Hedge Funds in India

The Benefits of Offering Hedge Funds in India

Here's a short article on how the Committee of Financial Sector Reforms in India might introduce hedge funds and why this would be a positive move for the Indian markets and fund industry as a whole.
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The Draft Report of the Committee on Financial Sector Reforms headed by Professor Raghuram Rajan was issued for comment in April 2008. Among the proposals that the high-level committee made was the introduction of domestic hedge funds. The committee feels that, “The presence of hedge funds would induce greater competitive pressure for other regulated fund management channels such as mutual funds.”

This week’s article discusses the benefits of introducing hedge funds in the Indian market. It shows how hedge funds could improve asset price efficiency. Besides, such funds, by virtue of their diverse investment styles, could provide investors an opportunity to enhance their risk-adjusted portfolio returns.

Of different genre

Suppose a long-only (mutual fund) manager and a hedge fund manager both have a negative view on SBI, a positive view on HDFC Bank and a neutral view on ITC.

Long-only active managers will buy ITC in the same weight as their benchmark index, may overweight HDFC Bank and may not take any exposure in SBI. There is a reason for such a strategy. Active managers strive to beat their benchmark index. But they do not take too many active bets, lest their bets go wrong. Often, active funds tail the benchmark index with few active bets. Importantly, such managers cannot short-sell to take advantage of their negative view on a stock.

Hedge fund managers’ do not suffer from such constraint. In the above example, the hedge fund manager may overweight HDFC Bank, short-sell SBI and not take any exposure in ITC.

Better still, to neutralise any market risk, the hedge fund manager may buy HDFC Bank and short-sell SBI in such a way that the market risk in HDFC Bank is offset by short-selling SBI. Often, neutralising market risk on a portfolio would mean short-selling Nifty futures.

Exploiting price inefficiency

Hedge funds identify mispriced assets and exploit any price inefficiency. One way to do this is to employ statistical arbitrage.

Suppose a hedge fund manager finds that combination of one share of HDFC Bank and two short shares of SBI (1HDFC – 2SBI) has a stable statistical distribution. If the “spread” wanders far away from its mean, a hedge fund manager would set-up this strategy with a view that the “spread” will tighten. Such relative-value strategies can help arbitrate away asset price inefficiencies in a “normal” market. Read more...

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Pharos Fund Russian Hedge Fund Tracker Notes

Pharos Fund

Pharos Financial Group - Hedge Funds

The following piece on Pharos Fund is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.

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Resource #1: (11.18.08) oscow-based hedge fund Pharos Financial Group is opening an office in sunnier climes. The Russia-focused hedge fund manager has been licensed to operate in Dubai and is opening an office at the Arab Emirate’s Dubai International Financial Centre.

The US$130 million firm, which was seeded by Soros Fund Management in 1997, is the first Russia-focused hedge fund manager to win approval from the Dubai Financial Services Authority. Founder Peter Halloran pointed to a growing appetite for Russia-focused funds among Persian Gulf Coast investors as a motivation for the new office.

“Our move to DIFC was an easy strategic decision given our expectation that the need for quality asset management in the GCC will grow substantially over the next decade,” he said in a statement. “Pharos intends to fill the niche as the market leader in emerging markets fund management. Already we have seen tremendous appetite from GCC investors for our Russian-focused investment opportunities.” Source

Additional Resources

The following is a list of resources and information that is publicly available about Pharas Fund.

Pharos fund portfolio.
Whitepaper on Pharos Fund. The White paper explains how the pharos fund manager makes decisions.
Every letter to all investors for 2008, from the Pharos Fund and Gas Fund.
Excel spreadsheet of every Pharos funds performance. So far, 2008 has a negative return on every fund.
Excel spreadsheet breakdown of Sector allocations for the pharos fund.
Excel spreadsheet breakdown of Sector allocations for the Gas fund. Pretty self-explanatory, the fund invests in options and futures in oil and natural gas.
Article about how there will be an increasing demand for natural gas.
Excel spreadsheet of Pharos small cap fund. The small cap fund uses Russia’s building economy and uses illiquid shares to make a profit.
Daily market comment and performance of all three funds. The Political Environment is fragile, which will create volatility in the market overall, which is good for each hedge fund.
Article about how all Pharos funds are down. The MSCI Russia Index is down 32.4% due to “a reversal of fortune from the market's earlier outperformance.”
The Georgia conflict severely hurt the Russian economy because investors pulled out more than $7 billion. Russian may not be allowed to host the next Olympics and the U.S. is restricting Visas for Russians.
Pharos said that the Russian economy is stable, but foreign investors insecurity will create short term-volatility.
Name of this article pretty much sums it up- “Pharos, TPG to acquire American Beacon Advisors for $480m.”
Interview with Peter Halloran. Eastern European (Russian affiliated) countries are rapidly growing faster than other developing nations.
Article about the government planning to increase domestic gas prices by 25-40 per cent, over the next three years.
A blog post that has a about positive outlook for every Pharos fund, for the month of June.
Article about how hurricane Gustav may increase gas to $5 a gallon. This may effect pharos gas fund.

