JUNE 23, 2010
6 ‘VOLCKER RULE’ TARGETS
3 Wells Fargo Eyes Prime Brokerage
3 Cowen Secures Pledges for Ramius
3 Meridian Pushes Board Oversight
3 Ex-Moore Staffers Prep Hedge Fund
4 Healthcare Funds Cut Long Exposure
4 Goldman Alum Preps Debt Vehicle
5 Family Office Targets Hedge Funds
5 Citadel Expanding Equities Division
THE GRAPEVINE
Tim Adler joined hedge fund shop
Paradigm Capital in New York this
month as a portfolio manager focused
on the stocks of small and mid-size
companies. He previously worked for a
decade in the asset-management division of J.P. Morgan.
Word has it that hedge fund marketer
Anne Popkin is about to join Symphony
Asset Management, the alternative-investment unit of Nuveen Investments.
Symphony is a San Francisco-based credit
specialist that also runs two equity strategies. Until earlier this year, Popkin
worked as a senior executive at BlueCrest
Capital of London, where she led the $15
billion firm’s New York operation and was
a member of its global operating committee since 2007. Before that, she worked for
Lehman Brothers and Goldman Sachs.
Popkin also is the president of 100 Women
Market Braces for Impact of ‘Volcker Rule’
Don’t expect to see a rash of “for sale” signs if banks are forced to dump their
hedge fund businesses under the financial-reform bill speeding toward passage in
Congress.
Assuming it survives an 11th-hour lobbying blitz, a provision known as the
Volcker Rule would forbid banks from managing or investing in hedge funds and
private equity vehicles. But market players said banks such as J.P. Morgan, which
owns hedge fund giant Highbridge Capital, and Morgan Stanley, which operates
FrontPoint Partners, would be loath to sell the businesses to other hedge fund operators. Instead, they’ll first look for ways to spin them off as free-standing firms,
possibly financing sales to existing management.
By spinning off their hedge fund operations, banks would be able to keep strong
profit generators out of the hands of potential competitors. And by financing such
See VOLCKER on Page 7
Hefty Gains Help III Advisors Raise Capital
III Advisors, whose main fund was nearly crushed during the financial crisis,
has begun to attract fresh capital on the strength of recent performance.
During the first five months of the year, Cliff Viner’s flagship III Fund gained
7.2%, and two other funds performed even better — III Relative Value Credit
Strategies Fund was up 7.7% and III Select Credit Fund gained 9.6%. The Boca
Raton, Fla., firm, which recently launched a marketing campaign in an effort to
rebuild its investor base, already has landed a sizable commitment from an
unidentified pension plan.
The firm still has a long way to go, however. After peaking around $5 billion
before the downturn, III Advisors’ assets under management now stand at about
$1.5 billion. And while III Fund has gained about 38% since the end of 2008, it
remains “under water” — meaning the fund hasn’t generated performance fees for
See GAINS on Page 5
Correlation Issues Plague Commodity Funds
Fund operator Waterstone Capital of
Plymouth, Minn., hired three key
investment staffers in the past month or
Persistent correlation between commodity and equity markets has contributed
to wild performance swings for some of the top operators of commodity hedge
funds, including Aisling Analytics, BlueGold Capital and Clive Capital.
Returns of commodity-trading advisors usually are uncorrelated with broader
financial markets, which is what makes them appealing to managers and investors
alike. Since the economic downturn, however, the markets have moved largely in
unison, confounding investment strategies — and marketing efforts — employed
by many commodity hedge funds.
“Everything’s being dominated by macro variables, everything’s correlating to
an unusually high degree, and it’s unclear how long that will last,” one manager
said. “The good [funds] are down 3%, and the bad ones are down 15-18%.”
Aisling, a giant Singapore commodity-trading advisor, has had a particularly difficult year so far. The firm, which trades mainly in “soft” agriculture and
energy futures, was up 9% in January but is now down around 15% year to
See GRAPEVINE on Back Page
See ISSUES on Page 10
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June 23, 2010
Hedge Fund
Wells Fargo Eyes Prime Brokerage
Wells Fargo wants to enter the prime-brokerage business.
The San Francisco bank — the only one among the top four
U.S. banks without a prime-brokerage unit — has been discussing such a move with industry veterans over the last few
months. A Wells executive was particularly vocal about the
bank’s plans during a recent Bloomberg networking event on a
party-boat cruise around Manhattan.
Market players who are privy to the bank’s thinking say
Wells could follow one of two paths: It could either build a
prime-brokerage unit from scratch or acquire an existing business, as Bank of New York did in 2004 when it bought Pershing
from Credit Suisse.
Wells’ timetable is unclear. One prime-brokerage veteran
said the bank may want to take its time following an unsuccessful attempt last year to launch a fund-administration business. A Wells spokesperson declined comment.
