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Hedge funds are facing another problem with European Union regulation. The EU is due to pass new bank bonus restrictions that will be applied to hedge funds as well. The new rule requires that cash can only be 30 percent of a regular bonus and a fifth of a large bonus.
It looks like the hedge fund industry will have to brace itself for yet another regulatory headache: Europe’s new bonus restrictions.
Hedge fund managers will be subject to planned bank bonus rules expected to be approved by the European Parliament next week, FINalternatives reported. Funds have been caught up in the new directive because management companies are considered to be credit institutions under the rules, Hedge Funds Review noted.
Under the terms of the proposal, cash could only constitute 30 percent of a regular bonus and one-fifth of a large bonus. A new watchdog for European banks will define what constitutes a large bonus. Companies will also have to defer at least 40 percent of bonus payments for a period of at least three years.
However, hedge funds may have a hard time complying with the rules, given that most are not publicly-listed and therefor, unlike banks, cannot make up the rest of the bonus payments in stock. Source
The competition is on to scoop up Wall Street traders and portfolio managers increasingly unnerved by the likelihood of sweeping new financial regulation.
Since political momentum began building earlier this year to limit trading for profit at Wall Street firms, traders have been exploring their options, and some have already left. Outside the banks, private investment funds looking for skilled traders have been gearing up for a hot talent market.
Greg Lippmann, who left Deutsche Bank AG on Friday, is among the highest-profile examples of traders lately exiting banks. Mr. Lippmann, who helped Deutsche earn billions betting against mortgages, is starting a hedge fund with other Deutsche colleagues that will be called Libre Max, people familiar with the matter say.
The jockeying intensified after the Senate, as part of financial-overhaul legislation it passed last month, included a provision expected to curtail banks' trading and other risk-taking activities. One countervailing trend keeping traders in place: The fund-raising environment for new hedge funds remains tough, especially with recent market volatility.
Blackstone Group, which long has backed hedge funds through its fund-of-funds business, is now raising a second, bigger "seeder" fund so it can dole out more money to proprietary traders and other investment pros spinning out of Wall Street to start hedge funds, say people close to the matter.
Seeding platforms typically give managers capital to trade—often $100 million to $250 million to start—and in exchange take a share of profits. The new Blackstone fund, which is still pulling in money, is expected to close with more than $2 billion, the people say.
Citadel Investment Group, the Chicago hedge-fund firm, has attracted more than a dozen portfolio managers to its second seeding platform for equities managers, called Surveyor, launched this year. Managers who recently joined the firm include Daniel Chai, who previously traded health-care stocks for UBS AG, people familiar with the firm say. Citadel's Pioneer Path seeding program, started in 2008, also has grown.
Elsewhere, big New York firm Millennium Management and SAC Capital Advisors in Stamford, Conn., are among the hedge-fund firms that have been corralling traders from Wall Street to increase their investing reach or expand into new strategies.
"Hedge funds with heft are standing there very ready. Some of these firms are built for soaking up talent," says Leor Landa, a hedge-fund lawyer at Davis Polk & Wardwell LLP in New York.
There has always been movement from Wall Street banks to hedge funds—either new or established ones—and the migration picked up after banks cut riskier bets during and after the financial crisis. But industry experts say what is different this time is that Washington lawmakers are closing in on stricter limits that threaten a slice of Wall Street's well-established trading culture.
One provision commonly referred to as the Volcker rule is a main driver of the activity.
Broadly, the rule, named for former Federal Reserve Chairman Paul Volcker, aims to curb banks' risk-taking by limiting their use of capital in trading and constraining their ownership of hedge and private-equity funds.
Much remains unclear about the rule, including whether it will affect bank-owned funds that trade primarily on behalf of clients, or be focused more on proprietary-trading desks and other units that trade the bank's own capital. But the mere prospect of passage, initially in doubt, has helped create a trader-arbitrage atmosphere among hedge funds, big banks and talent scouts.
"With Volcker, you've got everyone shaking in their boots, so these traders all have an ear to the ground," says John Pierson, a Manhattan-based headhunter for financial firms.
The problem for a lot of start-ups is that raising money right now is difficult. Robust hedge-fund profits boosted confidence last year after a difficult 2008, but the market's recent volatility has unsettled investors yet again.
"Even if you spin out of Wall Street, it's one of the worst fund-raising environments that we've ever seen. Many people will probably hang on until the last possible minute," said Emma Sugarman, who works with U.S. hedge-fund clients in fund-raising mode at French bank BNP Paribas SA.
The watch-and-wait crowd includes Robert C. Jones, a 23-year veteran of Goldman Sachs GroupInc. and managing director in the quantitative-investing group of Goldman Sachs Asset Management. Mr. Jones already has stepped back from day-to-day fund management to take on more of a consulting role, with plans to stay through most of this year, people close to the matter say. Meanwhile, he is pondering a spinout, possibly with one or more Goldman colleagues, people close to the matter say.
If Goldman ends up having to ratchet down its trading business, investment managers like Mr. Jones would have an easier time taking bigger teams with them when they leave, these people say.
Mr. Lippmann, the former global head of asset-backed securities trading at Deutsche, told the bank of his plan to leave late last year, according to a person familiar with the matter.
Mr. Lippmann and his Libre Max partners plan to launch their fund later this year, people familiar with the matter say. It's unclear how much money they will raise, especially considering the fund-raising environment right now.