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REO Properties Listings

REO Properties

Real Estate Owned (REO) Properties and Listings

Many of you in the hedge fund industry who read my blog also frequently visit Hedge Fund Message Board.com or other online forums. You may remember 9-12 months ago a large set of REO brokers and sales agents practically taking over a few online forum in the online hedge fund community trying to connect with hedge fund managers looking for REOs. They were quickly banned and considered spam but I do get emails from many of them - usually 2-3/week.

Upfront, I want to be clear that I do not want to get into the business of brokering or helping as a sales agent for banks or REO firms. I would like to identify a reputable broker who does work with hedge funds or private investment groups in this area simply because at this point I'm just having to delete emails from these REO agents as I have no way to help them. I've never worked with REO related investments so hopefully I'll connect with a reputable related group this blog.

Here's an example of a recent email I received on this topic:

Hello and good day Mr. Wilson. I was doing some research on the topic and I came across your blog. I have several potential customers who are looking to buy Bulk REO and / or Notes portfolios , from $10M and up and up. The thing is, it is difficult for me to find any true portfolio providers who can actually perform and do what they say they can do, especially without a lot of hassle and headache. I'm continuously running into a middleman parade, which always kills the deal. It is my understanding that the majority of Bulk REO and / or Notes portfolios are controlled by either asset managers at banks, or hedge funds. I see that you are the founder of Hedge Fund Group (HFG), so i say let me contact you to see if you could help me out. I have what seems like a new potential customer coming my way daily asking me if can fill their Bulk REO and / or Note orders. If you could help me out or point me in the right direction as to who to talk to, i would most gladly appreciate it. Thank you for your time Mr. Wilson, looking to speak to you soon. Enjoy your weekend.

Anyone have any great resources? websites? white papers? or networking groups I could be referring these people to? Thanks in advance for the help, much appreciated.

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Active Account

Active Account Glossary Definition

An active account is a brokerage account that makes many transactions. Some brokerage firms charge a fee to accounts that are less active. This is a way for brokerage firms to make money on accounts that otherwise would not generate revenues.

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Sloane Robinson Richard Chenevix-Trench

Sloane Robinson

Sloan Robinson & Richard Chenevix-Trench

While Sloane did very well last year you wonder how they are doing in today's marketplace. many managers who do well one year fall on the sword the next.

The following piece on Sloane Robinson is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Sloane Robinson cemented its position as one of London's most successful asset managers last year as the hedge fund reported that its profits had risen by two-thirds to £340m in the 12 months to March 31, a level above far larger traditional fund managers.

In accounts filed at Companies House, the privately owned Sloane Robinson partnership said14 partners would share the profits, with the highest earner taking home £87.3m, up from £51.4m the year before.

The firm refused to say who the best-paid manager was, but investors in its funds said it was likely to be Richard Chenevix-Trench, chief investment officer. The scale of the profits demonstrates the attraction of hedge fund fees, which are very high compared with traditional asset managers. However, the profits are flattered by the lack of salaries paid to the partners, meaning they cannot be compared directly with the results of a listed company such as Schroders, which made only little more pre-tax profit in 2007, or Henderson, New Star and Aberdeen, which together made less than Sloane in their last annual profits.

The strong growth in profits for Sloane Robinson in the year to March 31 came after an excellent year in investment performance for one of the first European hedge funds, with its main funds recording bumper returns. Read more...

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Dalton Strategic Partnership

Dalton Strategic Partnership - Japan

The following piece on Dalton Strategic Partnership is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Resource #1: (5.10.09) Hedge fund manager Steven Persky plans to start betting on companies' bad fortunes again.

Persky, who runs $1 billion hedge fund firm Dalton Investments, said on Wednesday he will re-launch his distressed debt strategy three years after liquidating two similar portfolios when the strong economy made such investing difficult.

