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The Last Hedge Fund Hurrah?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Bloomberg reports that hedge-fund assets increased by $21.4 billion in August:
Hedge-fund
assets increased by $21.4 billion in August as managers completed their
best year- to-date return in almost 10 years, driven by rising stock
markets amid signs of economic recovery, Eurekahedge Pte said.
Assets
grew for a fourth straight month, adding about $100 billion, the
largest sustained growth period since the end of 2007, the
Singapore-based research firm said in a report posted on its Web site.
Net inflows into the industry totaled $12.6 billion in August, while
gains through performance were $8.8 billion, bringing total assets
under management to $1.38 trillion, the firm said.
A
rebound in global stock markets has helped hedge funds record their
best first eight months since 2000, after managers posted their worst
year on record in 2008. The Eurekahedge Hedge Fund Index, tracking more
than 2,000 funds, gained 1.3 percent in August, as the MSCI World Index
of 23 developed nations advanced 3.9 percent in the month.
“We
believe the worst of the crisis has now passed and markets are slowly
returning to more normal levels of functionality and performance,” said
Spencer Young, chairman of HFA Holdings Ltd., an Australian hedge-fund
manager with A$6.16 billion ($5.4 billion) in assets, in its annual
report released today. “We have also seen early signs that the
redemption levels we witnessed at the height of the crisis have
diminished and we are cautiously optimistic that overall fund flows
will stabilize.”Europe, Relative Value
With
the gain in August, the global benchmark is up 13.4 percent so far this
year, the best eight-month gain since 2000, Eurekahedge said. Gains
during August were supported by economic data such as the reduction in
the unemployment rate in the U.S. and return to positive gross domestic
product growth rate for some developed countries, Eurekahedge said.
Assets
of funds investing in Europe rose 1.8 percent from July to $318.9
billion, the biggest percentage increase among five geographical
mandates, the report showed. Manager allocations to Latin America had
the smallest increase in assets, gaining just 0.9 percent.
All
regions reported inflows, led by Asia excluding Japan, which added $1.4
billion, or 1.5 percent of assets. A sell-off in Chinese equity markets
hurt hedge-fund performance in the region and led to a 0.1 percent
performance-related drop in assets. China’s Shanghai Composite Index
tumbled 22 percent in August, its biggest slide since October 2008,
pushing the benchmark into a so-called bear market.
New Funds
By
strategy, relative value funds had the biggest percentage gain, rising
3.7 percent, while long-short equity funds reported the biggest
absolute gain, with inflows of $4.1 billion and performance-related
increases of $2.1 billion.
Recovery in the capital
markets has prompted managers to start funds, Eurekahedge said. About
300 funds have started this year through August, while the rate of fund
closures continued to slow, with 200 of them shutting since the end of
the first quarter, compared with about 600 closures through fourth
quarter in 2008 and first quarter this year, the firm said.
Eurekahedge forecasts hedge-fund assets to reach $1.5 trillion by the end of this year.
“Hedge
funds have benefited from the recovery in global markets and that’s the
biggest reason behind the comeback,” said Hideki Hashiguchi, chairman
of the Japan chapter of the Alternative Investment Management
Association in Tokyo. “We’re starting to see some of the fund-of-funds
investors consider to allocate money back into alternative investments,
so it seems like the industry slowly but surely is emerging out of the
worst conditions.”
Hedge funds are mostly private pools
of capital whose managers participate substantially in the profits from
their speculation on whether asset prices will rise or fall.
All those assets flowing in explains why hedge funds still aren't reducing their fees:
After
posting poor returns and in some cases preventing investors from
withdrawing cash, hedge funds had been expected to make it up to
investors by softening some of their hard conditions or lowering fees.
It appears not.
Research compiled by
France's Olympia Capital Management, a fund-of-hedge-funds firm that
manages pools of individual hedge funds, found that only a handful of
2,659 funds it analyzed shortened the time between one redemption date
to the next, or reduced the initial lockup period they place on
investors' capital.
The funds' fees
also remained steady, said Guido Bolliger, chief investment officer at
Olympia Capital Management, "contrary to expectations."
"Industry
analysts expected the level of fees to decrease in order to reflect
both the strong decrease in the demand for hedge funds and their
disappointing performance," Mr. Bolliger said. But "we have not seen
any significant changes in the liquidity terms and the fees taken by
hedge funds during the first half of 2009," he said.