With $1.2 trillion in assets, Wells is the fourth-largest U.S.
bank after Bank of America, Citigroup and J.P. Morgan. Market
players said it’s only natural that Wells would want to compete
in the potentially profitable prime-brokerage arena. “Most
established banks will covet a solid prime-brokerage business,”
said an industry insider. “It’s very lucrative when it’s done
right.” ❖
Cowen Secures Pledges for Ramius
A year after Ramius Capital agreed to merge with boutique
investment bank Cowen Group, the combined firm has raised
more than $425 million of fresh capital for hedge fund-related
investments.
A state pension system plans to invest in Ramius Value &
Opportunity Fund, Jeffrey Solomon, Cowen’s chief strategy
officer, said during a recent conference call with Cowen shareholders. Though he didn’t identify the pension, it appears to be
Florida State Board. The $139.7 billion retirement plan has said
it plans to allocate about $100 million to Ramius in the coming months.
Solomon also said another state pension has committed
$100 million for a managed account, and a fund-of-funds
manager is setting up a $225 million separate account on
behalf of a large multinational financial institution. In addition, Cowen is working with two other investors on “hedging
solution assignments” designed to manage risk for portfolios
with combined assets of $700 million, Solomon said.
On the flip side, Cowen lost a large Ramius investor when
the Italian bank UniCredit asked to withdraw its $700 million
investment earlier this year. The redemption was triggered by
declining assets in the Ramius Multi-Strategy Fund. In its firstquarter earnings report, issued May 12, Cowen announced it
was shuttering the multi-strategy fund along with another
vehicle, Ramius Enterprise Fund.
Like many hedge fund operators, New York-based Ramius
was hit by a wave of redemption requests amid sharp losses in
2008. Ramius Value & Opportunity Fund fell 20.8% that year,
ALERT
3
and other Ramius funds lost even more. The firm liquidated
several vehicles, including Ramius Leveraged Multi-Strategy
Fund, which lost 54%.
At the time of its merger with Cowen, Ramius had about
$7.3 billion under management in hedge funds and other
alternative-investment vehicles. Cowen, which is based in New
York, is now laying the groundwork for its first hedge fund
launch since the merger. The planned event-driven vehicle was
the subject of recent discussions the firm held with prospective
investors. ❖
Meridian Pushes Board Oversight
Fund administrator Meridian Fund Services will soon begin
working with hedge fund clients on corporate-governance
issues.
The Bermuda firm aims to help fund managers streamline
all aspects of corporate governance, from appointing independent directors and running board meetings to establishing
more rigorous external controls. In most cases, the fee for the
added service will be built into the overall fund-administration package.
The recent financial crisis highlighted weak governance at
many hedge funds, including a widespread lack of independent boards, according to Meridian. “Because of the lack of generally accepted best practices for internal auditing and controls
and, more importantly, external fiduciary controls, the basic
hedge fund model has been called into question,” said Joyce
Heinzerling, who oversees an advisory business for Meridian.
Meridian, led by chief executive Tom Davis, has assigned
four staffers to spearhead the initiative. Part of their focus will
be to help boards stay abreast of risk and operational controls,
as well as liquidity issues. The idea is to keep boards attuned to
the concerns of investors, who have been demanding ever
greater transparency from fund managers. ❖
Ex-Moore Staffers Prep Hedge Fund
A former Moore Capital portfolio manager has hung out his
own shingle.
Sean Monaghan, who ran a long/short equity book for Louis
Bacon’s hedge fund firm, recently set up Cavoleph Partners of
New York with plans to launch a stock fund early next year. He
is joined by another Moore alumnus, Matt Vigneau, who more
recently worked at Soros Fund Management.
Monaghan and Vigneau have begun speaking with
investors who know them from their previous stints. Word has
it they want to launch their debut fund with at least $50 million.
First, Cavoleph plans to hire a marketer, an operations chief
and at least two stock analysts. The firm recently brought on
Stephen La Rosa as chief financial officer. He previously
worked at Moore as a director.
Vigneau clocked six years at Moore as an analyst. He left the
New York firm in 2006 to join Soros, where he worked until
last month. ❖
June 23, 2010
Hedge Fund
Healthcare Funds Cut Long Exposure
Several prominent hedge fund managers have significantly reduced their exposure to the healthcare sector.
Among the fund operators that dialed down their long
exposure to healthcare stocks last month: Columbus Circle
Investors, OrbiMed, SAC Capital and Visium Asset
Management. SAC has four healthcare portfolio management
teams at its Sigma Capital unit in New York, while Visium
invests in healthcare stocks via a $1.5 billion long/short equity fund, as well as a newly launched large-cap version of that
vehicle.