One additional challenge for Mr. Lippmann could be his role in transactions involving collateralized debt obligations, the people say. Some CDO-related transactions at Deutsche, Goldman and other securities firms are under investigation by federal authorities amid a broader probe of banks' selling and trading of mortgage-related deals. Neither Mr. Lippmann nor Deutsche has been accused of wrongdoing.
The Libre Max name is meant to suggest "open ideas" relating to investment opportunities, a person familiar with the matter said. "Libre" also incorporates the first two letters of Mr. Lippmann's name as well as Fred Brettschneider's, who has been Deutsche's head of global markets for the Americas but is joining him. "Max" incorporates the last names of the other two founders.
A somewhat surprising statistic to come out of the first quarter of 2010 is that the number of hedge funds closing their doors rose while solid performance continued in the beginning of the year. Hedge fund liquidations increased in Q1 2010 after falling for the previous four quarters of 2009. Hedge fund liquidations rose to 240 last quarter while the number was just 165 in Q4 2009.Typically, liquidations of hedge funds track performance. In 2008, a record 1,471 funds shut down as that index fell a sharp 19.03%.
A GLG Partners shareholder has sued the hedge fund, arguing that its deal to be acquired by the Man Group undervalues its shares.
The deal would create the world’s largest hedge fund manager, with some $63 billion in assets, at the expense of GLG’s investors, Ron Duva alleges. “The timing of the proposed transaction has been engineered to take advantage of a recent decline in the trading price” of GLG shares, the lawsuit, filed in Delaware Chancery Court, claims.
Man has agreed to pay $4.50 per share for GLG, a 55% premium to its stock price when the deal was announced on May 17. It’s still more than GLG shares are trading for today, about $4.22, and only slightly below its 52-week high of $4.61. But that is still less than half what GLG shares were valued when the firm went public on the New York Stock Exchange via a reverse-merger.
Duva’s lawsuit also alleges that the Man deal “contains provisions designed to entrench management and deter alternative offers,” specifically challenging both the $48 million breakup fee that GLG would have to pay if it backs out of the deal, and the provision paying GLG executives in Man shares rather than in cash, as other GLG shareholders will be paid.
GLG called the lawsuit “entirely without merit.”
Man is paying $1.6 billion for GLG, which manages $23.7 billion.
(Reuters) - Private banks are recommending that clients allocate more money to hedge funds, in particular event-driven funds that will benefit from an expected surge in mergers and acquisitions and debt restructuring.
Unlike in 2009 when stocks rallied across the board, the overall market direction is less certain this year and the best returns will likely come from event-driven managers who can better navigate the twists and turns in M&As compared with traditional long-only and exchange-traded funds (ETFs).
In debt markets, corporate and emerging market spreads have narrowed significantly, and outsized gains will come from sorting out the over $400 billion (279 billion pounds) in leveraged loans from the buyout bubble that will mature in the next few years, private bank investment strategists polled by Reuters said.
"The event-driven is our top strategy... We've recently gone positive on that strategy, and part of the reason is because we expect to see a lot more event-driven deals like mergers and distressed," said Karen Tan, director of the hedge fund group at Deutsche Bank Private Wealth Management in Singapore.
Deutsche has raised its recommended allocation to hedge fund to 16 percent of portfolio from 10 percent last year, while RBS Coutts suggests putting up to 13 percent into hedge funds compared with up to 7 percent at the start of the year.
Overall, seven of the eight private banks contacted by Reuters said they have become more positive on hedge funds and that their top pick was for event-driven funds.
Barclays Wealth suggests clients shift part of their equity holdings into long-short funds that are better able to take advantage of choppy stock markets.
"We are moving into a mid-cycle where the broad directional gains have already been made," said Barclays Wealth's Asia strategist Manpreet Gill.
Singapore-based fund tracker Eurekahedge said distressed debt and event-driven hedge funds have been the best performers so far this year, returning 8.4 percent and 5.7 percent as of end-April.
The worst performing strategies were commodity trading advisers/managed futures, which returned 0.9 percent, and macro hedge funds, which were up 1.97 percent in the first four months of 2010.
Event-driven funds try to take advantage of sharp changes in the value of a firm's equity or bonds in situations such as when the firm is involved in M&As, asset sales, or some form of corporate restructuring.
Some banks and commentators regard distressed debt hedge funds, which search for bargains in the loans and bonds of firms in trouble, as a subset of event-driven funds, while others put them in a separate category.
According to data from Lipper, a Thomson Reuters unit, the best-performing event-driven funds over the past five years are the SHK Corporate Arbitrage Manager Class A and B funds, which have returned more than 240 percent during this period.
The SHK funds, managed by Hong Kong's Sun Hung Kai Financial, are fund of funds structures that invest in a range of event-driven strategies including distressed debt.
Private banks were, however, divided when asked about hedge fund strategies to avoid.
ABN Amro Private Bank, for instance, is negative on long-short equity funds unlike Barclays.
"Fundamental macro managers may face very difficult times trying to predict highly politically driven situations such as country debt defaults," the ABN said in its latest strategy report to clients.
Joseph Pancini, head of alternative investments at JPMorgan Private Bank in Asia, however, argued that macro hedge fund managers provide consistency in returns and generally performed best when global growth is uneven.
Private banks said that contrary to perception, hedge funds were no riskier than forex or equities, and should be included in portfolios for reasons such as diversification and their ability to make money in falling markets.
"Hedge funds are like airplanes. When one crashes it always makes the headlines even though there is a higher chance of a car crash," said JPMorgan's Pancini.
"A lot of things can go wrong in a traditional long-only fund but hedge funds are always in the spotlight."
(Editing by Lincoln Feast)