Investment Jumps in Socially Responsible Alt Funds

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A new report finds that investment in alternative investment funds with environmental, social and governance criteria went up about 16% from last year.

“Sustainability Trends in Alternative Investments in the United States,” a report from the SIF Foundation by the Center for Social Philanthropy at the Tellus Institute, details that $80.9 billion was invested in 375 alternative investment funds - hedge funds, property investment, venture capital and private equity - incorporating ESG criteria at the beginning of 2011.

According to the report, that’s a 15.9% growth in combined assets since the beginning of 2010, when 346 alternative funds managed a combined total of $69.8 billion.

The report also found that hedge funds lagged behind other fund vehicles when it came to socially responsible investment with 47 hedge funds, representing a total of $2.6 billion in assets under management. That’s only 12.5% of funds reported with an ESG mandate.

“Sustainability Trends in Alternative Investments in the United States”

Where Are The Women In The Industry?

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According to the 2010 U.S. Census, while the number of working women have surpassed that of men, the hedge fund industry have yet to reflect that statistic.

Women only manage about 3% of the nearly $2 trillion industry, according to a recent study, but they get their due in a Business Insider article this week.

The spotlight is shone on such stars as Renee Haugerud, founder of New York-based fund Galtere, who transformed her $5 million firm into a $1 billion company; Leda Braga, president of BlueCrest Capital Management, who manages an astonishing $8 billion alone in her fund; and Elena Ambrosiadou, founder of Cyprus-based hedge fund IKOS Asset Management, who runs nearly half of the company's $2.5 billion assets under management.

Go to Business Insider article

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SEC Shuts Down Supposed Quant Fund

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A Massachusetts money manager and his investment advisory firm have been shut down by the Securities and Exchange Commission for his falsely claiming operation of a quant hedge fund.

The SEC on Wednesday alleged that Boston resident Andrey Hicks, 27, through his firm Locust Offshore Management, raised at least $1.7 million from several investors for the purported hedge fund, only to put the money into his personal bank account.

Also in the complaint, the agency alleged that Hicks and his firm misrepresented that the fund had held more than $1.2 billion in assets, Ernst & Young served as the fund’s auditor, Credit Suisse served as the fund’s prime broker and custodian, and the fund was incorporated in the British Virgin Islands.

Furthermore, the SEC alleged that Hicks lied that he worked at Barclays Capital, and graduated from Harvard University.

The SEC going after someone operating a fake hedge fund was the second such action by the agency in the same day. Also on Wednesday, the SEC charged Florida resident Scott Kupersmith in a securities fraud scheme involving a bogus hedge fund.

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Barclays Wealth With Six New Hires

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London-based hedge fund manager Barclays Wealth has hired six investment representatives for its various U.S. offices.

The advisors, each with an average of 19 years of financial experience, will be placed in the firm’s Boston, New York, Dallas and Miami offices, according to a company statement.

Glen Darby and Matthew Grady will both work in the Boston office, with Darby coming from Merrill Lynch's Private Banking and Investment Group and Grady from Boston-based firm Old North Advisors.

Jerrid Douglas and Andrew Leventhal have been appointed to the New York office. Prior to Barclays Wealth, Douglas was with Citi Private Bank while Leventhal comes from Credit Suisse Private Banking.

Over in Dallas, Michele Huff Powell joins the firm from U.S. Trust, Bank of America Private Wealth Management.

Finally, Narciso Munoz has been appointed to the Miami office. In his previous position, Munoz spent 7 years at HSBC's International Private Bank.

Barclays Wealth has $272 billion in total client assets.

Hey, It’s Raj Rajaratnam: The Movie

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There’s already a movie in the works about disgraced Ponzi schemer Bernard Madoff, so why not one on convicted hedge fund manager Raj Rajaratnam.

According to an article in the Hollywood Reporter, independent film company 108 Production announced Thursday that it is developing “Billion Dollar Raja,” with filming to start in the fall of 2012 in New York, Florida and Italy.

The movie will be written and directed by Nayan Padrai and produced by Sheetal Vyas, both responsible for the romantic comedy “When Harry Tries to Marry” that came out in theaters last spring.