OrbiMed’s Caduceus Fund is a dedicated healthcare hedge
fund with about $1.2 billion under management. Caduceus’
net long exposure — that is, the fund’s long positions minus
its shorts — fell from a range of 82-87% in the FebruaryApril stretch to 62% in May.
Columbus Circle runs about $275 million in its CCI
Healthcare Fund and related managed accounts. The fund’s
net long exposure dropped from about 65% to as low as 30%
for a few weeks in May, then rebounded to about 35%.
The “de-risking” was triggered by various factors. For
OrbiMed, the debate over healthcare reform earlier this year
created buying opportunities for depressed healthcare stocks.
But when the reform package passed Congress in March,
healthcare shares rebounded, and hedge funds such as
Caduceus took profits in April and May.
Macroeconomic factors also have played a role. CCI
Healthcare Fund pulled back amid a high degree of correlation between healthcare stocks and the broader equities market. Other factors included the European debt crisis and the
devaluation of the euro, which cut into profits for multinational healthcare companies.
Traditionally, large-cap healthcare stocks have been seen
as good defensive investments — a sector whose business
will remain steady regardless of the ups and downs of the
4
ALERT
economy. But with European governments looking to cut
back on healthcare costs, some fear that prices for drugs and
other healthcare products will fall. ❖
Goldman Alum Preps Debt Vehicle
A former Goldman Sachs distressed-debt manager has
started marketing a planned hedge fund that would seek to
buy commercial loans at sharp discounts to their face value.
Salman Khan is looking to raise $100 million to $150 million for the strategy, which he will run from his newly established Stabilis Capital of New York. Khan and his partners, Jon
Grossman and Steve Wilson, will target distressed commercial
loans from $1 million to $15 million that can be acquired at
discounts of 45-60%.
Stabilis has just begun speaking with investors about the
closed-end vehicle, which would combine elements of a hedge
fund and a private equity fund. It would have a 3.5-year investment period, during which investor capital will be locked up.
That’s an unusually long lockup for a hedge fund, but shorter
than for most pure private equity vehicles.
Khan and his partners believe an abundance of distresseddebt opportunities remain more than a year after the credit
crisis began to ease. Stabilis expects to be able to pick up discounted loans from still-struggling banks, the FDIC and other
hedge funds looking to sell illiquid assets. The overall market
for distressed commercial loans amounts to several hundred
billion dollars, according to the firm’s marketing documents.
Khan spent 12 years at Goldman managing a portfolio of
distressed commercial loans. He then moved to Silver Point
Capital of Greenwich, Conn., where he clocked six years running a similar strategy. Grossman previously worked at Archon
Group, a Goldman subsidiary that manages commercial real
estate assets. Wilson continues to hold a position at New Yorkbased Ciena Capital, where he oversees servicing of a $1 billion
portfolio of small-business loans. ❖
CALENDAR
Main Events
Dates
June 28-July 2
Sept. 26-28
Jan. 18-20, 2011
Jan. 30-Feb. 1
Event
Fund Forum International 2010
Alpha Hedge Institutional Investment Conference
GAIM USA 2011
Network 2011
Location
Monaco
San Francisco
Boca Raton, Fla.
Palm Beach, Fla.
Sponsor
ICBI
Institutional Investor
IIR
MFA
Information
www.icbi-events.com
www.marhedge.com
www.iirusa.com
www.managedfunds.org
Sponsor
NYSSA
RCA
Catalyst Financial
EDHEC
Information
www.nyssa.org
www.rcaonline.org
www.catalystforum.com
www.edhec-risk.com
Events in US
Dates
Event
Location
June 30
Alternative Assets Forum
New York
June 30
Asset Management Thought Leadership Symposium
New York
July 1
Cap Intro: Emerging Markets Alternative Investing
New York
July 13-15
Advances in Asset Allocation Seminar
New York
To view the complete conference calendar, visit The Marketplace section of HFAlert.com
June 23, 2010
Hedge Fund
ALERT
5
Family Office Targets Hedge Funds
Gains ... From Page 1
A former Perella Weinberg portfolio manager is gearing up
to launch a family office on July 1.
Caleb Sevian is setting up Focuspoint Capital of Boulder,
Colo., as an investment advisor that initially will manage
money for one family. Once Focuspoint completes its registration with the SEC, the firm is expected to take on two more
families as clients.
Between the three families, Focuspoint will manage more
than $100 million of hedge fund stakes, along with smaller
sums spread across other asset classes. Focuspoint eventually
may work with other families, as well as institutional investors.
Sevian previously spent one year at Agility, a Perella
Weinberg unit that manages about $1.3 billion for the
University of Colorado, other endowments, foundations, pensions and sovereign-wealth funds. Sevian and Agility’s chief,
Chris Bittman, worked for the university endowment directly
before they were hired by Perella Weinberg last year. After
they joined, Agility moved its offices from Austin, Texas, to
Denver.
