander Group, is looking to develop a new long/short equity fund of funds with a global mandate. (InstitutionalInvestor.com)
 

Have Gridley/Leeds Help Us ID Players Here?

Shipping derivatives gather head of steam
>By Kevin Morrison
>Published: March 2 2005 22:24 | Last updated: March 2 2005 22:24
>>
Hedge funds and financial brokers are taking an increasing interest in shipping derivatives following the steep rise in freight costs prompted by the growth of the Chinese economy.

A new report by Celent, a research and advisory firm, says the boom in activity could lead to a rise in
>the number of electronic exchanges that trade shipping derivatives.

Derivatives trading on shipping rates, also known as forward freight agreements (FFAs), rose by 70 per cent last year to $30bn, said Axel Pierron, the report’s author.

Mr Pierron forecasts the market will increase by another 70 per cent this year, following growth rates of 80 per cent in 2003 and 20 per cent in 2002. Shipping derivatives trade is conducted in the over-the-counter (OTC) market and benchmarked against prices listed on the Baltic Exchange, which is based in London.

He said hedge funds were also attracted to shipping derivatives trading because of the volatility, as many investors viewed the market as an extension of the underlying physical commodity market.

The Baltic dry freight index, a basket of prices for charting vessels on 25 of the world’s most important routes, more than quadrupled to its record high in December but has since fallen more than 20 per cent. “If you are involved in the buying and selling of commodities, you have to know the cost of shipping, and the only way you can manage that cost is to hedge,” said Mr Pierron.

More than 6bn tonnes of raw materials a year – or about 90 per cent of world trade by weighted volume – is carried by sea. Shipping is also expected to take a greater role in the oil market, with more than a third of global oil production transported by ships, a proportion that is expected to rise over the next decade.

Mr Pierron said Norway’s Imarex was the only electronic trading platform for FFAs. It has captured 15 per cent of the total FFA market in only two years. He said transaction volume on the Imarex platform had risen from 10 transactions in the first quarter of 2002 to more than 1,200 in the fourth quarter of last year.

Imarex has a greater share of the wet freight market, which is the segment that covers the oil tanker market, with a 35 per cent market share.

Mr Pierron said the average transaction value on Imarex was lower than the voice brokerage market, which would make it attractive for other electronic platform providers to come in and offer a service. “The success of Imarex might convince other electronic platforms such as Eurex and Euronext to expand into shipping,” he said.

Euronext already provides an electronic platform for trading in coffee, sugar and wheat.

He said Imarex might eventually be integrated into a larger exchange because it lacked the range of products that would complement FFAs such as energy, metals and agriculture.

Find this article at:
http://news.ft.com/cms/s/b334ee50-8b68-11d9-ae03-00000e2511c8,ft_acl=,s01=1.html

Friday, March 04, 2005

 

Barron's Research on Kerr-McGee/Big Stan Long

TUESDAY, MARCH 1, 2005

Kerr-McGee Corp. (KMG)

PRICE
CHANGE
U.S. dollars 80.66
-0.99
4:00p.m.

* At Market Close


Kerr-McGee Looks Pricey

Kerr-McGee Corp. (KMG: NYSE)
By A.G. Edwards & Sons ($77.66, March 1, 2005)

WE ARE DOWNGRADING shares of Kerr-McGee to Hold/Aggressive from Buy/Aggressive.


The stock has surpassed our previous fair value estimate of $70. Shares are up 34% year-to-date, versus a 22% increase for the integrated group and a 1% decline for the Standard & Poor's 500 Index.

Moreover, the stock has appreciated by approximately 50% since last May.

Although we believe the company's underlying fundamentals will continue to improve and earnings could surprise to the upside given its leverage to crude, the recent multiple expansion (due in part to Carl Icahn's impact and the announced chemical divestiture) implies the stock already reflects this improvement.

Hence, further upside potential appears limited near-term, and insufficient to maintain our Buy rating.

