wwHw.absoleuteredturn.nget e Magaiszsue 1i anpril 2e003

THE MAGAZINE FOR THE US aHEDGbE FUNsD COoMMUlNIuTY t ereturn

Moore on winning the talent game PAGE 30

Hedge funds under siege How much more regulation will there be in the US? PAGE 38 The start-up business Over $27 billion raised by new funds in 2002 and the pace isn’t slowing PAGE 44 Which index is best? S& P, Zurich, CSFB Tremont and HFRX analyzed PAGE 34 CONTRIBUTORS

Published by has been following hedge funds and HedgeFund Intelligence Ltd Mike Peltz other alternative investments since the early 1990s Douglas House – 3rd floor when he was a writer for Institutional Investor 16–18 Douglas Street magazine. In July 1996, Mike joined Worth magazine, London SW1P 4PB where he has continued to write about hedge funds as Website : www.hedgefundintelligence.com part of his broader financial and business coverage. He Email : [email protected] is currently Executive Editor of Worth and pens a Telephone : +44 (0) 20 7233 8585 monthly column on the markets called Streetwise. Fax : +44 (0) 20 7630 7948

New York office:

20th Floor, 104 Fifth Avenue, New York, NY 10011 Telephone: +1 212 352 8713 is the editor of InvestHedge , a sister Niki Natarajan Fax: +1 212 924 0240 publication of Absolute Return , and has nearly 10 years experience as a financial journalist, specialising mainly Managing editor: Iain Jenkins in investment management. Niki previously worked for [email protected] Financial News, where she launched the hedge fund US Editor: Peter Gallo and securities finance coverage. Before that, she [email protected] worked for Institutional Investor as launch editor of US Correspondent: Katrina Dean Allen Global Fund News and editor of Foreign Exchange [email protected] Letter.

Contributors:

Barry Cohen, Stephanie Hoppe, Niki Natarajan

Neil Wilson, Robert Maharajh, Mike Peltz, Paul Taylor has been a business journalist for more Data and Research Manager: Lisa Ahmed Paul Taylor [email protected] than 25 years and is currently based in New York. He

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Copyright:HedgeFund Intelligence Ltd. All rights reserved. is the editor of EuroHedge and has over Reproduction or transmission of this magazine, by either electronic Neil Wilson or mechanical means, including photocopying, recording or any 15 years experience as a financial journalist, mainly information storage and retrieval systems, prohibited without prior written permission of the publisher. specialising in derivatives and alternative investments. For information on reprints and back isssues, please email Neil was formerly European editor of MARHedge, [email protected] or call +44 (0)20 7901 1912 editor of Futures & Options Week, editor of Futures Subscribers must agree to the Terms and Conditions of Absolute Return as posted on the website www.AbsoluteReturn.net before and Options World and assistant editor of The Banker. subscribing. No statement in this magazine is to be construed as He has also worked for Risk Magazine and contributed an invitation to invest in hedge funds. HedgeFund Intelligence reserves the right to refuse subscriptions. to a variety of other publications such as the Financial

ISSN Number: 1740-4282 Times and The Economist.

4 ABSOLUTE RETURN APRIL 2003 EDITORIAL

New magazine for a new era

elcome to the first issue of Absolute news stories and each month we will be breaking WReturn, the magazine for the hedge fund news that you need to know. professional. Our launch comes at an interesting Our profiles of some of the leading players in time for the hedge fund community. Regulators the industry will give a valuable glimpse into the seem to be snapping at the heels of the industry. workings of some of the biggest and best firms. The press is full of negative stories about blow- And we will be bringing insights into the ups, falling assets and poor performance. performance of the hedge fund industry though Yet new funds are starting daily and the big our unique performance reports and our US institutions are showing real signs of allocating hedge fund database, which will expand over time. vast sums of money to hedge funds. In a move to address concerns about private More than ever, it would seem, there is a need placement rules, all our US subscribers have to be for a magazine to make sense of the seemingly ‘accredited investors’ and must agree not to conflicting currents swirling around the industry. circulate the magazine to non-accredited people. Our goal is to provide intelligent and We hope you enjoy the publication and agree provocative analysis of the real stories behind the that it maintains the high editorial standards that headlines. We aim to cut through the noise and we have set with our other publications, get to the heart of the issues facing the industry EuroHedge , AsiaHedge and InvestHedge . in considered way. This will not be at the expense of important Iain Jenkins, managing editor

APRIL 2003 ABSOLUTE RETURN 5 CONTENTS

Contents ......

MAIN FEATURES

17 Bowman is back - investors aren’t happy 30-32 How Louis Bacon is wooing trading talent The technology guru and one time manager of a Moore Capital, the $5 billion-plus group, is $5 billion fund is part of a trend to shut down breaking the mould in its battle to build its bench funds after a period of poor returns and quickly of traders in a strategy that sets new standards of open again in a new guise. flexibility for other hedge fund group’s trying to build sustainable operations. 18-19 Lazard discovers the power of the little guy After the shock departure of William von 38-42 Facing up to a new world of regulation Mueffling, the spotlight has now turned on the Attacks seem to be raining down on the US hedge involvement of mutual fund groups in hedge fund industry from all sides and some form of funds and has prompted serious questions about regulation now seems inevitable. But how bad will whether they are capable of holding on to top it be? hedge fund talent.

6 ABSOLUTE RETURN APRIL 2003 CONTENTS

CTA funds. Performance NEWS 43 GNueeisl tW coilusomnn explains why a reports on top equity funds. little regulation along the lines 8 Intelligence Big news stories from around of the European model may be 50 US league tables the industry good for US managers. Monthly performance data on over 500 funds with February’s numbers. 13 PWehoopl eis moving where INVESTORS 58 Indices and global round up 22 FWunhdys a arned e sqturaittye gfuiens ds not Absolute Return Index along 14 ISnt tohreie nse twhs at made the working? And could the with indices for European, headlines biggest hedge fund strategy be Asian funds and global fund of about to fall from favour in the funds. same way that macro fell out of 26 New funds Up coming launches favour in the late-90s. RESEARCH 34 Funds of funds in drag? 46 PWrohdautc pt raonddu vcetnsd aorre n newews and 25 IGnestniteurtailo nMaol btouryse ris’ pgluaiydie ng safe Are the latest wave of hedge what the vendors are doing with its pensioners money and fund indices nothing but a picking the safe brand name marketing gimmick designed funds for its initial foray. for institutional investors that VIEWPOINT don’t know any better? 5 Editorial PERFORMANCE 44 NAe lwo ofkun idn tsou rtvheey size of the start 21 Mairkkee tP ceoltmz mrevnet als Steve 48 PAeltrafo arnmda nocthe er convertible up business in the US suggests Cohen’s buy and hold secret funds reach new highs. Tudor that it may be bigger than and wonders why he has BVI and Campbell keep racing people thought and broken his own trading rules. ahead along other macro and increasingly polarized.

APRIL 2003 ABSOLUTE RETURN 7 INTELLIGENCE

Blocking tactics by Citadel and Amaranth plan by Citadel and Amaranth, two of the leading multi-strategy arbitrage groups, to Aactively 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 Chicago- based 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 Polygon’s concern about the issue that their investor presentation warned that, if they ISnomvee gsootdo nerwss steaemkse to rboe oan dth eo huortiz oon fo rt teecchnh ology funds after a rocky 12 months in which close to $10 billion invested with the fund, they risked being thrown flowed out of the sector and a number of high-profile funds out of any Citadel fund in which they were closed their doors. John Hurley, formerly at Bowman invested. Capital, looks set to raise an initial $300 million for his Meanwhile, Amaranth has indicated to investors Cavalry fund. that it is amending the shareholder agreement to But, overall, the picture is still pretty gloomy. Three huge stop its investors from ‘seeding’ managers who quit funds have shut down. Among them are the $1 billion their $2.2 billion Greenwich-based firm to start on Agnos fund – which was run by Tony Anagnostakis, their own. This move by Amaranth should come as Palantir – which was running $2 billion of assets, and no surprise as the COO of the firm, Charlie Bowman Capital – which at its peak had $5 billion under management. Winkler, who used to work at Citadel appears to Other smaller funds like Westfield Technology and have adopted the Citadel approach when it comes Essex also closed down last summer. to discouraging traders from leaving. Then there are the assets that flowed out of some of the While the policy of Citadel may deter some bigger technology funds that are still in business. Amongst investors who have made a lot of money from the those who lost technology assets over the past 12 months two firms over the years and have large are Digital Century, Galleon, Camelot, Intrepid and Pequot. investments with both groups, it is difficult to see On the positive side, last year Andy Kaplan left Andor to how it would be enforceable. Polygon would be start Grange Park and raised over $300 million. Mike Au quit Intrepid and raised close to $500 million for Hornet and very unlikely to tell Citadel who their shareholders Peter Labon left Bowman to join Citadel, where he is are. The Amaranth strategy is more enforceable as running Citadel Edison with over $300 million. Net flows it seems to be targeting ‘seed investors’ only – out of technology appear to be in the range of $7 billion. 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. Ganek mimics SAC high fee Moore Capital and SAC Capital often seed good Few start-up managers dare to break the standard hedge fund fee structure on day-one but, then again, David Ganek traders who leave their shops, while HBK has a is a little different. He is supposed to be one of the hottest policy of never helping or hindering their alumni. properties in the technology trading area and is borrowing heavily from his former employer, Steve Cohen, at