At Agility, Sevian managed several asset classes, including
hedge funds. His last job was overseeing a portfolio that
included real estate, commodities and inflation-linked securities.
Sevian, who is chief investment officer of Focuspoint, is
looking to hire at least two portfolio managers and one or two
analysts. ❖
the past 18 months or so. Its 2008 loss was more than 50%.
Since then, Viner and his partners have retooled their strategy, shifting the focus to quicker profit-taking by holding positions for shorter periods. They also dialed down leverage and
reduced their reliance on repurchase agreements, switching
instead to a self-financing mechanism.
Despite the turmoil, the firm has seen relatively little
turnover in its investment staff. While III Advisors lost about
15% of its overall staff at the end of 2008, most of the key
traders stayed on. That, along with the shift in strategy, has
allowed the credit-focused firm to post double-digit gains
across all three of its established funds since the end of 2008.
At the beginning of this year, III Advisors began trading a
fourth vehicle dubbed III Futures Neural Network. The fund,
the firm’s first launch since 2007, invests in commodity futures
via a program that is designed to mimic the workings of the
human brain.
The firm was founded in 1982 by Viner, a veteran bond
trader, and economist Warren Mosler, who remains an investor.
In late 2008, III Advisors suspended redemptions as investors
sought to withdraw capital en masse. When the firm lifted the
gates in mid-2009, a large volume of capital was pulled out of
the funds. The firm’s principals are now the largest investors in
the funds. ❖
Citadel Expanding Equities Division
Citadel laid off 10 staffers from its global-equities division
this month, but now plans to add to the group’s headcount by
hiring 18 investment professionals.
Ken Griffin’s $12 billion firm already has hired seven traders
to replace some of the people who were let go and is actively
searching for 11 more equity pros. The plan is to expand the
division to about 108 investment positions, from about 100
before the layoffs.
The equities desk, which hasn’t had a down year since it was
set up in 2002, runs portfolios for the Chicago firm’s flagship
Kensington and Wellington funds.
Separately, Citadel has made some staff changes at its two
fund-incubation units, PioneerPath Capital and Surveyor
Capital, both based in New York. Managers on those platforms
receive seed capital from Kensington and Wellington.
PioneerPath recently cut a manager and two analysts who
had been running a fund focused on technology, media and
telecommunications stocks.
Surveyor, meanwhile, pruned two analysts — one covering
financial stocks, the other healthcare stocks. At the same time,
Surveyor hired two staffers: retail-stock analyst Christina
Short, formerly of Lombard Odier Asset Management; and Allon
Hellmann, who previously was a portfolio manager at Plural
Investments. Both started work on June 21. ❖
VPM. A clear PERSPECTIVE.
www.sungard.com/vpm/learnmore
June 23, 2010
Hedge Fund
6
ALERT
Fund of funds
Real estate
Private equity
Assets
Under
Mgmt.
3/31/10
($Mil.)
Hedge funds
‘Volcker Rule’ Targets: Units That Banks Might Have to Shed
Bank
Unit
Bank of America
BAML Capital
Partners
$5,000
•
Formerly known as Merrill Lynch Global Private Equity, the unit
acquires controlling stakes in companies through equity and
mezzanine-debt investments.
BAML Global
Strategic Capital
16,600
• • •
Makes direct investments and operates fund-of-funds unit Capital
Access Funds, which backs vehicles focusing on underserved markets
in the U.S. In April, sold $1.9 billion portfolio of stakes in private equity
funds to AXA Private Equity.
• • • •
The three banks hold a combined 79% stake in BlackRock: 34.2% for
BofA, 24.6% for PNC and 19.9% for Barclays. BlackRock is the world’s
largest asset manager, with $3.4 trillion across virtually all aspects of
the investment world, including alternative investments. It’s unclear
whether the Volcker Rule was intended to force banks to divest such
holdings. BofA’s stake was reduced from 49% and PNC’s from 24.6%
in December, when BlackRock completed its purchase of Barclays
Global Investors from Barclays.
•
• •
Operates hedge funds, funds of funds and private equity vehicles
through 20 investment units. Also seeds new fund managers wishing
to establish track records before marketing to others.
•
Holds 15% stake in Optima Fund Management, a $3.5 billion fund-ofhedge funds operation.