Rajaratnam was sentenced to 11 years in prison earlier this month, one of the longest sentences for an insider-trading case.

Go to Hollywood Reporter article

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Latin America Doing Well, But Elsewhere …

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How would one know if Latin America is good place for investment?

Start with Tulio Vera, managing director and chief investment strategist at Bladex Asset Management, a New York investment adviser that oversees a macro hedge fund with a primary focus on Latin America.

Vera was a guest speaker at an event organized by the Latin American chapter of the lobbying group Hedge Fund Association at the Pierre Hotel in New York on Oct. 6. The event’s other featured speaker was SkyBridge Capital’s Anthony Scaramucci.

A Merrill Lynch vet who has dealt in Latin American investment strategies for years, Vera said it was a “good moment” now for Latin America in terms of investment when compared to Europe and its current economic crisis.

“Use Europe as a hedge; I think it has been probably the best hedge this year to be long Latin American emerging markets and hedge with Europe,” Vera said.

He also said Latin American emerging markets such as Brazil and Chile have changed the perception that those markets will be besieged by inflation by cutting interest rates.

Vera then turned to the economic powerhouse that is China, and explaining how it has become more important to Latin America than Europe and the U.S. because of the trading relationship between the two regions.

“Commodities are the bridge between the Far East and China, and Latin America,” Vera said. “Every major Latin American country is, in one way or another, a commodities exporter of sorts, whether it’s copper or wheat or oil or soy.”

He then wrapped up his speech with this pithy credo: “Latin America is in good shape, the world around is very turbulent.”

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eVestment | HFN Industry Report: September 2011

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Click here to read the full report.

eA|HFN Industry Overview: September 2011

On October 21, 2011 with 3,168 hedge fund products reporting, the HFN Hedge Fund Aggregate Index was -3.09% in September and -5.58% YTD 2011 while the S&P 500 Total Return Index (S&P) was -7.03% during the month and -8.68% YTD.

Hedge Fund Industry September Highlights
•Total industry assets fell an estimated 2.92% to $2.463 trillion in September. Performance accounted for the majority of the asset decrease and net investor flows were negative for the month.
•Average hedge fund return in Q3 was -5.97% and investors withdrew an estimated net $19.3 billion. These represent the first quarterly loss and net redemption since the financial crisis.
•Falling commodity prices along with volatile equity markets and large losses from emerging market funds weighed most heavily on hedge fund returns in September.
•Fixed income strategies continued to outperform equity funds, the latter posting negative average returns for the fifth consecutive month and falling -9.34% in Q3 vs. -1.39% for FI strategies.
•Mortgage sector funds posted their second consecutive aggregate decline and their worst return monthly since November 2008, however the HFN Mortgages Index was +9.28% through Q3 2011.

High volatility across most major markets was the norm in September caused primarily by the ongoing sovereign crisis in Europe and worries over the size and timing of the EFSF bailout fund. The resulting reduction of exposures to risky assets during the month appeared to benefit FX strategies and funds focused on government bonds. Their aggregate returns were +1.88% and +1.12%, respectively, during the month.

HFN developed the Outlier ratio to determine which sectors are producing returns outside of their normal ranges. In September, the ratio highlighted emerging markets as a sub-sector which was hit particularly hard with their worst performance since October 2008.

Regional Benchmarks
No regional specification produced aggregate positive returns in September. Emerging market exposures were most negatively impacted. Funds investing in Russia lost an average of -13.01% which is bad, but not nearly the -28.20% decline seen in October 2008. Conversely, losses from funds investing in Brazil and China were nearly on par with their declines during the financial crisis. Only funds investing in developed European markets and in Japan lost less than 1% on average during the month, -0.38% and -0.91%, respectively.

Performance from funds investing in developed European markets was relatively good in September. The Stoxx Europe 600 Index was -4.74% during the month compared to the median return from equity strategies focused in the region of -0.95%; the HFN Long/Short Equity Index was -4.14%. Investors continued to withdraw assets from developed Europe funds at an above average rate in September.