8 ABSOLUTE RETURN APRIL 2003 INTELLIGENCE

Stamford-based SAC Capital. that the bank will Cohen is legendary for his model of having no allow the creation of a management fee and an astonishing 50% performance fee. single-manager However, Ganek is understood to have initially opted for the platform. They regard best of both worlds: a management fee of 2% - which is right the Traxis venture as at the top end – and an unusually punchy performance fee very much a one-off of 35%. that the bank is For the time being investors are willing to listen to what tolerating because it Ganek and his team have to say, but many maintain that doesn’t want to sever alarm bells start ringing when they see aggressive fee links with Biggs, who structures from brand new management companies. was on the point of And the record of day-one high fee managers does not leaving Morgan augur well, they say. After all, most investors can remember Stanley to join former other start-ups that went for the Cohen structure of no colleagues at Front management fee and a 50% performance fee. Some raised a Point, which is lot of money quickly before struggling. building a hedge fund Furthermore, with the exception of Rich Walter, who has business and has delivered spectacular returns at Walter Capital, few SAC Barton Biggs of Morgan Stanley already provided alumni seem to perform as well outside the firm as they did infrastructure and when they were surrounded by the SAC infrastructure, seed capital for a number of successful launches. research and access to flows. For many senior Morgan Stanley staffers, the memory of That said, everyone acknowledges that Ganek is a the Russian debt crisis of 1998 is still fresh in their minds. different animal. He was operating with his own team within Then Morgan Stanley is understood to have paid out SAC and most have joined his new shop called Level. He compensation following the poor performance of one of its also had a spectacular record, which is encouraging many emerging market fixed-income hedge funds. investors to take a look. However, they may be more inclined to invest if he cuts the fee, which could still happen.

O’C’Conononr, nthoe Crh hicaigvoe-basse do hfefd gse pfuendc fiiram lhiesadtes d by Joe Scoby, which is part of the UBS Asset Management BThieg ngews T rmaxias fyun sd,t wahircth MMorogarng Satanle ys’su bietste known group, is poised to make a number of new single strategy market strategist, Barton Biggs, is starting with Madhav products available following a restructuring of its business. Dhar, may be the begining of a suite of single-manager The strategies include US long/short equity and European hedge fund products on a new platform being assembled by long/short equity as well as – on a limited basis – the firm’s Morgan Stanley. convertible arbitrage strategy. These have only been Putnam Coes, former chief operating officer of Morgan available hitherto within O’Connor’s multi-strategy platform. Stanley AIP, the firm’s fund of funds and private equity The changes also appear to involve what looks like plans operation, will head up the new platform dubbed Morgan to revive the firm’s flagship global equity arbitrage product. Stanley Hedge Fund Partners. The newly created group will This follows the move of Danny Schweizer, formerly chief look to build a range of other single manager funds, should executive officer at UBS Warburg in Switzerland, to the Traxis venture prove to be a success. O’Connor in Chicago earlier this year, where he has become The idea is to follow other banks, like Deutsche Bank, deputy chief executive and deputy chief investment officer, into the single-manager business with a range of funds. First reporting to Scoby. out of the blocks is the soon to be launched global multi- These moves follow a rocky performance spell last year, asset fund run by Biggs. which led to a sharp decline in assets in the firm’s equity However, some Morgan Stanley insiders are skeptical funds – which were at one time about $3 billion – to a

APRIL 2003 ABSOLUTE RETURN 9 INTELLIGENCE

current level estimated at about $1 billion. Despite overall Putnam Small-Mid Cap Value Long/Short Fund. problems with performance, sources say a number of the Founded more than 65 years ago, Putnam, part of Marsh underlying strategies have continued to perform well – and & McLennan, is one of the largest fund managers in the US. should be attractive to investors going forward. Like rival Fidelity it has always publicly denied that it had The US fundamental equity strategy is managed by Kipp any hedge funds although this could be set to change over Schrage, based in Chicago, who was previously head of the coming months. proprietary trading in US equities at UBS Warburg, In 1999, Putnam Investments formed TH Lee, Putnam responsible for the convertibles and relative value trading Capital, a joint venture with Thomas H. Lee, for alternative groups. Schrage is an O’Connor veteran. He runs a investments, although only venture capital funds have been fundamentally-based market neutral long/short strategy offered so far. that focuses on five main sectors. The strategy’s 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 O’Connor veterans and run a DMaett mGoohdc, trhae itn vfeustmnedntr baanikseer rre nsowtnaedr tfosr hfisund combination of opportunistic trading based on fundamental, political fundraising prowess for big-name Democrats and statistical, event-driven and other catalysts. Capacity is for hitting the headlines last fall for his involvement with a expected to be about $300-$500 million. blind trust managed for Democrat Senator Robert Torricelli, The convertibles strategy is run by George Locasto in has thrown his hat into the hedge fund arena. Chicago. He runs a market neutral portfolio concentrating The former principal of BluStone Capital and Whale on equity-sensitive bonds with selective trading of bond-like Securities recently established Gohd Asset Management, and lower credit products. His team focuses on shorter which on April 1 began trading its first hedge fund, a US duration, investment grade and lower premium securities. domiciled long/short vehicle. Ghod’s 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 Puutntamn aInvmest mpelnatsn, thse $t2o41 rboilliloln oBoustto nf-buasnedd ms utual been expected to be an easy Congressional bid, just 36 days fund manager, is poised to roll out a range of single- before the election. manager hedge funds No wrongdoing was alleged on Gohd’s part, and criticism that it has been quietly of Torricelli centered on his alleged failure to publicly incubating for the past disclose his personal dealings. Ironically, Torricelli had year with small apparently set up the blind trust in 1994 with Gohd amounts of internal specifically in order to prevent a conflict of interests capital. between his personal and public affairs. To spearhead the More recently, Gohd has been focused on setting up his move to hedge funds hedge fund shop in Manhattan. The long/short fund will and the development seek to exploit mispricings, primarily in US equities. Gohd of the alternative will employ a contrarian theme, looking at pairs of closely- business, William related securities. About 200 such groupings will be Landes has been considered, based on quantitative screenings, followed up plucked from his role by qualitative analysis of individual companies. as head of global research. The five funds, William Landes of Putnam which were seeded SToamn Sadndeelll’s reveenint-dfriovernc teeams odn tihset Sraendselsl/eCad stlerigg with $25 million, are the Putnam Emerging Markets Hedge Master Investments fund has brought in Herb Lust, another Fund, Putnam Equity Long/Short Fund, Putnam GAA senior specialist on the distressed securities side, as part of Hedge Fund, Putnam Mortgage Hedge Fund and the a move to take advantage of the growing opportunities in

10 ABSOLUTE RETURN APRIL 2003 INTELL?I? GENCE

WHERE ARE THEY NOW?

the distressed area. The move will reinforce Sandell’s 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 Joseph Stiglitz further enhances the firm’s capabilities on the distressed Since resigning from his position as Chief Economist at side following the addition of Jim Cacioppo in 2000, another the World Bank in 2000, Joseph Stiglitz has rarely been distressed specialist who had previously worked at Halcyon out of the media limelight. However, few people know that and Wasserstein Perella. the controversial economic theorist, and winner of the In contrast to many distressed strategies, a large part is Nobel Prize for Economics in 2001, has been actively in hedged capital structure arbitrage plays, with the only involved in hedge funds. outright long positions in senior debt instruments. So far, Stiglitz became widely known as the scourge of the most of the distressed portfolio is concentrated in the US. International Monetary Fund and is currently ensconced The Sandell team in New York and London has now as Professor of Economics at Columbia University’s Business School as well as an investor and investment grown to total of 27 staff, and the firm continues to manage advisor board member of a rather unusual hedge fund. just under $1 billion. 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. TLewe Hoo bmsono arned Jfohunn Fidchsth oornu, tw o sfe nMior atrvadeerrs iact tk he The firm was founded in 1991 by Andrew Weiss, $7 billion Maverick Capital, have left and are planning to Professor of Economics at Boston University. He attracted launch their own funds that look set to attract considerable other leading academics such as Steve Ross of MIT, investor interest. Bruce Greenwald of the Columbia Business School and They follow a number of other high-level departures Lucien Bebchuk of the Harvard Law School as investment from Maverick in recent months with senior trader John advisors. Weiss has known Stiglitz for the past 30 years Hickey leaving to join SAC Capital (see People on page 13). and has collaborated with him on many scholarly articles. Fichtorn, a specialist in technology, is slightly ahead in Except for one year since launch, the $150 million the start-up process with his Tracker Capital fund. He has operation has outperformed both the MSCI World and tapped Mark Hoffman, former head trader at JLF Asset Emerging Markets indices as well as the S&P 500. Management, which shut down last summer. Fichthorn’s Brookdale takes an activist approach to value realisation. brother Luke, a former senior vice president at Lazard It identifies funds trading for less than cash and Freres, will also be joining the firm. accumulates large stakes. It then initiates corporate The firm, currently being housed in Maverick’s New actions, such as tenders or share buybacks, to generate a York offices, is getting ready to debut its first fund, a multi- return of cash to shareholders. If it’s appropriate, it will sector, long/short fund this summer. gain control of the fund and replace the management. 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.