Bank of America,
PNC Bank and
Barclays
BlackRock
Bank of New York BNY Mellon Asset
Management
Mellon Global
Investing
Citigroup
Citi Capital Advisors
Deutsche Bank
DB Private Equity
RREEF
DB Advisors Hedge
Fund Group
Goldman Sachs
Goldman Sachs Asset
Management;
Merchant-Banking
Division
HSBC
HSBC Capital (USA)
62,000
3,500
14,700
• •
7,500
•
54,000
Under
1,000
147,000
1,000
Even as financial-reform legislation threatens to force the divestiture
of Citi Capital Advisors, the unit seeks to raise $3.5 billion for hedge
funds and private equity vehicles. It employs nearly 170 investment
staffers and manages $3.9 billion in hedge funds, $7.4 billion in
private equity funds and $3.9 billion in infrastructure vehicles. Earlier
this year, Citi sold two alternative-investment units. Apollo
Management bought real estate division Citi Property Advisors in
March and SkyBridge Capital bought Citi’s fund-of-hedge-funds
operation in May. A third unit, Citi Private Equity, remains on the block.
•
•
• • • •
• •
Deutsche formed the unit in April, combining the private equity
operations of its wealth-management team, the private equity
secondary-market part of its RREEF unit and the private equity fundof-funds operations of newly acquired Sal. Oppenheim jr. & Cie.
The bulk of its assets are in real estate investments, but the unit also
manages private equity infrastructure vehicles.
• •
•
Comment
In the final stages of shutting down a business that at one time
oversaw $4.5 billion in funds of hedge funds. It also operates smaller,
single-manager funds.
The two units oversee $98 billion in private equity funds and $17
billion-plus in hedge funds, which include Goldman’s well-known
Global Alpha quantitative investment vehicle. Goldman’s merchantbanking division oversees its own private equity investments.
The decade-old unit, formerly known as Midland Montagu Private
Equity, is one of five private equity groups worldwide that the bank is
thinking about selling. The other four are non-U.S. businesses not
covered by the Volcker Rule. It invests directly in companies through
buyouts and mezzanine financings. It also pursues real estate
opportunities.
Continued on Next Page
June 23, 2010
Hedge Fund
7
ALERT
• •
One Equity Partners
8,000
•
Highbridge Capital
Management
21,000
• •
Morgan Stanley
Asset Management
24,000
Morgan Stanley
Alternative
Investment
Management
43,000
J.P. Morgan
J.P. Morgan Asset
Management
Fund of funds
Hedge funds
$25,000
Unit
Real estate
Assets
Under
Mgmt.
3/31/10
($Mil.)
Bank
Morgan Stanley
Private equity
‘Volcker Rule’ Targets: Units That Banks Might Have to Shed (continued)
•
Largest bank-owned hedge fund operation, which also has around $5
billion of private equity investments. In 2004, J.P. Morgan bought its
first stake in Highbridge from founders Glenn Dubin and Henry Swieca.
It completed the transaction in July 2009, when it bought its final
stake in the unit. The bank is awaiting the outcome of the Volcker Rule
debate on Capitol Hill before finalizing talks to purchase Gavea
Investments, a $5 billion-plus hedge fund operation in Brazil.
Includes $15 billion of real estate assets and $4 billion of investments
in infrastructure projects. The investment bank only recently started
re-establishing its presence in the private equity business after selling
buyout unit Metalmark Capital to Citigroup’s Citi Capital Advisors in
2007.
•
Includes hedge fund-seeding unit FrontPoint Partners, which Morgan
Stanley bought in 2006. In January, the bank said it was
contemplating the sale of FrontPoint, as well as its minority stakes in
fund operators Abax Global Capital, Avenue Capital, Hawker Capital,
Lansdowne Partners and Traxis Partners.
•
More than a dozen of the unit’s investment professionals run a fund of
hedge funds.
Northern Trust
Northern Trust Global
Advisors
3,000
•
PNC Financial
Services
PNC Equity
1,000
•
PNC Capital Advisors
Under
1,000
State Street
State Street Global
Advisors
6,300
• •
US Bancorp
Wealth Management
Group
7,000
• • • •
Volcker ... From Page 1
deals, they could maintain some exposure to the businesses.
The Volcker Rule also would prohibit proprietary trading by
banks, which could lead to the sale or spin-off of prop-trading
desks. “The folks I’ve spoken to have more targeted the proptrading businesses, as opposed to hedge funds or private equity,” said Jay Langan, a mergers-and-acquisitions specialist at
Deloitte. “But if Volcker comes out in a punitive form — if they
keep pushing on the derivatives front, for example — I think
you will see a lot of M&A activity” involving bank-owned
hedge fund businesses.
Even then, market players said, banks would likely consider a sale of a hedge fund or private equity unit only after
exhausting other options, such as a management-led buyout.
Operates a 20-year-old fund of hedge funds business with $7.6 billion
of assets and an $18 billion private equity fund-of-funds unit.
Invests directly in private companies, largely through an Asia-based
team that pursues emerging-market opportunities.
• •
•
Comment
The largely autonomous unit runs buyout and mezzanine-finance
vehicles capitalized by the bank and outside investors.
