Absolute Return

absolute return
www.absolutereturn.net issue 1
Hedge Magazine
april 2003
THE MAGAZINE FOR THE US HEDGE FUND COMMUNITY
Moore on winning the talent game

PA G E 3 0
Hedge funds under siege

PA G E 3 8
How much more regulation will there be in the US? Over $27 billion raised by new funds in 2002 and the pace isnt slowing
PA G E 4 4
The start-up business Which index is best?

PA G E 3 4
S&P, Zurich, CSFB Tremont and HFRX analyzed
CONTRIBUTORS
Published by
London SW1P 4PB
1618 Douglas Street
Douglas House 3rd floor
HedgeFund Intelligence Ltd
Telephone: +1 212 352 8713 Fax: +1 212 924 0240
20th Floor, 104 Fifth Avenue, New York, NY 10011
New York office:
Fax: +44 (0) 20 7630 7948
Telephone: +44 (0) 20 7233 8585
Email: info@hedgefundintelligence.com
Website: www.hedgefundintelligence.com
Mike Peltz has been following hedge funds and other alternative investments since the early 1990s when he was a writer for Institutional Investor magazine. In July 1996, Mike joined Worth magazine, where he has continued to write about hedge funds as part of his broader financial and business coverage. He is currently Executive Editor of Worth and pens a monthly column on the markets called Streetwise.
Marketing Manager: Joanna Douglas jdouglas@hedgefundintelligence.com pbowler@hedgefundintelligence.com jbrown@hedgefundintelligence.com Group Publisher: John Willis jwillis@hedgefundintelligence.com Subscription enquiries Subscriptions Executive: Penny Bowler Circulation and Accounts Manager: Jan Brown
mhayes@hedgefundintelligence.com
Production Editor: Melissa Hayes
lahmed@hedgefundintelligence.com
Data and Research Manager: Lisa Ahmed
Neil Wilson, Robert Maharajh, Mike Peltz, Paul Taylor
Barry Cohen, Stephanie Hoppe, Niki Natarajan
Contributors:
kdeanallen@hedgefundintelligence.com
US Correspondent: Katrina Dean Allen
pgallo@hedgefundintelligence.com
US Editor: Peter Gallo
ijenkins@hedgefundintelligence.com
Managing editor: Iain Jenkins
publication of Absolute Return, and has nearly 10 years experience as a financial journalist, specialising mainly in investment management. Niki previously worked for Financial News, where she launched the hedge fund and securities finance coverage. Before that, she worked for Institutional Investor as launch editor of Global Fund News and editor of Foreign Exchange Letter.
Niki Natarajan is the editor of InvestHedge, a sister
Paul Taylor has been a business journalist for more than 25 years and is currently based in New York. He writes on business and technology subjects for a number of publications including the Financial Times and Nasdaq International magazine. He has also written extensively for leading financial publications about the capital markets and financial services industry.
Stephanie Hoppe is a senior correspondent on
London: +44 (0)20 7901 1912
Advertising Enquiries: +44 (0)20 7901 1918 jwillis@hedgefundintelligence.com
EuroHedge, a sister publication of Absolute Return. Prior to that she was the editor of Financial Products, a weekly newsletter on structured derivatives products, and an assistant editor on Futures and Options Week. She has also written for a variety of other publications including Handelsblatt and The Times Educational Supplement.
Copyright:HedgeFund Intelligence Ltd. All rights reserved. Reproduction or transmission of this magazine, by either electronic or mechanical means, including photocopying, recording or any information storage and retrieval systems, prohibited without prior written permission of the publisher. For information on reprints and back isssues, please email info@hedgefundintelligence.com or call +44 (0)20 7901 1912 Subscribers must agree to the Terms and Conditions of Absolute Return as posted on the website www.AbsoluteReturn.net before subscribing. No statement in this magazine is to be construed as an invitation to invest in hedge funds. HedgeFund Intelligence reserves the right to refuse subscriptions. ISSN Number: 1740-4282
Neil Wilson is the editor of EuroHedge and has over

15 years experience as a financial journalist, mainly specialising in derivatives and alternative investments. Neil was formerly European editor of MARHedge, editor of Futures & Options Week, editor of Futures and Options World and assistant editor of The Banker. He has also worked for Risk Magazine and contributed to a variety of other publications such as the Financial Times and The Economist.
ABSOLUTE RETURN APRIL 2003
EDITORIAL
New magazine for a new era

W
elcome to the first issue of Absolute Return, the magazine for the hedge fund news stories and each month we will be breaking news that you need to know. Our profiles of some of the leading players in the industry will give a valuable glimpse into the workings of some of the biggest and best firms. And we will be bringing insights into the performance of the hedge fund industry though our unique performance reports and our US hedge fund database, which will expand over time. In a move to address concerns about private placement rules, all our US subscribers have to be accredited investors and must agree not to circulate the magazine to non-accredited people. We hope you enjoy the publication and agree that it maintains the high editorial standards that we have set with our other publications, EuroHedge, AsiaHedge and InvestHedge. professional. Our launch comes at an interesting time for the hedge fund community. Regulators seem to be snapping at the heels of the industry. The press is full of negative stories about blowups, falling assets and poor performance. Yet new funds are starting daily and the big institutions are showing real signs of allocating vast sums of money to hedge funds. More than ever, it would seem, there is a need for a magazine to make sense of the seemingly conflicting currents swirling around the industry. Our goal is to provide intelligent and provocative analysis of the real stories behind the headlines. We aim to cut through the noise and get to the heart of the issues facing the industry in considered way. This will not be at the expense of important Iain Jenkins, managing editor
APRIL 2003 ABSOLUTE RETURN
CONTENTS
Contents ................
MAIN FEATURES
17
The technology guru and one time manager of a $5 billion fund is part of a trend to shut down funds after a period of poor returns and quickly open again in a new guise.
Bowman is back - investors arent happy
30-32
18-19
After the shock departure of William von Mueffling, the spotlight has now turned on the involvement of mutual fund groups in hedge funds and has prompted serious questions about whether they are capable of holding on to top hedge fund talent.
Lazard discovers the power of the little guy
Moore Capital, the $5 billion-plus group, is breaking the mould in its battle to build its bench of traders in a strategy that sets new standards of flexibility for other hedge fund groups trying to build sustainable operations.
How Louis Bacon is wooing trading talent
38-42
Attacks seem to be raining down on the US hedge fund industry from all sides and some form of regulation now seems inevitable. But how bad will it be?
Facing up to a new world of regulation
CONTENTS
8 Intelligence 13 People
NEWS
43 Guest column
Big news stories from around the industry
14 In the news 26 New funds
Who is moving where
22 Funds and strategies
INVESTORS
Neil Wilson explains why a little regulation along the lines of the European model may be good for US managers.
50 US league tables
CTA funds. Performance reports on top equity funds.
Stories that made the headlines
46 Product and vendor news
Up coming launches
21 Market comment
5 Editorial
VIEWPOINT
What products are new and what the vendors are doing
25 Institutional buyers guide
Why are equity funds not working? And could the biggest hedge fund strategy be about to fall from favour in the same way that macro fell out of favour in the late-90s.
58 Indices and global round up
Monthly performance data on over 500 funds with Februarys numbers.
Mike Peltz reveals Steve Cohens buy and hold secret and wonders why he has broken his own trading rules.
48 Performance
PERFORMANCE
General Motors is playing safe with its pensioners money and picking the safe brand name funds for its initial foray.
34 Funds of funds in drag?
RESEARCH
Absolute Return Index along with indices for European, Asian funds and global fund of funds.
44 New fund survey
Are the latest wave of hedge fund indices nothing but a marketing gimmick designed for institutional investors that dont know any better?
Alta and other convertible funds reach new highs. Tudor BVI and Campbell keep racing ahead along other macro and
A look into the size of the start up business in the US suggests that it may be bigger than people thought and increasingly polarized.
7
INTELLIGENCE
Blocking tactics by Citadel and Amaranth
plan by Citadel and Amaranth, two of the leading multi-strategy arbitrage groups, to actively discourage investors from backing
managers that leave to start on their own, came to light with the recent launch of Polygon by Citadel alumnus, Reade Griffith. Citadel investors who contacted the Chicagobased firm about investing with Polygon, which is one of the big launches in Europe this year, were politely referred to the shareholder agreement that stops them from investing in break-away funds. Such was Polygons concern about the issue that their investor presentation warned that, if they invested with the fund, they risked being thrown out of any Citadel fund in which they were invested. Meanwhile, Amaranth has indicated to investors that it is amending the shareholder agreement to stop its investors from seeding managers who quit their $2.2 billion Greenwich-based firm to start on their own. This move by Amaranth should come as no surprise as the COO of the firm, Charlie Winkler, who used to work at Citadel appears to have adopted the Citadel approach when it comes to discouraging traders from leaving. While the policy of Citadel may deter some investors who have made a lot of money from the two firms over the years and have large investments with both groups, it is difficult to see how it would be enforceable. Polygon would be very unlikely to tell Citadel who their shareholders are. The Amaranth strategy is more enforceable as it seems to be targeting seed investors only which are much more difficult for any Amaranth alumni to hide. The developments highlight the differences of approach used by firms when they lose staff. Moore Capital and SAC Capital often seed good traders who leave their shops, while HBK has a policy of never helping or hindering their alumni.
Investors take road out of tech
Some good news seems to be on the horizon for technology funds after a rocky 12 months in which close to $10 billion flowed out of the sector and a number of high-profile funds closed their doors. John Hurley, formerly at Bowman Capital, looks set to raise an initial $300 million for his Cavalry fund. But, overall, the picture is still pretty gloomy. Three huge funds have shut down. Among them are the $1 billion Agnos fund which was run by Tony Anagnostakis, Palantir which was running $2 billion of assets, and Bowman Capital which at its peak had $5 billion under management. Other smaller funds like Westfield Technology and Essex also closed down last summer. Then there are the assets that flowed out of some of the bigger technology funds that are still in business. Amongst those who lost technology assets over the past 12 months are Digital Century, Galleon, Camelot, Intrepid and Pequot. On the positive side, last year Andy Kaplan left Andor to start Grange Park and raised over $300 million. Mike Au quit Intrepid and raised close to $500 million for Hornet and Peter Labon left Bowman to join Citadel, where he is running Citadel Edison with over $300 million. Net flows out of technology appear to be in the range of $7 billion.
Ganek mimics SAC high fee
Few start-up managers dare to break the standard hedge fund fee structure on day-one but, then again, David Ganek is a little different. He is supposed to be one of the hottest properties in the technology trading area and is borrowing heavily from his former employer, Steve Cohen, at
INTELLIGENCE
Stamford-based SAC Capital. Cohen is legendary for his model of having no management fee and an astonishing 50% performance fee. However, Ganek is understood to have initially opted for the best of both worlds: a management fee of 2% - which is right at the top end and an unusually punchy performance fee of 35%. For the time being investors are willing to listen to what Ganek and his team have to say, but many maintain that alarm bells start ringing when they see aggressive fee structures from brand new management companies. And the record of day-one high fee managers does not augur well, they say. After all, most investors can remember other start-ups that went for the Cohen structure of no management fee and a 50% performance fee. Some raised a lot of money quickly before struggling. Furthermore, with the exception of Rich Walter, who has delivered spectacular returns at Walter Capital, few SAC alumni seem to perform as well outside the firm as they did when they were surrounded by the SAC infrastructure, research and access to flows. That said, everyone acknowledges that Ganek is a different animal. He was operating with his own team within SAC and most have joined his new shop called Level. He also had a spectacular record, which is encouraging many investors to take a look. However, they may be more inclined to invest if he cuts the fee, which could still happen.
that the bank will allow the creation of a single-manager platform. They regard the Traxis venture as very much a one-off that the bank is tolerating because it doesnt want to sever links with Biggs, who was on the point of leaving Morgan Stanley to join former colleagues at Front Point, which is building a hedge fund business and has Barton Biggs of Morgan Stanley already provided infrastructure and seed capital for a number of successful launches. For many senior Morgan Stanley staffers, the memory of the Russian debt crisis of 1998 is still fresh in their minds. Then Morgan Stanley is understood to have paid out compensation following the poor performance of one of its emerging market fixed-income hedge funds.
Biggs may start Morgan suite
OConnor hives off specialists
The new Traxis fund, which Morgan Stanleys best known market strategist, Barton Biggs, is starting with Madhav Dhar, may be the begining of a suite of single-manager hedge fund products on a new platform being assembled by Morgan Stanley. Putnam Coes, former chief operating officer of Morgan Stanley AIP, the firms fund of funds and private equity operation, will head up the new platform dubbed Morgan Stanley Hedge Fund Partners. The newly created group will look to build a range of other single manager funds, should the Traxis venture prove to be a success. The idea is to follow other banks, like Deutsche Bank, into the single-manager business with a range of funds. First out of the blocks is the soon to be launched global multiasset fund run by Biggs. However, some Morgan Stanley insiders are skeptical
OConnor, the Chicago-based hedge fund firm headed by Joe Scoby, which is part of the UBS Asset Management group, is poised to make a number of new single strategy products available following a restructuring of its business. The strategies include US long/short equity and European long/short equity as well as on a limited basis the firms convertible arbitrage strategy. These have only been available hitherto within OConnors multi-strategy platform. The changes also appear to involve what looks like plans to revive the firms flagship global equity arbitrage product. This follows the move of Danny Schweizer, formerly chief executive officer at UBS Warburg in Switzerland, to OConnor in Chicago earlier this year, where he has become deputy chief executive and deputy chief investment officer, reporting to Scoby. These moves follow a rocky performance spell last year, which led to a sharp decline in assets in the firms equity funds which were at one time about $3 billion to a
INTELLIGENCE
current level estimated at about $1 billion. Despite overall problems with performance, sources say a number of the underlying strategies have continued to perform well and should be attractive to investors going forward. The US fundamental equity strategy is managed by Kipp Schrage, based in Chicago, who was previously head of proprietary trading in US equities at UBS Warburg, responsible for the convertibles and relative value trading groups. Schrage is an OConnor veteran. He runs a fundamentally-based market neutral long/short strategy that focuses on five main sectors. The strategys capacity is expected to be about $750 million. The European long/short strategy is managed out of London by a team headed by Chris Salter and Graham Pattle. Both are also OConnor veterans and run a combination of opportunistic trading based on fundamental, statistical, event-driven and other catalysts. Capacity is expected to be about $300-$500 million. The convertibles strategy is run by George Locasto in Chicago. He runs a market neutral portfolio concentrating on equity-sensitive bonds with selective trading of bond-like and lower credit products. His team focuses on shorter duration, investment grade and lower premium securities.
Putnam Small-Mid Cap Value Long/Short Fund. Founded more than 65 years ago, Putnam, part of Marsh & McLennan, is one of the largest fund managers in the US. Like rival Fidelity it has always publicly denied that it had any hedge funds although this could be set to change over the coming months. In 1999, Putnam Investments formed TH Lee, Putnam Capital, a joint venture with Thomas H. Lee, for alternative investments, although only venture capital funds have been offered so far.
Democrat fundraiser starts fund
Putnam plans to roll out funds
Putnam Investments, the $241 billion Boston-based mutual fund manager, is poised to roll out a range of singlemanager hedge funds that it has been quietly incubating for the past year with small amounts of internal capital. To spearhead the move to hedge funds and the development of the alternative business, William Landes has been plucked from his role as head of global research. The five funds, William Landes of Putnam which were seeded with $25 million, are the Putnam Emerging Markets Hedge Fund, Putnam Equity Long/Short Fund, Putnam GAA Hedge Fund, Putnam Mortgage Hedge Fund and the 10
Sandell reinforces distressed
Matt Gohd, the investment banker renowned for his political fundraising prowess for big-name Democrats and for hitting the headlines last fall for his involvement with a blind trust managed for Democrat Senator Robert Torricelli, has thrown his hat into the hedge fund arena. The former principal of BluStone Capital and Whale Securities recently established Gohd Asset Management, which on April 1 began trading its first hedge fund, a US domiciled long/short vehicle. Ghods political activism has come with some controversy. Between 1994 and 1998 he had managed a blind trust for Torricelli, the Senator from New Jersey who made headlines last fall when he dropped out of what had been expected to be an easy Congressional bid, just 36 days before the election. No wrongdoing was alleged on Gohds part, and criticism of Torricelli centered on his alleged failure to publicly disclose his personal dealings. Ironically, Torricelli had apparently set up the blind trust in 1994 with Gohd specifically in order to prevent a conflict of interests between his personal and public affairs. More recently, Gohd has been focused on setting up his hedge fund shop in Manhattan. The long/short fund will seek to exploit mispricings, primarily in US equities. Gohd will employ a contrarian theme, looking at pairs of closelyrelated securities. About 200 such groupings will be considered, based on quantitative screenings, followed up by qualitative analysis of individual companies.
Tom Sandells event-driven team on the Sandell/Castlerigg Master Investments fund has brought in Herb Lust, another senior specialist on the distressed securities side, as part of a move to take advantage of the growing opportunities in
INTELLIGENCE ??
WHERE ARE THEY NOW?