Now that times have changed dramatically, Persky is among a handful of fund managers who expect to make money for their wealthy clients in the distressed area. source

Resource #2: (4.22.09) Another foreign hedge fund has entered the—so far fruitless—effort to improve corporate governance and transparency at Japanese companies.

Los Angeles-based Dalton Investments says it is going to try a less confrontational approach to those used by The Children’s Investment Fund and Steel Partners, who were rebuffed in activist battles in Japan. The firm, which has $818 million in assets, 70% of it invested in Japan, plans to ask nicely, sending the 70 Japanese companies it invests with letters urging them to appoint independent directors and increase share buybacks. source

Resource #3 (12.15.08) Dalton Investments LLC, the Los Angeles-based hedge fund with 70 percent of its assets in Japan, is starting a 50 billion yen ($550 million) fund that will invest in U.S. distressed assets, taking advantage of low prices.

The fund has raised about 10 billion yen from U.S. investors and will begin marketing in Japan by the end of March, said Junichiro Sano, chief executive officer of Dalton’s local unit. It will invest in bonds sold by U.S. companies that once had AAA ratings and have since been downgraded below investment grade, aiming to profit from the high yields on the debt.

Dalton, co-founded by James Rosenwald and Steven D. Persky in 1998, aims to raise its assets under management after they fell 23 percent to about 100 billion yen this year amid the biggest financial market losses since the Great Depression. Global financial institutions have posted about $989 billion in writedowns and credit losses linked to the U.S. mortgage market collapse, pushing corporate bond yields higher.

“There is quite a big interest among Japanese institutional investors in distressed asset investments,” Sano, 53, said in an interview in Tokyo on Dec. 12. “The Lord giveth, and the Lord taketh away.” source

Resource #4: Dalton Strategic Partnership has liquidated its Melchior Japan Hedge Fund following a long period of underperformance.

Launched in 2003 and managed by FuNNeX, the same Tokyo group responsible for the troubled Melchior Japan Investment trust, the fund has hemorrhaged investors recently. Assets had fallen to around £20 million from a high of above £500 million in 2006, and the fund had lost 39.05% over the year to date versus a benchmark loss of just 4.7%, and following several years of double-digit losses.

Investors have been given the option of moving into DSP’s Melchior Japan 002 hedge fund, but many had lost their appetite for Japanese hedge fund investment after several years of underperformance, said DSP head of sales Richard Jones. Read more...

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Balyasny Asset Management LP Barry Colbin

Balyasny Asset Management LP

Balyasny Asset Management LP & Barry Colbin

The following piece on Balyasny Asset Management LP is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Balyasny Asset Management LP recruited more than 30 money managers and analysts from competing hedge funds in the first eight months of the year, exceeding its total for all of 2007.

``We have been aggressively looking for talent, and in a year like this, there are a lot more candidates out there,'' said Barry Colvin, vice chairman of the Chicago-based firm, which oversees $2.5 billion. Hires came from New York-based Satellite Asset Management LP and Magnetar Capital LLC in Chicago, which have both lost money this year.

While more than 200 hedge funds shut down this year, Balyasny, SAC Capital Advisors LLC and Citadel Investment Group LLC are taking advantage of the industry's worst performance in a decade to go on a hiring spree. Hedge funds, diminished by a scarcity of credit and enfeebled stock markets, fell by an average 4.7 percent as of Aug. 28, according to data compiled by HFR inChicago. Sixty-one percent of the 2,795 funds managing more than $100 million that are in New York-based HFN database are losing money in 2008.

Most hedge funds have what are known as high-water marks that prevent them from collecting performance fees, usually 20 percent of investment profits, until they recoup declines from peak fund values. That leaves a shrinking base of management fees, typically 2 percent of assets, to pay employees. Read more...

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Aggressive Portfolio

Aggressive Portfolio - Definition

An aggressive portfolio contains high growth investments that will hopefully appreciate in value. This strategy attempts to achieve high long-term growth by investing in often risky but profitable, short-term stocks.

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Active Portfolio Strategy

An active portfolio strategy utilizes available information and resources to predict how benchmarks will perform and hopefully outperform the benchmark, like a market index. In this strategy, the management selects investments may be undervalued and possibly provide high returns.

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Vallea Capital

Vallea Capital - Hedge Fund Notes

The following piece on Vallea Capital is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Management company Vallea Capital has launched the macro long/short Vallea Fund. The hedge fund aims to achieve consistent above average returns by exploiting long-term and short-term opportunities through investments in fixed income, foreign exchange and global stock indices.
The target is to raise $100 million in the first 12 months.

