IVY Plus Blog

Star Hedge Fund Managers Hit By Apple Decline

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Insider Monkey claims that with Apple as the largest held stock for several hedge funds, many funds will be caught underperforming with Apple’s 4% loss as the S&P rose 3% in the last few weeks.  Possible losers are (some may have covered calls or puts) – 

* Ken Griffin: Citadel – 2.3 million shares of Apple in its portfolio

* D. E. Shaw – 2 million shares of Apple  

*  Discovery Capital has lost $45 million.

Coatue Management lost $37 million today.

*  Greenlight Capital’s loss is also $37 million

You can find out more here – http://bit.ly/O8YxlQ


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Citi Predicts Hedge Fund Assets to Increase to $5 Trillion by 2016

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 Citi Prime has come out with a study expecting hedge fund assets to increase to $5 trillion by 2016 from their record $2.1 trillion they now hold.  Citi distinguishes between Beta capture which it says are now mostly exemplified via ETF or Index investing and Alpha investing in alternatives.  http://citi.us/MIve8S  

"According to the survey, global assets invested with hedge fund firms could rise from today’s record $2.1 trillion to more than $5 trillion largely due two emerging trends.

The first is the potential for market-leading institutional investors to enlarge allocations to hedge fund strategies by $1.0 trillion to better shield against risk.

Second, the survey revealed a "convergence zone," in which hedge funds and traditional asset managers will increasingly vye confronting each other to offer a broad set of equity and credit strategies, leading to an additional $2 trillion in new allocations to hedge fund firms in the form of regulated alternatives and long-only products."  http://bit.ly/PgWHOD

 KPMG meanwhile reports that it expects institutional investors to remain the largest part of hedge fund investors.  http://bit.ly/LVrdOB

"Almost 60 percent of global assets under management are now from institutional investors."

"Seventy-six percent of respondents have observed an increase in investment by pension funds since 2008, while institutional investors as a whole, including funds of funds, accounted for a clear majority (57 percent) of assets under management."

Meanwhile Pension funds continue to add more allocations to Hedge Funds:

* New Jersey Increased it’s alternatives by 14% – http://bit.ly/L0uHuY

* Illinois increased allocations from 25% of assets to 35% –http://bit.ly/LVsAN7

* And Ohio Pension Funds has invested more than $30 million in another Hedge Fund.  http://bit.ly/LdKwj9


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In our last post, we reviewed the growing logjam of PE funds that are outlasting their lifespans – http://bit.ly/Mrl4a1 .   In this post, we continue with coverage of hedge funds.  Credit Suisse reported that more than 67% of existing hedge funds were under their high-water mark as of the end of last year and 13% have not paid a performance fee since 2007.   The hedge fund Implodemeter, http://bit.ly/5Lwj7p ,  tracks large funds likely to close but the list is far greater than they present.  Though most hedge funds were looking for a turn around in 2011, the August mini crash of that year led to an average hedge fund performance down 5.2% that year, far worse than the gain of 2% seen by the S&P 500.  http://econ.st/zrkgVF

As a result, consolidation is hastening in the Fund of Fund space and more single strategy hedge funds are shuttering.  Funds that have not been acquired are looking for earn out opportunities where they can transfer assets and continue to manage existing capital with another fund who has more opportunities for growth.  We are seeing this as Man Group has acquired 2 major funds with GLG and FRM in the last 2 years , http://bit.ly/KCtZHw .   Man has not had success retaining the assets of it’s acquisitions as current AUM are substantially under peak since 2008.  

More recently, Prisma Capital has been purchased by KKR, http://on.mktw.net/Ndj2NA .  Prisma’s acquisition was surprising because it is one of a handful of substantial growth funds of funds who have emerged from 2008 earning several mandates from pension funds.  Prisma, like it’s brethren successful fund of funds, has moved away from the "Access" style of fund of funds, promising access to high return hedge funds with a few limited partners, into one which develops specialty portfolios that fit client needs and risk parameters.  

Another merger has happened with Gottex fund of funds acquiring Hong Kong based fund of funds, Penjing http://reut.rs/JIGSy9 .  

Skybridge Asset Management has also shut down two of their seeder funds and more recently, http://bit.ly/KY59kl , Stark Investments, a former $14 billion powerhouse with 2012 AUM of $4 billion  has announced they are shuttering 3 of their funds, http://bit.ly/Mxq7tN .  Likewise, fund of funds, EIM Capital is another candidate for sale as it’s assets too have shrunk in half from a size over $14 billion, http://bloom.bg/Ly0Ygp .

Though there are a slew of hedge fund mergers and consolidation, hedge fund managers are not resting.  New hedge fund launches are at their peak since 2008.

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Zombie Private Equity Funds Causing Industry Shift

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The emergence of large number of "Zombie" Alternative funds in both Private Equity and Hedge Funds are causing tectonic shifts in the business.  