APRIL 2003 ABSOLUTE RETURN 11 INTELLIGENCE PEOPLE

US equity fund, to go it Goldman Sachs Asset arb, distressed securities, Unschuld’s $160m day alone with their own Double Management. He will run mutual-fund timing, and oEnx-eS cshurocdcersss ‘m sitcorory-cap’ V Partners fund. the firm’s new London systematic trading. manager Ira Unschuld has A firm official said Double V office. filled up his new Brant Point principals Vicas and von Burnside is well known in SAC plucks Hickey from fund with around $160 Olnhausen left amicably the European investor Maverick million on its first day of from ING, which seeded the community. He worked at SAC Capital Advisors has offering. Investors long/short fund with $10 Goldman Sachs prime taken on John Hickey, a scrambled to get a piece of million in October 2000. brokerage in London where senior trader at Dallas-based Unschuld’s very limited Prior to their hedge fund he was responsible for the Maverick Capital, as a trader capacity – and no wonder. foray, Vicas and von capital introduction effort focusing on technology at Under his guidance the Olnhausen had worked before moving to the GSAM SAC. Maverick Capital, Schroder Capital Ultra fund, together at Furman Selz and fund of funds operation which has approximately $7 was up an average 72% successor firm ING for more where he led the institutional billion in assets, is managed annually. It was being run as than a decade. Vicas was a sales efforts in London. by Lee Ainslie III and was a quasi-hedge fund with managing director of founded with seed capital shorts taking the form of international equities while Aquila expands line-up from Sam Wyly, who has index futures. Such was the von Olnhausen served as a and key new staffers since seeded the Dallas- popularity of the fund that it managing director covering Aquila Capital Management based fund of funds Ranger regularly changed hands at Scandinavian institutions for run by Neal Berger, Capital. An official at SAC a premium to net asset ING. formerly a principal at the $3 confirmed Hickey’s hire. A value. billion Millennium Partners, spokesman from Maverick is adding staffers and Capital did not return calls Lefevre named as head drawing up plans for an before press time. Kingdon loses tTrraipdpe Lr eafetv Wrea itne Mr Sartcrhe ewt as offshore twin for its US fund KNaewrc Yhomrke-br atsoe dL RheL dge fund appointed to the post of expected to begin trading in giant Kingdon Capital head trader at Water Street late April or early May. Ashraf Starts Management in March lost Management, replacing One recent recruit is Russell EAm foprmyreera amna lFyustn fd rom Essex portfolio manager Matthew Carrie King who recently Lavelle, an arbitrage Investment Management Karchmer to LRL Capital left the firm. specialist who departed and Summit Partners, Rauf Management. Karchmer’s is The Jacksonville, FL-based Millennium Partners in early Ashraf has struck out on his a consumer and retail sector hedge fund shop is managed March. The other new own with the launch of Ash specialist and will now be by firm founder Gilchrist addition is David Roy Smith Capital Management. The working as part of a team Berg, who got early support who was previously trading Boston-based firm was that includes managing in starting Water Street from his own accounts focused on slated to begin trading the partner Andy Lester and Tiger Management’s Julian mutual-fund timing. $35 million Empyream Fund Gary Jacobson, a principal at Robertson in 1988. Water The new staffers brings the on April 1. Ashraf who had the firm who also serves as Street’s senior staff includes tally to eight at Aquila, previously worked at a director at the University principals Peter Mahon and which was formed last Fidelity Investments of Albany Foundation. Robin Bradbury. summer and began trading developing trading models Kingdon has replaced its first fund in late 2002. for the giant Magellan Fund Karchmer with Christine DKR beefs up investor Other members of the will oversee Empyream’s Hyland Frankenhoff. realtions with Burnside Aquila team include analysts portfolio. DKR Capital, the $2.8 billion and traders Andrei The long/short portfolio will Stamford-based group which Gerasimov, Michael Lubin, use a quantitative Double V part ways with is best known for its DKR Peter Blumen and risk methodology in choosing its IRNoGbe Frtu Vrmicasn a Snde lEz rnst von Soundshore convertible manager Fuaad Qureshi. equity picks, drawing on a Olnhausen have left ING fund, has boosted its Aquila’s diversified arbitrage system comprised of 60 Furman Selz, where they investor relations efforts fund plays six general individual screens running had been running a $55 with the appointment of themes – statistical arb, models built and honed by million small and mid-cap David Burnside, formerly of equity-volatility arb, credit Ashraf.

APRIL 2003 ABSOLUTE RETURN 13 IN THE NEWS

LANCER Lauer attempts fightback ancer Partners, Michael Lauer’s $1 billion hedge fund group, has tried to strike back at Morgan LStanley for writing down its stake in the firm. 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 Lauer’s initiative can buy extra time for Lancer as the bad news keeps mounting for Park Avenue’s 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 prompting James Hedges, 20. At the same time the group has been struggling to IRS president of LJH Global meet redemption demands from investors to the tune of Investments, to warn that $250 million – 29% of the fund’s assets. Tax trap sprung on III funds could be forced to At the heart of the group’s problem seems to lie the US-based hedge funds are liquidate billions of dollars valuations given by Lancer to the many illiquid stocks watching nervously for any of assets in order to pay in its portfolio, which investors suggest have been over- signs that the Internal back-taxes they owe. generous. Lauer declines to comment, and his lawyer Revenue Service demand Hedges cautioned that a for millions of dollars in wider clampdown on Jeffrey Zuckerman did not respond to requests for back-taxes from III deferral of taxes on comment. Lancer is already facing a number of law Offshore Advisors, the offshore income could suits from Morgan Stanley and other investors. In turn, Florida-based hedge fund impact some of the biggest, Lancer is suing a number of newspapers. group that runs $1.4 billion most successful hedge in two bond strategies, is fund managers, who could DRIEHAUS part of a broader be forced to repatriate crackdown. “hundreds of millions, if Hedge fund managers not billions of dollars” of Second equity fund underway often defer taxes on fee their own investments from income from offshore the fund. riehaus Capital, Richard Driehaus’ $2.2 billion funds by reinvesting the mutual fund shop, quietly launched its second fees back into the funds. Dlong/short equity fund at the beginning of the THUNDER BAY This allows the money to year. The strategy has adopted a market neutral compound tax-free until Ex-Deutsche man starts approach with a US focus, and is based on computer they repatriate the profits. Dean Barr, Deutsche Asset models developed in-house by the fund’s manager In the past, the IRS went Management’s former James Krema and Driehaus himself. Krema has been along with this practice, chief investment officer, involved in systems development at the group for the but it has come under has become the latest in a increased scrutiny in the string of Wall Street last 13 years. The launch of this fund follows the wake of accounting veterans to set up his own introduction of Driehaus’ first hedge fund, a $20 scandals at Enron and hedge fund business. million long/short equity strategy managed by Jeffrey elsewhere. Barr, who until August, James, last April. Depending on its success, the group In February, it emerged helped raise and manage is understood to be eager to expand its hedge fund that the IRS had targeted roughly $800 billion at suite by spinning out more products. III Offshore Advisors with Deutsche’s money a back-tax demand management unit, is on