The fund is co-managed by Alessandro Palmarella and Pascal Monnerat of the fund advisory company BelleVue Conseils Sàrl. Together they have 45 years of industry experience and have traded this strategy together successfully for eight years.

The fund is confident it has the expertise and non-correlated investment style to deliver above average absolute returns with low volatility in all market environments. The fund is domiciled in the Cayman Islands. Minimum investment is €100,000, management fee set at 2%, and performance fee at 20% subject to a high water mark. The hedge fund was launched September 1, 2008. Read more...

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Thames River Capital

Thames River Capital, Hedge Fund Notes

While this is spun in a neutral or even partially negative way it looks like a positive note to me. Closing at $1B or even less due to operation constraints or availability of investments is common.

The following piece on Thames River Capital is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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Thames River Capital’s Warrior Fund, a multi-strategy fund of hedge funds, has reached $1.1 billion and is now closed to new subscriptions. The Warrior Fund, which has exposure to directional and non-directional hedge funds such as the Paulson Credit Opportunities fund and the CQS Directional Opportunities fund, finished July down 2.82%, bringing its year-to-date loss to 2.07%.

The fund of funds is on pace to its worst year ever since inception in January 2003. It finished 2007 up 27.35%. “The short term remains choppy but we do believe this is one of the best times to selectively invest given the dislocations witnessed in the financial markets across almost all asset classes and geographical regions,” said Ken Kinsey Quick and Alex Kuiper, co-portfolio managers. Read more...

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FRM Credit Alpha Financial Risk Management

FRM Credit Alpha

Financial Risk Management (FRM) - Credit Alpha

The following piece on FRM Credit Alpha is being published as part of our daily effort to track hedge fund events in the industry. To review other hedge fund related announcements please see our Hedge Fund Tracker Tool.
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FRM Credit Alpha has published a prospectus for admission of the company’s shares to the official list and to trading on the main market of the London Stock Exchange. At the same time it has made an offer for subscription of C shares to be issued at £1 for each C sterling share, €1 for each C euro share and $1 for each C dollar share.

FRM is hoping to generate significant returns over cash, with low volatility and beta to global credit markets, when measured over a market cycle. The portfolio comprises between 12 and 25 specialist credit hedge funds using fundamental research, asset allocation, security selection and activism to invest in credit securities.

Both FRM Investment Management and Financial Risk Management are part of the FRM Group, founded in 1991 with approximately $15 billion in funds of hedge funds assets under management. Read more...

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Emerging Markets Fund

Emerging Markets Fund - List

Below please see a list of Emerging Market Funds, thanks to Investment Seek:

Axiom Investment Management (Hong Kong) - emerging markets hedge fund focused on Asia.
Farallon Capital Management
Horseman Capital Management
Marathon Asset Management
Moon Capital Management
Moore Capital Management - Moore Emerging Markets
Sloane Robinson - SR Global Fund Emerging Markets, SR Vista Emerging Markets
Thames River Capital (United Kingdom)
Tudor Investment

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Hedge Funds vs. Banks

Hedge Funds Serving Corporations

One long-term trend I've seen in the hedge fund industry is that hedge funds are now competing with banks within several dozen areas of business. Here is a short list of why some corporations are turning to hedge funds instead of Banks.

Some commercial banks may not have enough money to lend because of timing or relationships in place with the corporation
Some companies launching hostile takeovers need large amounts of cash quickly and hedge funds can sometimes provide the quickest solution at a competitive rate
A company may need to borrow money overnight or for several days to make payroll until more of their receivables come in
Some corporations use hedge funds to fund risky projects that wouldn’t fly with many banks
Lately corporations have turned to hedge funds or sovereign wealth groups in times of desperation, when they need large infusions of cash to stay afloat

Yesterday I sent a note out about Hedge Fund Conference Email Alerts. The email-based subscribers to my blog could not see the email opt-in form though. If you would like to sign-up for free for these alerts please see this page: Hedge Fund Conference & Event Alert Email List

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Emerging Markets Research

Interview - Emerging Markets Research

I sometimes get email from hedge fund managers and portfolio managers looking for certain types of equity or industry research for their fund. Most hedge funds currently use and are in constant need of high end unbiased qualitative and quantitative research to identify and evaluate opportunities in the global markets.