the distressed area. The move will reinforce Sandells steady move away from merger arbitrage into global distressed opportunities. The proportion of the portfolio invested on the distressed side rose from about 20% in 2001 to about 40% last year, and is still about that level today. Lust was a colleague of Sandell at Bear Stearns where he was head of distressed research in the early 1990s and had spells with Salomon Smith Barney, Lehman Brothers and Furman Selz before becoming risk manager and then head of global distressed research at JPMorgan between 1998 and 2002. His most recent post was as senior distressed portfolio manager at EBF Associates, prior to joining Sandell. He further enhances the firms capabilities on the distressed side following the addition of Jim Cacioppo in 2000, another distressed specialist who had previously worked at Halcyon and Wasserstein Perella. In contrast to many distressed strategies, a large part is in hedged capital structure arbitrage plays, with the only outright long positions in senior debt instruments. So far, most of the distressed portfolio is concentrated in the US. The Sandell team in New York and London has now grown to total of 27 staff, and the firm continues to manage just under $1 billion.
Two more funds out of Maverick
Lee Hobson and John Fichthorn, two senior traders at the $7 billion Maverick Capital, have left and are planning to launch their own funds that look set to attract considerable investor interest. They follow a number of other high-level departures from Maverick in recent months with senior trader John Hickey leaving to join SAC Capital (see People on page 13). Fichtorn, a specialist in technology, is slightly ahead in the start-up process with his Tracker Capital fund. He has tapped Mark Hoffman, former head trader at JLF Asset Management, which shut down last summer. Fichthorns brother Luke, a former senior vice president at Lazard Freres, will also be joining the firm. The firm, currently being housed in Mavericks New York offices, is getting ready to debut its first fund, a multisector, long/short fund this summer. Lee Hobson is a little further behind Fichtorn with his fund that is expected to have a Maverick-style global equity strategy. He is planning to announce some big hires for his team.
Since resigning from his position as Chief Economist at the World Bank in 2000, Joseph Stiglitz has rarely been out of the media limelight. However, few people know that the controversial economic theorist, and winner of the Nobel Prize for Economics in 2001, has been actively involved in hedge funds. Stiglitz became widely known as the scourge of the International Monetary Fund and is currently ensconced as Professor of Economics at Columbia Universitys Business School as well as an investor and investment advisor board member of a rather unusual hedge fund. The man who continues to crusade for changes in the rules of global capitalism is currently profiting from the same dislocations through his involvement with Brookdale Group, a Boston-based alternative investment firm run by a group of high-profile academics. The firm was founded in 1991 by Andrew Weiss, Professor of Economics at Boston University. He attracted other leading academics such as Steve Ross of MIT, Bruce Greenwald of the Columbia Business School and Lucien Bebchuk of the Harvard Law School as investment advisors. Weiss has known Stiglitz for the past 30 years and has collaborated with him on many scholarly articles. Except for one year since launch, the $150 million operation has outperformed both the MSCI World and Emerging Markets indices as well as the S&P 500. Brookdale takes an activist approach to value realisation. It identifies funds trading for less than cash and accumulates large stakes. It then initiates corporate actions, such as tenders or share buybacks, to generate a return of cash to shareholders. If its appropriate, it will gain control of the fund and replace the management.
Joseph Stiglitz
11
INTELLIGENCE
PEOPLE
Unschulds $160m day one success story
US equity fund, to go it alone with their own Double V Partners fund. A firm official said Double V principals Vicas and von Olnhausen left amicably from ING, which seeded the long/short fund with $10 million in October 2000. Prior to their hedge fund foray, Vicas and von Olnhausen had worked together at Furman Selz and successor firm ING for more than a decade. Vicas was a managing director of international equities while von Olnhausen served as a managing director covering Scandinavian institutions for ING. Goldman Sachs Asset Management. He will run the firms new London office. Burnside is well known in the European investor community. He worked at Goldman Sachs prime brokerage in London where he was responsible for the capital introduction effort before moving to the GSAM fund of funds operation where he led the institutional sales efforts in London. arb, distressed securities, mutual-fund timing, and systematic trading.
Kingdon loses Karchmer to LRL
Ex-Schroders micro-cap manager Ira Unschuld has filled up his new Brant Point fund with around $160 million on its first day of offering. Investors scrambled to get a piece of Unschulds very limited capacity and no wonder. Under his guidance the Schroder Capital Ultra fund, was up an average 72% annually. It was being run as a quasi-hedge fund with shorts taking the form of index futures. Such was the popularity of the fund that it regularly changed hands at a premium to net asset value.
SAC plucks Hickey from Maverick
Aquila expands line-up and key new staffers
Lefevre named as head trader at Water Street
Double V part ways with ING Furman Selz

Robert Vicas and Ernst von Olnhausen have left ING Furman Selz, where they had been running a $55 million small and mid-cap
New York-based hedge fund giant Kingdon Capital Management in March lost portfolio manager Matthew Karchmer to LRL Capital Management. Karchmers is a consumer and retail sector specialist and will now be working as part of a team that includes managing partner Andy Lester and Gary Jacobson, a principal at the firm who also serves as a director at the University of Albany Foundation. Kingdon has replaced Karchmer with Christine Hyland Frankenhoff.
DKR beefs up investor realtions with Burnside
Tripp Lefevre in March was appointed to the post of head trader at Water Street Management, replacing Carrie King who recently left the firm. The Jacksonville, FL-based hedge fund shop is managed by firm founder Gilchrist Berg, who got early support in starting Water Street from Tiger Managements Julian Robertson in 1988. Water Streets senior staff includes principals Peter Mahon and Robin Bradbury.
DKR Capital, the $2.8 billion Stamford-based group which is best known for its DKR Soundshore convertible fund, has boosted its investor relations efforts with the appointment of David Burnside, formerly of
Aquila Capital Management run by Neal Berger, formerly a principal at the $3 billion Millennium Partners, is adding staffers and drawing up plans for an offshore twin for its US fund expected to begin trading in late April or early May. One recent recruit is Russell Lavelle, an arbitrage specialist who departed Millennium Partners in early March. The other new addition is David Roy Smith who was previously trading his own accounts focused on mutual-fund timing. The new staffers brings the tally to eight at Aquila, which was formed last summer and began trading its first fund in late 2002. Other members of the Aquila team include analysts and traders Andrei Gerasimov, Michael Lubin, Peter Blumen and risk manager Fuaad Qureshi. Aquilas diversified arbitrage fund plays six general themes statistical arb, equity-volatility arb, credit
Ashraf Starts Empyream Fund
SAC Capital Advisors has taken on John Hickey, a senior trader at Dallas-based Maverick Capital, as a trader focusing on technology at SAC. Maverick Capital, which has approximately $7 billion in assets, is managed by Lee Ainslie III and was founded with seed capital from Sam Wyly, who has since seeded the Dallasbased fund of funds Ranger Capital. An official at SAC confirmed Hickeys hire. A spokesman from Maverick Capital did not return calls before press time.
A former analyst from Essex Investment Management and Summit Partners, Rauf Ashraf has struck out on his own with the launch of Ash Capital Management. The Boston-based firm was slated to begin trading the $35 million Empyream Fund on April 1. Ashraf who had previously worked at Fidelity Investments developing trading models for the giant Magellan Fund will oversee Empyreams portfolio. The long/short portfolio will use a quantitative methodology in choosing its equity picks, drawing on a system comprised of 60 individual screens running models built and honed by Ashraf.
13
IN THE NEWS
Lauer attempts fightback
LANCER
ancer Partners, Michael Lauers $1 billion hedge Stanley for writing down its stake in the firm.
fund group, has tried to strike back at Morgan
Lauer told investors that his flagship Lancer Offshore Fund fell 16% last year, while Morgan Stanley calculated its own estimates of the portfolio and subsequently wrote down five-sixths a staggering 83% - of its share. It remains doubtful whether Lauers initiative can buy extra time for Lancer as the bad news keeps mounting for Park Avenues former darling. In the latest setback for the once high-flying Lancer family of funds, the company disclosed that Lancer Offshore was suspended from the Irish Stock Exchange on March 20. At the same time the group has been struggling to meet redemption demands from investors to the tune of $250 million 29% of the funds assets. At the heart of the groups problem seems to lie the valuations given by Lancer to the many illiquid stocks in its portfolio, which investors suggest have been overgenerous. Lauer declines to comment, and his lawyer Jeffrey Zuckerman did not respond to requests for comment. Lancer is already facing a number of law suits from Morgan Stanley and other investors. In turn, Lancer is suing a number of newspapers.
IRS
Tax trap sprung on III
Second equity fund underway
DRIEHAUS
riehaus Capital, Richard Driehaus $2.2 billion mutual fund shop, quietly launched its second long/short equity fund at the beginning of the
year. The strategy has adopted a market neutral approach with a US focus, and is based on computer models developed in-house by the funds manager James Krema and Driehaus himself. Krema has been involved in systems development at the group for the last 13 years. The launch of this fund follows the introduction of Driehaus first hedge fund, a $20 million long/short equity strategy managed by Jeffrey James, last April. Depending on its success, the group is understood to be eager to expand its hedge fund suite by spinning out more products. 14
US-based hedge funds are watching nervously for any signs that the Internal Revenue Service demand for millions of dollars in back-taxes from III Offshore Advisors, the Florida-based hedge fund group that runs $1.4 billion in two bond strategies, is part of a broader crackdown. Hedge fund managers often defer taxes on fee income from offshore funds by reinvesting the fees back into the funds. This allows the money to compound tax-free until they repatriate the profits. In the past, the IRS went along with this practice, but it has come under increased scrutiny in the wake of accounting scandals at Enron and elsewhere. In February, it emerged that the IRS had targeted III Offshore Advisors with a back-tax demand
prompting James Hedges, president of LJH Global Investments, to warn that funds could be forced to liquidate billions of dollars of assets in order to pay back-taxes they owe. Hedges cautioned that a wider clampdown on deferral of taxes on offshore income could impact some of the biggest, most successful hedge fund managers, who could be forced to repatriate hundreds of millions, if not billions of dollars of their own investments from the fund.
THUNDER BAY
Ex-Deutsche man starts
Dean Barr, Deutsche Asset Managements former chief investment officer, has become the latest in a string of Wall Street veterans to set up his own hedge fund business. Barr, who until August, helped raise and manage roughly $800 billion at Deutsches money management unit, is on
IN THE NEWS
track to meet his $200 million investment goal for his own new fund Thunder Bay Capital Management. The long/short equity fund is based on a quantitative factor model to forecast market direction.
TROY, VAR & PALENTIR
Three more US casualties
Three more US hedge funds have decided to shut down in recent weeks Troy Capital, VAR Partners and Palantir Capital Managements technology fund. Troy Asset Management, the Connecticut-based hedge fund group founded by Alex Troy in 2001, liquidated its flagship long/short equity fund Troy Capital in early April. The strategy peaked at $80 million last June, but performance has since dropped by over 10%, prompting the closure. Weve already liquidated our portfolio and were in cash right now, said Richard Silberberg, Troys chief operations officer. Future plans of the firms three principals, Marc Van Tricht, Michael Rothenberg and Troy himself, are not yet known. VAR launched in 1996 and ran assets of close to $100 million in its heyday. But, manager-founder Victor Resnick decided to shut down the oncelucrative strategy after suffering losses for three consecutive years. Negative returns and subsequent redemptions had drained the vehicles assets to $30
million by the beginning of this year. It is understood that Resnick is planning to retire and only run his own money in the future. Palantir is the third hedge fund casualty closing its doors to investors. The groups technology fund, which at its height in 2000 managed meaty assets of $3 billion, has seen a sharp downturn in performance since the tech bubble burst and was consequently hit by a heavy wave of redemptions.
FIDELITY
TOPIC OF THE MONTH
Credit trading
ith long/short equity and other mainstream strategies in the doldrums, investors have been casting around for promising new
areas of opportunity and credit trading has emerged as flavour of the month with many established convertible-arbitrage houses and some new entrants launching funds. In the main, CB arbitrage players began using credit derivatives to hedge credit risk on their convertible books, with most of them reaching first for asset swaps and then credit default swaps (CDSs). In the past year, many have begun to see credit itself as an asset class a whole new playground in which they can trade against the implied volatilities of equity options. Trading the CDS against equity option volatility on either a long/short or an arbitrage approach has hence emerged as a whole new strategy area. The new entrants come to the table without any inventory of busted convertibles, and mostly from proprietary trading backgrounds. They ply a range of long/short, event-driven and arbitrage strategies both in credit derivatives and structured products like collateralized debt obligations (CDOs). Investors have been attracted to these funds because credit is seen, so far at least, as a relatively uncrowded space where there is still a significant degree of mispricing to exploit. They have a variety of strategies, with some based on fundamental analysis of credit, others largely on quantitative techniques. Investors also focus on different parts of the credit spectrum, some mainly on high yield or distressed credits, others mostly on investment grade names. For investors, this would appear to be a good thing as the risks faced should not be too concentrated. On the other hand, these funds certainly do face risks most obviously from leverage on their relative value positions, and also from legal risk on documentation. Credit default swaps, for instance, are supposed to pay out on a credit event such as a default or a downgrade but managers will be well advised to read the fine-print (as well as taking legal advice) to make sure they do.
Geode targets institutions
Fidelity Investments is considering rolling out its systematic equity hedge fund range to institutions and individuals. It has been managing $229 million of corporate money in a number of strategies since the end of 2001. However, Fidelity remained tight-lipped about its Geode hedge fund strategies and maintains that they arent technically hedge funds because they dont employ all hedge fund strategies. The firm declined to specify Geodes returns but the funds generated income before taxes of $7.98 million last year. Geode operates separately from Fidelity and has its own trading operations and separate staff. Jacques Perold, a Fidelity veteran who has spent more than 16 years at the firm, is serving as Geodes president. He also manages Fidelitys family of index funds.
15
IN THE NEWS
Bowman is back in a new guise

Tech guru is part of a trend to shut down funds after poor returns and quickly re-open again
ho would wind up a hedge fund after a period of poor performance and then, a few months later, bounce back with a brand new fund and a new performance high-water mark? Enter the legendary Larry Bowman and an increasing number of other brand name managers. Unsurprisingly, Bowmans reincarnation is being given a decidedly cool reception by investors. One capital introduction event attracted only a handful of investors a far cry from the days when Bowman was the toast of the investor community and Wall Street. Investors are angry that Bowman has launched his new vehicle so soon after closing his flagship fund, which was labouring well below its high-water mark. They argue that he is not playing by the unwritten rules of the hedge fund business: get paid for the upside and share the downside with investors. Over the years as he built his $5 billion hedge fund operation, Bowman did very well out of the upside. However, investors say that he quit when the going got tough and he found himself in a position of having to work for a considerable time without a performance fee. To be fair to Bowman, he has promised to honour the highwater mark of any original investor who backs the new fund, a tactic that has been employed by other managers like Jeffrey Feinberg, who wound up the $1 billion New York-based JLF Asset Management to start again a few months later in San Diego. Few investors, however, have been impressed by this gesture because they say that so few original investors will back Bowmans new fund that it amounts to a re-setting of the highwater mark. While Bowman would not comment about the new fund or about the level of assets that he has raised thought to be about $200 million there is a defence for his actions and it may explain why a number of other managers have closed their
funds only to start a few months later. The explanation is simply that once a manager is significantly below the high-water mark it means that he will no longer be able to pay his analysts and other portfolio managers for a year, or possibly two, out of performance fees. The only option is to pay them out of the principals own pocket. Few people are willing to do this, which means they are faced with the inevitable disintegration of their team, something that is happening across the industry today as under-performing shops lose key staffers. Possibly Bowman was just bowing to the inevitable. He was never going to be able to pay his key people enough to keep them particularly when it is so easy for them to set up on their own and earn so much more. Just to prove the point, two of Bowmans top staffers are already up and running with their own funds. Michael Lebon was the first out of the starting blocks and is now running $800 million of money for Ken Griffin at Citadel. The second out of the traps was John Hurley who is raising $300 million for his Cavalry fund. The logic of hedge fund economics mean that when a fund performs poorly there is a real danger that it gets caught in a downward spiral. Analysts and top traders walk, leaving the principal with little option but to let the vicious spiral run its course as staffers and assets flee the fund. The alternative is to take pre-emptive action like Bowman. Some investors are now saying that, as a result, the whole fee structure of hedge funds needs to be reworked. It seems sensible, they say, to renegotiate the high-water mark to stop funds imploding but only in exchange for less reward for managers on the upside.
17
IN THE NEWS
Lazard discovers the power of the little guy