14 ABSOLUTE RETURN APRIL 2003 IN THE NEWS track to meet his $200 million by the beginning of million investment goal for this year. It is understood TOPIC OF THE MONTH his own new fund – that Resnick is planning to Thunder Bay Capital retire and only run his own Management. The money in the future. long/short equity fund is Palantir is the third Credit trading based on a quantitative hedge fund casualty closing ith long/short equity and other mainstream factor model to forecast its doors to investors. The strategies in the doldrums, investors have market direction. group’s technology fund, Wbeen casting around for promising new which at its height in 2000 areas of opportunity – and credit trading has emerged TROY, VAR & PALENTIR managed meaty assets of $3 as flavour of the month with many established billion, has seen a sharp convertible-arbitrage houses and some new entrants downturn in performance Three more US casualties launching funds. Three more US hedge since the tech bubble burst funds have decided to shut and was consequently hit In the main, CB arbitrage players began using credit down in recent weeks – by a heavy wave of derivatives to hedge credit risk on their convertible Troy Capital, VAR Partners redemptions. books, with most of them reaching first for asset swaps and Palantir Capital and then credit default swaps (CDSs). Management’s technology FIDELITY In the past year, many have begun to see credit itself fund. Troy Asset as an asset class – a whole new playground in which Management, the Geode targets institutions they can trade against the implied volatilities of equity Connecticut-based hedge Fidelity Investments is options. Trading the CDS against equity option volatility fund group founded by considering rolling out its Alex Troy in 2001, systematic equity hedge on either a long/short or an arbitrage approach has liquidated its flagship fund range to institutions hence emerged as a whole new strategy area. long/short equity fund and individuals. It has been The new entrants come to the table without any Troy Capital in early April. managing $229 million of inventory of ‘busted’ convertibles, and mostly from The strategy peaked at $80 corporate money in a proprietary trading backgrounds. They ply a range of million last June, but number of strategies since long/short, event-driven and arbitrage strategies both performance has since the end of 2001. in credit derivatives and structured products like dropped by over 10%, However, Fidelity collateralized debt obligations (CDOs). prompting the closure. remained tight-lipped about Investors have been attracted to these funds because “We’ve already its Geode hedge fund liquidated our portfolio and strategies and maintains credit is seen, so far at least, as a relatively uncrowded we’re in cash right now,” that they aren’t technically space where there is still a significant degree of said Richard Silberberg, hedge funds because they mispricing to exploit. They have a variety of strategies, Troy’s chief operations don’t employ all hedge fund with some based on fundamental analysis of credit, officer. Future plans of the strategies. The firm others largely on quantitative techniques. Investors also firm’s three principals, declined to specify Geode’s focus on different parts of the credit spectrum, some Marc Van Tricht, Michael returns but the funds mainly on high yield or distressed credits, others Rothenberg and Troy generated income before mostly on investment grade names. himself, are not yet known. taxes of $7.98 million last VAR launched in 1996 year. For investors, this would appear to be a good thing and ran assets of close to Geode operates as the risks faced should not be too concentrated. On $100 million in its heyday. separately from Fidelity and the other hand, these funds certainly do face risks – But, manager-founder has its own trading most obviously from leverage on their relative value Victor Resnick decided to operations and separate positions, and also from legal risk on documentation. shut down the once- staff. Jacques Perold, a Credit default swaps, for instance, are supposed to pay lucrative strategy after Fidelity veteran who has out on a ‘credit event’ such as a default or a suffering losses for three spent more than 16 years at downgrade – but managers will be well advised to read consecutive years. Negative the firm, is serving as returns and subsequent Geode’s president. He also the fine-print (as well as taking legal advice) to make redemptions had drained manages Fidelity’s family of sure they do. the vehicle’s assets to $30 index funds.

APRIL 2003 ABSOLUTE RETURN 15 IN THE NEWS

funds only to start a few months later. The explanation is simply that once a manager is Bowman 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 principal’s own pocket. Few people are willing to do this, which means they are back – in a 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 new guise 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 Bowman’s top staffers are Tech guru is part of a trend to shut already up and running with their own funds. Michael Lebon down funds after poor returns and 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 quickly re-open again the traps was John Hurley who is raising $300 million for his Cavalry fund. ho would wind up a hedge fund after a period of poor The logic of hedge fund economics mean that when a fund performance and then, a few months later, bounce performs poorly there is a real danger that it gets caught in a Wback with a brand new fund and a new performance downward spiral. Analysts and top traders walk, leaving the high-water mark? Enter the legendary Larry Bowman and an principal with little option but to let the vicious spiral run its increasing number of other brand name managers. course as staffers and assets flee the fund. The alternative is to Unsurprisingly, Bowman’s reincarnation is being given a take pre-emptive action like Bowman. decidedly cool reception by investors. One capital introduction Some investors are now saying that, as a result, the whole event attracted only a handful of investors – a far cry from the fee structure of hedge funds needs to be reworked. It seems days when Bowman was the toast of the investor community sensible, they say, to renegotiate the high-water mark to stop and Wall Street. funds imploding but only in exchange for less reward for Investors are angry that Bowman has launched his new managers on the upside. 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 high- water 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 Bowman’s new fund that it amounts to a re-setting of the high- water 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

APRIL 2003 ABSOLUTE RETURN 17 IN THE NEWS

Lazard discovers the power of the little guy

After William von Mueffling’s departure, the spotlight has now been turned on the involvement of mutual fund groups in hedge funds

writes Stephanie Hoppe

own to $800 million and falling. That is all that is left of performance. the once proud Lazard Asset Management hedge fund In the face of this debacle, Lazard is remaining tight-lipped Dbusiness, which only two months ago boasted close to about the chain of events that led to the evaporation of a big slice $4 billion of assets and appeared on course to prove that of their profits. Yet, piece-by-piece, the tale of an ideological clash traditional asset management firms are capable of riding the – between a traditional asset management firm and a youthful hedge fund wave. hedge fund team – is starting to emerge. Lazard had done so much right in its move into hedge funds. When von Mueffling walked into Bruce Wasserstein’s office But today, it finds itself scrambling around to fill a void left by the in mid-January to explain his decision to leave the firm, the departure of William von Mueffling and much of his team while legendary Wall Street dealmaker and chairman of Lazard still managing a wave of redemptions, which has further hurt seemed to feel that he could persuade his most successful hedge

18 ABSOLUTE RETURN APRIL 2003 IN THE NEWS fund manager to stay. to notice. When you have downside volatility, everyone notices.” However, von Meuffling quietly told him that his mind was The sad part of the breakdown in negotiations is that von made up. There was no going back. But, even at this moment, Mueffling clearly enjoyed working for Lazard although he was Lazard may not have understood the scale of the problems they understood to have occasional clashes with Michael Rome, the faced. Certainly, their press release implied that they did not one remaining senior hedge fund manager at Lazard, who runs expect to lose Robert Cope, Ben Guest and Jay Genzer, the the Lazard Global Opportunity fund. other key managers in von Mueffling’s team. Each had signed a At the start of negotiations, he had no thoughts of resigning. letter to investors saying they were staying. However, as the negotiations dragged on, von Mueffling The storm that was unleashed on Lazard appears to have its became increasingly frustrated. By mid-December, events were origin in prolonged negotiations between von Mueffling and moving away from Lazard as stories started to circulate amongst Norman Eig, the chief executive of the New York-based asset investors about the possibility of von Mueffling walking out on manager. Few people in von Mueffling’s team were aware of the Lazard and starting his own fund. details of the talks. Some people have suggested that von Mueffling encouraged However, investors say that a central issue was that von the rumours of a rift to help his negotiating position. But, if that Mueffling and his team had been offered 2.5% of the equity of was the case, it failed to impress the Lazard negotiators who the business as part of the group share option scheme, which he must have either been confident that he would not leave, or that did not believe reflected the if he did, it would not hurt team’s contribution. the business too much. After Lazard argued that it was Piece-by-piece, the tale of an all, managers had left before not right to value a single but the Lazard brand was far manager hedge fund business ideological clash – between a stronger than any one in the same way as Lazard’s individual, a point regularly $65 billion long-only assets. traditional asset manager and a repeated by Lazard. Furthermore, they felt that Lazard president Charles von Mueffling and his team youthful hedge fund team – is Ward, commenting on the could not expect to win twice – departures, says: “Asset once through generous starting to emerge management is a team effort performance-related at Lazard. We have further compensation and a second time through share options. strengthened our asset management business by reorientating Insiders also say that von Mueffling and his team had been our alternative investments to a research driven, team offered half of the shares being made available to all staff. approach.” Other issues included von Mueffling’s apparent belief that However much Lazard may stress its assets base of $68 the straightforward compensation for him and his team should million and its team of over 600, the lesson from the whole saga be improved. Lazard argued that the package was among the is that hedge funds are very dependent on the ‘star manager’. most generous on offer in the institutional hedge fund business. Try as institutions may to turn hedge funds into a team effort, When negotiations finally broke down, some newspapers they are and will remain largely dependent on one person. attempted to paint von Mueffling as a greedy and brash hedge The key question today is whether the real casualty of the fund manager who was making unreasonable demands for von Mueffling saga is not Lazard, but all traditional asset himself and his team. But anyone who knows von Muefflling management firms that are attempting to build hedge fund well says that this couldn’t be further from the truth. operations. Are they forever destined to trip over the issue of Von Mueffling was a wealthy man and had done very well out compensation? And will they ultimately resent the ‘brash’ of Lazard over the years, largely because his performance had hedge fund managers who earn more than the senior been so good. However, investors say he is not a hot headed, management? arrogant hedge fund manager. In fact, most go out of their way Lazard is confident it will be back with new hedge fund to say how meticulously polite and well balanced he is. managers tempted by its infrastructure and marketing prowess Von Mueffling would always return calls and was always but, in the meantime, investors are voting with their feet. They willing to explain his unusual strategy that was far more volatile believe that hedge funds are still very much an individual than other long/short strategies, but which had turned his business and they are getting out of the Lazard funds as fast as Lazard European Opportunities fund into the best performing they can. fund in the world over four years with a compound annual Worse still for the traditional asset managers, many are return of 51%. saying they will find it very difficult to invest in an institutional His favorite saying, when people talked about the volatility of manager again. Few will have the same reservations about his fund over the past year and a half, was: “The fund has always investing in von Mueffling’s new fund when it launches later been volatile but when you have upside volatility no one seems this summer.

