Archive for March, 2010

Goldman Replicator: Mixed but Promising Results

March 30, 2010

Chidem Kurdas

Goldman Sachs runs a hedge fund tracking strategy that buys and sells instruments like futures contracts according to a benchmark. Replicating hedge fund returns has been a topic of interest to investors for several years.

So how does the Goldman tracker compare to actual hedge funds? There’s some bad news. In 2009, Class A shares in the Goldman tracker fund returned 5.75%. That’s substantially lower than returns for hedge funds as a group. (more…)

Advertisements

Plainfield Liquidation Hits Big Investors

March 25, 2010

Chidem Kurdas

Just when you think Max Holmes’ Plainfield Asset Management can’t get into any more trouble, fresh bad news crops up.  (more…)

Ares May Raise $1 B

March 22, 2010

Chidem Kurdas

Middle-market lending specialist Ares Capital looks ahead to equity and other offerings that could total $1 billion, to take advantage of opportunities as businesses have to refinance large amounts of debt coming due.

Ares, one of the largest business development companies, managed around $8 billion as of the end of 2009, including the debt funds of a portfolio company, Ivy Hill Asset Management. Ares’ manager, Ares Management LLC, runs a total of $33 billion in leveraged loans, private equity investments, mezzanine debt, high-yield-bonds and other investments.

Demand for refinancing leveraged loans is expected to rise in the coming years, peaking from 2011 to 2014, according to a recent report from Sapient. Meanwhile, banks have cut back on their lending and middle-market firms in particular have trouble getting loans. This means lenders like Ares can get attractive yields and terms. (more…)

Bullish Barclays Suggests Volatility as Hedge

March 18, 2010

Chidem Kurdas

After successfully predicting “green shoots” a year ago, the analysts at Barclays Capital retain a positive outlook over the next quarter. Their likely scenario is moderate tightening by central banks in developed economies, where there is a lot of slack and no reason to tamp down growth, with little danger of a double-dip.

They recommend that investors maintain significant exposure to stocks and credit but balance this with a short position on US Treasuries and a long position in volatility both in equities and bonds. Volatility,  down to near-normal levels from the crisis spike, is an effective hedge because another spike could tamp down on markets.

Admittedly, Barclays has an interest in encouraging investors to buy volatility. It is the provider of exchange-traded notes linked to the VIX Index, which are an easy way to invest in vol. Hedge funds have taken to trading these instruments— see below. Larry Kantor, head of research at Barclays, says there are many ways to play volatility. (more…)

Ramius-Cowen Focus on Pipeline

March 18, 2010

Chidem Kurdas

Hedge fund firm Ramius acquired investment bank Cowen last year. It was probably a smart move to expand the capital base as well as the skill set as Ramius faced substantial redemption requests.

Net redemptions since the beginning of 2009 are more than $3 billion, including $459 million withdrawn by clients this January. As a result, assets fell 26% from $10.6 billion to less than $7.9 billion, factoring in a performance gain in 2009. The January datum suggests that redemptions have slowed but may continue.

With lock-ups in certain investor contracts allowing for redemption in March and June,  more money could come out of Ramius’ hedge funds. But chief strategy officer Jeffrey Solomon says to date redemptions are relatively small for investors in funds with rolling lock-ups, meaning that if people don’t withdraw during the specified times, another lock-up will come into effect for two years—to the manager’s benefit. (more…)

IRA Market Growth Promising for Alternatives

March 18, 2010

Chidem Kurdas

Individual retirement accounts may not be what comes to mind when you think of hedge fund investing. But people can invest in hedge funds – or other alternatives – through IRAs, which held more than $4 trillion as of late 2009. That’s around one-fourth of total US retirement assets.

IRAs could grow to as much as $7.5 trillion over the next 10 to 15 years. When people leave their jobs, they often move employer-sponsored accounts into self-directed IRAs.  “By some estimations, the IRA marketplace is expected to crest at $7 to $7.5 trillion dollars, thanks to Baby Boomers rolling funds out of their employer-sponsored qualified plans such as 401(k)s,” says Rob Spalding of  Pensco Trust Co. (more…)

AQR Strategies Vary in Retail Appeal

March 18, 2010

Chidem Kurdas

The series of mutual funds AQR Capital started  since early last year have raised almost $1.1 billion as of the end of this February. From that perspective the mass market bet – watched by other hedge fund managers interested in starting mutual funds – appears to have worked out.

AQR, founded by a former Goldman Sachs group led by Cliff Asness, had total assets of around $20 billion at the end of 2009, down by more than one-third from the peak in 2007.  (more…)

Hedge Funds Trade Volatility

March 18, 2010

Chidem Kurdas

Going long on volatility made a lot of money in 2008 and lost a bundle in 2009. Now, it sounds like many people are braced for another upsurge in vol.

Hedge funds are using exchange-traded notes linked to the VIX Index to make bets. The iPath S&P 500 VIX Short-Term and Mid-Term Futures exchange-traded notes (VXX and VXZ on NYSE Arca) are relatively novel instruments offering a low-cost way to go long or short volatility. ETNs are debt securities, but like ETFs they can be shorted.

Hedge funds account for 20% to 30% of the trading in VXX and VXZ, says Michael Schmanske, head of index volatility trading at Barclays Capital. Institutions account for another 30%. These are trading vehicles, not holding products, he said, speaking at a conference.

He sees uncertainty about what will happen when the Federal Reserve starts to withdraw volatility as driving people to buy VIX futures contracts and the VIX  ETNs. If volatility declines again, of course, owning the VIX will turn into a big-time losing trade as it did in 2009—VXX went down 75% in the past year.

But the ETNs  are better than owning S&P puts, Mr. Schmanske says.

iPath S&P 500 VIX Mid-Term ETN targets a weighted average futures maturity of 5 months while the short-term ETN targets maturity of one month. Volatility arbitrageurs use them to make spread bets, but others take directional positions. Some long/short equity funds have hedged their portfolio by buying the VIX.

Where does a volatility investment belong in a diversified portfolio? Some argue that volatility is an asset class that should have its own portfolio allocation.  Most investors, though, don’t treat volatility as an asset in itself but use it as a measure of risk.