In Private Equity, there are more than 200 funds globally representing as much as $100 billion of Assets Under Management that have not shut down after a normal fund term of 10 years.  The size of the industry globally is about $1.5 trillion.  As the vintages of debt fueled buyout funds come to term, it is likely that several more hundreds of billions of invested capital will not be returned to investors as funds go beyond termination date.  The Wall Street Journal quotes Torrey Cove Capital Partners research, http://on.wsj.com/N2mn2I,  in discussing the issue of funds that have remaining assets that are hard to value and that can only be divested at fire sale prices.  At times the valuation of these assets to the funds are the difference between a successful and not successful fund term as PE firms keep the valuation of these assets at lofty levels.  

Investors have little recourse outside of litigation which can last longer than the remaining term of the fund.  Secondary buyers will frequently look at many institutional investor stakes in these funds but will value those stakes at the fire sale prices of the remaining portfolio.  Another relevant aspect is that some zombie funds continue to charge 2% management fees even though the term of the funds has expired.  Pension funds and other institutions who actively use their capital to pay down pensions or finance endowment acquisitions or maintenance are looking at ways to deal with fund liquidity that they had counted on but have not appeared.  

The Financial Times, http://on.ft.com/O688dL,  estimates more than 57% of PE Limited Partners (LPs) are invested in underperforming funds.  Jeremy Coller of Coller Capital, a leading secondaries fund, claims that many PE funds will not make their 8% hurdle rates necessary for managers to collect carried interest fees.  More than 80% of LPs expect to receive requests for fund lifespan extensions.  

Illinois Retirement Fund System has an interest in a 13 year old Invesco venture capital fund that it is still paying fees on.  After paying $340,000, Illinois has notified Invesco that further fees endanger the entire portfolio of more than $950 million in Invesco funds.  The state of Oregon has negotiated so it only pays fees on 30% of funds older than 10 years old and those fees are less than .8% of existing assets under management.  

 More recently, liquidity hungry LPs such as Calpers, http://on.wsj.com/NTGXTq,  have moved to second markets to sell their stakes in past maturity funds.  Calpers stake may be as large as $400 million in Venture Capital and Private Equity stakes it is trying to unload.  Second market exchanges have grown from $3 billion in 2002 to $30 billion today with LPs looking to unload stakes in funds.  "Investors in a private-equity fund raised in 2000 by Willis Stein & Partners in Chicago agreed to extend the life of the fund but only if Willis Stein agreed to share management of the roughly $700 million in remaining assets with another manager."

Meanwhile, leading advisors such as Stepstone Global advise their clients that it is only worthwhile for their clients to invest in the top 20% of PE funds by performance.  Likewise, several theorists prior to 2008 cited a 3% liquidity premium, http://bit.ly/L42W5V.  Certainly given the post 2008 less leverage environment and the experience with funds that go beyond their mandate in duration, the liquidity premium has expanded.   


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Man Group Acquires Distressed FRM for Contingencies

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Seeing further consolidation in UK hedge fund of funds managers, The Man Group is acquiring FRM.  The deal is being done for no cash up front and CONTINGENCIES.  FRM can potentially realize as much as $82.8 million of cash over 3 years depending on performance and net of total assets acquired and maintained.  In addition, there is a potential for FRM to receive 47.5% of fees on their existing AUM of $8 billion.  More details on the deal can be found here – http://bit.ly/LtMY9r .  Cost cutting, i.e. staff cuts, will amount to $45 million.

FRM at its peak managed as much as $15 billion – http://bit.ly/L5O7Pn , but had seen AUM drop by $5 billion due to the 2008 market crash.  FRM’s founder, Blaine Tomlinson, was brought back in 2010 to revive the business and had initial success but saw redemptions increase again.  

Man Group has had their own problems as mentioned prior, http://bit.ly/L5O7Pn .  Man’s stock price has fallen from $1.44 in March to roughly $1.16 http://bit.ly/JLoSpg .  Total market value has declined to about 10% from their 2007 peak.  Man’s stock price dropped by roughly 6% in response to the acquisition announcement made on May 21st.  The FTSE was down 8% in May and there is no information on Man’s performance in that month.

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Skybridge Shutters Seeder Funds

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 Among the shutdown of several hedge funds, http://bit.ly/Ju90rm , and drops in AUM in several longer standing funds, http://bit.ly/IXRg5h.  Skybridge Capital has announced that they will shut down their fund seeding business.  Since 2006, Skybidge 1 and 2 have provided startup capital to 15 managers and are presently invested in 7 funds.  Of the funds invested in, Only Westport Capital has surpassed $1 billion in assets.  The older seeding fund was down 5.3% since opening.  

Skybridge intends to focus more on their core business.  The Skybridge multi fund advisor is up 7.7% as of the end of April vs. 3.1% for the fund of fund index.  The Series G fund of funds acquired from Citigroup in 2010 has increased in AUM from $722 million to $2.4 billion.  There is no news on performance as of May when the S&P 500 was down 9%.  

More about Skybridge can be found here – http://bit.ly/Lov42e  and here http://bit.ly/KVB4kW .  