APRIL 2003 ABSOLUTE RETURN 19 MARKET COMMENT

Cohen’s buy and hold secret

writes Mike Peltz

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

APRIL 2003 ABSOLUTE RETURN 21 FUNDS & STRATEGIES

Why equity isn’t 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 an environment where interest rates are 2% or lower, they need lack of pricing power across most sectors, equity to generate 8% or more alpha to reach the same 10% target Wmarkets continue to provide some testing times for return. This implies a doubling of leverage and an increase in long/short equity managers. Such are the problems facing the risk. sector that many investors are now wondering whether Ironically, taking extra risk is something that managers long/short equity is the ‘new macro’. cannot do because investors are increasingly intolerant of their What they mean by this is that long/short equity may be under-performing equity funds. One or two sharp down months poised to fall from grace in exactly the same way that macro fell will send investors scurrying for the exit. out of favor in the late 1990s and early 2000s. Then, macro The effect of this investor intolerance is to make some managers just couldn’t make any money although there were long/short equity managers even more cautious. Far from clear trends such as the relentless slide of the euro against the increasing the risk, which the theory suggests they need to do to dollar. Assets started to leave the compensate for falling interest strategy and many of the big Long/short equity is no rates, they are doing exactly the players closed down. opposite and retreating into cash. The parallels with long/short longer everyone’s favorite For those that have stayed fully equity today are all too obvious. For invested, the bet is unlikely to have the past two years, there have been strategy and many paid off, partly because shorting clear trends in equity markets – has become so treacherous due to downwards. Yet, all too few funds explanations are being put the downward trend in equity have managed to make money. markets, punctuated by vicious Some big names like Larry forward for the trials and rallies that have the effect of Bowman have closed down and ‘stopping out’ the shorts that most investors are starting to move tribulations of equity funds managers are holding. money out of equity. This has been made worse by So far there is no stampede for the exit and no one is the fact that the stocks that rise the fastest in the bear market suggesting that macro and fixed income strategies will once rallies are precisely the stocks that most managers would want to again become the dominant hedge fund strategies – a position short. Research by Morgan Stanley entitled ‘Now Playing: Night they lost to long/short equity a few years ago after Julian of the Living Dead’ and ‘Strange Days’, graphically illustrates the Robertson and George Soros abandoned their macro funds. point. However, long/short equity is no longer everyone’s favorite Steve Galbraith looked at stocks in the US with a dollar strategy and many explanations are being put forward for the denomination of under $5, which were largely bombed out trials and tribulations of equity funds. The most obvious is that, stocks with high debts, negative cash flow and few prospects. in a low interest rate environment, managers have to generate Remarkably, in the final quarter of 2002, these ‘zombie stocks’ more alpha or use more leverage to reach a 10% return. rose an astonishing 105% from their lows. Meanwhile, bigger To achieve a 10% return in a 6% interest rate environment, the denominated stocks of $60 or above rose 2% over the same manager only needs to generate 4% alpha from stock selection. In period.

22 ABSOLUTE RETURN APRIL 2003 FUNDS & STRATEGIES

This strange stock behaviour had the effect of negating the How some equity funds bucked the trend research strength of many of the top US equity managers. Even Steve Mandel and his gifted research team at Lone Pine had -- ANDOR GLOBAL DIVERSIFIED - NET SHORT their first down quarter ever at the end of 2002, although they 1 David Felman and Christopher James steered Andor still managed to end up for the year. Diversified to an exceptional 31% for 2002 and Such was the difficulty of shorting stocks that many managed it by remaining net short throughout the year, managers chose to reduce their gross exposure rather than go which was no mean feat given the dramatic bear market net short. As a result, many were net long during the savage rallies that punctuated the steady slide in stock prices. downward move in stock prices over the past two years. It is understood that the $1.5 billion fund was close to 30% Evidence for this comes from the ‘short interest’ in the US net short throughout the year, which is a punchy short throughout the period. position compared to most other US equity funds, which Expressed as a percentage of total equity market tend to have a net long bias. capitalization in the US, the ‘short interest’ hardly changed from The achievement of Felman and his team was to avoid the market peak in March 2000 to today. As the assets of equity being caught by the bear market rallies, particularly in the hedge funds rose throughout the periods, this implies that the final quarter when the Nasdaq rose 15% and the S&P 500 amount of shorting carried out by the hedge fund community was up 9% when the fund was very significantly net short. may actually have fallen. At the end of the final quarter the fund was down 1%, which was an astonishingly good result, and can only have be Hedge fund managers are not the only people who are achieved by nimble footwork to quickly reduce the gross included in the ‘short interest’ calculations. There are also exposure and by the use of futures to protect the fund from proprietary traders, treasury departments and private investors, the market upside. but it seems reasonable to assume that they continued shorting Good stock picking also appears to have helped protect the at the same rate as before or even increased it as the bear fund, with some longs holding up and some of shorts in the market took hold. retail area still working out despite the rally. Little wonder when all these factors are added up that On the positive side, throughout the year, much of the long/short equity managers in the US ended the year down 3%- return came from technology and healthcare shorts. 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 GALLEON ADMIRALS - TRADER there is no prospect of getting back to the high-water mark An impressive debut for the duo of Ken Brodkowitz and quickly to restart the bonus tap. Michael Curtis saw the fund surge 37% net last year Little wonder also that investors are skittish. At best, they 2 as the active trading strategy which mixes a top- fear that the money they have invested with equity funds is ‘dead down view with fundamental stock picks paid off. money’ in the current markets. At worst, they fear that it is loss- The duo monitor the macro and geopolitical situation very making money and that the teams that run the funds are in carefully and use their readings to determine their portfolio danger of walking out of the door. construction. Essentially, they are opportunistic and will Only two things are stopping a mass investor exodus from move their portfolio around at short notice. This has helped some of the established equity shops. The first is the constant them capture short-term twitches in the market. For example, they increased their net long bias in October Changing fortunes of macro and US equity 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 don’t work out. The objective is not to get all the decisions right but to get continued on page 24

APRIL 2003 ABSOLUTE RETURN 23 FUNDS & STRATEGIES

How some equity funds bucked the trend 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’ more right than wrong, which has clearly happened since funds, they will never get back in again. There are large numbers inception of the fund in March 2001. Moreover, the returns have been achieved with surprisingly little volatility. of new institutional investors like Calpers, Texas University and Key to the performance of the fund are the stock picking General Motors who are moving into hedge funds and want to skills of the three investment professionals Rick Abeyta, John invest in the ‘safe’ brand name hedge fund managers. They are Fleming and Richard Swift in their chosen specialist areas of happy to take up the capacity of the disillusioned fund of funds. financials, consumers and media, telecoms and energy. The Going forward, the central issue for investors is their outlook team formerly worked together at Red Coat. for US equity markets. If markets are likely to recover after the The fund has no capitalization bias and will invest in anything Iraqi war in a steady and sustained way, then the universal view is from small to mid-cap to big board S&P 500 stocks. that long/short equity will once again be the flavor of the month. The next most positive outcome would be a steady decline in ARCAS COVERED - SHORT SELLER equity markets based on fundamentals in which good companies Big intraday reversals and sudden jolts in US indices and weathered the market slide and bad companies were punished. individual stock prices in 2002 and the first quarter of 2003 That way the fundamental research skills of the majority of US haven’t maimed returns for short-only funds as some may long/short equity managers would be rewarded. have expected. In fact, funds like the Derivative As David Ahm at GAM in New York explains: “Once you are 4 Consulting Group’s $150 million Arcas family of funds in an environment of sharp value compression, fundamental have deftly exploited volatility through tactical-trading stock-pickers find it very difficult, not least because they are maneuvers. using historic comparisons to determine value and these The firm’s flagship Arcas Covered Fund gained 70% net of comparisons are no longer relevant.” fees in 2002 and punched up returns of 10% in the first The trade that worked in 2002 was to be long the value names quarter of 2003. in the small to mid-cap area, picking stocks where there was a Adding to overall returns were puts placed on equity indices margin of safety, and to short the large cap beta stocks. However, like the S&P 500, which jumped in price in advance of this isn’t a comfortable trade to put on as there is a fundamental prolonged investor anticipation of the outbreak of hostilities mismatch in the risk, which could have gone horribly wrong. in Iraq as well as because of lowering interest rates. Arcas The other trade that worked was being net short or short Covered, the six-year-old fund which comprises 70% of the firm’s assets under management, found itself generating technology, providing you were willing to ride out the extreme extra alpha selling the options, complementing returns made volatility. Among those who adopted this approach were David on individual short bets, according to firm principal John Webb, while he was at Shaker, David Felman at Andor and Frazer. The puts “covering” the portfolio can make up to 10% William von Mueffling before he left Lazard. of fund assets at any given time. Each did it differently. Webb and von Mueffling had a very Considering the strong returns at Arcas, it is not surprising diversified short book, which helped reduce the risk. They also that San Francisco-based Derivative Consulting Group has held them through the rallies, which created 5%-7% down months, seen more inflows of late from investors, including long/short but over time paid off. Felman, on the other hand, used futures to managers who farm out all or part of their short book to hedge his shorts, which created a surprisingly low volatility. Arcas. In fact, for the third time in five years Arcas has found The other strategy that should have worked was short-term itself turning away investor capital as it tries to keep firmwide trading. However, in practice, only a few funds managed to make assets below $200 million – a level needed to keep this work, including SAC, which was up in 2002 and is off to a performance optimal, so Frazer says. reasonable start this year. It seems that markets were even too If anyone doubts the level to which opportunities have risen choppy for most of the traders. for short funds, it’s worth pointing out that the Arcas portfolio, All of which leaves investors with something of a dilemma. managed in three parallel funds, contained about 330 Should they stick with it or should they reallocate – at least their positions at the start of the second quarter of 2003, up from new money – to other areas? Happily for the long/short equity about 88 at the end of the last bull market in 2000. community, all the signs are that particularly the US fund of Still, short sellers prefer gradual trending in prices rather than funds groups will not dramatically shift out of equity because it is hefty moves. 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 ABSOLUTE RETURN APRIL 2003 INSTITUTIONAL BUYERS GUIDE