•
The unit operates three small funds of hedge funds assumed via its
2006 acquisition of Mercantile Bancorp.
•
Manages a combined $6.3 billion on behalf of clients in hedge funds
and private equity vehicles.
Its investments in hedge funds and private equity vehicles are “tiny by
comparison” to the unit’s traditional holdings, a bank spokesman said.
M&A activity involving hedge fund assets may not materialize
for years.
In fact, it would be at least three years before the Volcker
Rule fully took effect. That’s because the legislation, as it’s currently written, would give regulators six months to study the
situation and another nine months to draft regulations. Banks
would then have two years to unload the targeted assets.
In the nearer term, market players expect the Volcker Rule
to trigger a good deal of chaos and infighting between banks
that operate hedge funds and the funds’ outside investors. For
example: If a bank were forced to give up management of a
fund, would that trigger so-called key-man provisions that, in
turn, would prompt institutional investors to pull out?
“No one on Capitol Hill is focused on the way the funds are
See VOLCKER on Page 8
June 23, 2010
Hedge Fund
Pension Questions Hatteras Results
New Orleans Employees is having second thoughts about
one of the funds of hedge funds it invests in.
Since allocating $5 million to Hatteras Investment three
years ago, the $312 million pension system has seen the value
of its investment drop to $4.3 million. Pension officials now
want to talk to their investment consultant, Morgan Stanley,
about whether to replace the Raleigh, N.C., manager.
New Orleans Employees is expected to conduct a full review
of its relationship with Hatteras in the coming months. The
question for pension officials is whether the firm has merely
hit a rough patch or is incapable of meeting the pension’s
return goals.
The pension’s fund-of-funds portfolio also includes a $5.3
million investment with French bank Societe Generale, $3.2
million with K2 Advisors of Stamford, Conn., $2.5 million with
Silver Creek Capital of Seattle and $3.1 million with Meridian
Capital of New York.
At the same time, New Orleans Employees is considering
whether it’s time to shake up its portfolio of single-manager
hedge funds. The pension has direct investments with 15 fund
managers. A decision on that issue is due by yearend.
The pension system allocates 20% of its overall assets, or
about $62 million, to hedge fund investments. It has been
investing in hedge funds since 2002. ❖
Plural May Open for New Investors
Matthew Grossman’s Plural Investments, which closed its
doors to new investors even before it began trading in early
2009, plans to accept fresh capital starting next year.
The New York firm also may ease liquidity terms for
investors, including shortening the current four-year lockup
period. “A four-year lock was extreme, even for somebody with
Grossman’s pedigree,” one fund-of-funds manager said. “A
greater number of investors will be willing to sign the check
today, if only he offers easier liquidity.”
Grossman, who previously managed a large book of investments for SAC Capital, began trading his Plural Investments
hedge fund in January 2009 with $450 million of capital.
Despite the lengthy lockup, the fund was one of the largest
launches during the financial crisis. The Plural fund gained
7.3% last year but was flat during the first quarter of 2010.
At SAC, Grossman was chief investment officer of the firm’s
CR Intrinsic unit. Earlier in his career, he covered energy stocks
at Tiger Management. ❖
Volcker ... From Page 7
structured and operating,” said Lawrence Kaplan, a lawyer in
the bank-regulatory group at Paul Hastings in New York. “If
they are forced to liquidate, you could get fire sales, but there
are so many possible unintended consequences it’s hard to
say.”
ALERT
8
And what if a fund’s legal documents require the managing
partner to remain invested? In that case, other investors
would likely sue the bank, potentially dragging out the
divestiture process for years.
“In processing withdrawal requests, the general partner or
investment advisor must balance fiduciary duties to the
redeeming bank holding company and the remaining limited
partners,” said Cheri Hoff, a hedge fund lawyer with Bracewell
& Giuliani in New York. “The general partner or investment
advisor must not cherry-pick the liquid assets . . . to satisfy the
redeeming bank holding company and leave the illiquid assets
for the remaining limited partners.”
Said another market player: “You can see this turning into
Vietnam real fast.”
President Obama has said he wants a financial-reform bill
on his desk by the end of this week, ahead of the G-20 summit
in Toronto on Saturday. By all appearances, the exact dimensions of the Volcker Rule will remain in flux up until the last
minute. Assuming it isn’t removed altogether, the provision
would apply to all U.S. bank holding companies, whether
American- or foreign-owned. Thirteen of the largest banks
operate 20 asset-management units overseeing some $450 billion of assets largely in hedge funds and private equity vehicles that the institutions could no longer be affiliated with (see
list on Pages 6-7).
Banks have mounted a Herculean lobbying campaign to
take much of the bite out of the Volcker provision, which is the
brainchild of former Federal Reserve chairman and Obama
advisor Paul Volcker. While most Congressional observers
believe it will survive in some form, bank executives are confident the final version will allow them to continue managing
hedge funds as long as they don’t invest any of the banks’ own
capital.