After William von Muefflings departure, the spotlight has now been turned on the involvement of mutual fund groups in hedge funds
writes Stephanie Hoppe
D
18
own to $800 million and falling. That is all that is left of the once proud Lazard Asset Management hedge fund business, which only two months ago boasted close to $4 billion of assets and appeared on course to prove that traditional asset management firms are capable of riding the hedge fund wave. Lazard had done so much right in its move into hedge funds. But today, it finds itself scrambling around to fill a void left by the departure of William von Mueffling and much of his team while managing a wave of redemptions, which has further hurt
performance. In the face of this debacle, Lazard is remaining tight-lipped about the chain of events that led to the evaporation of a big slice of their profits. Yet, piece-by-piece, the tale of an ideological clash between a traditional asset management firm and a youthful hedge fund team is starting to emerge. When von Mueffling walked into Bruce Wassersteins office in mid-January to explain his decision to leave the firm, the legendary Wall Street dealmaker and chairman of Lazard still seemed to feel that he could persuade his most successful hedge
IN THE NEWS
fund manager to stay. However, von Meuffling quietly told him that his mind was made up. There was no going back. But, even at this moment, Lazard may not have understood the scale of the problems they faced. Certainly, their press release implied that they did not expect to lose Robert Cope, Ben Guest and Jay Genzer, the other key managers in von Muefflings team. Each had signed a letter to investors saying they were staying. The storm that was unleashed on Lazard appears to have its origin in prolonged negotiations between von Mueffling and Norman Eig, the chief executive of the New York-based asset manager. Few people in von Muefflings team were aware of the details of the talks. However, investors say that a central issue was that von Mueffling and his team had been offered 2.5% of the equity of the business as part of the group share option scheme, which he did not believe reflected the teams contribution. Lazard argued that it was not right to value a single manager hedge fund business in the same way as Lazards $65 billion long-only assets. Furthermore, they felt that von Mueffling and his team could not expect to win twice once through generous per formance-related compensation and a second time through share options. Insiders also say that von Mueffling and his team had been offered half of the shares being made available to all staff. Other issues included von Muefflings apparent belief that the straightforward compensation for him and his team should be improved. Lazard argued that the package was among the most generous on offer in the institutional hedge fund business. When negotiations finally broke down, some newspapers attempted to paint von Mueffling as a greedy and brash hedge fund manager who was making unreasonable demands for himself and his team. But anyone who knows von Muefflling well says that this couldnt be further from the truth. Von Mueffling was a wealthy man and had done very well out of Lazard over the years, largely because his performance had been so good. However, investors say he is not a hot headed, arrogant hedge fund manager. In fact, most go out of their way to say how meticulously polite and well balanced he is. Von Mueffling would always return calls and was always willing to explain his unusual strategy that was far more volatile than other long/short strategies, but which had turned his Lazard European Opportunities fund into the best performing fund in the world over four years with a compound annual return of 51%. His favorite saying, when people talked about the volatility of his fund over the past year and a half, was: The fund has always been volatile but when you have upside volatility no one seems to notice. When you have downside volatility, everyone notices. The sad part of the breakdown in negotiations is that von Mueffling clearly enjoyed working for Lazard although he was understood to have occasional clashes with Michael Rome, the one remaining senior hedge fund manager at Lazard, who runs the Lazard Global Opportunity fund. At the start of negotiations, he had no thoughts of resigning. However, as the negotiations dragged on, von Mueffling became increasingly frustrated. By mid-December, events were moving away from Lazard as stories started to circulate amongst investors about the possibility of von Mueffling walking out on Lazard and starting his own fund. Some people have suggested that von Mueffling encouraged the rumours of a rift to help his negotiating position. But, if that was the case, it failed to impress the Lazard negotiators who must have either been confident that he would not leave, or that if he did, it would not hurt the business too much. After all, managers had left before but the Lazard brand was far stronger than any one individual, a point regularly repeated by Lazard. Lazard president Charles Ward, commenting on the departures, says: Asset management is a team effort at Lazard. We have further strengthened our asset management business by reorientating our alternative investments to a research driven, team approach. However much Lazard may stress its assets base of $68 million and its team of over 600, the lesson from the whole saga is that hedge funds are very dependent on the star manager. Try as institutions may to turn hedge funds into a team effort, they are and will remain largely dependent on one person. The key question today is whether the real casualty of the von Mueffling saga is not Lazard, but all traditional asset management firms that are attempting to build hedge fund operations. Are they forever destined to trip over the issue of compensation? And will they ultimately resent the brash hedge fund managers who earn more than the senior management? Lazard is confident it will be back with new hedge fund managers tempted by its infrastructure and marketing prowess but, in the meantime, investors are voting with their feet. They believe that hedge funds are still very much an individual business and they are getting out of the Lazard funds as fast as they can. Worse still for the traditional asset managers, many are saying they will find it very difficult to invest in an institutional manager again. Few will have the same reservations about investing in von Muefflings new fund when it launches later this summer.
Piece-by-piece, the tale of an ideological clash between a traditional asset manager and a youthful hedge fund team is starting to emerge
19
MARKET COMMENT
Cohens buy and hold secret

writes Mike Peltz
ew hedge fund managers pull the investment trigger as quickly, or with such rapid-fire intensity, as Steve Cohen. Since he left Wall Street to launch SAC Capital Management in 1992 with just $20 million, Cohen has earned a well-deserved reputation as one of the hedge fund worlds savviestand most secretivetraders. Today his firm has an estimated $4 billion under management and trades tens of millions of equity shares across hundreds of different positions daily. Cohen is the antithesis of the buy and hold investor; he measures portfolio turnover in terms of days, weeks, maybe months, but certainly never years...except for one rather unusual investment in an adult entertainment business (more of that later). Cohens massive trading operation is one of Wall Streets largest cash cows, generating about $150 million in commissions a year. Because brokers dont want to risk losing its business, you rarely hear what SAC is buying or selling. Yet, four times a year you can get a peek at SACs portfolio, and its perfectly legal as the information is sitting in an SEC filing. While these 13F filings only give a snapshot of a portfolio, they nonetheless can be quite revealing. Take SACs most recent filing for the quarter ended December 31, 2002. It provides details on 462 different positionscommon stocks, convertible debt, listed options totaling roughly $2.5 billion. Shorts, straight debt, over-thecounter derivatives, and cash are not included. Still, it is possible to piece together some of Cohens more complex trades. Not surprisingly, much of SACs portfolio had changed since the September 30, 2002, filing and the latest big holding was (it may well since have been sold) Tenet Healthcare that had seen its share price cut in half following an FBI raid on one of Tenets California facilities, where doctors were allegedly performing unnecessary heart surgeries. As of the December filing, SAC owned 16.2 million shares of Tenet valued at $265 million. However, SACs most intriguing position by far is its 9.5%
stake in New Frontier Media. The Boulder, Coloradobased company, is one of the few publicly traded players in the adult entertainment industry. In a business where size really does matter, it is second only to Playboy Enterprises and owns The Erotic Networks (TEN). It is hard to imagine how the company whose erotic fare is available by satellite or cable in more than 37 million homes can satisfy Steve Cohens principal fetish: making money. In mid-February, New Frontier co-founder Mark Kreloff resigned from his positions as chairman and CEO as the company announced disappointing third-quarter results and more restructuring. Kreloffs resignation came just six months after he had successfully fended off New Frontiers largest shareholder, Edward Bonn, in a proxy fight that was even nastier than the live chat promoted on the TEN Web site. Not surprisingly, New Frontiers shares have taken a beating, trading below a dollar since last autumn. At a recent price of 85 cents, SACs 2 million shares are worth all of $1.7 million. Cohens predilection for turning over positions makes his investment in New Frontier all the more difficult to understand. SAC began buying shares of New Frontier almost four years ago, during the spring of 1999, when they were trading between $5 and $10. By December 2000, SAC owned 1.9 million shares. Even before the recent slump, New Frontiers shares had been in a steady decline, so why has Cohen, who is famous for cutting losers still holding New Frontier? Part of the reason may simply be necessity. At this point, SAC would have a hard time unwinding its position in New Frontier without knocking down the price even further. New Frontier has an average daily trading volume of 22,000 shares, and on some days only a few hundred shares change hands. But perhaps Cohen has held on to his losing bet on New Frontier as a lesson to everyone that the key to success is frenetic trading, not long-term investing.
21
FUNDS & STRATEGIES
Why equity isnt working

Investors worry that the dominant strategy may not make money for years due to volatile markets and the negation of US manager research strengths
writes Iain Jenkins
ith the war in Iraq, uncertain economic trends and a lack of pricing power across most sectors, equity markets continue to provide some testing times for long/short equity managers. Such are the problems facing the sector that many investors are now wondering whether long/short equity is the new macro. What they mean by this is that long/short equity may be poised to fall from grace in exactly the same way that macro fell out of favor in the late 1990s and early 2000s. Then, macro managers just couldnt make any money although there were clear trends such as the relentless slide of the euro against the dollar. Assets started to leave the strategy and many of the big players closed down. The parallels with long/short equity today are all too obvious. For the past two years, there have been clear trends in equity markets downwards. Yet, all too few funds have managed to make money. Some big names like Larry Bowman have closed down and investors are starting to move money out of equity. So far there is no stampede for the exit and no one is suggesting that macro and fixed income strategies will once again become the dominant hedge fund strategies a position they lost to long/short equity a few years ago after Julian Robertson and George Soros abandoned their macro funds. However, long/short equity is no longer everyones favorite strategy and many explanations are being put forward for the trials and tribulations of equity funds. The most obvious is that, in a low interest rate environment, managers have to generate more alpha or use more leverage to reach a 10% return. To achieve a 10% return in a 6% interest rate environment, the manager only needs to generate 4% alpha from stock selection. In 22
Long/short equity is no longer everyones favorite strategy and many explanations are being put forward for the trials and tribulations of equity funds
an environment where interest rates are 2% or lower, they need to generate 8% or more alpha to reach the same 10% target return. This implies a doubling of leverage and an increase in risk. Ironically, taking extra risk is something that managers cannot do because investors are increasingly intolerant of their under-performing equity funds. One or two sharp down months will send investors scurrying for the exit. The effect of this investor intolerance is to make some long/short equity managers even more cautious. Far from increasing the risk, which the theory suggests they need to do to compensate for falling interest rates, they are doing exactly the opposite and retreating into cash. For those that have stayed fully invested, the bet is unlikely to have paid off, partly because shorting has become so treacherous due to the downward trend in equity markets, punctuated by vicious rallies that have the effect of stopping out the shorts that most managers are holding. This has been made worse by the fact that the stocks that rise the fastest in the bear market rallies are precisely the stocks that most managers would want to short. Research by Morgan Stanley entitled Now Playing: Night of the Living Dead and Strange Days, graphically illustrates the point. Steve Galbraith looked at stocks in the US with a dollar denomination of under $5, which were largely bombed out stocks with high debts, negative cash flow and few prospects. Remarkably, in the final quarter of 2002, these zombie stocks rose an astonishing 105% from their lows. Meanwhile, bigger denominated stocks of $60 or above rose 2% over the same period.
This strange stock behaviour had the effect of negating the research strength of many of the top US equity managers. Even Steve Mandel and his gifted research team at Lone Pine had their first down quarter ever at the end of 2002, although they still managed to end up for the year. Such was the difficulty of shorting stocks that many managers chose to reduce their gross exposure rather than go net short. As a result, many were net long during the savage downward move in stock prices over the past two years. Evidence for this comes from the short interest in the US throughout the period. Expressed as a percentage of total equity market capitalization in the US, the short interest hardly changed from the market peak in March 2000 to today. As the assets of equity hedge funds rose throughout the periods, this implies that the amount of shorting carried out by the hedge fund community may actually have fallen. Hedge fund managers are not the only people who are included in the short interest calculations. There are also proprietary traders, treasury departments and private investors, but it seems reasonable to assume that they continued shorting at the same rate as before or even increased it as the bear market took hold. Little wonder when all these factors are added up that long/short equity managers in the US ended the year down 3%4% on average. Many are down a lot more than that and are now in danger of imploding as their teams of analysts leave because there is no prospect of getting back to the high-water mark quickly to restart the bonus tap. Little wonder also that investors are skittish. At best, they fear that the money they have invested with equity funds is dead money in the current markets. At worst, they fear that it is lossmaking money and that the teams that run the funds are in danger of walking out of the door. Only two things are stopping a mass investor exodus from some of the established equity shops. The first is the constant
Changing fortunes of macro and US equity
How some equity funds bucked the trend