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

APRIL 2003 ABSOLUTE 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 David Webb of Verus structure arbitrage. At Deephaven, Bergerson managed the US convertible arbitrage portfolio with over $600 million WAnye mbonbe yr meatnuagrenr csap awblei tohf g eVneerartiungs r efturns d in in assets and oversaw several other funds including current equity markets naturally finds his skills hugely in the European and Japanese convertible arbitrage demand. Witness the case of David Webb. After Webb took strategies. Bergerson is understood to be planning to the decision to leave Shaker last November, the fund run his fund similar to the way he ran Deephaven’s suffered nearly $1.3 billion in redemptions – leaving it with US convertible arbitrage portfolio in terms of style, just $135 million in assets. set up and assets under management. Webb is now back, having begun his own company, The firm is also looking to hire at least two credit Verus Investment, not far from the Shaker offices in analysts and a convertible trader to work on the fund, Cleveland, Ohio. While he is coy about his starting assets, said Bergerson. Waterstone Capital Management is he says they are “significant” – industry sources say they using Goldman Sachs and Deutsche Bank as its prime could be well over $500 million. brokers. Deephaven manages approximately $1.25 His contrarian, stock-focused process typically involves a billion in assets. A Deephaven spokesman did not fairly concentrated long book of around 30 to 50 core return calls before press time. 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 CCreerdoen Keellder &o Pnart’nsers iCs pBrepa rlinag tuo lanuncch h 200 and 300 positions, enabling him to avoid the nightmare another convertible arbitrage fund designed for scenario of a severe squeeze on a major short position. institutional investors that do not want credit Over the last few years, the short book has been key to exposure. It will focus on investment grade bonds. generating returns. However, Webb aims to create an The fund is expected to launch with around $35 asymmetry between the long and short sides whereby million, and has a capacity of $400million - $500 longs, relative to shorts, have less potential for downward million. The new fund is scheduled for May 1. movement in a down market, and greater potential for The group’s flagship vehicle, the Alta Partners fund upward movement in an up market. As a result, the long was hard-closed to new investment in mid-2002 with book has also been profitable – clocking up significant $720 million in assets. It is managed by Scott positive performance in 2000 and 2001. Creedon, the fund has returned an annualised 23.02% Webb is also highly flexible and at Shaker moved since inception. Creedon also runs a discounted exposure over a range from 50% net long to over 40% net convertible arb vehicle with assets of $67 million. short. Gross exposure has ranged from over 230% at its peak to less than 40%.

26 ABSOLUTE RETURN APRIL 2003 NEW FUNDS

investing. PSAM has also attracted three analysts to support the VCrienighikton m Kaangn, f osrmtear ratnasly swt aintdh p o$rtf5ol0io mma nCagMer Kwith new distressed strategy – Douglas Polley, Sean Mullin and Vinik Asset Management, launched CMK Capital, a Tyler Greif. Polley, a senior analyst, and Greif, a junior long/short hedge fund at the beginning of April and has analyst, bring restructuring and M&A experience from already raised $50 million of assets from family offices and Goldman Sachs in New York, while Mullin, another senior wealthy individuals. analyst, brings similar experience from Morgan Stanley in Other than working for Jeff Vinik, Kang also worked as London. an analyst for Julian Robertson at Tiger. With these two Late-stage distressed investments have at times names behind him, he has been able to avoid doing accounted for about 30% of PSAM’s portfolios, which run ‘seeding’ deals with anyone. current assets of about $400 million. Going forward, CMK Capital will invest in the six industry sectors however, the PSAM team believes that the profit which Kang covered for Vinik – namely healthcare, opportunities for distressed investing are increasing biotech, software, consumer products, business services dramatically – with an estimated $1 trillion of face value of and cyclicals. Although he is seeking opportunities in US debt now defaulted in the US and Europe and a growing stocks valued between $200 million to $35 billion, he is not number of attractive new credits both entering and exiting too concerned by market capitalization. the distressed arena. 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 CAlbhurquyesrqluee,r N sewe Meedxisco -bHasaedn Hsaensaeatiicc G rfoupn hdas won annualized net return of 15% to 20% with a volatility profile an initial $7 million allocation from DaimlerChrysler for a of around 15%. new long/short large-cap equity program expected to Kang considers the ideal optimum size for his fund to be begin trading on April 7. around $500 million. “However, a lot of people go from $50 Hanseatic president Katherine Burr said the new million to $500 million very quickly and then returns program’s strategy would be quantitatively driven, building disappear straight away,” he says. “It does take a while to on the firm’s established trading systems that use non- build a good team.” linear 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, SP. Scchhooenefenldf Aessledt M oannag temheent , Ronee bof othue lnond gest- including hedge funds and managed futures programs run established names in the world of event-driven investing, in both pooled and managed-account format. The allocation has recently launched a stand-alone global distressed by the DaimlerChrysler pension system comes at a time investment fund called Rebound Partners LP. The fund when Hanseatic has been actively looking to extend its launched in March with initial assets of $15 million. reach to non-US investors. The managers of Rebound include Peter Faulkner, The group has also been looking to places like Brazil William Popper, a managing director heading the firm’s and Korea, where Burr says the appetite for alternatives London office, and Peter Schoenfeld, PSAM’s founder. has grown among institutional investors such as pension Rebound Fund Ltd, an offshore version of Rebound funds and reinsurers. Of late, Hanseatic has been Partners LP, is expected to be available shortly to qualified particularly active in Brazil, where Burr has established a international investors. satellite office for the asset-management group. 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 EIt’s rsaree txo emncoaunte rs ftamailryt mse mLboercs hma nCagainpg itthea sl ame such strategies, not only in the US, but also internationally, hedge fund, but even more unusual is a hedge fund run by since establishing a London presence in 1986. twin brothers. Yet, Tim and Todd McSweeney, who started Faulkner, formerly with MJ Whitman Inc and Third the Boston-based firm, Loch Capital, at the beginning of Avenue Value Funds, joined PSAM last year and has 20 this year, clearly don’t suffer from sibling rivalry. years’ experience in distressed and special situation When Tim McSweeney resigned from managing the

APRIL 2003 ABSOLUTE RETURN 27 NEW FUNDS

Essex Global High Technology Fund last October, he CAleox nRicbaororffd’si Cao nfcordciau is pelasnn iongn to eadqd ua nitewie eqs uity immediately began market neutral strategy focusing on US equities in June. It to build Loch Capital will be managed by Jason Hathorn and Jason Cheung who with Todd, former already manage Concordia’s two successful equity market head of global neutral funds focusing on European and Asia-Pacific technology at Baring markets. Asset Management. Both of these funds are currently closed to new Inevitably, given investment, with the European version, Class F, managing their technology about $350 million in the strategy, and the Asia Pacific Class backgrounds, they G running about $150 million. launched both The new US market neutral strategy is expected to adopt onshore and a similar factor model-based approach, which would make it offshore versions of both sector neutral and highly diversified, with an Tim McSweeney of Loch Capital the Loch Fund, a US anticipated 250 long and 250 short positions. The approach long/short technology vehicle. is characterized by relatively low level of turnover, executed They were also in the enviable position of being able to through weekly program trades with the whole portfolio provide $20 million of their own money, which pre-empted turning over about six to eight times a year. any need to go soliciting for seed capital. The fund only The new strategy is expected to have capacity of about began to take in money from outside investors at the end of $500 million, but is already understood to have received March. strong indications of support from investors, with Tim’s impressive track record at Essex should prove to commitments already estimated at about $275 million. The be a strong selling point. During the period of October 2001 European and Asian strategies in particular are known to to October 2002, when he ran the $20 million Essex have received strong backing from Man Investment technology fund, he achieved a return of almost 25%. He Products, for which it runs a large managed account, but it reconstructed the portfolio, reduced the number of is thought that Man will be among the supporters of the holdings and applied a market neutral orientation to the new version. investment process. As a result, his net short stance paid off handsomely when the market slumped.