But the banks have had a hard time keeping up with the
developments on Capitol Hill. Earlier this month, a
spokesperson for Highbridge Capital said the $21 billion hedge
fund operator wouldn’t be affected by the Volcker Rule
because Highbridge doesn’t manage money for parent J.P.
Morgan. But last week, a bank spokeswoman seemed to do an
about-face, though she declined to elaborate.
And Citigroup said last week that it plans to raise another
$3.5 billion in hedge fund and private equity assets, regardless
of what happens in Congress.
The Volcker Rule could prove to be especially tricky for
banks that own stakes in firms whose business entails managing hedge funds. Bank of America, for example, has a 34.1%
stake in asset-management giant BlackRock, while PNC
Financial owns a 24.6% stake and Barclays holds a 19.9%
stake.
On a smaller scale, Bank of New York owns a piece of
Optima Fund Management, a $3.5 billion fund-of-funds manager. The bank also provides seed capital to emerging hedge
fund managers. Market players said the Volcker Rule, if it
forces banks to stop making seed investments, could further
dampen an already-difficult capital-raising environment. ❖
June 23, 2010
Hedge Fund
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June 23, 2010
Hedge Fund
ING Prop Trader Seeks Spin-Off
The manager of an event-driven hedge fund within ING’s
proprietary-trading operation plans to spin off the fund as an
independent business.
Geoff Arens has been running the Gray Cove fund for 13
months as a unit of ING Global Investment Strategies, which
manages about $500 million of proprietary capital for the
Dutch bank. About $114 million of the overall capital is invested in Gray Cove.
Arens is in advanced negotiations with ING about breaking
off Gray Cove, which, like the rest of ING Global Investment
Strategies, is based in New York. ING may be open to such a
move as it looks to shed riskier assets.
Gray Cove seeks low volatility via fundamental analysis of
distressed-credit and special-situations investments. Its preferred strategies include capital-structure arbitrage and the
purchase of bankruptcy claims and nonperforming loans. It is
65% invested in U.S. assets, and corporate debt accounted for
more than half of the portfolio at the end of April.
The fund gained about 12% in 2009 and another 7% during
the first four months of this year.
In addition to running Gray Cove, Arens oversees ING
Global Investment Strategies. Before joining ING 15 years ago,
he worked at Canadian investment advisor Argosy Securities, a
unit of CIBC.
FAMILY OFFICE &
PRIVATE WEALTH
MANAGEMENT FORUM
JULY 21-23, 2010
HYATT REGENCY, NEWPORT, RHODE ISLAND
This is Opal’s premier conference for high net worth
individuals and family offices in North America. Private
investors and money managers from around the globe will
return to this picturesque setting for three days of engaging
discussions on the latest investment trends.
The Forum will explore the challenges and opportunities
associated with investing in emerging markets, alternative
investments, distressed real estate, direct energy and
numerous other asset types.
To register, visit us online at
www.opalgroup.net or email us at
[email protected]
REF CODE: FOPWA1003
ALERT
10
Lance Larsen is Gray Cove’s chief operating officer and
director of business development. He has been at ING since
2005, having previously worked at Merrill Lynch.
ING Global Investment Strategies has an investment staff of
14 working in New York and Hong Kong. ❖
Issues ... From Page 1
date.
BlueGold started out the year with an 11% loss in January,
prompting the London firm to send a letter to investors
quashing rumors that it was unwinding. It turned things
around in February and March, then suffered another sharp
loss — of 12.5% — in May. London-based Clive fell 6% in May
— its worst monthly decline since 2008.
The woes of each firm can be blamed at least in part on illtimed trades and other portfolio missteps. But market players
see broader macro-economic factors changing the dynamics
for commodity-trading advisors generally.
Historically, commodity prices have correlated with the
broader markets only during recessions, which clearly was the
pattern in late 2008 and early 2009. Witness the S&P 500
index versus the Goldman Sachs Commodity Index: In the
years leading up to the financial crisis, they often moved in
opposite directions. But since late 2008, they’ve been in lockstep.
Most commodity portfolio managers expected their market would uncouple from the stock market beginning in late
2009 or early 2010, but that hasn’t happened. Indeed, during
the past six weeks or so, commodities have been more closely
correlated with equities than at any time during the past eight
years, with the exception of June 2009, according to hedge
fund services firm Newedge Group.
Some market observers fear that pattern is here to stay.
Why? In a word, uncertainty. Across most asset classes, managers have been preoccupied with the same set of macroeconomic trends, including Europe’s sovereign-debt crisis and
lingering concerns about the strength of the global economy
and governmental responses to the last credit crisis.