1
FUNDS & STRATEGIES
--ANDOR GLOBAL DIVERSIFIED - NET SHORT David Felman and Christopher James steered Andor Diversified to an exceptional 31% for 2002 and managed it by remaining net short throughout the year, which was no mean feat given the dramatic bear market rallies that punctuated the steady slide in stock prices. It is understood that the $1.5 billion fund was close to 30% net short throughout the year, which is a punchy short position compared to most other US equity funds, which tend to have a net long bias. The achievement of Felman and his team was to avoid being caught by the bear market rallies, particularly in the final quarter when the Nasdaq rose 15% and the S&P 500 was up 9% when the fund was very significantly net short. At the end of the final quarter the fund was down 1%, which was an astonishingly good result, and can only have be achieved by nimble footwork to quickly reduce the gross exposure and by the use of futures to protect the fund from the market upside. Good stock picking also appears to have helped protect the fund, with some longs holding up and some of shorts in the retail area still working out despite the rally. On the positive side, throughout the year, much of the return came from technology and healthcare shorts.
GALLEON ADMIRALS - TRADER An impressive debut for the duo of Ken Brodkowitz and Michael Curtis saw the fund surge 37% net last year 2 as the active trading strategy which mixes a topdown view with fundamental stock picks paid off. The duo monitor the macro and geopolitical situation very carefully and use their readings to determine their portfolio construction. Essentially, they are opportunistic and will move their portfolio around at short notice. This has helped them capture short-term twitches in the market. For example, they increased their net long bias in October as the October/November market rally got underway and added to long positions on market pullbacks. In December, they cut back long exposure to financials and retailers and had a long position in energy. STADIA CAPITAL - NET NEUTRAL The three-man investor team at $300 million Stadia Capital notched up healthy returns of a little over 16.49% in 2002 and are off to a good start this year with a 3 strategy that aims to keep the portfolio more or less neutral with virtually no net exposure. However, the real defining characteristic of the portfolio is the number of positions held at any one time with up to 55 to 50 longs and as many shorts. These are cut quickly if the positions dont work out. The objective is not to get all the decisions right but to get continued on page 24 23
How some equity funds bucked the trend
FUNDS & STRATEGIES
more right than wrong, which has clearly happened since inception of the fund in March 2001. Moreover, the returns have been achieved with surprisingly little volatility. Key to the performance of the fund are the stock picking skills of the three investment professionals Rick Abeyta, John Fleming and Richard Swift in their chosen specialist areas of financials, consumers and media, telecoms and energy. The team formerly worked together at Red Coat. The fund has no capitalization bias and will invest in anything from small to mid-cap to big board S&P 500 stocks.
ARCAS COVERED - SHORT SELLER Big intraday reversals and sudden jolts in US indices and individual stock prices in 2002 and the first quarter of 2003 havent maimed returns for short-only funds as some may have expected. In fact, funds like the Derivative 4 Consulting Groups $150 million Arcas family of funds have deftly exploited volatility through tactical-trading maneuvers. The firms flagship Arcas Covered Fund gained 70% net of fees in 2002 and punched up returns of 10% in the first quarter of 2003. Adding to overall returns were puts placed on equity indices like the S&P 500, which jumped in price in advance of prolonged investor anticipation of the outbreak of hostilities in Iraq as well as because of lowering interest rates. Arcas Covered, the six-year-old fund which comprises 70% of the firms assets under management, found itself generating extra alpha selling the options, complementing returns made on individual short bets, according to firm principal John Frazer. The puts covering the portfolio can make up to 10% of fund assets at any given time. Considering the strong returns at Arcas, it is not surprising that San Francisco-based Derivative Consulting Group has seen more inflows of late from investors, including long/short managers who farm out all or part of their short book to Arcas. In fact, for the third time in five years Arcas has found itself turning away investor capital as it tries to keep firmwide assets below $200 million a level needed to keep performance optimal, so Frazer says. If anyone doubts the level to which opportunities have risen for short funds, its worth pointing out that the Arcas portfolio, managed in three parallel funds, contained about 330 positions at the start of the second quarter of 2003, up from about 88 at the end of the last bull market in 2000. Still, short sellers prefer gradual trending in prices rather than hefty moves.
flow of money into the fund of funds community, which in the US has a strong bias towards equity and needs to find a home. The second is the fear that once investors leave these closed funds, they will never get back in again. There are large numbers of new institutional investors like Calpers, Texas University and General Motors who are moving into hedge funds and want to invest in the safe brand name hedge fund managers. They are happy to take up the capacity of the disillusioned fund of funds. Going forward, the central issue for investors is their outlook for US equity markets. If markets are likely to recover after the Iraqi war in a steady and sustained way, then the universal view is that long/short equity will once again be the flavor of the month. The next most positive outcome would be a steady decline in equity markets based on fundamentals in which good companies weathered the market slide and bad companies were punished. That way the fundamental research skills of the majority of US long/short equity managers would be rewarded. As David Ahm at GAM in New York explains: Once you are in an environment of sharp value compression, fundamental stock-pickers find it very difficult, not least because they are using historic comparisons to determine value and these comparisons are no longer relevant. The trade that worked in 2002 was to be long the value names in the small to mid-cap area, picking stocks where there was a margin of safety, and to short the large cap beta stocks. However, this isnt a comfortable trade to put on as there is a fundamental mismatch in the risk, which could have gone horribly wrong. The other trade that worked was being net short or short technology, providing you were willing to ride out the extreme volatility. Among those who adopted this approach were David Webb, while he was at Shaker, David Felman at Andor and William von Mueffling before he left Lazard. Each did it differently. Webb and von Mueffling had a very diversified short book, which helped reduce the risk. They also held them through the rallies, which created 5%-7% down months, but over time paid off. Felman, on the other hand, used futures to hedge his shorts, which created a surprisingly low volatility. The other strategy that should have worked was short-term trading. However, in practice, only a few funds managed to make this work, including SAC, which was up in 2002 and is off to a reasonable start this year. It seems that markets were even too choppy for most of the traders. All of which leaves investors with something of a dilemma. Should they stick with it or should they reallocate at least their new money to other areas? Happily for the long/short equity community, all the signs are that particularly the US fund of funds groups will not dramatically shift out of equity because it is so central to their strategy and they will take the view that it will come back eventually. European investors may not be so tolerant. The Swiss, in particular, were the hedge fund pioneers and were the early backers of Soros, Steinhardt, Caxton, Tudor, Moore and Robertson. Macro is in their blood and they will find it far easier to drop their under-performing US equity investments.
24
INSTITUTIONAL BUYERS GUIDE
GM opts for brand names

Safety first is the strategy from the car giants pension fund
by Niki Natarajan
hen General Motors entered the hedge fund game with its own fund of hedge funds, it initially invested in a couple of fund of hedge funds. At the time it made its filing GMAM Absolute Return Strategies Fund had $583 million in hedge funds and had more than 10 single strategy managers - most of them brand name managers including BlackRock, Cerberus, BBT and Shepherd. Today, the fund probably has over $800 million in hedge funds spread across a range of equity, convertible, merger, multi-strategy arbitrage, fixed income and distressed debt. Among the investments that General Motors initially included in their portfolio was $26.7 million in Zaxis Offshore, a hedged equity investment that the California Public Employees Retirement System also funded with $17.5 million in July last year. Zaxis Partners is a long-biased diversified strategy, investing in some 250 to 300 names. The fund is part of Apex Capital, a hedge equity specialist firm founded by Sandy Colen in 1995. In the hedged equity category, GM also invested $26 million with Scout Capital, a $300 million hedge fund founded by James GM Absolute Return Strategies Fund Crichton, a former alumnus of Hedge Fund Strategy $ Value (March 31, 2002) Zweig-DiMenna, and $31 million Multi-Strategy Arbitrage 10,033,371 with Black Bear Offshore fund, BBT Concentrated Alpha Portfolio BBT Overseas Partners, LP Multi-Strategy Arbitrage 51,873,620 which is run by Rick Barry. Black Bear Stearns Convertible Offshore Fund Convertible Arbitrage 40,363,789 Black Bear Offshore Fund Hedged Equity 31,053,534 Bear is one of the Eastbourne Cerberus International Distressed Investment 35,502,007 Merger Arbitrage 35,268,818 Capital Management family of CNH Merger Arbitrage Fund Glenwood Institutional Fund Fund of Funds 130,028,385 hedge funds. Barry and his Obsidian (Offshore) Fund Fixed Income Arbitrage 36,091,828 O'Connor Absolute Strategies Fund of Funds 74,901,750 colleagues from Robertston Scout Capital Fund Hedged Equity 26,442,719 Convertible Arbitrage 35,606,020 Stephens Investment Management Shepherd Investments The Long Horizon Overseas Fund Distressed Investment 20,474,600 founded the San Rafael, California- Zaxis Offshore Hedged Equity 26,651,318 Total investments in funds 554,291,759 based hedge fund in 1995. Debt Securities 24,800,587 CNH Merger Arbitrage Fund Index-Linked Redemption Note Other Assets, Less Liabilities 3,728,659 was the only merger arbitrage Total 582,821,005 investment, possibly reflecting the
state of the M&A market. GM has an allocation of $35 million with Todd Pulvino and Mark Mitchell, principals of CNH Partners in New York, the merger arbitrage affiliate of AQR Capital Management. Meanwhile the Bass Brothers funds, BBT Concentrated Alpha Portfolio and BBT Overseas Partners, make up the $61 million multi-strategy arbitrage allocation. Bear Stearns Convertible Offshore Fund and Shepherd Investments International make up General Motors allocation to convertible arbitrage. GM has invested $40 million with Bear Stearns and $35 million with Shepherd Investments, a British Virgin Islands fund, run by Michael Roth and Brian Stark, managing members of Wisconsin-based Staro Asset Management. For fixed income arbitrage, GMAM has invested $26 million in the Obsidian (Offshore) Fund. The low volatility fixed income and relative value arbitrage fund, which is run by BlackRock, invests across a wide range of debt instruments and derivatives, with a core leverage of between three and five times. For distressed investment, General Motors has invested $35 million with Stephen Feinbergs Cerberus International fund and $20 million in The Long Horizon Overseas Fund. For investment advice on market neutral strategies in European equities, General Motors entered into a two-year subadvisory relationship with Numeric, a Cambridge, Massachussets-based firm with $4.5 billion under management. Numeric is responsible for providing investment advice to the fund relating to a market neutral strategy of both long and short positions in European equity securities or equivalent derivative positions, which are usually swap transactions. For the advice, General Motors is paying Numeric a management fee at the annual rate of 1% of the net asset value of the Numeric sub-advised assets. In addition to the management fee, the sub-advisory agreement provides for an annual performance fee, first payable on July 31, 2003, if the increase in net asset value of the sub-advised assets exceeds a benchmark return based on 90-day Treasury bills. In such event, Numeric will receive a performance fee equal to 20% of the increase in net asset value in excess of the benchmark return.
25
NEW FUNDS
Bergerson resurfaces with Waterstone

Shawn Bergerson, the former CIO at Deephaven Capital Management, is gearing up to launch a convertible and capital structure arbitrage hedge fund in July. At the same time, Bergerson has wooed Martin Kalish, the former operations manager at Deephaven, as chief financial officer for his Minneapolis-based firm, Waterstone Capital Management. Up to $12.5 million of the initial capital will come from Waterstone employees, and the fund should start with $100 million in assets. Waterstone Market Neutral Fund will be mostly convertible arbitrage, with 20% focused on capital structure arbitrage. At Deephaven, Bergerson managed the US convertible arbitrage portfolio with over $600 million in assets and oversaw several other funds including the European and Japanese convertible arbitrage strategies. Bergerson is understood to be planning to run his fund similar to the way he ran Deephavens US convertible arbitrage portfolio in terms of style, set up and assets under management. The firm is also looking to hire at least two credit analysts and a convertible trader to work on the fund, said Bergerson. Waterstone Capital Management is using Goldman Sachs and Deutsche Bank as its prime brokers. Deephaven manages approximately $1.25 billion in assets. A Deephaven spokesman did not return calls before press time.
Webb returns with Verus fund
David Webb of Verus
Creedon Keller & Partners is preparing to launch another convertible arbitrage fund designed for institutional investors that do not want credit exposure. It will focus on investment grade bonds. The fund is expected to launch with around $35 million, and has a capacity of $400million - $500 million. The new fund is scheduled for May 1. The groups flagship vehicle, the Alta Partners fund was hard-closed to new investment in mid-2002 with $720 million in assets. It is managed by Scott Creedon, the fund has returned an annualised 23.02% since inception. Creedon also runs a discounted convertible arb vehicle with assets of $67 million. 26
Creedons CB launch
Any money manager capable of generating returns in current equity markets naturally finds his skills hugely in demand. Witness the case of David Webb. After Webb took the decision to leave Shaker last November, the fund suffered nearly $1.3 billion in redemptions leaving it with just $135 million in assets. Webb is now back, having begun his own company, Verus Investment, not far from the Shaker offices in Cleveland, Ohio. While he is coy about his starting assets, he says they are significant industry sources say they could be well over $500 million. His contrarian, stock-focused process typically involves a fairly concentrated long book of around 30 to 50 core positions, with net holding positions of a year or more. In addition, there are also likely to be tactical longs, depending on market conditions. The long book is usually matched in size by the short book, but here Webb is far more diversified, with between 200 and 300 positions, enabling him to avoid the nightmare scenario of a severe squeeze on a major short position. Over the last few years, the short book has been key to generating returns. However, Webb aims to create an asymmetry between the long and short sides whereby longs, relative to shorts, have less potential for downward movement in a down market, and greater potential for upward movement in an up market. As a result, the long book has also been profitable clocking up significant positive performance in 2000 and 2001. Webb is also highly flexible and at Shaker moved exposure over a range from 50% net long to over 40% net short. Gross exposure has ranged from over 230% at its peak to less than 40%.
Vinik man starts with $50m CMK
NEW FUNDS
investing. PSAM has also attracted three analysts to support the new distressed strategy Douglas Polley, Sean Mullin and Tyler Greif. Polley, a senior analyst, and Greif, a junior analyst, bring restructuring and M&A experience from Goldman Sachs in New York, while Mullin, another senior analyst, brings similar experience from Morgan Stanley in London. Late-stage distressed investments have at times accounted for about 30% of PSAMs portfolios, which run current assets of about $400 million. Going forward, however, the PSAM team believes that the profit opportunities for distressed investing are increasing dramatically with an estimated $1 trillion of face value of debt now defaulted in the US and Europe and a growing number of attractive new credits both entering and exiting the distressed arena.
Creighton Kang, former analyst and portfolio manager with Vinik Asset Management, launched CMK Capital, a long/short hedge fund at the beginning of April and has already raised $50 million of assets from family offices and wealthy individuals. Other than working for Jeff Vinik, Kang also worked as an analyst for Julian Robertson at Tiger. With these two names behind him, he has been able to avoid doing seeding deals with anyone. CMK Capital will invest in the six industry sectors which Kang covered for Vinik namely healthcare, biotech, software, consumer products, business services and cyclicals. Although he is seeking opportunities in US stocks valued between $200 million to $35 billion, he is not too concerned by market capitalization. The fund will typically hold 60 to 120 positions and cannot exceed a maximum of 200% on a gross basis. In terms of its net position, the portfolio will range between 0% and 70% long, and might be modestly net short on a beta-adjusted basis. Kang is ambitiously aiming for an annualized net return of 15% to 20% with a volatility profile of around 15%. Kang considers the ideal optimum size for his fund to be around $500 million. However, a lot of people go from $50 million to $500 million very quickly and then returns disappear straight away, he says. It does take a while to build a good team.
Chrysler seeds Hanseatic fund
Schoenfeld on the Rebound
P. Schoenfeld Asset Management, one of the longestestablished names in the world of event-driven investing, has recently launched a stand-alone global distressed investment fund called Rebound Partners LP. The fund launched in March with initial assets of $15 million. The managers of Rebound include Peter Faulkner, William Popper, a managing director heading the firms London office, and Peter Schoenfeld, PSAMs founder. Rebound Fund Ltd, an offshore version of Rebound Partners LP, is expected to be available shortly to qualified international investors. PSAM spun out of Schroders US in 1996, where Schoenfeld was vice chairman, and at that time the core team had already been together for 20 years. PSAM has been investing in late-stage distressed opportunities and special situations for more than two decades and running such strategies, not only in the US, but also internationally, since establishing a London presence in 1986. Faulkner, formerly with MJ Whitman Inc and Third Avenue Value Funds, joined PSAM last year and has 20 years experience in distressed and special situation
Albuquerque, New Mexico-based Hanseatic Group has won an initial $7 million allocation from DaimlerChrysler for a new long/short large-cap equity program expected to begin trading on April 7. Hanseatic president Katherine Burr said the new programs strategy would be quantitatively driven, building on the firms established trading systems that use nonlinear models for perceiving patterns in market moves. The fund will be overseen by a portfolio team headed by Ed Meihaus. The Hanseatic Group manages $250 million in assets spread across a range of alternative investment products, including hedge funds and managed futures programs run in both pooled and managed-account format. The allocation by the DaimlerChrysler pension system comes at a time when Hanseatic has been actively looking to extend its reach to non-US investors. The group has also been looking to places like Brazil and Korea, where Burr says the appetite for alternatives has grown among institutional investors such as pension funds and reinsurers. Of late, Hanseatic has been particularly active in Brazil, where Burr has established a satellite office for the asset-management group.
Essex man starts Loch Capital
Its rare to encounter family members managing the same hedge fund, but even more unusual is a hedge fund run by twin brothers. Yet, Tim and Todd McSweeney, who started the Boston-based firm, Loch Capital, at the beginning of this year, clearly dont suffer from sibling rivalry. When Tim McSweeney resigned from managing the
27
Tim McSweeney of Loch Capital
Essex Global High Technology Fund last October, he immediately began to build Loch Capital with Todd, former head of global technology at Baring Asset Management. Inevitably, given their technology backgrounds, they launched both onshore and offshore versions of the Loch Fund, a US
Concordia focuses on equities
NEW FUNDS
long/short technology vehicle. They were also in the enviable position of being able to provide $20 million of their own money, which pre-empted any need to go soliciting for seed capital. The fund only began to take in money from outside investors at the end of March. Tims impressive track record at Essex should prove to be a strong selling point. During the period of October 2001 to October 2002, when he ran the $20 million Essex technology fund, he achieved a return of almost 25%. He reconstructed the portfolio, reduced the number of holdings and applied a market neutral orientation to the investment process. As a result, his net short stance paid off handsomely when the market slumped.
HBK man flies out with Aviator
Ranger ready for multi-strategy
Alex Ribaroffs Concordia is planning to add a new equity market neutral strategy focusing on US equities in June. It will be managed by Jason Hathorn and Jason Cheung who already manage Concordias two successful equity market neutral funds focusing on European and Asia-Pacific markets. Both of these funds are currently closed to new investment, with the European version, Class F, managing about $350 million in the strategy, and the Asia Pacific Class G running about $150 million. The new US market neutral strategy is expected to adopt a similar factor model-based approach, which would make it both sector neutral and highly diversified, with an anticipated 250 long and 250 short positions. The approach is characterized by relatively low level of turnover, executed through weekly program trades with the whole portfolio turning over about six to eight times a year. The new strategy is expected to have capacity of about $500 million, but is already understood to have received strong indications of support from investors, with commitments already estimated at about $275 million. The European and Asian strategies in particular are known to have received strong backing from Man Investment Products, for which it runs a large managed account, but it is thought that Man will be among the supporters of the new version.
Bill Park, formerly with Dallas-based HBK, has teamed up with Eric Wong from Angelo Gordon and Koji Takasumi from KBC to start their own New York-based global multistrategy operation. Aviator will start in July and will have five strategies, which are a mixture of capital structure arbitrage, convertible bond arbitrage, catalyst, relative value volatility and statistical arbitrage volatility. The primary focus of the fund will be in the US but it will have some Asian trades as Park spent three of his six years at HBK in Tokyo. It will also make occasional forays into European arbitrage trades when the opportunities present themselves. Aviator Capital Management has been in detailed talks with a number of seeders and incubators but are, so far, not thought to have done any deals. Multi-strategy funds are currently popular with investors, as the managers can allocate the capital from one strategy to another, depending on where the opportunities are.
The Texas-based hedge fund Ranger Capital, a relatively new hedge fund shop founded by veteran-investor Sam Wyly famous in the hedge fund community for being one of the original backers of local manager Lee Ainslie at Maverick is gearing up to launch a new fund. Recent filings with the SEC in late March indicate that the firm is poised to start Ranger Multi-Strategy LP, believed to be the firms first multi-strategy vehicle. Industry insiders point to Ranger as one of the mostwatched new hedge fund firms in the last year. Fund of funds firms say that Rangers strategies have pulled in significant investor capital with firm assets under management at roughly $200 million, up from an initial seeding of $50 million. Rangers first two strategies have been long/short plays with differing investment styles. One portfolio managed by Russell Glass looks for deep-value opportunities, trading equity and debt instruments. Glass was a long-time business associate of billionaire Carl Ichan and served as chief investment officer of Ichan Associates, a post he abruptly stepped down from last year to play an integral part in Rangers then-budding hedge fund initiatives. 29
PROFILE
Bacons recipe for talent