RThae Tnegxaes-bra sreed haedgye fufnodr R amnguer lCtaip-istatl, raa retlaetigveyly new hedge fund shop founded by veteran-investor Sam Wyly – famous in the hedge fund community for being one HBilBl PKark m, foarmner lfy lwiieths D aollaus-tba swedi tHhBK A, hvasi ateatmoer d up of the original backers of local manager Lee Ainslie at with Eric Wong from Angelo Gordon and Koji Takasumi Maverick – is gearing up to launch a new fund. from KBC to start their own New York-based global multi- Recent filings with the SEC in late March indicate that strategy operation. the firm is poised to start Ranger Multi-Strategy LP, Aviator will start in July and will have five strategies, believed to be the firm’s first multi-strategy vehicle. which are a mixture of capital structure arbitrage, Industry insiders point to Ranger as one of the most- convertible bond arbitrage, catalyst, relative value volatility watched new hedge fund firms in the last year. Fund of and statistical arbitrage volatility. funds firms say that Ranger’s strategies have pulled in The primary focus of the fund will be in the US but it will significant investor capital with firm assets under have some Asian trades – as Park spent three of his six management at roughly $200 million, up from an initial years at HBK in Tokyo. It will also make occasional forays seeding of $50 million. into European arbitrage trades when the opportunities Ranger’s first two strategies have been long/short plays present themselves. with differing investment styles. One portfolio managed by Aviator Capital Management has been in detailed talks Russell Glass looks for deep-value opportunities, trading with a number of ‘seeders’ and incubators but are, so far, equity and debt instruments. Glass was a long-time not thought to have done any deals. business associate of billionaire Carl Ichan and served as Multi-strategy funds are currently popular with investors, chief investment officer of Ichan Associates, a post he as the managers can allocate the capital from one strategy abruptly stepped down from last year to play an integral to another, depending on where the opportunities are. part in Ranger’s then-budding hedge fund initiatives.

APRIL 2003 ABSOLUTE RETURN 29 PROFILE

Bacon’s recipe for talent

Moore Capital is taking innovative steps to woo top traders

writes Iain Jenkins

hen you have a successful technology hedge fund handed back the assets to investors and intends to rejoin Moore running $1 billion of assets and you made 9%-10% in Capital after a short sabbatical - probably to run his own fund Wthe treacherous markets of 2002, what do you do? with Moore Capital’s backing. Continue running the hugely profitable operation? Or wind it up He is not alone. Across the hedge fund industry, other and go back to work for your previous employer? managers who were tempted to strike out on their own have No contest for Tony Anagnostakis. Having left Moore Capital decided that the life of an entrepreneur isn’t that simple. After to start his own fund, Agnos Group, he decided that running his dealing with difficult staff, regulations, due diligence meetings, own show wasn’t that much fun after all. Although he was one of short-term clients and broken photocopier machines as well as the few technology managers to make any money last year, he very testing markets, their old employers suddenly don’t seem

30 ABSOLUTE RETURN APRIL 2003 PROFILE so bad. Moore handles these issues for its portfolio managers. has learned a number of harsh lessons along the way. However, Already Peter Swartz, one of the key lieutenants at the central concept is that the firm provides the right analytical Anagnostakis’ shop, is back at Moore Capital in New York. A and research resources to enable traders to do their job more few weeks earlier, Henry Bedford, who had left Moore Capital effectively than if they were on their own. Then Moore pays to co-manage the TT Europe fund a few years ago, decided that them for what they generate. he too wanted to move back to his former employer. “There is no re-cutting of the deck that takes place in many At the same time, Moore Capital has successfully lured a investment banks where the performance of the firm affects number of other hedge fund managers who had been running the bonus of someone who had delivered real revenue. If it their own businesses. One such person is Kaveh Alamouti, who costs us money, so be it. It is a price worth paying to hold on to decided that it was better to have the infrastructure that Moore talent,” Bacon has been heard to say. offered than build out his own $200 million Optimum fund. What Moore Capital is trying to avoid is the situation that is And, remarkably, it is not just hedge fund managers that facing so many hedge funds today after a poor year in 2002. Moore is managing to lure away from the time-consuming Many lost money for investors and consequently didn’t distractions of dealing with staff compensation, systems, generate performance fees, which means that they have not stationery and paper clips, but also top bank proprietary been able to pay traders or analysts … who then split from the traders. firm and start on their own. The latest to quit his The strategy is working. In banking job for Moore Capital Creating the right environment 2002, Bacon’s flagship $3 is Mohsen Fahmi, who co- billion Moore Global fund headed the bond and foreign and remuneration package is far ended down 4% for the year, exchange proprietary trading but analysts and traders who book at Tokai Bank. He was more difficult to achieve than it generated returns still got willing to throw away the paid and Moore Capital security of a bank and, even sounds and Moore Capital has continues to attract talent. more importantly, the ability to These traders get paid in hand back capital to the bank learned a number of harsh lessons various ways. Many when he ran out of good trading contribute ideas to the main ideas for the rigours of a hedge fund group. Equally important, Moore Global fund and some run pockets of money for the the ability to form his own company with Moore’s support, portfolio. If these ideas and pockets do well – as Bacon freely should he wish to do so in the future, was of great appeal to admits occurred in 2002 – it doesn’t matter that the fund was Fahmi. down, the traders still get paid. Behind these moves is the conscious decision by Moore In a further initiative to motivate traders, 11 of them run a Capital to set out to win the talent game. Only by attracting the piece of the $2 billion Moore Fixed Income fund, which is best traders and investment brains will the firm continue to possibly the most interesting experiment being carried out at thrive while taking some of the pressure off Louis Bacon, who Moore Capital. Bacon does not run any of the money in the for 17 years has never managed to have a two-week holiday. fund and simply acts as overall risk control manager. Once To do this, Bacon and his team, led by Elaine Crocker, the again, each trader is paid for what they generate. president of Moore Capital, and Michael Garfinkle and The beauty of this approach is that it is sustainable and may Anthony Gibbons, both managing directors, have created a provide a model for other groups attempting to build structure, which is designed to attract the best trading brains in sustainable hedge fund operations. For example, if one of the the business. traders in Moore Fixed Income leaves, no harm is done. The The thought that Moore, with its remuneration packages remaining traders can simply run more money or a and institutional infrastructure, wants to sow in the mind of replacement trader can be found. established or future hedge fund managers is: could you make The genesis of this concept, explains Crocker, was the more money for a lot less hassle by working for Moore rather constant re-writing of history by the Moore traders. “They than doing it on your own with more risk? always remembered their profitable recommendations to Louis There are two central planks to the strategy. The first is but forgot the unprofitable ones – the trades that Louis did put simply to create the right environment for traders to trade and on and made money. They neatly forgot the ones that he didn’t be paid for what they deliver – not on the performance of the put on but lost money. In the end, Louis said, ‘OK. Do it firm. The second is a slightly counter-intuitive idea of letting yourselves’ and it has worked very well.” managers leave – often with infrastructure and assets from A further extension of this approach is that, in some cases, Moore itself – without any acrimony. Moore Capital also allows managers to run their own funds. So Creating the right environment and remuneration package far, the only example is the Moore Emerging fund run by Marc is far more difficult to achieve than it sounds and Moore Capital Cheval, who approaches emerging markets from a macro

APRIL 2003 ABSOLUTE RETURN 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 momentum- be 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 isn’t 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 Bacon’s 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 Fact File means that they lose part of the previous year’s bonus if they leave. This has rarely been an issue, though, because of the spin- off structure. Moore Capital 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 isn’t that easy to run your own shop and make Strategy: Fixed income money. Performance: 18.8% annualized Interestingly, there is a tendency for the performance of these ‘alliance’ managers to fall off once they start on their own. Moore Emerging It is not that they become bad managers; it is more that they Strategy: Emerging markets take less risk because they know that a few bad months could Performance: 13.29% annualized kill their business. Bacon understands the difficulty of trying to manage money Offices: New York and London