“There’s been tremendous connection between markets
that in the past have been entirely unconnected,” another
manager said. “Things that should have very little relationship to one another are getting caught up in it.”
The upshot: The market has become significantly harder to
read for commodity managers. Newedge researcher James
Skeggs said quantitative traders have had a particularly difficult time.
One portfolio manager said the past six months have been
“the rockiest, most testing months I can remember.”
Persistent correlation also is raising concerns among
investors that have long seen commodities as a hedge against
the broader financial markets. “The reason some people
wanted to be in commodities was the diversification,” the
same manager said. “If you believe that 2008 and 2009 is the
new norm, then there is no diversification story anymore.” ❖
June 23, 2010
Hedge Fund
11
ALERT
LATEST LAUNCHES
Portfolio managers,
Management company
Fund
Equity at
Launch
Launch
(Mil.)
Strategy
Service providers
Long/short: equity,
catalyst-driven
Prime broker: Jefferies
Law firm: Giordano Halleran
Auditor: Rothstein Kass
Administrator: ALPS Price Meadows
July 1
$5
Summation Sigma Fund 1 Mark Levin
Summation Capital,
Domicile: U.S.
Los Angeles
818-222-2001
Event-driven: special
situations and
distressed
Prime broker: BTIG
Law firm: Sadis and Goldberg
Auditor: Rothstein Kass
Administrator: ALPS Price Meadows
April 1
$8
SPAG I
Domicile: U.S.
Multi-strategy
Prime brokers: BNY ConvergEx and
NorthPoint Trading
Law firm: Hutner Klarish
Auditor: J.H. Cohn
Administrator: Nottingham
Investment Administration
May 1
$100
Spotlight Catalyst Fund
Domicile: U.S.
Terry Lally
Spotlight Funds Management,
Laguna Beach, Calif.
949-715-4030
Brian Shapiro and George Boyan
Specialized Performance
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New York
917-621-3351
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June 23, 2010
Hedge Fund
THE GRAPEVINE
... From Page 1
so. Sergio Castellon left Sandelman
Partners of New York to join $1.5 billion Waterstone as a portfolio manager
specializing in capital-structure arbitrage. David Duback arrived from Stark
Investments, a St. Francis, Wis., firm
where he served as a senior credit analyst for six years. Duback is working
with Kevin Cavanaugh, portfolio manager for distressed investments. Finally,
Bimal Shah came aboard from
Macquarie Securities as a financialstock analyst.
12
ALERT
at $7 billion Magnetar Capital in a similar role. Paul Smith will continue as
Magnetar’s chief legal officer. Wachter’s
arrival coincides with the SEC’s ongoing
review of Magnetar and other sponsors
of collateralized debt obligations.
Citadel Investment alumnus Alec
Litowitz set up Magnetar in 2005.
John Roglieri is starting work this week
as a director in the prime-brokerage unit
of BNP Paribas. He is working under Tom
Mahala, deputy head of prime-brokerage
sales in North America and South
America. Roglieri was previously cohead of U.S. hedge fund transactions at
HedgeBay, an online secondary-market
trading service based in the Bahamas.
Robert Bryan started June 15 as a senior
credit analyst at distressed-investment
specialist Bay Harbour Management of
New York. He previously headed the
credit unit of New York hedge fund firm
Colbeck Capital. Bay Harbour has about
$1.5 billion under management in hedge
funds and private equity vehicles.
Karl Wachter, who previously worked as
general counsel of now-defunct
Amaranth Advisors, last month arrived
Retail-stock analyst Angelique Dab
rejoined the New York office of hedge
fund manager Dawson Capital within the
past two weeks. She left the Southport,
Conn., firm in August 2008. Dawson has
about $450 million under management,
down from the $3.2 billion it was managing when Dab departed.
Alan Tsang, formerly an analyst at
Basso Capital of Stamford, Conn.,
joined the New York office of investment firm GWI Group earlier this
month. Tsang will head research of
financial firms for GWI, a Sao Paolo,
Brazil, firm that oversees about $1 billion of investments in hedge funds, real
estate vehicles and private equity funds.
Newedge hired Christina Qian this
month to work in the prime-brokerage
sales area. She previously led business
development and investor relations at
Parametrica Asset Management, a statistical-arbitrage shop in New York.
Qian reports to Jonathan Gane, who
works in Newedge’s New York office
overseeing the sales, origination and
structuring functions for the U.S.,
Canada and South America.
Prime-brokerage veteran Rob Davis is
selling “Together,” a CD of his original
songs. Davis, a managing director at
New York mini prime broker Concept
Capital and founder of the charity
Hedge Funds Care, sings 14 “folk-country-rock” tunes on the album. The CD
is available for $20 online, with some
of the proceeds going to Hedge Funds
Care.
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