Moore Capital is taking innovative steps to woo top traders
writes Iain Jenkins
hen you have a successful technology hedge fund running $1 billion of assets and you made 9%-10% in the treacherous markets of 2002, what do you do? Continue running the hugely profitable operation? Or wind it up and go back to work for your previous employer? No contest for Tony Anagnostakis. Having left Moore Capital to start his own fund, Agnos Group, he decided that running his own show wasnt that much fun after all. Although he was one of the few technology managers to make any money last year, he 30
handed back the assets to investors and intends to rejoin Moore Capital after a short sabbatical - probably to run his own fund with Moore Capitals backing. He is not alone. Across the hedge fund industry, other managers who were tempted to strike out on their own have decided that the life of an entrepreneur isnt that simple. After dealing with difficult staff, regulations, due diligence meetings, short-term clients and broken photocopier machines as well as very testing markets, their old employers suddenly dont seem
PROFILE
so bad. Moore handles these issues for its portfolio managers. Already Peter Swartz, one of the key lieutenants at Anagnostakis shop, is back at Moore Capital in New York. A few weeks earlier, Henry Bedford, who had left Moore Capital to co-manage the TT Europe fund a few years ago, decided that he too wanted to move back to his former employer. At the same time, Moore Capital has successfully lured a number of other hedge fund managers who had been running their own businesses. One such person is Kaveh Alamouti, who decided that it was better to have the infrastructure that Moore offered than build out his own $200 million Optimum fund. And, remarkably, it is not just hedge fund managers that Moore is managing to lure away from the time-consuming distractions of dealing with staff compensation, systems, stationery and paper clips, but also top bank proprietary traders. The latest to quit his banking job for Moore Capital is Mohsen Fahmi, who coheaded the bond and foreign exchange proprietary trading book at Tokai Bank. He was willing to throw away the security of a bank and, even more importantly, the ability to hand back capital to the bank when he ran out of good trading ideas for the rigours of a hedge fund group. Equally important, the ability to form his own company with Moores support, should he wish to do so in the future, was of great appeal to Fahmi. Behind these moves is the conscious decision by Moore Capital to set out to win the talent game. Only by attracting the best traders and investment brains will the firm continue to thrive while taking some of the pressure off Louis Bacon, who for 17 years has never managed to have a two-week holiday. To do this, Bacon and his team, led by Elaine Crocker, the president of Moore Capital, and Michael Garfinkle and Anthony Gibbons, both managing directors, have created a structure, which is designed to attract the best trading brains in the business. The thought that Moore, with its remuneration packages and institutional infrastructure, wants to sow in the mind of established or future hedge fund managers is: could you make more money for a lot less hassle by working for Moore rather than doing it on your own with more risk? There are two central planks to the strategy. The first is simply to create the right environment for traders to trade and be paid for what they deliver not on the performance of the firm. The second is a slightly counter-intuitive idea of letting managers leave often with infrastructure and assets from Moore itself without any acrimony. Creating the right environment and remuneration package is far more difficult to achieve than it sounds and Moore Capital has learned a number of harsh lessons along the way. However, the central concept is that the firm provides the right analytical and research resources to enable traders to do their job more effectively than if they were on their own. Then Moore pays them for what they generate. There is no re-cutting of the deck that takes place in many investment banks where the performance of the firm affects the bonus of someone who had delivered real revenue. If it costs us money, so be it. It is a price worth paying to hold on to talent, Bacon has been heard to say. What Moore Capital is trying to avoid is the situation that is facing so many hedge funds today after a poor year in 2002. Many lost money for investors and consequently didnt generate performance fees, which means that they have not been able to pay traders or analysts who then split from the firm and start on their own. The strategy is working. In 2002, Bacons flagship $3 billion Moore Global fund ended down 4% for the year, but analysts and traders who generated returns still got paid and Moore Capital continues to attract talent. These traders get paid in various ways. Many contribute ideas to the main Moore Global fund and some run pockets of money for the portfolio. If these ideas and pockets do well as Bacon freely admits occurred in 2002 it doesnt matter that the fund was down, the traders still get paid. In a further initiative to motivate traders, 11 of them run a piece of the $2 billion Moore Fixed Income fund, which is possibly the most interesting experiment being carried out at Moore Capital. Bacon does not run any of the money in the fund and simply acts as overall risk control manager. Once again, each trader is paid for what they generate. The beauty of this approach is that it is sustainable and may provide a model for other groups attempting to build sustainable hedge fund operations. For example, if one of the traders in Moore Fixed Income leaves, no harm is done. The remaining traders can simply run more money or a replacement trader can be found. The genesis of this concept, explains Crocker, was the constant re-writing of history by the Moore traders. They always remembered their profitable recommendations to Louis but forgot the unprofitable ones the trades that Louis did put on and made money. They neatly forgot the ones that he didnt put on but lost money. In the end, Louis said, OK. Do it yourselves and it has worked very well. A further extension of this approach is that, in some cases, Moore Capital also allows managers to run their own funds. So far, the only example is the Moore Emerging fund run by Marc Cheval, who approaches emerging markets from a macro
Creating the right environment and remuneration package is far more difficult to achieve than it sounds and Moore Capital has learned a number of harsh lessons
31
PROFILE
perspective, which has assets of while managing a business. He $500 million and is a general likes to say that talent needs to be emerging market fund. nurtured, not diffused. A losing Other strategies are likely to year at Moore is not grounds for be launched in the future. The termination. All portfolio most probable appears to be a managers will experience losing credit fund, which will probably periods but with the momentumbe called Moore Credit and is based allocation procedures used likely to be run by Tim Leslie, a in the funds of funds business, it long-time employee of the firm. can be a terminal event for If, for whatever reason, these managers with relatively young measures are not enough to hold hedge funds. on to key traders, Moore Capital With its multi-layered then does something that is truly approach to holding on to talent counter-intuitive and very and in some cases letting it go unusual in the hedge fund while still retaining access to business: it is happy to help their top traders, Moore Capital people to leave the firm by is throwing down the gauntlet to Elaine Crocker, president of Moore Capital offering infrastructure, advice, other hedge fund groups by staff and, in some cases, even assets. showing just how enlightened you have to be to win the battle Crocker explains: If the same issues keep on cropping up, it for talent in increasingly competitive markets. probably means that it is better if the person leaves and we help Shackling managers isnt the way forward. The key is them. Sometimes they become an affiliate manager which securing the brains in the business in the battle for the hearts, means that we provide infrastructure and may seed them. minds and, of course, wallets. Sometimes we just offer them advice. One of Bacons mantras is: Free men for free markets. He is known to believe that there is no point in shackling people, although each trader has a golden handcuff in theory which means that they lose part of the previous years bonus if they leave. This has rarely been an issue, though, because of the spinoff structure. Behind the affiliate program is the understanding that some Founded: 1998 people will inevitably want to start their own business and that there is no point in standing in the way. In some cases, it actually Owner: Louis Moore Bacon suits the firm if certain traders leave and Moore often switches President: Elaine Crocker in their mind from awkward employer to welcome client. Among the affiliates are Bill Tung, who started the Assets under management: over $5 billion consumer goods and financials long/short equity fund, Avesta, last year and Alan Lewis, who launched the Stenos European Flagship Fund: Moore Global long/short equity fund in 2001. Both started with money from Strategy: Fully diversified macro fund with portfolio Moore Capital and considerable help. managers who trade currencies, fixed income, equity, A surprising additional benefit from the good grace with distressed, credit, relative value and commodities which Moore Capital has treated its trader refugees has been Performance: 23.86% annualized the surprising willingness of some of these managers to come back to what people at Moore Capital call the mother ship once Moore Fixed Income they realize that it isnt that easy to run your own shop and make Strategy: Fixed income Performance: 18.8% annualized money. Interestingly, there is a tendency for the performance of Moore Emerging these alliance managers to fall off once they start on their own. Strategy: Emerging markets It is not that they become bad managers; it is more that they Performance: 13.29% annualized take less risk because they know that a few bad months could kill their business. Offices: New York and London Bacon understands the difficulty of trying to manage money
Moore Capital
Fact File
32
ANALYSIS
Funds of funds in drag

Investible indices find followers, but critics say that they are nothing more than a clever marketing gimmick for gullible institutions
writes Paul Taylor
edge fund indices and hedge fund index investible products are hot. Everyone seems to be racing to get in on the act with Chicago-based Hedge Fund Research (HFR) being the latest to launch an investible product with other big index names like MSCI watching closely from the wings. But many people remain skeptical about the rush into investible products which has already seen $2.5 billion flow into the existing 26 indices and has seen banks that distribute the products saying that the investible indices could attract $50 billion over the next five years. The critics say that these indices represent little more than a clever marketing gimmick targeting institutional and other investors that have steered clear of hedge funds in the past. They say that the investible products are little more than thinly disguised fund of fund products. Some of the most pointed criticism has come from academics like Professor Thomas Schneeweis, founder and director of the Center for International Securities and Derivative Markets at the University of Massachusetts, Amherst. Prof Schneeweis says: Calling something an index does not make it an index. But the index providers remain unfazed by the criticism and the evidence suggests that the investors arent too worried either. Justin Dew, director of portfolio services for S&P, says that just shy of $500 million has been invested in their index products since the launch in mid-November and more is still to come. Joe Nichols, founder and chairman of HFR, says: There is growing evidence that new products based on the indices are beginning to gain some traction. Over time, they could become a very significant part of the money invested in hedge funds. Index products account for a third of all equity investments. A similar pattern could emerge with hedge funds. The index players argue that they represent an attempt to establish genuine benchmarks and improve the transparency of the $600 billion hedge fund industry as well as providing a lowcost entry into hedge funds. The HFR index will allow institutions to invest in hedge funds for a total fee of 50 to 75 basis points, which is far cheaper than most fund of fund products. However, critics argue that despite their good intentions, the 34
latest crop of hedge fund indices have merely added to confusion in the market particularly since direct comparisons between the main indices reveal huge discrepancies and divergence of composition, performance and methodology. One of the most comprehensive critiques of the emerging hedge fund index market was published in February by two academics, Noel Amenc of the EDHEC Graduate School of Business and Lionel Martellini, an assistant professor of finance at the Marshall School of Business, University of Southern California. In their paper, The Brave New World of Hedge Fund Indices, the two economists note that existing hedge fund indices provide a somewhat confusing picture of the investment universe. Prof Martellini identifies two main problems that he claims hobble existing indices. First, he says: They are biased for a given style, an index may encompass the return of a manager not following the announced strategy; such style shift and style bias problems are also present for traditional style indices such as growth, value, etc. Second: They lack representativeness - for a given style, an index only encompasses a (generally relatively small) number of funds following the given strategy; this problem is specific to the hedge fund industry, because it is entirely unregulated, with no mandatory requirement to report performance. The presence of measurement biases, that hedge fund indices inherit from hedge fund databases they are built on, are well documented. There are at least three main sources of differences between the performance of hedge funds in the database and the performance of hedge funds in the overall market survivorship bias, a selection bias and an instant history bias. Most indices rely on fund managers to report their own performance it is estimated that just over half of all hedge funds report their performance to one of the main hedge fund databases. However, many hedge funds either do not report to any database, stopped operating before the databases were launched or stop reporting either permanently or temporarily when performance is poor resulting in survivorship bias.
ANALYSIS
According to estimates, survivorship bias can be as large as 4%. The CSFB Tremont Hedge Fund Index faced a survivorship bias issue a year ago when the devaluation of Lipper Convertibles and Lipper Offshore Convertibles led to the CSFB/Tremont convertible arbitrage sector index recording its worst monthly performance in three years. Lippers problems were not representative of returns from convertible bond managers, but affected the index. Another serious problem and the main focus of the Amenc/Martellini paper is that existing hedge fund style indices provide a somewhat confusing picture of Joe Nicholas of HFR the investment universe. This is partly because there are at least 14 competing hedge fund index providers. They all have differing selection criteria in terms of length of track record, assets under management, restrictions on new investments; style classification for example a managers self proclaimed style compared with an objective statistically-based classification, weighting scheme equally weighted or value weighted; and rebalancing scheme for example whether rebalancing takes place monthly or annually. As a result of such differences in construction methods, competing index products offer a very contrasted picture of hedge fund returns, and differences in monthly returns can be greater than 20%, says Prof Martellini. This poses serious problems for portfolio analysis involving hedge funds and even bigger problems when trying to build valid investible products. In addition, existing indices are not fully representative; in other words, some funds that should be part of an index are not included and most indices represent only a small proportion of the available universe of funds. There are also differences in weightings. Most indices including the S&P index but, with the notable exception of CSFB/Tremont, are equal weighted something that advocates claim avoids the tendency of index performance to follow hot sectors. While equal weighting may avoid some problems, it means that none of the available indices genuinely reflect the real state of the market which is roughly 50% equity, 35% convertibles and relative value with macro/CTA and fixed income making up most of the remainder. This means that hedge fund indices look less like benchmarks and more like traditional funds of funds. S&Ps reliance on collecting data from just 40 funds has drawn some skepticism from rivals, but S&P insists its statistical research suggests that 30 to 40 funds reliably reporting their performance data can accurately represent a much larger universe. However, it can create some interesting switches. At the end of February, S&P quietly removed Jemmco from the index and added GLC Gestalt Europe. Justin Dew of S&P says the move was, simply a change we both agreed too. Despite the critique from the academic world and from the fund of fund industry that claims that these products are just poorly constructed funds of funds, all the signs are that the wind is at the back of the index providers and that they are likely to continue to gain ground, not least because institutional investors feel familiar with the index concept. They also believe that it is a lot safer than investing directly in hedge funds and seems to be more cost-effective.
S&P HEDGE FUND INDEX

