Smaller Hedge Funds Are Attracting Investors

Emerging hedge funds are attracting interest from pension fund investors such as the California Public Employees' Retirement System (CalPERS) and the New Jersey Division of Investment.  Smaller hedge funds that manage less than $50 million returned 13.1% annually for the last 15 years through 2010.  Compare this figure with an 11.62% return for funds with more than $1 billion in assets under management and 10.23% return for the HFRI Fund Weighted Composite Index.  Pension funds are also mimicking the hedge fund of funds business model by seeding these new funds and getting a share of their profits.  So, they are getting investment returns and participating in the incentive fees.  Seeders invest for the long term and usually have a two to three year lockup on their capital.

The largest hedge funds receive about 90% of the investment dollars.  Many investors are worried about capacity issues as they swell in assets under management.  After 2010, the more successful funds have recovered from the credit crisis and are closing their funds to new investors.

Some firms that specialize in seeding fund of funds and investing in emerging funds are Busara Advisors, Reservoir Capital Management, Protege Partners, Blackstone Alternative Asset Management and Larch Lane Advisors.

The source for this article can be accessed here.

Active vs. Passive Investing: What Investors Are Doing

A survey of institutional investors by the money manager Janus Capital Management said that they were increasing their investments into actively managed funds.  63.3% of investors believed that active managers can outperform their benchmark indices.  They needed to generate returns above the market (alpha), meet plan return assumptions, re-allocation of capital, increased confidence in risk management of fund managers and improved market conditions.  On the other hand, investors planning to decrease investments with active managers have less confidence in the managers' risk management procedures, did not like the high fees and underperformance of the funds.

However, the data from the survey is not consistent with fund flows.  The eVestment Alliance Passive Fixed Income universe has been positive in four of the past five quarters.  One consultant noted that passive fixed income returns would be "challenged" as credit spreads have narrowed and investors can counter that by investing in active fixed income.

Managed Futures: An Asset Class?

Hedgeworld alerted me to an article regarding the question:  Is Managed Futures an Asset Class?  In an earlier post, I had mentioned that it was according to the curriculum for the CAIA program.  The article defines an asset class as "...investment opportunities that behave and are treated in a similar manner."  The four characteristics are:    common regulatory guidelines, large amounts of assets under management, singular performance when compared to other asset classes and common risk/return profile within the asset class.  The first three answers are definitely yes.  The fourth is a maybe.   Even though the performance of managed futures sub-strategies are not correlated,  they all have position level detail, separately managed accounts and liquidity.  The article then goes on to rebut three counterarguments:

• Not all managed futures strategies react to market events in the same way
• Managed futures' underlying assets include stock indices, currencies and bonds and not only commodities
• Performance is not easily replicated within managed futures space

Roubini Speaks: Another Asset Class Falls

On Thursday, Shelley Goldberg, the commodities strategist at Roubini Global Economics, recommended that investors take some profits on their positions.  There was fear that the recent price increases were overdone.  She was predicting a retrenchment before commodities will resume their upward trajectory.  The Reuters-Jefferies CRB Index, one of the commodity indices, fell 5% on that day.  Oil, natural gas, silver, copper, tin, cocoa and coffee cratered.

The reasons for the fall in prices were varied:

• Weak US economy
• May seasonal selling of commodities
• Eurozone debt troubles
• Monetary tightening, slowing growth and inflation in emerging markets
• Trend following algorithmic traders
• More assets invested in commodity ETFs
• Unwinding of arbitrage trades
• Profit taking

There is more information in this article.

Funds of Funds: Creating Value Differently

I was alerted to an article by Albourne Village about how funds of funds (FoFs) have been changing after the credit crisis of 2008.  One of the unfair criticisms from institutional investors and academics is that hedge funds and private equity managers do not want FoFs as clients.  In October 2010, SEI and Greenwich Associates discovered that 50% of buyside investors only invest in FoFs.  For investors in both hedge funds and FoFs, 60% of assets under management are placed in FoFs.  The institutions in the study were Foundations & Endowments, Public, Corporates and Consultants.  The items that provide FoFs an edge are access to managers, building customized portfolios and access to emerging markets hedge funds.

Venture Capital Investments By Sector

In the first quarter of 2011, there were $5.9 billion in venture capital investments.  The leading sectors were Software (20%), Industrial/energy (19%) and Biotech (14%).  Here is the chart of all sectors.

Is Goldman Sachs No Longer the Best Firm on Wall Street?

I was alerted to an article about how Goldman Sachs has fallen back to the rest of the bulge bracket.  William Cohan has a new book:  Money and Power:  How Goldman Sachs Came to Rule the World.  Some evidence of  this are:

• Fixed Income, Currencies and Commodities business was down 28% in the latest quarter
• Losing the best employees to smaller firms out of the regulatory spotlight
• Bonus pool is smaller
• Mergers and Acquisitions has fallen to number 2 behind JP Morgan after the first quarter
• Public relations missteps - AIG bailout, CDOs created for Paulson & Company and Facebook transaction