In
the 12 months to May, the research found that fewer than 1% of fund
managers had adjusted their liquidity terms, which include their
redemption frequency or notice periods investors must give to exit. A
similar proportion hadn't changed any lockup periods they imposed on
investors.
That is mainly because performance has been so much
better this year. After an average 19% loss in 2008, hedge funds posted
a 14% gain in the first eight months of 2009, according to Hedge Fund
Research. Funds that survived 2008 also are typically larger and
performed better than those that failed, giving investors less power to
renegotiate fees or redemption terms.
Funds also may be holding
back on offering features that can become a double-edge sword in a
crisis. Investors like buying funds that give them the option to redeem
at frequent intervals. But it can also make them the first port of call
for investors that can't get their money out elsewhere, even when a
fund is posting strong returns.
Alex
Allen, chief investment officer of London-based Eddington Capital
Management, which like Olympia Capital puts together and manages
portfolios of hedge funds, said his firm lost between 30% and 40% of
its assets from investor redemptions between December 2008 and April of
this year. This is despite that Eddington's two main funds of funds had
returns of 25% and a 1% loss -- much better than the average 21% loss
on Hedge Fund Research's Fund of Funds Composite Index.
After
some modest inflows since then, Eddington manages about $155 million,
down from a peak of $280 million. "We were a victim of our own success
because we didn't gate the fund and investors used it as a cash
machine," Eddington Chairman Andrew Popper said last week.
Dozens,
if not hundreds, of hedge funds slammed down "gates" last year to
prevent investors from pulling money. On top of liquidity terms that
can range from one month to three years, hedge funds nearly always have
a right in their contracts with investors to put a gate down on part or
all of their capital.
It's amazing how a year after the worst financial crisis in post-war history, when hedge funds were closing the gates of hedge hell, things have not changed on Wall Street.
German Chancellor Angela Merkel urged Group of 20 leaders on Thursday to agree concrete new regulations for financial markets at a summit this week, but we shall see if anything comes out of this summit.
Moreover, Paul Volcker, the former Federal Reserve chairman, expressed more doubts over the White House’s plan for financial regulatory reform on Thursday and backed new taxes on banks.
One
interesting Bloomberg article that did catch my attention today
reported that the IRS told its auditors in Manhattan to develop cases
against offshore hedge funds and foreign companies it said are trying
to avoid taxes on income from loans they make in the U.S:
The
agency, in a Sept. 22 directive, urged the Manhattan field director of
the IRS financial services section to pursue a transaction the agency
says seeks to improperly take advantage of an otherwise legal tax
break. The agency also urged the official to be watchful for similar
techniques.
“We understand that foreign corporations
and non-resident aliens may have used other strategies to originate
loans in the United States, giving rise” to tax obligations, Steven
Musher, the top lawyer in the IRS’s international department, wrote in
a memo to Kathy Robbins, the Manhattan field director.
“We encourage you to develop these cases and we stand ready to assist you in the legal analysis,” Musher wrote.
It
is unusual for IRS lawyers to recommend audit targets to field
investigators, said
Robert Willens, founder of Robert Willens LLC,
which advises investors on accounting and tax rules.
The
IRS is “obviously incensed about this and intends to pursue the
strategy quite vigorously,” Willens said in an interview.
Hedge Fund Risks
The
IRS memo signals new tax risks for hedge funds and foreign investors
making and refinancing loans to Americans after the financial system
crash, lawyer Roger Lorence, a partner at Sadis & Goldberg LLP in
New York, said in an interview.
“Anything that doesn’t
involve buying a loan in the secondary market is arguably affected by
this IRS action,” said Lorence, who advised clients in a letter today
to “consider their structure in light of the IRS’s conclusions.”
“Who knows how far they’ll go,” Lorence said.
How
far will they go? It's about time they start cracking down on
sophisticated tax avoidance schemes that hedge funds and private equity
funds regularly engage in. Joe & Jane Taxpayer are squeezed, scared
to death of losing their jobs and health care and we got a financial
elite that are using an army of accountants to avoid paying their fair
share of taxes.
Michael Moore is right, capitalism has failed and
we need a new democracy that addresses the concerns of the restless
many, not just those of the privileged few.