Date established: 2002 Number of indices: 5 main and four sub-indices including the recently launched S&P Managed Futures Index. New indices will be added as seed investments become available. Number of funds in index: 40 but hope to expand. Styles represented: 9 - macro, equity long/short, managed futures, special situations, merger arbitrage, distressed, fixed income arbitrage, convertible arbitrage and equity market neutral. Construction: The 40 funds making up the index are divided into three sub-indicies, arbitrage, event driven and tactical which in turn represent nine separate strategies. These strategies are equal weighted. Potential index constituents must pass a set of quantitive 36
screening tests. Transparency so that valuations can be verified by Derivatives Portfolio Management enabling the index to be calculated daily. Candidate funds are vetted by Albourne Partners. The index, which has been licensed to Bermuda-based PlusFunds, is maintained by an S&P Index Committee. Strengths: The S&P name. Aims to provide transparent benchmark for asset class. Daily index is published on website and is based on valuations verified by independent third party. Weaknesses: Small number of funds represented and selection basis make the indices look unrepresentative and more like a fund of funds. The main index actually includes fewer than 1% of all known hedge funds. Equal weighting across the nine categories.
ANALYSIS
CSFB TREMONT INDEX

Date established: 2000 (with data going back to 1994.) Number of indices: 9 main index plus 8 sub-indices. Number of Funds: 417 (as of February 2003) Styles represented: convertible arbitrage, dedicated short bias, emerging markets, equity market neutral, event driven (distressed, multi-strategy, risk arbitrage) fixed income arbitrage, global macro, long/short equity, managed futures, multi-strategy. Construction: The CSFB/Tremont Hedge Fund Index was the industry's first asset-weighted hedge fund index. (Proponents claim asset weighting, as opposed to equal weighting, provides a more accurate depiction of an investment in the asset class.) The index is based on the TASS database and funds are selected from a universe of 730 funds. To be considered for inclusion in the index, funds must have a minimum of $10 million under management and produce a current audited financial statement. Funds are separated into primary sub-categories based on their self-designated investment style. The indices are designed to represent at least 85% of the assets under management in a particular universe. Funds are re-selected on a quarterly basis as necessary and the indices are calculated and re-balanced monthly. Strengths: Asset weighting should mean the indices reflect the market more accurately. Re-balanced monthly. The index identifies its constituent funds and a large accounting firm audits the methodology. Weaknesses: Asset weighting means the index may tend to over-represent the current most popular strategies. Relies on performance figures supplied by fund managers themselves.
HFRX HEDGE FUND INDEX
Date established: 2003 Number of indices: 9 (eight primary and a composite global index) Number of funds: Initially 50 but rising over time Styles represented: convertible arbitrage, distressed securities, event-driven, equity hedge, equity market-neutral, macro, relative value, and merger arbitrage. Construction: HFR launched the HFRX family of investable primary indices and an asset weighted composite global index at the end of last month (March). The indices are based on the HFR database which tracks 1,400 funds and have been designed to offer full transparency, daily re-pricing and consistent fund selection. HFR tries to ensure that the investment and performance
characteristics of each fund used in the index are consistent and representative of its respective strategy. Funds included in the indices must also be open for new capital. Once the funds have been selected, daily risk management, based on closed-system transparency and independent daily repricing, is then applied to ensure certainty of underlying exposures and to capture strategy pure returns. The indices are rebalanced on a quarterly basis. Strengths: Asset-based index, daily independent pricing and risk analysis. Experienced data collector. Weaknesses: Relatively small number of funds could make indices unrepresentative and asset weighting could skew returns towards hot strategies.
ZURICH CAPITAL MARKETS INDEX

Date established: 2001 (with data going back to 1998). Number of indices: 5 Number of funds: 60 Strategies represented: 5 convertible arbitrage, merger arbitrage, distressed securities, event driven and hedge equity. Construction: A family of indices based on an equally weighted portfolio of funds selected in order to satisfy a number of qualitative criteria. The indices are based on 60 funds selected from a universe of several thousand. Funds within each category must have a two-year minimum track record, meet a statistically-based style purity constraint
(cluster analysis), and have sufficient assets under management to demonstrate organizational and managerial infrastructure. Investable portfolios are available for each of the five indices with monthly liquidity ensured by ZCM. Strengths: Independent advisory board. Uses cluster analysis style purity tests to try and ensure that selfreported style classification is correct. Guaranteed. Weaknesses: Small number of funds, small number of strategies represented, equal weighted. Already, there has been difficulty ensuring that the equity portion of the index is representative of equity returns. 37
REGULATION
Facing up to a new world of regulation

With attacks raining in from all sides the industry is burying its head in the sand as the regulators and the tax man close in
writes Peter Gallo
fter months of attacks on the hedge fund industry from regulators, taxmen, lobby groups, leading attorneys and the press, the US hedge fund industry is resigned to some form of regulatory change. The only question remaining is: how far will it go? Some of the big hedge fund groups have even instructed their legal counsel to explore the implications of moving their main operations offshore in the event that the environment gets too hostile. They stress that this is just a precautionary step and say that they hope nothing drastic happens or, better still, that nothing at all happens. However, the chances of the industry being left alone as happened after previous investigations seem unlikely. Most people expect that, at a minimum, hedge funds will have to register with the Securities and Exchange Commission, that some tax loopholes will be closed and that the Patriot Act will oblige funds to scrutinize investors. Most hedge funds will be able to live with these changes. Some people even argue that the changes may benefit the industry by creating greater transparency and a greater understanding of the hedge fund industry. They say that, as the industry has nothing to hide, it should welcome greater openness. If the regulators want hedge funds to spend a few thousand and register, whats the big deal? Thats a very small price to pay in the greater scheme of things and it will lend legitimacy to the industry, says Robert Green of Connecticutbased firm of accountants Green Trader Tax. 39
REGULATION
However, this seemingly small step may have a far bigger impact than people think. For a start, it will force a notoriously secretive industry out into the open and managers will no longer be able to hide behind the veil of the SEC private placement rules. At a stroke, the scale and scope of the industry will be open for everyone to see on public access websites. Everything from the telephone numbers of the funds, to the names of the partners and the assets under management, will be available to investors, rival funds and the media. A new world of transparency will be ushered in. There will be no more guessing games about the size of the industry and the number of funds in the US. Everyone will have the information at the tips of their fingers from the vast directory that will be sitting on the SEC website. A handful of funds like San Francisco-based Farallon and Connecticut-based Andor are already registered and the details of their funds, partners, assets and offices are open to the public (see box on page 41). Such funds register for various reasons, perhaps because they run other businesses such as broker-dealer operations. Even in the cases of Andor and Farallon, the information that this obliges them to disclose hasnt done these two notoriously secretive groups any harm; so it seems unlikely to harm the industry at large. Some other big funds are also registered with another Washington agency, the Commodity Futures Trading Commission those such as Tudor and Moore that make use of futures and options to execute their trading strategies. The CFTC also monitors the futures and options markets for potential manipulation, applying a system called commitments of traders reports. These are used to identify large position-holders and sometimes these big players may include hedge funds. The real fear, however, is that SEC registration for all hedge funds may be followed by something far worse. Roger Joseph, partner at the Boston-based law firm of Bingham McCutcheon, says. What seems certain is that managers will have to register individual funds, which many think puts them on the radar for additional regulation. George Mazin, partner of New York-based Dechert, thinks there is a similar danger with the Patriot Act, which in itself is not a threat to the industry although it may add unnecessary costs. However, he says: The real fear here for hedge fund managers is not the Patriot Act itself, but that it may be the start of creeping regulation. Yet, in the face of the prospect of more damaging regulation, the hedge fund industry remains strangely mute. Rather than coming out fighting to defend itself, the leading figures in the hedge fund business are doing what they have 40
The real fear here for hedge fund managers is not the Patriot Act itself, but that it may be the start of creeping regulation
done for years when the going gets tough: shrinking back behind a wall of silence. So far, none of the big names of the industry have stood up to defend the record of the hedge fund industry or to counter point by point the criticism that is being leveled at the industry from short selling to the thinly veiled suggestion that hedge funds are launderers of illegal and terrorist money. Remarkably, all that the big hedge fund managers say today is that they want to keep a low profile until the storm passes. However, some people are starting to wonder if this strategy is appropriate. Such are the myriad attacks on the industry and such are the vested interests arrayed against it that some positive action may be necessary. The job of defending the industry has been left to people like Jim Chanos of the $1 billion short-selling specialist Kynikos Associates, who in a testimony to a Congressional committee on Enron, portrayed short sellers as the good guys who spotted the accounting misdeeds at the energy giant. Even Eliot Spitzer, the New York attorney general, seems to be somewhat bemused that the hedge fund industry hasnt been more active in fighting its corner. In a speech in early March to the Wall Street Hedge Fund Forum, a New York-based hedge fund association, he urged hedge funds to take a more active role in putting forward their case on Capitol Hill. Lessons could be learned from the European hedge fund industry, which is already regulated, and is far more homogenous and proactive. It has faced similar attacks from lobby groups and the media and has had certain of its practices investigated by the UKs Financial Services Authority (FSA), but it actively defends its corner. As soon as the FSA announced that it was taking a look at short selling, the Alternative Investment Management Association, which counts 520 groups as members, quickly swung into action. A submission was sent to the FSA defending short selling and the regulator seemed to accept many of the arguments. European managers are willing to be even more proactive. Centaurus, Pendragon, Henderson, Jupiter, Lansdowne, Kairos and a host of other hedge funds helped establish a set of guidelines on how European funds should run themselves. The top managers were acting to ensure that the industry stayed clean to forestall any criticism. There have been few similar industry-wide initiatives in the US involving leading hedge fund managers. Most seem to prefer to batten down the hatches and hope that the regulators and the press wont find them and that the investment banks will fight the industrys corner for it. This strategy may work. After all, the industry has been here before. It might seem that more regulation is just around
REGULATION
the corner, but that was reinvested fee income as true back in 1998 when many people fear. you had Long-Term Instead, it will have the Capital Management, effect of stopping new says Mike Dever, deferred income president of Pennsylvaniaschemes and forcing based Brandywine Asset older schemes to Management. unwind without penalty It may happen again to the manager. today. There is a chance Once again, despite that even the issue of the headlines in the deferred compensation newspapers, the likely from fees earned offshore outcome doesnt seem Roger Joseph of Bingham McCutcheon may go away. Until now, George Mazin of Dechert so bad. It may be the managers have been able same for the Patriot Act, to reinvest profits from fees paid on offshore funds back into which will theoretically force all hedge funds to vet all their the fund, which has the effect of deferring taxation until the investors and to throw out those who will not reveal their position is liquidated. identities. This is unlikely to have very much impact on hedge The IRS recently launched a case against III Offshore funds and is far more significant to European private banking Advisors but lawyers looking at the case think that it is so groups. specific to III that it may not have much impact on the rest of The issue is more that it isnt necessary at all as Mazin at the hedge fund industry that already do their accounts on a Dechert explains: Considering their relative illiquidity, you cash, rather than an accrual basis, as was the case with III. would think hedge funds would be the last place a launderer Even if new legislation is passed as has been threatened would want to hide their money. And, of course, there is the this will not result in penalties and interest payments on the fear that the Patriot Act may simply be the thin edge of the
ndor and Farallon are two of the big name hedge funds that are already registered
further $2.3 billion. The filing also includes the names of the senior team which were Thomas Steyer, Joseph Downes, Richard Fried, Stephen Millham, Mark Wehrley, William Duhamel, Monica Landry, Fredrick Mellin and David Cohen. Other than the firms One Maritime Plaza office in San Francisco, Farallon also has offices in Chicago and Singapore. The Andor filing gives similar basic fund information on Andor Technology, Andor Technology Perennial, Andor Technology Aggressive, Andor Technology Small Cap, and Andor Diversified. Group assets are a little over $7 billion. The miscellaneous text explains the background of the split with
Pequot and shows that Andor entered into new management agreements with respect to $8.8 billion of assets that used to be managed by Pequot. In the list of owners of the business, it shows that Daniel Benton owns greater than 50% of Andor Capital Management and that Christopher James owns greater than 49% of the business. Other executives are Peter Streinger, Jolyne Caruso-Fitzgerald and Michael Nexus. All in all, the information is hardly revealing but helps by providing a basic level of transparency that can only improve the reputation of the industry by showing that hedge funds are real entities, just like any other financial organisation, and are not shadowy,
with the SEC, and the type of information that they are obliged to reveal makes interesting reading but has hardly impeded the success of the two firms. Nevertheless, the Investment Adviser Registration form gives basic information, which is enough to help build a thumbnail sketch of the firms, including details of the investment team, the products and assets. According to the filing Farallon has $8 billion of assets in its 11 multistrategy arbitrage products, the biggest of which are Farallon Capital Partners, which has $2.3 billion of assets, and Farallon Capital Institutional Partners 2, which has a
41
REGULATION
regulatory wedge. actually inhibit short selling or limit However, there are other dangerous leverage if indeed it would be possible to issues that keep on cropping up where the do so. industry would be wise to have a voice. Overall, the one thing that is giving the One obvious subject is the issue of short hedge fund industry cause for optimism is selling. The SEC is already investigating a the fact that the SEC is moving slowly. The number of abuses of short selling such as fact that regulators have moved slowly has those related to death spiral convertible been taken as a positive sign that there is deals and a new assault is likely to be no rush to make changes. The perception launched by a number of Fortune 500 is that they are taking their time to ask companies who claim to have been questions and survey the industry before targeted by hedge funds. they take action, says Dwight Eyrick of They are being represented by Lanny New Yorks West Broadway Partners. Davis, a Washington insider who works for But once the door has been prized open law firm Patton Boggs. The cases alleges a little and a chink of light has fallen on the Eliot Spitzer, New York attorney general that some funds tried to create their own industry as a result of the expected short-selling opportunities by spreading false information registration of hedge funds, there is no doubt that there will be about companies to send stock prices lower. Only increased demands for the door to be opened even further. disclosure will prevent this from happening, Davis says. Change will come and the industry seems ill-prepared for it, Most recently, it has been predicted that the SEC may take preferring to bury its head in the sand and hope that the action on short selling. It has been speculated, for instance, demons will go away and leave them with the industry, that has that the agency could rule out so-called naked short sales, made so many people so much money, exactly as it is. where the manager does not borrow the underlying stock. Unfortunately, this seems a very faint prospect. While this may increase costs for some, it seems highly unlikely that the SEC would take more severe action to
*In March 2003, the SEC invites other national regulators, including the UKs Financial Services Authority, to attend a global summit on regulation of hedge funds.
The rising demand for action
*Hearings on hedge fund regulation are announced by the Senate Banking Committee and House Financial Services Committee in Washington DC. *In February 2003, new SEC chairman William Donaldson says that the agency will take a long, hard look at hedge funds. *In January 2003, SEC commissioner Roel Campos says agency officials are discussing a complete overhaul of regulations affecting hedge funds, including potential limits on short selling and leverage. *Having overhauled practices on Wall Street relating to IPOs, New York attorney general Eliot Spitzer turns his attention to hedge funds, investigating allegations from companies that a group of hedge funds had conspired to manipulate their stock prices.
*In a case related to III Offshore Advisors, the Internal Revenue Service raises fears that it will challenge or seek to halt the current practice of US-based managers who defer fee income from their offshore funds for tax purposes. In Congress, it is estimated that this could raise IRS tax revenues by some $5 billion over 10 years. *In November 2002, the SEC alleges fraud and performance mis-statement at Beacon Hill. *In October 25, 2002, moves are initiated to oblige hedge funds to screen all new investors to make sure they have no links with money laundering or terrorism under the Patriot Act. *In May 2002, the SEC begins a study into whether changes may be needed in relation to rules for hedge funds sold to retail investors, and into potential conflicts of interest for hedge funds run by mutual fund companies. *In February 2002, the SEC launches an investigation into the Lipper convertibles fund after its NAVs are re-stated to reveal large losses.
42
GUEST COLUMN
Why regulation can be good

writes Neil Wilson
ews that Securities & Exchange Commission chairman William Donaldson plans to take a long, hard look at hedge funds will no doubt have sent a frisson of concern, if not fear, through the industry in the US. But the experience of regulation in Europe suggests that it need not be a cause for alarm and may indeed do some good. Understandably many US hedge funds find this hard to believe. After all, the SECs record, including the imposition of the up-tick rule and many detailed rules designed to protect retail investors, suggests that it is not a benevolent regulator. They fear that once it gets its teeth into hedge funds, anything could happen. As a result of the SECs onerous some would say heavyhanded approach to regulation, hedge funds in the US have had a single strategy over the years: to fly below the radar screens and, as far as possible, to avoid attracting the SECs attention by ensuring they dont market themselves openly to the public. However, the experience from Europe suggests that a little regulation done correctly may not be a bad thing. It seems to have helped create standards of practice while doing nothing to stop the booming start-up business in Europe where 181 new funds launched last year raising $8.8 billion. The main benefit of the regulation is that the European industry is far more transparent than its US counterpart. As a result, the regulator in the UK seems to understand the value of hedge funds, which are now the fastest growing area of the financial services industry in Europe. It is eager to nurture rather than harm the industry. Interestingly, the UK authorities have gone about regulation in a completely different way from the SEC. In Europe, there is no attempt to regulate the way hedge funds trade, which means there is no up-tick rule. Instead, the Financial Services Authority regulates the hedge fund management company. The goal is to provide a minimum standard hurdle in terms of systems, regulatory capital, and due diligence checks on backgrounds of the managers. This may sound onerous to the
average US fund and the reality is that it does significantly increase the cost of getting started as well as causing a delay of four to six months. But the process encourages managers to think long and hard about whether they have an edge before they go ahead with the launch. It also encourages managers to build professional operations from the outset, rather than scrambling to put them together after launch. Undoubtedly, the process deters a number of managers, but that may not be a bad thing as many of them probably should not have started anyway. While the industry in the US is far larger and more dynamic and has generated most of the industrys leaders it has also been stricken by repeated blow-ups and scandals. Europe has been mercifully spared these frauds and blow-ups with the exception of Volter, a fund managed by Imad Lahoud in Paris. But this took place three years ago and the French authorities did not even know that Volter was a hedge fund! Defenders of the existing US regulatory scheme may suggest that, given the sheer greater scale of the American industry, there will - by the law of averages be more scandals than in Europe. But could some well-considered minimum standard rules reduce the risk of fraud and blow-ups? Probably. A final effect of the UK regulatory approach is that FSA approval has become a valuable gold standard for start-up funds. It shows that they have set up a professional business and that the principals have been given a clean bill of health. There is no doubt that it helps to offer some reassurance to the investor in the difficult task of evaluating start-up managers. The key question for the US managers, however, is whether the European model is appropriate. Would it simply be the Trojan horse that starts a process of relentless and cumbersome regulation which would eventually strangle a very dynamic industry? Or would it help legitimise an industry that has been somewhat driven underground by the SEC private placement rules?
43
RESEARCH
Money still flooding into US start-ups