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Zoe Cruz Hedge Fund Fails

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Former Morgan Stanley co-President is the latest in a long line up of former star bankers to fail at the hedge fund business.  In 2007, The 57 year old Cruz was a target at Morgan Stanley from the "Group of Eight" insurrection which saw other corporate leaders place a full page ad in the Wall Street Journal protesting the corporate management structure with her in the leadership position.  She was forced to resign when Morgan Stanley’s mortgage group announced a $3.7 billion loss on mortgage investments.  http://nyp.st/g73Ofr

In 2009, Cruz started Voras Capital Management with an initial $200 million including capital from Morgan Stanley.  Immediately rumors swirled that Voras was unable to raise new capital and senior management turnover was heavy.  In March 2011 it was reported that Voras had lost three members of their executive leadership team.  The Radcliffe grad with a degree in "Romance Languages and Literature" did not cut it with Voras’ "Credit" fund which she shut down in 2011.  While about $8 billion in new capital was raised by Global Macro funds in the fourth quarter of 2011, Voras’ flagship Global Macro fund underperformed the market with -8% returns.  Speculation of a Morgan Stanley redemption was the final straw as Voras announced it was being shut down.  http://reut.rs/JgmOkB


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Man Group AUM and Stock Plummet

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Formerly Massive Hedge Fund – The Man Group – has plummeted in Assets Under Management (AUM) over the last few years resulting in a depressed stock price.  In the past, Man Group had more than $79 billion in AUM prior to acquiring GLG.  GLGs AUM were $23.7 billion at the time of purchase in 2010.  Combined AUM today are less than $59 billion (down from $68 billion this time last year) and the firm’s stock is in Pink Sheets in London with a value of $1.44 or more than 80% off the price from a few years ago.  

Dealbook reports "Along with assets, revenue and profits have fallen drastically since 2008. In 2008, Man Group was pulling in about $3.2 billion of revenue and about $1.7 billion in net income. By 2011, revenue sank to $1.6 billion and profit was down to $211 million."

Man’s latest strategy has been to try to raise capital in the United States where it has successfully raised $3.1 billion in Q1 2012 (while losing $4.1 billion in AUM the same quarter with other investors).  Man had announced in 2011 that it was focusing efforts in the US family office market to raise capital.  More info here – http://nyti.ms/f7GKpN

Man Group has a checkered history as in December 2008 it was found out that one of Man Group’s funds of funds has invested $360 million with Ponzi schemer, Bernie Madoff.  In the last quarter of 2010, one investor withdrew $1 billion. Their former brokerage unit, spun off in 2007, Man Financial Group aka MF Global was shuttered and account holders have been left with a short fall of as much as $1.6 billion.  More recently, Man Group has been humiliated by the performance of former trader, David Harding, whose Winton Group has outperformed Man Group by more than 25% over the last three years including having an up year of 6.2 % in 2011 while Man’s AHL was down roughly the same amount.  Winton Group charges a 1% management fee vs. Man Group’s 3% raising questions of management complacency and whether Man Group’s orientation is towards asset gathering rather than performance.  Winton Group’s fund now eclipses Man Group by $29 billion AUM to $21 billion.  More here –  http://bit.ly/IPj5NK

More info can be found here – http://nyti.ms/IkmkZP, here – http://bit.ly/7rZocX and here – http://bit.ly/qkpzhf

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Lyxor Managed Accounts Platform Assets Increase by 7% in Quarter due to Increased Global Macro Interest and CALSTRS Block

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HFM Week reports that Calstrs has increased it’s allocation to Lyxor’s managed accounts platform for Global Macro investing purposes.  Lyxors AUM for managed accounts has increased by more than 7% in the last quarter to $11.5 billion from  $10.7 billion at the end of 2011.  

"The California State Teachers’ Retirement System (CalSTRs) has boosted its existing allocation to Lyxor Asset Management after it selected the Societe Generale Group subsidiary late last year as its advisor in the development of a new global macro hedge fund strategy, HFMWeek has learned"

More info can be found here – http://bit.ly/IkCh5O

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Pertrac – 4% of Hedge Funds Control 60% of All Fund Assets, Funds Now Number More than 13,000

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 PerTrac’s ninth annual database survey finds that more than 60% of all hedge fund assets are controlled by hedge funds with more than $1 billion under management.  Funds of that size make up roughly 4% of all hedge funds.  Despite their size, total AUM for those funds increased by only 1.4%.  Institutional bias seems to be more apparent in Funds of Hedge Funds (FOHF).  The number of FOHFs reporting more than $1 billion in assets increased by 18% but the overall number of FOHFs decreased by 4.8%.  PerTrac’s study is unique in that it aggregates data from 11 different hedge fund databases.  54% of hedge fund managers report to only one database.  

"The study also found among reporting funds that:

— Overall, the number of single-manager hedge funds and FoHFs increased to 13,395, a growth of 3.73% from 2010 to 2011.

— The AUM of single-manager hedge funds and FoHFs expanded by 3.37% to reach $2.245 trillion at the end of 2011.

— More than half of all single-manager hedge funds and FoHFs are denominated in US Dollars and 77% are denominated in either US Dollars or Euros.

— The number of single-manager hedge funds increased by 6.98% in 2011, reaching 10,007 funds.

— The AUM of single-manager hedge funds was $1.798 trillion at the end of 2011, an increase of 4.2% from 2010."

The full press release is here – http://on.mktw.net/JMvvY7 .

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