»
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I think it's really a misnomer to called our current system capitalist. We certainly have elements of free enterprise but all the bailouts are moving the economy towards the same command economy model that the Soviet Union.
All of our key industries. Home financing (GSE's) and auto industry have in effect been nationalized.
The real scam isn't socialism but the fact we seem to have some of the worst traits of the old former Soviet system and capitalism. At least during the Soviet era rent, food and medical care was cheap for the average citizen.
In our current system,espcially in place like California, housing, medical costs and taxes are all high.
As someone once said "capitalism without failure is like religion without sin." Will capitalism fail, in a functioning capitalistic system yes failure is neccesary the infirm and unfit must pass and make way for the strong.
Unfortunately we have the exact opposite of capitalism in our current system. The weak and infirm seem to be gobbling up the lion share of society's wealth and output. The Fed commits ever larger amounts of capital towards propping up a failing system. We keep zombie banks alive that should be dead.
Even the Swedes had enough sense to understand that these zombie banks had to have the assets sold off at "REAL" values. This is what happened in the US with the S&L Failure.
In a sense we need failure for our system to continue and survive. Without some failure the system as a whole will ultimately fail be unable to reconstitute itself.
I'll bet Mikey Moore didn't show which party supported these bail-outs. Yeah, yeah they all suck but the fact is a huge majority of Republicans voted against this crap.
Take away these bail outs and he doesn't have a movie.
So private individuals perceive that they will make money by gambling with hedge funds. How is that a problem?
If Welch wants to put the bazillions he got for turning GE into a failed bank, tanking the stock for generations of GE stockholders, I'd be delighted to see him lose every penny, go naked on the streets of Yew Nork.
However, the effect hedge funds have on the rest of us would be of far more interest. Where is that money being invested? In entities that will be bailed out by government fiat? Then, Houston, we have a problem.
"And while I stood in line, buying food on a tight budget, people in front of me were buying lobster, ribs, and other gourmet products with Food Stamps"
Don't forget about all those people buying BMW, Mercedes and Audi with welfare checks. Please...
You have some valid points but statements like that ruin your credibility.
Do I follow the article correctly? There are inflows into hedge funds - and some are not satisfied with proposed regulatory reforms or their pace - and the IRS is trying to reign in improper tax avoidance strategies - therefore Michael Moore is right and capitalism is broken?
How does that make sense?
"And on taxes, we all know that the rich pay taxes but the question is do they pay their fair share of taxes? Of course not. They use an army of corporate accountants and tax arbitrage strategies to get away with whatever they can. It might be technically legal, but it certainly is unethical."
I don't even know where to begin with that statement, so let me just throw an example out there for you:
The 'rich', even those that make $250k a year, might be able to afford private school for their kids. So, they send their kids to private school. Yet, they still have to pay taxes for public schools, which they do not attend. Now, tell me, is that ethical?
Top 50% of Wage earners pay 96% of taxes. The wealthiest 1 percent of the population earn 19 percent of the income, but pay 37 percent of the income tax. The top 10 percent pay 68 percent of the tab. Meanwhile, the bottom 50 percent --those below the median income level--now earn 13 percent of the income but pay only 3 percent of the taxes. These are proportions of the income tax alone and don't include payroll taxes for Social Security and Medicare. And, let's not forget my personal favorites, capital gains taxes and property taxes. And you think that the rich aren't paying enough?
For the most part, taxes decreased efficiencies, increased waging of wars, increased government control, and pillaged the middle class. Listen, here's the ultimate problem with socialism: Eventually you run out of other people's money. Taking from the rich and re-destributing the money has never worked. Taxes have been increasing since the founding of this country; at what point is enough?
I am reminded of my college years, many years ago, when I used to go shopping for Ramen noodles. And while I stood in line, buying food on a tight budget, people in front of me were buying lobster, ribs, and other gourmet products with Food Stamps -- is that fair?! I had $0 government aid for school b/c my parents were considered "upper middle class", although they barely were/are. As a result, they had very little excess money for savings due to them being in the highest tax bracket & having $0 government aid, relying only on what remained of their paycheck to pay for everything. So, tell me this: How much taxes should the rich pay? What do you conclude is a fair share? How do you calculate it? I'll be sure to forward your analysis to middle class families asap.