Polarization between big asset raisers and the rest
writes Lisa Ahmed
tarting hedge funds has never been easier and there are no signs on the basis of last years activity or anecdotal evidence this year - that it is slowing down in the US or anywhere else in the world. What does seem to be happening, however, is a polarization of the NEW FUNDS 2002 BY REGION market. US still dominates the startExperienced managers who have split with up business despite recent their existing firm are still finding it relatively gains in Europe and the easy to attract money as are well established emergence of an Asian brand names that launch second, third or hedge fund industry fourth products. However, start-ups without an New funds 2002 No. of funds Assets ($m) overwhelmingly obvious US (est.) 400 17,000 pedigree are struggling to Europe 181 8,813* reach critical mass. Asia Pacific 66 1,680** Total 647 27,493 To some extent this has always been the case *EuroHedge **AsiaHedge with start-ups, but the polarization is more extreme today than ever, according to research by Absolute Return, which conducted an extensive survey of investors and start-up managers. Another significant trend is the move by investors away from new long/short equity managers unless, of course, they come from a top hedge fund group. At the same time, startup credit, macro, fixed income and distressed funds are finding the going a lot easier than they did a few years ago. To put some numbers on the start-up business, last year alone over 400 funds launched in the US, 181 in Europe and 60 in 44
Asia. The figures for the US come from two leading investors who monitor start-up activity, while the European and Asian numbers are derived from our sister publications, EuroHedge and AsiaHedge. Already this year, the start-up business in the US is off to a brisk start with some monster launches. John Hurley raised $300 million for a technology fund. Ira Unschuld at Brant Point opened and closed on day-one with $160 million; and David Webb raced to $800 million within a few months with his Verus fund. Each of these managers came with a big reputation from their previous employer. Hurley was at Bowman Capital, while Unschuld worked at Schroders in New York where he had established one of the best mutual fund track records in the world, and Webb was the star manager at Shaker Heights. To a certain extent, some of the new fund business is a zero sum game. One start-up wins assets while another group loses. The most dramatic example of this is Verus and Shaker Heights. Since Webb left Shaker Heights late last year, assets have shrunk from over $1 billion to $135 million with part of the money switching to Verus. The pattern mirrors the results from 2002 when many of the big start-ups arose from the break-up of existing high profile teams, which has prompted observers to ask how much really new money came into hedge funds last year. A large part of the money appears to have been re-cycled out of one product into another.
RESEARCH
A look at some of the top 20 start-ups in the US in 2002 compiled by Absolute Return shows that many of the new funds were the result of a divorce between two portfolio managers who went on to run separate funds. Among the divorcees were the Midtown duo Neil Barsky and Scott Sipprelle, who started Alson and Copper Arch, respectively, with over $400 million apiece. Another was Mike Au, who split from Intrepid to launch his own Hornet technology fund with around $400 million. Finally, the other category of successful launches came from existing hedge fund groups. Andor led the way with the launch of David Felmans Andor Diversified, which raised $1 billion. Other big launches from existing groups included BGI, which raised $400 million for the BGI 32 fund; and Viking, which launched a $250 million consumer fund. Andor Diversified only just crept into the 2002 launches as it officially began at the end of 2001 but started taking in outside money in 2002. There was a similar story for the two Citadel funds. Moving beyond the top 20 launches in the US last year, information on the remaining 380 start-ups is sketchy. No one monitors the asset size of the US hedge fund business accurately but Absolute Return contacted a sample of 100 funds that started in the US last year to see if there were any clear patterns. The answer is that the launch size appears to tail off fairly steeply. Of the 100 fund sample, only seven had raised assets of over $100 million with three of those being launched by established hedge fund groups like Clinton, III and Lazard Market Neutral. Other big money raisers were distressed debt or emerging market funds. Interestingly, none were equity funds with the exception of the Lazard US Market Neutral fund, which recently lost its managers and has subsequently shrunk dramatically in size. In fact, the average size of launch of the 40 equity funds that made up the sample was $38 million by the end of 2002. The six macro funds in the sample raised an average of $108 million with distressed funds averaging $82 million. Putting a number on the assets raised by US start-ups in 2002 is therefore something of an inexact science. However, when you add the $9 billion raised by the top 20 launches with the $4 billion raised by the 100 sample that Absolute Return surveyed, you reach a total of $13 billion of confirmed assets raised by start-ups last year. Estimating the size of the remaining 280 funds becomes more difficult. If you assume that the sample of 100 funds polled by Absolute Return is representative of the industry then it would mean that the remaining 280 funds raised a little less than $12 billion. However, many prime brokers and administrators say that this figure seems high, which suggests that the sample of 100 funds was not representative of the industry as a whole. A number of funds did not co-operate TOP 20 US STARTS IN 2002 with our survey, and it seems reasonable to Big asset raisers were often assume that one reason they were unwilling to managers splitting from co-operate was because they did not raise much established hedge funds money. such as RedSky or big Furthermore, the types of funds that we groups rolling out new funds were able to find were by definition the more like Andor and Citadel serious operations. Prime brokers and administrators confirm that there are hundreds of funds Fund name Est. asset size Dec 2002 ($m) that start with $5 million of Andor Diversified Growth 1000 assets from family and friends RedSky 1000 that would not be on anyone Silverpoint 850 elses radar screen. Suttonbrook 670 Citadel Equity Opportunity 500 As a result, it is reasonable Fortress Drawbridge 500 to assume that the remaining Alson Signature Fund 400 new funds raised somewhere Copper Arch 400 Hornet 400 around $4 billion which would BGI 32 400 mean that the total money Mackay Shields 400 raised by US funds in 2002 is GRT Topez 400 Citadel Edison 300 somewhere in the region of Avesta 300 $17 billion, which is an Grange Park Technology 250 impressive number and is Fortress Macro 250 Viking New Consumer 250 significantly more than Europe JD Partners 220 and Asia. Galleon Admiral 220 Happily, however, in the DE Shaw Laminar 220 Total 8,930 other regions of the world, guestimates are not necessary. Our sister publications, EuroHedge and AsiaHedge, monitor all start-ups in Europe and Asia and produce very accurate numbers for the launch activity each year in those markets. Europe is showing a similar pattern to the US with a shift away from equity managers to macro and fixed income funds, which seems to be gathering even more momentum this year. In 2002, the 181 funds that launched raised a total of $9 billion with $2.4 billion coming from arbitrage, macro and fixed income and $2.5 billion coming from macro and fixed income. Asian funds are still very much dominated by long/short equity.
45
PRODUCT & VENDOR NEWS
Perry incubator seeks ideas swap
erry Capital, the $5 billion event-driven group run by Richard Perry, has started a hedge fund incubator. It has already seeded three
managers with $125 million between them from the main Perry Partners event-driven fund and is looking for more funds to back. The three funds are housed on a floor in the Perry headquarters in New York and are given all the necessary infrastructure to enable them to run the operations side of the business efficiently. While Perry clearly hopes to make money from its investment in these managers, one of the main reasons for the new incubator programme is the attempt to create a flow of information between these managers and Perry itself. Bill Vernon who runs the program at Perry says: All of the managers are people we would have liked to have hired but who wanted to run their own fund. By incubating them, we can still get much of the benefit from them in an exchange of ideas and research while enabling them to run their own shows. Each of the managers is responsible for building their own investment teams and for marketing the funds. At the same time, each manager brings some different research skill and knowledge to Perrys investment team. Bob Friend, formerly at UBK is running the Recon Arbitrage fund, a hybrid distressed, convertible bond and capital structure arbitrage fund. Christian Leone, who was at Goldman Sachs before becoming a successful Silicon Valley entrepreneur is managing Luxor Capital Group, a credit arbitrage and equity fund. And Jay Yang, formerly with Tiger and then Omega, is running a bottom-up, absolute return long/short equities fund called Searchlight Capital Management. Vernon says that he is looking for up to two more funds to incubate over the next 12 months.
Rahl and Polsky reunite at L2

Leslie Rahl of L2
Wall Street veterans Leslie Rahl and Lisa Polsky have teamed up to launch L2, a new breed of hedge fund consultancy. The service aims to go beyond providing traditional risk consulting, strategy selection and valuation capabilities by offering to manage client portfolios post structuring. Customization, greater education and more comprehensive risk management will also be key focal points of the new company. L2 forms an extension of Rahls existing hedge fund advisory boutique, Capital Market Risk Advisors, which she founded in 1994. CMRA offers a range of risk management consulting services including due diligence, hedge fund manager selection, risk management outsourcing, budgeting and governance, new product development and financial forensics. Rahl and Polsky first met at Citibank, where they coheaded its derivatives business between 1986 and 1991. Rahl spent 19 years at Citibank, including nine as head of the firms derivatives group in North America. During this time, she has been credited with launching Citibanks caps and collars business in 1993 as an extension of the proprietary options arbitrage portfolio she previously ran. Polsky was most recently a managing director at Merrill Lynch, where she headed collateralized financing services including prime brokerage, swaps, repo, stock loan and margining. Prior to that she was a managing director with Morgan Stanley, overseeing global risk, credit and insurance for the firm.
Private label funds from Access
Apache Capital is the latest management group to be added to a new private label marketing platform that is being assembled by Access International Advisors, which is best known for raising money for Clinton, Cerberus and the Bass Brothers.
46
PRODUCT & VENDOR NEWS