Monthly Asset Flow Estimates
•Total estimated hedge fund assets at the end of September 2011 were $2.463 trillion, a decrease of -2.92%, or $74.1 billion from August.
•Performance accounted for a decrease of $59.5 billion and investors accounted for a net outlfow of $14.5 billion.
•The core rate of growth/decline (% asset change due to investor allocations/redemptions) was -0.57%, the second monthly decline of Q3 2011.
•There was a net investor outflow of $19.3 billion in Q3, the first quarterly outflow since Q1 2009. Redemptions were nowhere near the scope of that quarter when the industry lost an estimated $215 billion.

With increased volatility and performance losses emerging, investor flows began to slow in May 2011 and eventually shifted to net redemptions in July. The net outflow in September was the largest since April 2009. Allocations and redemptions have a history of lagging performance by a few months which would indicate net outflows may persist.

Sub-Sector Specific Flows
•Investors withdrew more than they allocated to Japan focused funds in September at a rate above the industry average. Developed Europe focused funds also faced net investor outflows for the fourth month in the last five.
•Emerging markets funds continued to lose assets at an above average rate in September. The group had an estimated $1.8 billion in net redemptions during the month and $4.8 billion in Q3.
•Investors appeared to be reducing exposure to credit strategies during Q3 as redemptions came at a higher rate than that of equity strategies for the first quarter since Q1 2010.
•Fixed income arbitrage and event driven strategies had among the highest rates of net outflow in September. Global macro was among the few strategies with net allocations.
•Asia domiciled funds continued to increase AUM due to net investor flow in September. The region has seen above average growth rates throughout 2011.

Performance Review
Fixed Income (FI) Strategies
•The average return of all fixed income focused strategies was -0.80% in September and +2.37% year-to-date.
•Government bond strategies again performed best during the month, +1.12% and corporate credit strategies were -2.17%.
•Fixed income fund assets fell for the third consecutive month, -2.37% in September to an estimated $676.4 billion. Investors redeemed a net $11.2 billion during the month.

Equity (EQ) Strategies
•The average return of all equity focused strategies was -4.42% in September and -8.68% YTD.
•Energy focused funds were down most, -8.10%, followed by small cap strategies and healthcare funds, -5.88% and -5.21%, respectively.
•Equity fund assets fell an estimated -5.03% to $769.5 billion in September. Investors redeemed a net $4.4 billion during the month.

Commodity and Foreign Exchange (FX) Strategies
•Broad natural resource commodity strategies were -0.53% in September and +0.26% YTD.
•Returns were again varied by sector. Funds investing in metals markets were -13.5% while agriculture funds were +0.03% during the month.
•Funds targeting financial futures again withstood market volatility relatively well, +0.13%, and FX strategies had some of the best overall performance in the industry, +1.88%.

Summary Analysis
The European sovereign debt crisis, operation twist embarked upon by the U.S. Federal reserve, evidence of China’s slowing economy and their housing market topping out were all stated by managers as contributors to the high level of volatility in September. October asset flows will be a good bellwether for the rest of the year as typically outflows would be expected with the continued performance losses. It is possible investors recall the missed opportunities following 2008 and currently invested capital may be more sticky, or new money may come in more quickly. Regardless, 2011 is shaping up to be the second year of annual performance losses on record for the hedge fund industry and investors will be hunting for investments which can match their rising budgetary needs.

Click here to read the full report.

New Rules Bring About Hedge Fund Transparency

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The Securities and Exchange Commission approved Wednesday the adoption of a new rules requiring private funds to report details of about how they borrow and invest.

Specifically due to the Dodd-Frank Act, registered investment advisers with at least $150 million in private fund assets under management must periodically file reports on what is known as Form PF with regulators starting next year, according to various reports.

Also the advisers are broken up into two categories – “large” and “small” - with large being $1.5 billion and above, while smaller funds are below $1.5 billion.

The new rules are considered historic since private funds including hedge funds, private-equity funds and other types of pooled investment vehicles in the past did not have to register with the SEC.

However, the hedge fund industry fought for and won some concessions.

Those hedge funds that meet the $1.5 billion in assets threshold would have to provide the most in-depth reporting of information, instead of the $1 billion mark originally proposed.