BTW, you know the Fifth Amendment? The one that allows you to remain silent and not testify against yourself. Try using that to defend yourself against IRS when they do audit on you -- and it is incumbant of you to bring evidence against yourself. The burden of proof should be on IRS not on you. Riddle me this, how is that legal?
Books have been written on this. Just because there are some people that are really wealthy, doesn't mean you suddenly have a right to their property.
I encourage you to read some Ludwig Von Mises, Friedrich Hayek, and Murray Rothbard.
"You could believe what you want, but capitalism is changing. I am just not sure it's for the best."
Agreed.
I lament the burden of the wealthy. I myself suffer the horrors of brilliance. I frequently have 50% of the good ideas in a room of five, even six people! Then they want to accept the credit as a comittee. If that wasn't enough, one of my co-workers, with the same insurance, just got a hysterectomy. I don't even have a hyster. Why should my premiums go for stuff I don't even have, to make her more like me, which I think is an unfair comparative advantage. I tremble to think of how much tax, the wealthy would be taxed, if the Caymans could be taxed. It all makes a person want to be poor and stupid, but dammit if Zero Hedge isn't making both harder.
The 'rich', even those that make $250k a year, might be able to afford private school for their kids. So, they send their kids to private school. Yet, they still have to pay taxes for public schools, which they do not attend. Now, tell me, is that ethical?
Being part of a civilized society means taking care of the collective good, so the above statement is absurd. The poor and working class make up 90% of our armed forces - they are the ones who are dying in Iraq and elsewhere is that fair? Oh but they enlisted, you might say, it was their choice - Bullshit - they would be selling credit default swaps on wall street if they could, but they can't, so they take the best opportunity offered to them - same as anyone else would. I don't own a car, yet my tax dollars go to fix potholes. Is that fair? I could go on, but I think the point is made.
Bottom line, we live in an imperfect society, but the goal is to make it both fair, and avoid moral hazard. When I lived in Germany, I knew young people who spent a decade getting their PHD's because it was easier getting high every day and getting a student pension from the government, rather than finish on time and look for a job. The problem in the US is that much of our underclass is unemployable, and until we fix education it is likely to stay that way.
"Being part of a civilized society means taking care of the collective good, so the above statement is absurd."
Wrong. Being part of civilized society means that government protects me from you and you from me. It also means that first and foremost you must respect people's property rights. Or, put another way, it means that if something is mine, a bully (or government), cannot take my property and give it to someone who thinks could benefit more from it. That falls somewhere in the category of mob rule, which is hardly civilized. If you think that a civilized society means to take care of collective good, then by that logic you wouldn't mind killing people with aids or swine flu (a minority) to protect the collective good of society (majority). The ends (collective good), don't justify the means (killing people). Or, in my examples the ends of (collective good), don't justify the means of you (stealing) from some to serve others.
Regarding your armed forces example. Let me just state this: I believe in employment at will. So if they want to join the armed forces they can, and must abide by whatever contractual agreement they have with employer. But, likewise, if they want to quit (employment at will) or not want to serve, then I think it is illegal for the government to imprison you for quiting or not being forcefully enrolled -- that violates above principal of property rights, with your own body being the utmost property right. Government cannot force you to perform a certain job. Also, starting wars and empire building is something I also disagree with on similar principals
"I don't own a car, yet my tax dollars go to fix potholes. Is that fair?"
No, it's not fair. And that's another great point. I'd actually go into how roads themselves should be privately owned and not government owned, which would also suggest that such a move would actually decrease both traffic and death numbers. (read this: http://mises.org/story/3416)
"Bottom line, we live in an imperfect society, but the goal is to make it both fair, and avoid moral hazard. When I lived in Germany, I knew young people who spent a decade getting their PHD's because it was easier getting high every day and getting a student pension from the government, rather than finish on time and look for a job. The problem in the US is that much of our underclass is unemployable, and until we fix education it is likely to stay that way."
