Heightened vigilance of hedge funds is now essential to ensure the stability of the financial system and managers need to step up their self-monitoring efforts, according to a guide to bes
Heightened vigilance of hedge funds is now essential to ensure the stability of the financial system and managers need to step up their self-monitoring efforts, according to a guide to best practice issued by the asset managers’ committee of the President’s Working Group on Financial Markets, an initiative led by the US Treasury. Foremost, the committee says, managers need to improve their disclosure, especially of illiquid securities that are at the centre of the current storm engulfing investment banks and some hedge funds.
To that end, the report recommends that managers release periodic financial statements and make timely disclosure of material information in the same way as their public corporate counterparts. The committee, headed by Eton Park Capital’s Eric Mindich, says managers should also adhere to new accounting standards that make a distinction between the types of assets held by hedge funds and the resulting risks.
At the same time, a separate report by the investors’ committee of the President’s Working Group, led by California Public Employees Retirement System investment chief Russell Read, suggested that pension funds should adopt written procedures for investment in hedge funds. Prudential funds must answer for themselves whether they can sustain their strategic allocations in the face of short-term volatility, says the investors’ committee, which also wants hedge funds to disclose information sufficient to enable pension funds to assess their appropriateness.
The Treasury and other members of the Presidents Working Group, which include the heads of the US Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, have met with some criticism for not making these practices mandatory from critics who want better policing of hedge funds. The working group is seeking comment on the reports over the next two months.
Greg Coffey, who manages USD7bn of GLG Partners’ USD25bn in assets, resigned but rescinded his resignation a day later, according to a stock exchange announcement on April 15. He is believed to be keen to set up his own firm but was persuaded by the London-based manager to stay on, at least for now.
Lehman Brothers is taking a page from the Goldman Sachs playbook by planning a fund with between USD1bn and USD3bn in capital to invest in hedge fund management firms. Lehman will run the planned entity from London and New York. Goldman has so far invested in a handful of managers via its Petershill private equity fund, which is managed by Jonathan Sorrell.
BlackRock’s co-investments in real estate and hedge funds fell in the latest quarter, resulting in a mark-to-market loss of USD24m on those bets. However, cash management products gained traction, and the firm’s assets under management rose 1 per cent to USD1.4trn, while net profit rose 24 per cent to USD242m on revenues of USD1.3bn. Chief executive Larry Fink says BlackRock is teeing up something huge for the second quarter in distressed mortgage and credit areas, and adds that he expects to see dramatic consolidation among asset managers.
Appoloosa Management, which has more than USD6bn in assets under management in founder David Tepper’s Appaloosa Investment and Palomino funds, reported a 17 per cent first quarter decline, while John Meriwether’s JWM Partners posted a 31 per cent fall for the first three months of the year. Overall, industry-wide losses averaged 2.8 per cent, according to Chicago-based Hedge Fund Research.
US venture capital firm Sequoia Capital is believed to be raising a USD750m hedge fund, its first. The San Francisco outfit is best known for its successful venture investments in technology leaders such as Yahoo and Apple. Meanwhile, Goldman Sachs structured products trader Josh Birnbaum, who joined the firm in 1993, is setting up his own USD1bn fund to invest in mortgage assets.
According to HedgeFund Intelligence, global hedge fund assets under management rose 27 per cent to USD2.6trn in 2007, although growth slowed to 6.6 per cent in the second half of the year, and returns averaged 8 per cent for the year. HFI identified 390 firms with more than USD1bn in assets who accounted for nearly 80 per cent of the industry’s total assets. Europe saw asset growth of 25 per cent while Asia-Pacific funds gained over 33 per cent, with Singapore and Hong Kong gaining ground as hedge fund centres over Tokyo.