--Bruce Lanni, analyst


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

Swiss Competitor (Albourne Village)

Calling all young emerging managers

posted by anricb on Friday 4 Mar 2005 00:33 GMT

Infiniti Capital AG, the Zurich based family office and fund of funds is seeking additional managers for its fund of emerging managers.The company has allocated over 300 million to this asset class this year alone and is looking at quadrupling that figure over the coming months. Emerging managers with unique strategies should please mail their offering, DDQ and marketing docs to reports@ehfr.Com quoting the name of the fund and the strategy in the subject line.
 

Possible Investor for Stan in 2nd Closing???

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This article was printed from PrivateEquityOnline.com and can be viewed here:
http://www.PrivateEquityOnline.com/TopStory.asp?ID=5657
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Morgan Stanley raises $500m fund of funds
01/03/2005

Morgan Stanley Alternative Investment Partners’ second vehicle will make commitments to US and European buyout, global venture and special situation partnerships.


Financial services giant Morgan Stanley today announced that Morgan Stanley Alternative Investment Partners (AIP) has raised $500 million (€379 million) for its second private equity fund of funds.

According to Morgan Stanley AIP co-head Cory Pulfrey, the final number represents the firm’s hard cap, surpassing the $350 million goal set when fundraising began in the first quarter of 2004.

Morgan Stanley AIP Global Diversified Fund, also known as Private Markets Fund II, focuses on four strategies: US buyouts, European buyouts, global venture capital and special situations.

In addition to investing in private equity funds, the new fund will invest approximately 35 percent of its committed capital in a combination of secondary interests and direct co-investments made alongside private equity managers and financial sponsors.

Pulfrey said the fund will invest between 50 percent and 60 percent of its capital in buyouts, 20 percent to 30 percent in venture, and the rest in special situations. The fund will have a “heavy international flavour”, with between 55 percent and 65 percent of commitments outside of the US.

However, he added that the majority of venture-dedicated money will remain in the US, although the firm will be exploring opportunities in Israel, Western Europe and Asia.

Morgan Stanley AIP is Morgan Stanley’s primary fund of private equity funds and fund of hedge funds manager. The Private Markets team of Morgan Stanley AIP manages more than $3 billion in private equity commitments in funds of private equity funds and separately managed accounts.

Thursday, March 03, 2005

 

Get Schroders Approved for Stan

Schroders chief foresees death of tracking error

IPE.com 2/Mar/05: EUROPE – A top executive at Schroders has foreseen that tracking error may no longer be the best way of measuring portfolios as the focus moves towards risk and liabilities.

“Tracking error could be dead as a measure,” said Curt Custard, head of multi-asset solutions. He called for a “new language” to deal with volatility and liabilities.

Tracking error is defined as the divergence between the price behaviour of a portfolio and the price behaviour of a benchmark.

Custard – who joined Schroders last year from Allianz, where he was chief investment officer of multi-asset products in London - also saw the role of asset managers changing. “I see asset managers working with the consultants. The role of asset managers is not just to provide product. Most consultants would agree with that.”

He said the current landscape had moved on from the old ‘tri-polar’ world of a few years ago, where funds, asset managers and consultants co-existed. Now, he said, it was more like a ‘Venn diagram’ where different players’ roles were more diverse.

Custard’s comments chime with other industry figures. Andrew Dyson, head of institutional business at Merrill Lynch Investment Managers in Europe, has spoken of his ideas about a “new model” for the relationship between investment consultants and asset managers.

Custard also he explained that the firm sees the Netherlands as a “critical market” – and that Schroders is a natural fit for this “cutting edge” market.

The new regulatory environment of the FTK, the new financial assessment framework for pension schemes, “dovetails with how we look at the world”.

Schroders yesterday said it had a net outflow of £8.4bn (€12.2bn) of institutional assets in 2004 as investors withdrew from balanced mandates.

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