You're right on the nose regarding moral hazard. Here are a few problems with our system: Our government has moral hazard with tuition. For instance, students can get college loans, regardless of how employable they are or aren't. An engineer can get a college loan just as easily as an art major -- even if they don't have assets or rich parents. One of those has a much higher degree of a financial future, the other does not. But what happens when both of them get college loans? One negative outcom with college tuition is the same as with housing; when everyone gets a loan (prime, subprime) it drives prices UP. Why do you think tuition has gone up like crazy? Ask yourself this: should everyone get a Ph.D? Of course not, so why should everyone get a bachelor's degree? Should mechanics get a bachelors? Also, maybe some peopel should work first and save up for higher education? Another problem with our educaiton system is b/c it's a public system with skewed incentives. Teachers don't get paid based on how good of a teacher they are, but based on tenure. Teachers, just like everyone else, come with different abilities. Not all teachers are created equal, nor are all doctors. Why should they not get rewarded or fired based on performance? Similar problems exist in our education system that exist in employment in European countries --- often times it is illegal to FIRE a teacher, unless they break the law like rape a student. When teachers know they can't get fired, are they going to work really hard to teach kids or are they going to petition their governments for more pay, aguing that if they get paid more, test scores will increase.
N e ways, there's many problems, I think that we can agree on, but what you should realize is many of the problems and moral hazards that exist are as a direct result of government intervention with their 'solutions for the betterment of society'.
"And while I stood in line, buying food on a tight budget, people in front of me were buying lobster, ribs, and other gourmet products with Food Stamps"
Don't forget about all those people buying BMW, Mercedes and Audi with welfare checks. Please...
You have some valid points but statements like that ruin your credibility.
With all due respect, your response does not at all address the point you quoted me on. Also, are you suggesting that higher salaries should not equate to more spending power?
But, believe it or not, your point does address part of the problem with why we're in the current debt-ridden debacle in this country. In our society, if you can't afford something then there's no way that you can buy something...right? Wrong. Whether it's Lobster, a house on a subprime mortgage, a Flat Screen LCD on credit card debt, an Audi on low financing deals, people who could not even afford those things to begin with were buying them nonetheless. Why do you think we had negative savings rate?
"And while I stood in line, buying food on a tight budget, people in front of me were buying lobster, ribs, and other gourmet products with Food Stamps"
Don't forget about all those people buying BMW, Mercedes and Audi with welfare checks. Please...
You have some valid points but statements like that ruin your credibility.
The defining level or cut-off for "rich" should be broadened; in many areas $250,000 is lot of pesos. In metro-regions like NYC or Chicago, I have to imagine that is not much adjusted for living standards. Politicians define the rich because, by/large, few ever worked a day in the life of a private sector job. Being an attorney doesn't count either (john edwards: skirt-chaser / ambulance chaser supreme).
Hell make that "rich" number a bigger target: $1.5 million AGI. In my dreams I'm still gonna be rich someday...
I enjoy reading all your comments, even those that make my eyes roll back. There is no doubt that Michael Moore is part of the privileged few, but at least he is standing up for the common folks who rightly feel bamboozled from all these bailouts to the Wall Street elites.
As far as capitalism, it never really existed. What we have is a system of corporate welfarism where corporate elites use their lobbying power to get favors from politicians. In extreme cases, like 2008, they can create a climate of sheer panic and get billions in bailouts.
And on taxes, we all know that the rich pay taxes but the question is do they pay their fair share of taxes? Of course not. They use an army of corporate accountants and tax arbitrage strategies to get away with whatever they can. It might be technically legal, but it certainly is unethical.
You could believe what you want, but capitalism is changing. I am just not sure it's for the best.
Leo
"And on taxes, we all know that the rich pay taxes but the question is do they pay their fair share of taxes? Of course not."
How do you define what is 'fair' - by what is legal?
After reading the dross that is this article and the green energy article - I'm henceforth avoiding anything you write at all costs. Terrible
Michael Moore, really? .......
Leo seems to be leaning INGSOC. Sorry bro, but you may become soylent green sooner than you want to. Pick your side bro.
"Michael Moore is right, capitalism has failed"
Do yourself a favor and look up the definition of capitalism; you'll realize that what 'failed' is not remotely capitalism.
"we need a new democracy that addresses the concerns of the restless many, not just those of the privileged few."
Great blanket statement. Maybe Obama can use it in his next speech. It can be a nice replacement to the perennial favorite "We must do the right thing".
Thanks for the tip on the IRS digging into the criminal exploits of the offshore hedge funds.