Some other concessions include filings to be done 60 days after the end of a fiscal quarter, instead of the originally proposed 15 days after a quarter’s end and hedge funds will not have to report on individual holdings in their portfolio but instead aggregate holdings.

But the rule does not go into effect immediately as the Commodity Futures Trading Commission has to approve the rule, which may happen sometime next week.

Those involved in the investment world weighed in on the adoption of the Form PF regulation.

Kevin Duffy, a former SEC staff attorney who oversees the regulatory and compliance practice at financial advisory firm Kinetic Partners saw the pros and cons of the new rule in an interview with Hedgefund.net.

Duffy said the change for filings from 15 days to 60 days was “pretty reasonable.” Yet, he thought Form PF should not be about one form fits all funds but instead should be different forms for different funds.

He also said he wouldn’t be surprised if some money managers would seek legal action to overturn the new rules, pointing out that a lawsuit brought by a hedge fund was successful in stopping the SEC from imposing rules to get hedge funds to register.

At the same time, Duffy offered a caveat.

“If someone is going to bring legal action, they have to look and see if it is financially worth it,” Duffy said.

Go to New York Times article

Go to Wall Street Journal

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eVestment | HFN Regional Focus Report: Developed Europe

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Click here to read the full report.

Overview: Developed Europe Focused Hedge Funds

The eA|HFN active and inactive databases have performance and asset information for 204 unique funds that invest primarily in developed European markets. There are an additional 317 funds which invest broadly across all European markets. The latter may have large exposure to developed markets, but are kept separate to ensure the prior group is a pure representation of developed Europe focused strategies.

•In the midst of the sovereign crisis in the Eurozone, funds investing in developed Europe have performed relatively well in 2011, -4.67% vs. -13.92% of the Stoxx Europe 600, however most lag the aggregate hedge fund industry.
•Investor interest in developed and broad Europe focused funds has been below average. Funds have had an estimated net outflow of $1.8 billion in 2011, or 1.0% of total AUM vs. 2.8% growth for the hedge fund industry.
•On a regional basis, developed Europe focused funds have had the highest rate of combined liquidations and non-responsive fund delistings in the HFN database.

The European sovereign debt crisis has been a slow developing fiscal mess which has severely hurt investor confidence. Hedge funds investing in these markets appear to have been defensively positioned, but there are still pockets of large losses. The remainder of this report will look at the sub-groups of funds investing in the region to see if outperformance of regional equity markets appears to be tactical or if it is more a factor of breadth of strategies and smoothed aggregate performance.

Developments in European Markets and Impacts on HFs
The European sovereign debt crisis has had global market implications, but the effects on European equity markets and hedge funds that focus on them has been direct in terms of relative performance, investor redemptions and liquidations. Following are highlights from the eVestment | HFN database on those funds focused primarily on developed European markets.

•Last twelve month percentile rankings of equity focused developed and broad Europe funds has lagged other developed equity market exposures at all data points.
•Figure 5 illustrates to what extent developed Europe fund performance has tracked the severity of the sovereign debt crisis as characterized by the spread between Greek and German two year sovereign yields. September appears to be another difficult month as the spread nearly doubled and the Stoxx Europe 600 was down almost 10% before the month end rally.
•The eA | HFN database has recorded a 12.4% decline in developed Europe focused funds due to liquidations and non-responsive fund delistings in 2011, nearly double that of broad Asia focused funds and 1.8x higher than North America funds.
•30% of developed Europe funds reporting through August are positive YTD. If September results are similar to August, less than 20% of funds will likely remain in positive territory. Of those reporting through August, 42% are down more than 5%.
•There is virtually no difference in average YTD performance for UCITS structured developed Europe focused funds and those not structured as UCITS.
•Despite above average investor outflows and performance losses, developed Europe focused funds remain larger on average than N. America funds ($212mm vs. $206mm), both of which dwarf the average size of Asia focused funds ($130mm).

There are pockets of positive returns amongst developed Europe focused funds, however no single sub-sector appears to be keeping its head above water. The implication being that positive returns are driven more so by the quality of management than environment. There is a proportional mix of credit, equity and commodity (power markets) funds among those up for the year.