The new platform is designed to repackage existing funds in a format that should make them more attractive to investors because of the transparency, risk controls and the due diligence that has been carried out on them. They are then sold under the Elite brand name. Over the last few months, Access International Advisors has already raised $109 million for the first three funds on the platform the Elite Trade Finance Fund managed by the Stewardship Group, Elite Performance Convertibles Fund managed by the Argent Financial Group and Elite Statistical Arbitrage Fund managed by Trident Advisors. A fourth single-manager vehicle, the fixed-income focused Elite AAA Carry Fund, managed by Apache Capital, will be added in May. One of the reasons you have seen so much interest in funds of funds has been that investors like the idea of having an outside group doing due diligence on funds and handling risk monitoring. Were taking the same idea and applying it to single-manager funds, says Ted Dumbauld, a partner at Access International Advisors. In order to avoid potential conflicts of interest, Access International Advisors will refrain from taking an equity stake in underlying managers and their funds. It will earn its money from a straight-forward marketing fee for assets raised in the new structure.
GlobeOp may be on the block
und administrator GlobeOp, the firm founded by former Long-Term Capital Management principals, may be on the block, according to
industry insiders. GlobeOp, which has operations on both sides of the Atlantic, has built an impressive list of clientele in the three years since its founding. Among the clients who tap GlobeOp for its daily risk management and data collection and reconciliation services is Man Investment Products, a firm managing an estimated $11 billion in alternatives including a growing array of hedge fund-linked structured products. Officials at GlobeOp declined to comment on rumors that the independent firm had been approached by a prospective suitor or whether the firm was actively seeking such a deal. The privately held firm got off the ground in 2000 partly through a $10 million allocation made by the European private-equity player Mezzanine Management Ltd, which at the time took a 12.5% equity stake in GlobeOp through its Mezzanine Management Fund III. Since its inception, GlobeOp has focused on providing its hedge fund clients with rapid data aggregation and extensive risk management tools, adding a level of oversight that has become a prerequisite for investment by institutions looking to tap hedge funds. And using the same data and information, GlobeOp has leveraged its capabilities to offer additional services to hedge fund managers such as the preparation of monthly investor newsletters. GlobeOps chief executive is former LTCM riskmanager Hans Hufschmid. Other founding members are Didier Martineau, a senior LTCM strategist, and Jerome Barraquand, a fixed-income specialist who had worked previously for Sanwa International and Salomon Brothers. With offices in London and in the New York City suburb of Harrison in Westchester County, the firm has roughly 100 employees and is apparently poised to grow.
Refco starts prime brokerage
In a sign that larger clearing firms are looking for an edge in the once overlooked foreign-exchange prime brokerage arena, futures giant Refco in March inked a deal with forex specialist Currenex to add enhanced-trading capabilities aimed at attracting new clients among the ranks of hedge funds, managed futures trading advisors and institutional investors. The strategic move is perhaps less than surprising. Once the ugly duckling of the prime-brokerage universe, forex trading and its promise of higher revenues and keeping more client volume in-house has already led UBS and other clearing houses to boost their the size of their forex operations and trading capabilities. A weak equity market combined with stronger performance and inflows for managed futures advisors and global macro funds segments of the alternatives universe traditionally more active in currencies has led many players like Refco to identify forex trading as a growth market. Refcos deal allows the group to offer its clients Currenexs online trading platform called FX Clear. New York-based Currenex s business model has not been to build a prime-brokerage unit itself. Instead, the group has leveraged its online trading capabilities by striking deals with groups like ABN AMRO, Barclays Capital and Standard Chartered.
47
PERFORMANCE
Alta reaches a new high as CB arb players thrive
AC SO SN EV T EA R LTLI IB ALN EC SE
ne of the most successful players in the convertible arbitrage field has been the $720 million Alta Partners fund, flagship vehicle of
Creedon Keller Partners managed by Scott Creedon. The fund is already up a tremendous 9.21% so far in 2003, having clocked up a very impressive 29.81% in 2002, and an average annual return since inception of 23.02%. It has a volatility arbitrage focus, and invests right across the premium-grade and credit spectrum. Other convertible bond houses have also done well with Lydian now up 7.88% for the year, Alexandra Global up 6% and Canyon up 5.3%. The funds macro process involves initially identifying the cheapest convertible exposure on a relative basis, and then applying a delta neutral hedge on the underlying equities. Bond exposure is then addressed by means of total return swaps on high yield indices giving an overall macro hedge against all long convertible exposure. According to Creedon, the particular benefit of the swaps is that the indices have an embedded pairing effect to the non-investment grade exposure in the portfolio. As a result, the short provides an important liquidity hedge, which has held up well in various liquidity crises, such as September 1998, the end of 2000, and September 11, 2001. The final step is a gamma trading discipline, using a quant-based programme whose model is akin to BlackScholes, which is mechanically executed on a nearcontinuous basis. This last has been an important factor in generating constant returns even in times of lacklustre volatility, generally accounting for between 80 and 160 basis points of return per month. Over the last few months since around November the funds performance has prospered partly thanks to an infusion of liquidity into the convertibles market, particularly in the small and mid-cap area. Creedon puts this down to a number of factors, including the lack of new issuance and the re-entry of managers who had lightened their gearing in anticipation of redemptions that never occurred. 48
EVENT-DRIVEN
Chart of the month: Campbell
Campbell & Co.s Global Assets fund has had a
storming start to the year, as the chart above shows. The firm, which now runs some $4.5 billion in CTA strategies, trades about 50 different financial futures contracts in the Global Assets strategy. It has skilfully exploited the prospect-of-war theme which, in turn, has created significant investor uncertainty and consequent market volatility. As the value of the US dollar declined over the past year, the fund has generally been short the greenback and long on other major currencies. It has also benefited from a sharp rise in interest rate futures throughout the world and from shorting stock indices as global markets continue to see-saw. However, the winning streak went into reverse in mid-March, just before the onset of hostilities in Iraq. The reality of war forced an abrupt reversal in trends, resulting in a loss of 4% for Global Assets in March. November and December, having rebounded from October lows. Risk arb was also profitable in January, mainly due to the portfolios holding of German speciality chemical company Degussa AGwhose agreement to be acquired by RAG was stopped by the German courts in December. Angelo ratcheted up the distressed exposure in the portfolio significantly going into the rebound, moving from 58% at the end of July to 73% at the end of
Angelo motors ahead
One of the best-performing funds this year is GAM Arbitrage, managed by New York-based John Angelo of Angelo, Gordon & Co. The fund is now up 5.29% year-to-date. Much of this good performance came from prices in the distressed sector, which accounted for 79% of assets continuing in January on the uptrend that began in
PERFORMANCE
September, and he began to re-invest the cash he had been holding when coming out of the October slump. February was fairly uneventful, with a 0.67% return. Angelo saw no major trends on the distressed side, although prices were generally firm, while on the risk arb side, currently 15% of the portfolio, spreads on both Pharmacea/Pfizer and Household Finance/HFC narrowed. Among the other big, event-driven funds Perry Partners was up 0.56% in February, taking it to 3% for the year. value specialists. Alex Roepers US equity-focused Cambrian is down 0.96% year-to-date, after an initial drop of 2.18% in January it recovered by 1.25% in February. Global equity player Orbis Optimal is down 3.28% so far on the year, having fallen 2.6% in February. Other bigger funds that are on a winning steak are Greenlight. It was up 1.2% in February, taking it to 3.43% for the year which means that the funds annual compound rate of return remains at 28.48% since its inception in May 1996. Overall the Absolute Return median for US equity funds is slightly down for the year to date.
MACRO
Kingdon back in form
EQUITY
Mark Kingdon suffered something of an annus horribilis in 2002, the worst year since inception in 1986, dropping 8.44% which followed a fall of 5.77% in 2001. Nevertheless, 2003 has begun positively, and the fund is up 1.23% to the end of February. Meanwhile, after a tremendous 31.83% return in 2002, David Felmans Andor Diversified has begun 2003 well, up 2.54% so far after a 0.70% rise in February. Lee Ainslie at Maverick, on the other hand, has struggled so far this year. He was down 2.59% in January and flattish in February, leaving him now down 2.53% on the year. This follows a relatively subdued 2002 by his own standards with a 2.6% return. The year has also started badly for some of the big
Simons still delivering
MEDALLION
How does Jim Simons at Medallion International continues to deliver the goods with such phenomenal consistency? Once again, the notoriously secretive group appears to be up and running and off to a strong start in 2003 with the fund reported to be up 4.09%, after a 2.01% return in January and 2.04% February. Medallion has prospered in the difficult market conditions over the last couple of years a very strong return of over 25% in 2002 was surpassed by an exceptional 34% return in 2001. Since January 2001 to the end of February 2003, the fund is understood to have made a total gain of over 75%. Even more remarkably, the fund did not have a negative month over the period.
-aul Tudor Jones Tudor BVI Global fund was up 2.16% in February pushing it to 4.62% for the year as macro funds continued to capitalize on major trends in the market that have been thrown up by the Iraq war and doubts about the strength of the global economy. Tudors returns follow an outstanding 2002, during which the fund was up 21.01%. Jones and his team are thought to have gained significantly from long positions in Treasuries over the last 18 months, while also playing the euro/dollar futures game. Among the major funds, Louis Bacons Moore Global Investments has shown even better performance so far this year now up 4.92% to the end of February, on the back of a 0.57% gain in February. Of the other star macro players, Bruce Kovners Caxton had a good 2002, with positions in gold thought to have contributed much of the return. In February, when the fund was up 0.37%, leaving it up 1.82% year-to-date, gains in financials and energy more than offset modest losses in commodities and stocks. Meanwhile, on the fixed income side, John Meriwethers JWM Partners Relative Value Opportunity portfolio has also begun the year well, a slight February dip of 0.13% leaving the fund nevertheless up 3.11% year-to-date. Over the last 12 months, the major macro players seem to have focused on the same themes. Although many will have traded around these positions, major plays such as being long Treasuries, shorting the dollar particularly against the euro as well as being selectively long gold and oil and short equity markets have been the basic constituents. Overall, the median macro fund in the Absolute Return database was up 1.5% in February taking the median fund up to 2.4% for the year.
Tudor Jones piles on
49
INDICES
US funds
European funds
istressed debt funds have had a flying start to the year in the US with Februarys 1% month taking the median fund in the Absolute Return Distressed Index up to 4.33% for the year. While this is clearly good, it is still some way behind the returns from US-based CTA which were are up close to 8% for the first two months of the year - although they have given part of that back in March. Equity managers are still struggling with the median US equity fund down for the first two months of the year. The median technology fund just scraped into positive territory while the median global equity fund was down 1.15%. It is better news for US convertible managers with the median fund already up 3% in the first two months of the year.
Strategy
ebruary was another in a series of good months for Europes convertible arbitrage, macro and fixed income managers. Big convertible managers such as GLG and KBC again posted excellent numbers, as did big fixed-income funds like JPMorgan Diversified. Some of the new entrants in the macro sphere, such as the Mail Capital Fountain Fund and Razor Macro, also entered our tables for the first time on the back of a series of strong gains. It continued to be tough going in other arbitrage categories, particularly among the statistical arbitrage and quantitative funds, as well as in the big long/short categories. On average, global equity continues to be even tougher than European long/short.
Strategy
Absolute Return - US funds

Feb-03
-0.53% 0.42% 1.20% 0.65% 1.01% 0.94% 0.58% -0.33% -0.55% 1.00% 3.17% -0.40% 1.22% 3.01% 1.67% 2.22% 2.46% 1.35% -1.15% 0.18% 4.33% 7.69%
US Equity Arbitrage Convertible Equity Arbitrage Mortgage Backed Fixed Income/High Yield Macro Event Driven Global Equity Technology Distressed CTAs
2003 YTD
EuroHedge Index
Feb-03 0.16% 0.58% -0.33% 0.77% 0.63% -1.32% 3.69%
2003 YTD 0.01% 0.12% -0.28% 1.55% 1.59% -1.82% 6.87%
European Long/Short $ European Long/Short European Long/Short E Macro $ Fixed income & high yield $ Global equity $ Managed futures
Global fund of funds

he flagship InvestHedge Global Multi-Strategy posted performance of 0.37% its worst since October representing a range of returns of more than 3% at one end of the spectrum and to losses of more than 2% at the other. Once again investors in specialist global macro and futures fund of funds saw healthy returns in February, with a surge of 1.65% taking returns for the first two months to 3.4%. Meanwhile, the InvestHedge Global Equity Index lost more ground, falling 0.31%, showing that most equity strategies continued to struggle with European specialist fund of funds finding the going very tough.
Asia-Pacific funds
sia-Pacific hedge fund managers continue to weather particularly difficult market conditions in the region. All strategies under-performed the major market indices in February 2003 not uncommon behaviour in these purportedly flat, but actually very volatile markets. For once, Australian long/short managers did not outperform the benchmark, falling 0.85%. Asia excluding Japan did the best, continuing a trend that was started several months back. Japan and Asia including Japan managers are still beset by gloom and doom in Japan, meaning that they can do little else besides protecting the downside.
Global Multi Strategy US$ Arbitrage US$ Global Equity US$ US Equity US$ European Equity Emerging Markets Hedge US$ Asia-Pac Funds of Funds US$ Global macro currency debt US$
Category
InvestHedge Index
Feb-03 0.37% 0.54% -0.31% -0.44% -0.52% 0.92% -0.38% 1.65%
2003 YTD 1.16% 1.78% -0.31% -0.17% -1.06% 1.22% -0.20% 3.48%
Strategy
Bank of Bermuda AsiaHedge Index

Feb-03 -0.44% -0.01% -0.16% -0.38% -0.85% -0.04% 1.30% 2003 YTD -0.16% 1.12% -0.04% -0.29% 0.29% 0.29% 1.55%
Asia including Japan US $ Asia excluding Japan US $ Japan Long/Short US $ Japan Long/Short Yen Australia Long Short AUS $ AsiaHedge Composite Emerging Markets
58
ABSOLUTE RETURN APrIL 2003
GLOBAL ROUND UP
An extract of top performing funds from the EuroHedge publication www.eurohedge.com
European league tables

Fund name
EUROPEAN LONG/SHORT EQUITY E Aspect European Equity Fund Barclays European Market Neutral Novalis Europe Fund Egerton European Equity Fund Leonardo Capital Fund RAB UK Equity Fund Share Class A Meditor Bear Martin Currie Absolute Return UK Fund Talentum Activedge HSBC UK Market Neutral Fund
February Last 3 Last 6 Last 12 YTD 03 (%) mnths (%)mnths (%) mnths (%) (%)
Annualized compound (%)
Incep date
4.89% 3.35% 3.07% 3.04% 2.71% 2.65% 2.63% 2.56% 2.49% 2.37%
7.97% 8.95% 4.06% 1.84% 3.74% 4.92% 13.52% 1.01% 2.23% 1.95%
2.87% n/a 4.28% -0.55% 10.07% 7.62% 6.76% 0.04% 2.68% -2.89%
11.12% n/a 3.83% 7.83% 23.11% 10.44% 22.67% 4.81% n/a -4.81%
4.70% 7.03% 3.41% -0.15% 2.75% 4.24% 5.81% 2.68% 1.67% 2.21%
5.96% 37.25% 12.99% 21.89% 41.00% 11.50% 20.94% 1.93% 3.77% -3.89%
Nov-01 Nov-02 Dec-99 Oct-94 Jul-99 Oct-01 Feb-00 Oct-01 Jul-02 Jan-01
An extract of top performing funds from the AsiaHedge publication www.asiahedge.com
Asian league tables

Fund name
JAPAN LONG/SHORT FUND US$ Optimal Japan Fund Speedwell Japan L/S Cayman Fund - US$ MW Nippon Fund Penta Japan Fund Arcus Zensen Fund - US$ GAM Japan Fund - US$ Asuka Japanese Equity L/S Fund - US$ Whitney Japan Select Investors Fund Tower K1 Fund - US$ Chikara Japan Fund
Incep date
1.99% 1.42% 1.42% 1.37% 1.32% 1.12% 1.09% 0.69% 0.64% 0.62%
2.70% 0.05% -0.65% 5.31% 3.59% 0.62% 1.15% 4.24% 7.29% 0.89%
-2.92% 4.42% -2.39% 15.52% -0.43% -2.62% 6.61% 6.02% 6.96% 3.75%
-1.21% 2.57% -2.60% 22.57% 14.28% -7.02% n/a 5.05% 69.31% 9.46%
3.34% 0.79% 0.44% 4.23% 5.72% 1.97% 1.03% 2.47% 1.77% 0.71%
8.75% 9.40% -2.60% 12.18% 13.58% 6.33% 13.67% 8.51% 51.86% 6.02%
Oct-99 Nov-00 Mar-02 May-98 Dec-01 Jun-98 Sep-02 Nov-00 Jul-98 Jan-01
Extract from the Bank of Bermuda AsiaHedge League Tables
An extract of top performing funds from the InvestHedge publication www.investhedge.com
Fund of funds league tables

Fund name
GLOBAL MULTI-STRATEGY US$ Absolute Invest Pike Protos LP Swiss Life Eurostars Mariner Commodore, Ltd* Hemisphere Defensive HF Ltd Belmont Alternative Strategies Ltd Class B Auda Absolute Return Fund RMF Top Twenty Class 'V' Absolute Alpha Fund PCC Ltd Opportunistic* Auda Global
Incep date
3.36% 1.99% 1.72% 1.65% 1.32% 1.27% 1.16% 1.14% 1.13% 1.12%
8.06% 11.36% 6.13% 3.50% 5.16% 3.08% 3.49% 3.99% 5.15% 4.41%
5.96% 6.22% 7.04% 4.98% 5.67% 3.83% n/a 4.41% 6.58% 6.39%
6.62% 14.54% 8.61% 5.17% 11.43% 4.55% n/a 6.85% 11.83% 8.00%
6.85% 5.35% 2.80% 1.89% 3.28% 2.44% 2.58% 2.16% 2.21% 3.04%
4.64% 7.24% 8.23% 8.50% 11.32% 4.53% 13.45% 5.72% 7.29% 9.61%
Oct-99 Dec-98 Aug-00 Feb-00 Jan-95 Feb-00 Oct-02 Mar-01 May-98 Oct-99
59

Absolute Return - April 2003 - Inaugural Issue

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Absolute Return - April 2003 - Inaugural Issue

Uploaded by

Copyright:

Available Formats

THE MAGAZINE FOR THE US HEDGE FUND COMMUNITY

Moore on winning the talent game

Hedge funds under siege

The start-up business Which index is best?

S&P, Zurich, CSFB Tremont and HFRX analyzed

London SW1P 4PB

1618 Douglas Street

Douglas House 3rd floor

HedgeFund Intelligence Ltd

Telephone: +1 212 352 8713 Fax: +1 212 924 0240

20th Floor, 104 Fifth Avenue, New York, NY 10011

New York office:

Fax: +44 (0) 20 7630 7948

Telephone: +44 (0) 20 7233 8585

Production Editor: Melissa Hayes

Data and Research Manager: Lisa Ahmed

Neil Wilson, Robert Maharajh, Mike Peltz, Paul Taylor

Barry Cohen, Stephanie Hoppe, Niki Natarajan

US Correspondent: Katrina Dean Allen

US Editor: Peter Gallo

Managing editor: Iain Jenkins

Niki Natarajan is the editor of InvestHedge, a sister

Stephanie Hoppe is a senior correspondent on

London: +44 (0)20 7901 1912

Advertising Enquiries: +44 (0)20 7901 1918 jwillis@hedgefundintelligence.com

Neil Wilson is the editor of EuroHedge and has over

ABSOLUTE RETURN APRIL 2003

New magazine for a new era

APRIL 2003 ABSOLUTE RETURN

Bowman is back - investors arent happy

Lazard discovers the power of the little guy

How Louis Bacon is wooing trading talent

Facing up to a new world of regulation

ABSOLUTE RETURN APRIL 2003

Big news stories from around the industry

14 In the news 26 New funds

Who is moving where

22 Funds and strategies

CTA funds. Performance reports on top equity funds.

Stories that made the headlines

46 Product and vendor news

25 Institutional buyers guide

58 Indices and global round up

Monthly performance data on over 500 funds with Februarys numbers.

34 Funds of funds in drag?

44 New fund survey

APRIL 2003 ABSOLUTE RETURN

Blocking tactics by Citadel and Amaranth

Investors take road out of tech

Ganek mimics SAC high fee

ABSOLUTE RETURN APRIL 2003

Biggs may start Morgan suite

OConnor hives off specialists

Democrat fundraiser starts fund

Putnam plans to roll out funds

Sandell reinforces distressed

WHERE ARE THEY NOW?

Two more funds out of Maverick

APRIL 2003 ABSOLUTE RETURN

Kingdon loses Karchmer to LRL

SAC plucks Hickey from Maverick

Aquila expands line-up and key new staffers

Lefevre named as head trader at Water Street