I'll be sure to let my compadres in the Criminal Syndicate know so that they can close up shop and move their filthy lucre to secret bank accounts in Switzerland.
No use paying Federal taxes on our criminal gains when we have plenty of socialist rubes right here in the US more than willing to pony up more of their paycheck each week in new taxes to cover the gap in lost tax revenue.
Capitalism works best when it simulates an athletic contest where the best teams move forward and the rest are eliminated instead of when ways to fill toothpaste with toxic filler to garner the most profit are employed.
I say this, but even our athletic contests have succumb to a need to "fill the seats" by stressing entertainment over competition.
Cobain was right, we're not even entertainers any more but "Imitainers" and if "all the world's a stage" we're all just "stacks of actors, stacked to the rafters, line up all the bastards all I want is the truth".
"Joe & Jane taxpayer are squeezed, scared to death of losing their jobs and health care and we got a financial elite that are using an army of accountants to avoid paying their fair share of taxes."
This argument would have more teeth if the bottom 35-40% of this nation's citizens were also paying income taxes, but they aren't. This group is compiled of net tax consumers, not net tax producers, and they are just as much of a burden on the middle class Joe and Jane Taxpayer as the upper-class pigmen. Saying that the elites need to pay "their fair share" is nothing more than populist agitprop, because their taxes are, and always have been, carrying this country since the progressive income tax was instituted.
If the sainted "poor" weren't getting Earned Income Tax Credits every year on April 15th, I could buy into the argument that the "rich" should be paying more into the system. At least in that scenario, everyone would have skin in the game.
And Moore may be right in this case, but he's also a colossal hypocrite. He's gotten very wealthy reaping the benefits of the very capitalist system that he criticizes, and if the system of government that he envisioned actually came to pass, he'd be worthless to society unless some state official gave him a job as Minister of Propoganda or Twinkie Czar. He's also been free every year to send in a greater share of his income to the IRS beyond what he actually owes, and I can't see where he's ever done so. So he's hardly in a position to be advocating that the "elites" pay their "fair share."
"Everybody was poor years ago," he said. "When we were kids, we ate what was on the table. Crusts of bread or whatever it was. You ate what they put on your plate, and that's all you got," Breuning said.
http://www.usatoday.com/news/nation/2009-09-24-oldest-man-diet_N.htm?se=...
Thank you - good stuff brother, but Moore is wrong. True capitalism works, but we don't have it's purest form today.
Should have seen the Rothschild fund of funds head on CNBC Asia as 'guest host.' Never a cockier moment. Not a mention of what happened anytime recently, from anyone...
And back onto hedge funds...the maxim still holds true: fools and their money, easily parted
I don't always agree with his arguments, as Moore can come over as self-serving & self-satisfied IMO. But he's right on this front: it is a failure of leadership at companies, at regulators, at government. I don't expect Ward Cleaver to show up again & run GE or Citigroup for $2 million / year, but I'll be damned that's still a nice earnings target. IT used to be a lot, and it still is a lot. Don't bullshit anyone that it's not.
Jack Welch has been on record that CEO's should be paid whatever they are worth. Well, there are fortune 1000 companies with $ billions in revenues. To make us believe that one person is responsible for the rise or fall of each company & should be paid accordingly is just f**king absurd; it takes management, it takes talent at all levels in the corporation.
Leaders like Steve jobs at Apple are a rare breed, typically.
Moore was just on msnbc, and his description was on-target: it's become amoral. Amoral to cash out on short-term gains while risking equity investors long-term capital; amoral to bonus out (cash or options) on moderately easy earnings or income targets that are quite easily manipulated.
Facism, not capitalism has failed.
Entrepreneur's still producing...
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3251493
Would have thought that TD knew that.
Capitalism has not failed in the instances of our banks, investment banks and other robbers who have captured the government purse to bail them out, a la GE, AIG, Goldman Sucks, and dozens of others. These entities took all the benefits of capitalism and then Socialized, communized their losses. I don't know what you'd call a system like that but, TD take note, that is emphatically not Capitalism.
The risk that capital will be reduced or lost altogether is an essential part of Capitalist economy.
Moore is right about a lot of things in his movie, but fails to mention that Captialism is working just great to make and keep him a multimillionaire. If his movies lost money, he'd have to disappear.