Total Asset Levels
eA | HFN tracks AUM for funds investing across all European markets, including emerging Europe, but has not previously estimated flows for those investing solely in developed Europe. By backing out estimates for emerging Europe we can estimate flows for funds investing solely in developed Europe and broadly across all European markets, the latter being predominantly focused on developed Europe:

•AUM in funds investing across all European markets was estimated at $220.7 billion at the end of August 2011, down from a pre-2008 crisis peak of over $400 billion.
•At the end of August, HFN estimated emerging market Europe fund AUM of $44.8 billion and therefore an estimated $175.9 billion in AUM in funds investing primarily in developed broad European markets.
•Approximately ? of the combined AUM, or $44 billion is invested solely in developed European markets.
•Investors have withdrawn an estimated net $1.8 billion from Europe non-EM focused funds in 2011. This follows net redemptions of $13.3 billion in 2010.
•Redemptions in 2010 began in earnest in May ($10.7 billion net redeemed in May/June 2010) coinciding with the first major spike in European sovereign yields.

The investor flow data paints a very clear picture that investors have been actively reducing exposure to European markets, on an aggregate basis, since the first major fears of a sovereign default in the Eurozone. The rates of redemptions have slowed, but persisted in recent months.

Performance Comparisons by Region/Country
Developed Europe focused funds generally invest across many Eurozone markets; however there are a number of funds which invest either primarily in the U.K., or in Nordic markets. U.K. funds operate almost entirely in equity markets whereas Nordic funds have concentrations of funds trading regional power markets, mortgage bond and the equity markets.

Figures 8 and 9 and the table above show the performance of these funds and their sub-market classifications and performance of other developed country specific hedge fund exposures and equity benchmarks.

•Despite being primarily equity market oriented, U.K. focused hedge funds have performed very well compared to the FTSE 100 Index, however both are in negative territory mostly due to August returns. In September, the FTSE lost an additional -4.93%.
•Nordic equity focused managers have performed very well compared to regional EQ benchmarks. The credit related strategies have fared worse. Performance from these funds has been weighed down by those with leveraged exposure to Danish mortgage bonds.
•Canada focused funds are the only country specific group which has been unable to outperform the relevant equity benchmark in 2011.

Performance by Primary Strategy in Developed Europe
Funds investing in European markets typically fall into one of five primary strategies; Long/Short EQ, Market Neutral EQ, Event Driven, Credit and Multi-Strategy. Figures 9 and 10 and the table on the following page illustrate the relative performance of funds utilizing these strategies in developed European markets to their counterparts operating primarily in other developed market.

•There is a high concentration of funds investing the Danish mortgage market in the developed-only credit group. These funds appear to have suffered after the Basel III proposal determined the bonds would have a limited role in bank holdings as liquidity instruments.
•The classification of broad European credit funds, which have performed more in-line with other developed market credit funds, is more indicative of developed European credit expsure, however their descriptions of regional orientation tend to be more open ended.
•European market neutral equity and event driven strategies have lagged their developed market counterparts by a wide margin in 2011.
•Long/short equity funds have been in-line with North America focused strategies. Asia/Pac long/short funds have performed noticeably better in 2011.

The last page of the report contains full correlations of monthly returns between regional primary strategies and both equity and hedge fund benchmarks over various time frames.

Going Forward
Among the high concentration of equity focused managers in developed European markets, there appears to be a pronounced defensive positioning which has led to the large outperformance during recent market declines. Early indications for September show an average return of -1.38%, compared to a decline of -4.78% in the Stoxx Europe 600, however this may drift lower as more funds report. Combined developed and broad Europe funds are -0.54%.

In the longer term, it is difficult to ignore the consideration that amid this crisis there may be massive value and opportunity being created, similar in concept to the environment mortgage related strategies realized post-2008 financial crisis. The declining rates of net outflows in recent months may be an indication that allocations may be beginning to return in anticipation. Where and when opportunities will be available are obviously the key, but chances are there will be hedge funds at the forefront.

HFN will publish Europe focused fund flows estimates in the both the early performance release due out Tuesday October 11th and in the Monthly Industry Report the week of the 24th.

Click here to read the full report.