Asset Manager

At a recent Reuters seminar speakers made their point that the hedge fund and private equity industry is at a near term peak in their cycle after the rampant growth of both industries in the last few years.Anthony Bolton of Fidelity said “Private equity and hedge funds both have cycles, and I think we’re now at the peak of the cycle for the time being,” and added “The flow of money has encouraged some mediocre people. They will all be wiped out in the current environment, which will allow the good people to go on.”

How they will be ‘wiped out’ was not clear but maybe he was suggesting that these ‘mediocre’ managers will simply not be able to sustain the hedge fund business model with their current investment strategies. It’s true that in an industry of $2 trillion and, essentially being conducted in a bull market, some managers will find it difficult to survive in a market that is less predictable.

Many funds have been battered by the equity and credit market woes which has prompted some commentators, including us, to suggest that further defaults in the sub prime markets and the turmoil in the equity markets will kill off a number of funds or, at the very least, cause them to be eaten by bigger funds.

As far as the private equity market is concerned there is a virtual standstill because of difficulty in obtaining credit, which is a big part of the market. The Bank of England Auction for loans was expected to produce interst rates over 6% to win on a bid although wider collateral is to be accepted, but still..6%!

“As the credit market currently stands, the large leveraged buyout market in the Western world does not exist today,” said Charles Sherwood, a partner at private equity firm Permira, pointing out that the business model depends on the use of leverage, or heavy borrowing, to “magnify” returns.

“That magnifying glass today is broken. (However), I don’t think there is huge pressure. Private equity firms can sustain a period of reduced activity.”

Also affecting the private equity market is the lack of IPO’s being completed. Private equity companies rely on taking a business private, giving it some spit and polish and then selling it back to the market in an IPO at a higher price than they paid for it. With the equity markets shying away from virtually all IPO’s this route is looking increasingly difficult, in the near term, for the private equity groups.

They say every cloud has a silver lining and that was provided by Christopher Fawcett, CEO and founding partner of fund of hedge funds firm Fauchier Partners. He said there had not been the levels of redemptions he hoped for in certain funds.

“We were hoping for redemptions so we could put money in,” he said. “There have been pockets of redemptions in certain strategies and certain hedge funds, but not across the industry.”

That’s the spirit Chris! You get the inaugural ‘Asset Manager Financial Hero of the Week’ award for being the most positive. This was snatched away from Florian Homm whose total disregard for tons of cash had made him a front runner for most of the week.

In a marvellous ’slight of hand’, worthy of the best magicians, the US government has put together proposals that hedge fund investors and managers should regulate themselves.Amid calls from the German Chancellor Angela Merkel, President Sarkozy of France and other politicians urging for more transparency and better policing of the financial markets, the US has set up The ‘President’s Working Group on Financial Markets’. Its job is to develop ‘best practice’ guidelines for investors and managers who run the funds. This is against a back drop of saying earlier this year that regulations were ’sufficient’ to prevent funds from ‘threatening’ the financial system.

The words ‘Poacher’ and ‘Game keeper’ come to mind.

Don’t get me wrong, I rabbit and rant about regulatory interference all the time so I am in favour of self regulation. The idea, however, that hedge funds will all adhere to ‘club rules’ is a little far fetched. Who, for example, would police this system? Would we have Man group (the biggest dogs in the yard) sending boot boys around to your office if you did not adhere to the best practices? It all seems a bit of a waste of money to me. I wonder how much it cost to put a ‘Presidents Working Group’ together?

A second group is also coming up with some ideas on what type of ‘due diligence’ those investing in hedge funds should undertake as well as the kind of information they should receive.

Yes, you did read that correctly, and no I am not making it up.

With all the rules on who can and can’t invest in hedge funds, is it really necessary to put together a group that will tell investors what they should be looking for as far as due diligence in hedge funds? I would respectfully suggest, that if you do not know then no matter how much money you have you should not be investing in hedge funds..

But lets play the game for the moment. What would be the Ten Commandments that this US group could come up with?

First the investors.

1. Thou shalt not invest in a fund if you are not rich beyond the dreams of Croesus.

2. Thou shalt not invest in a fund where the manager is a crook.

3. Thou shalt not invest in a fund that has naughty practices when it comes to shorting shares and bullying management.

4. Thous shalt not invest in a fund that is not based in the US and subject to US tax laws because the rest of the world does not really know what they are doing and we are the bosses of you.

5. Thou shall invest in a fund where the fund manager makes fat donations to campaign contributions (please read subsection 1)

Rule 5. Subsection 1. Thou shall redeem your funds from the fund invested in Rule 5 if the fund manager has backed the losing candidate and thou shalt re-invest those funds in a fund manager that backed the winner.

6. Thou shalt not covert another funds profits.

7. Thou shalt not worship false hedge fund gods. While we appreciate there are people in Europland, Switzerstan and the United States of the Carribean, we feel it is better that you stick with the USA, where all things are good and saintly.

8. Thou shalt not invest a fund if the fund manager does not send you monthly statements detailing every investment bought and sold where the NAV of the remaining holdings has been passed through a computerised modelling system which calculates the liquidity of the market and the haircut price of any illiquid investments.

9. Thou shalt not invest in a fund where the managers name ends in ‘ov’, ‘ziz’, ‘fif’ or one with no vowels in it.

10. Thou shalt not sue the SEC.

And the Hedge Fund Managers, what will they come up with?

1. Thou shalt not get caught

2 – 10. See rule 1.

A little bit of fun, but the situation is one of spin. The government does not want to upset hedge fund managers or private equity firms but does want to be seen to be ‘concerned’ about the situation so they just set up a quango to talk about it while the heat dies down.

A political manoeuvre of the highest quality.