Many of these opportunities are now being found in both emerging markets of MENA, China and SE Asia as well as emerging alternative asset classes. There are few quality research options for hedge funds investing within these spaces. Last week I met a few members of the Hedge Fund Group (HFG) who are partners of a research firm which has experience in researching and analyzing opportunities in these markets. They specialize in providing investment research on areas where information is usually hard to find and validate and language barriers exist. Their firm is called SG Analytics (www.sganalytics.com) and they are based in Pune, India.

Structured to serve money managers with unbiased investment research on both strategic and quantitative fronts, SG Analytics (referred to also as SGA) has clients amongst the top money managers, hedge funds, investment banks and private equity funds. SGA already counts 3 of the top 10 investment banks as its client currently. Most of SGA's hedge fund clients come from the Long/Short equity, global macro and distressed debt space and SGA supports them in making long term judgments based on fundamental research. Many money managers we have talked to, use SGA to cover small to mid caps or emerging market securities.

I would like to introduce this firm to the readers of my hedge fund blog because their team of 100 professionals offers a unique set of industry research services that many hedge funds could probably benefit from. SGA is not a plain vanilla outsourcing firm but a provider of end to end research and analysis that can stand on its own. Contrary to other conventional outsourcing service providers, the SGA team consists of experienced qualitative and quantitative research analysts from the local talent pool as well as from the developed financial markets of Europe and US. This blend of experience is unique and powerful as it leverages the well developed research practices of the developed western countries with talent which understands the emerging markets well. The management of the company also brings 50+ years of global work experience in the financial markets and is passionate in its commitment to deliver high quality relevant investment research to its clients. Here is my short interview with the CEO of SGA.

Richard: What are the top 2 challenges for hedge fund managers investing in China and India? There seems to be a slew of language, regulatory, culture, news, on the ground research challenges that I know many small and mid-sized hedge funds are struggling with right now.

Sushant (SGA CEO): One of the main issues which still remain for Hedge fund mangers investing in India and China is the evolving regulatory environment which limits their options both in terms of strategies (e.g. limited use of shorting) and liquidity (e.g. limited choice beyond the large caps). The other challenge of course, is to penetrate the perception and find reality which is often difficult given the fact that on-the ground and fundamental unbiased research is still an evolving culture and business here.

Richard: What trends are you seeing in hedge funds using research services such as yours to invest in emerging markets? Are more hedge fund managers using your services while looking for in-depth coverage of certain stocks and sectors to test the waters for future products or are most hedge funds looking to bulk up research for already existing products?

Sushant: We see a great response for services such as ours where we can provide Hedge funds with an extension to their research team rather than ‘outsourcing solutions’. Companies who have the capability to connect with the Hedge funds managers at their level of understanding are bound to do well, while the ones who are limited to being outsourced number crunchers will be of limited use for Hedge funds. One key requirement from Hedge funds is fast response which one can only do with deep domain understanding. With the days of heady returns behind us, we expect further emphasis on fundamental research to uncover investment opportunities in the years to come.

Richard: Thank you for your time today Sushant. Where can readers of my blog learn more about your firm or contact you directly?

Sushant Gupta, CEO
SG Analytics Pvt Ltd
sushant@sganalytics.com
www.sganalytics.com
Tele : +91 20 25665306/25661897

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Investment Marketing

Investment Marketing Hurdles for Hedge Funds

I just read an interesting article on AllAboutAlpha discussing the challenges today in marketing hedge funds to new potential investors. Within the piece AAA discusses how the US has one of the most restrictive regulatory regimes in the world when it comes to the hedge fund industry. The countries of Australia, Canada, Japan and China are all less restrictive.

Here's a short excerpt from the article:

An article in this month’s Journal of Financial Transformation illustrates why this is. The piece, titled "Hedge fund marketing in an era of regulatory uncertainty” covers many of the issues faced by those trying to raise money in the US. It’s a great update on the ebb and flow of SEC edicts over the past year and was co-authored by hedge fund personality James Hedges. Here’s some of what Hedges suggests:

Avoid speaking to the media about your funds - even if you’re not actively selling, but just “conditioning the market”.
Avoid “print, radio and television advertisements or solicitations regarding funding or investment matters”.
When giving presentations, “address the risks associated with hedge funds in general as well as the specific risks associated with the hedge fund being offered.”
When your fund has a great year, make sure you “disclose the reasons for extraordinary performance…”
No “mass mailings” except to “individual investors, or a discrete group of accredited investors”.

Click here to read the full article.

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