32 ABSOLUTE RETURN APRIL 2003 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 latest crop of hedge fund indices have merely added to products are hot. Everyone seems to be racing to get in confusion in the market – particularly since direct comparisons Hon the act with Chicago-based Hedge Fund Research between the main indices reveal huge discrepancies and (HFR) being the latest to launch an investible product with other divergence of composition, performance and methodology. big index names like MSCI watching closely from the wings. One of the most comprehensive critiques of the emerging But many people remain skeptical about the rush into hedge fund index market was published in February by two investible products which has already seen $2.5 billion flow into academics, Noel Amenc of the EDHEC Graduate School of the existing 26 indices and has seen banks that distribute the Business and Lionel Martellini, an assistant professor of finance products saying that the investible indices could attract $50 at the Marshall School of Business, University of Southern billion over the next five years. California. The critics say that these indices represent little more than a In their paper, ‘The Brave New World of Hedge Fund clever marketing gimmick targeting institutional and other Indices,’ the two economists note that existing hedge fund investors that have steered clear of hedge funds in the past. They indices “provide a somewhat confusing picture of the say that the investible products are little more than thinly investment universe.” Prof Martellini identifies two main disguised fund of fund products. problems that he claims hobble existing indices. First, he says: Some of the most pointed criticism has come from academics “They are biased – for a given style, an index may encompass like Professor Thomas Schneeweis, founder and director of the the return of a manager not following the announced strategy; Center for International Securities and Derivative Markets at the such style shift and style bias problems are also present for University of Massachusetts, Amherst. Prof Schneeweis says: traditional style indices such as growth, value, etc.” “Calling something an index does not make it an index.” Second: “They lack representativeness - for a given style, an But the index providers remain unfazed by the criticism and index only encompasses a (generally relatively small) number of the evidence suggests that the investors aren’t too worried either. funds following the given strategy; this problem is specific to the Justin Dew, director of portfolio services for S&P, says that “just hedge fund industry, because it is entirely unregulated, with no shy of $500 million” has been invested in their index products mandatory requirement to report performance.” since the launch in mid-November and more is still to come. The presence of measurement biases, that hedge fund Joe Nichols, founder and chairman of HFR, says: “There is indices inherit from hedge fund databases they are built on, are growing evidence that new products based on the indices are well documented. There are at least three main sources of beginning to gain some traction. Over time, they could become a differences between the performance of hedge funds in the very significant part of the money invested in hedge funds. Index database and the performance of hedge funds in the overall products account for a third of all equity investments. A similar market – survivorship bias, a selection bias and an instant pattern could emerge with hedge funds.” history bias. The index players argue that they represent an attempt to Most indices rely on fund managers to report their own establish genuine benchmarks and improve the transparency of performance – it is estimated that just over half of all hedge the $600 billion hedge fund industry as well as providing a low- funds report their performance to one of the main hedge fund cost entry into hedge funds. The HFR index will allow databases. However, many hedge funds either do not report to institutions to invest in hedge funds for a total fee of 50 to 75 basis any database, stopped operating before the databases were points, which is far cheaper than most fund of fund products. launched or stop reporting either permanently or temporarily However, critics argue that despite their good intentions, the when performance is poor – resulting in survivorship bias.

34 ABSOLUTE RETURN APRIL 2003 ANALYSIS

According to estimates, survivorship bias the available universe of funds. There can be as large as 4%. are also differences in weightings. Most The CSFB Tremont Hedge Fund indices including the S&P index but, Index faced a survivorship bias issue a with the notable exception of year ago when the devaluation of Lipper CSFB/Tremont, are equal weighted – Convertibles and Lipper Offshore something that advocates claim avoids Convertibles led to the CSFB/Tremont the tendency of index performance to convertible arbitrage sector index follow ‘hot’ sectors. recording its worst monthly performance While equal weighting may avoid in three years. Lipper’s problems were not some problems, it means that none of representative of returns from convertible the available indices genuinely reflect bond managers, but affected the index. the real state of the market which is Another serious problem – and the roughly 50% equity, 35% convertibles and main focus of the Amenc/Martellini paper relative value with macro/CTA and fixed – is that existing hedge fund style indices income making up most of the provide a somewhat confusing picture of Joe Nicholas of HFR remainder. This means that hedge fund the investment universe. This is partly indices look less like benchmarks and because there are at least 14 competing hedge fund index more like traditional funds of funds. providers. S&P’s reliance on collecting data from just 40 funds has They all have differing selection criteria in terms of length of drawn some skepticism from rivals, but S&P insists its track record, assets under management, restrictions on new statistical research suggests that 30 to 40 funds reliably investments; style classification – for example a manager’s self reporting their performance data can accurately represent a proclaimed style compared with an objective statistically-based much larger universe. However, it can create some interesting classification, weighting scheme – equally weighted or value switches. At the end of February, S&P quietly removed weighted; and rebalancing scheme – for example whether Jemmco from the index and added GLC Gestalt Europe. Justin rebalancing takes place monthly or annually. Dew of S&P says the move was, “simply a change we both “As a result of such differences in construction methods, agreed too.” competing index products offer a very contrasted picture of Despite the critique from the academic world and from the hedge fund returns, and differences in monthly returns can be fund of fund industry that claims that these products are just greater than 20%,” says Prof Martellini. This poses serious poorly constructed funds of funds, all the signs are that the problems for portfolio analysis involving hedge funds and even wind is at the back of the index providers and that they are bigger problems when trying to build valid investible products. likely to continue to gain ground, not least because institutional In addition, existing indices are not fully representative; in investors feel familiar with the index concept. They also believe other words, some funds that should be part of an index are not that it is a lot safer than investing directly in hedge funds and included and most indices represent only a small proportion of seems to be more cost-effective.

S&P HEDGE FUND INDEX

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

36 ABSOLUTE RETURN APRIL 2003 ANALYSIS

CSFB TREMONT INDEX

Date established : 2000 (with data going back to 1994.) audited financial statement. Funds are separated into Number of indices : 9 main index plus 8 sub-indices. primary sub-categories based on their self-designated Number of Funds : 417 (as of February 2003) investment style. Styles represented : convertible arbitrage, dedicated The indices are designed to represent at least 85% of the short bias, emerging markets, equity market neutral, assets under management in a particular universe. event driven (distressed, multi-strategy, risk arbitrage) Funds are re-selected on a quarterly basis as necessary fixed income arbitrage, global macro, long/short equity, and the indices are calculated and re-balanced monthly. managed futures, multi-strategy. Strengths : Asset weighting should mean the indices Construction : The CSFB/Tremont Hedge Fund Index was reflect the market more accurately. Re-balanced monthly. the industry's first asset-weighted hedge fund index. The index identifies its constituent funds and a large (Proponents claim asset weighting, as opposed to equal accounting firm audits the methodology. weighting, provides a more accurate depiction of an Weaknesses : Asset weighting means the index may tend investment in the asset class.) to over-represent the current most popular strategies. The index is based on the TASS database and funds are Relies on performance figures supplied by fund selected from a universe of 730 funds. To be considered managers themselves. for inclusion in the index, funds must have a minimum of $10 million under management and produce a current

HFRX HEDGE FUND INDEX

Date established : 2003 characteristics of each fund used in the index are consistent Number of indices : 9 (eight primary and a composite global and representative of its respective strategy. Funds included index) in the indices must also be open for new capital. Once the Number of funds : Initially 50 but rising over time funds have been selected, daily risk management, based on Styles represented: convertible arbitrage, distressed closed-system transparency and independent daily securities, event-driven, equity hedge, equity market-neutral, repricing, is then applied to ensure certainty of underlying macro, relative value, and merger arbitrage. exposures and to capture strategy pure returns. The indices Construction : HFR launched the HFRX family of investable are rebalanced on a quarterly basis. primary indices and an asset weighted composite global Strengths : Asset-based index, daily independent pricing and index at the end of last month (March). risk analysis. Experienced data collector. The indices are based on the HFR database which tracks Weaknesses : Relatively small number of funds could make 1,400 funds and have been designed to offer full indices unrepresentative and asset weighting could skew transparency, daily re-pricing and consistent fund selection. returns towards ‘hot’ strategies. HFR tries to ensure that the investment and performance

ZURICH CAPITAL MARKETS INDEX

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

APRIL 2003 ABSOLUTE RETURN 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 Aindustry 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, what’s the big deal? That’s a very small price to pay in the greater scheme of things and it will lend legitimacy to the industry,” says Robert Green of Connecticut- based firm of accountants Green Trader Tax.

APRIL 2003 ABSOLUTE RETURN 39 REGULATION

However, this seemingly small step may have a far bigger done for years when the going gets tough: shrinking back impact than people think. For a start, it will force a notoriously behind a wall of silence. secretive industry out into the open and managers will no So far, none of the big names of the industry have stood up longer be able to hide behind the veil of the SEC ‘private to defend the record of the hedge fund industry or to counter placement rules’. – point by point – the criticism that is being leveled at the At a stroke, the scale and scope of the industry will be open industry from short selling to the thinly veiled suggestion that for everyone to see on public access websites. Everything hedge funds are launderers of illegal and ‘terrorist’ money. from the telephone numbers of the funds, to the names of the Remarkably, all that the big hedge fund managers say today partners and the assets under management, will be available to is that they want to keep a low profile until the storm passes. investors, rival funds and the media. However, some people are starting to wonder if this strategy is A new world of transparency will be ushered in. There will appropriate. Such are the myriad attacks on the industry and be no more guessing games about the size of the industry and such are the vested interests arrayed against it that some the number of funds in the US. Everyone will have the positive action may be necessary. information at the tips of their fingers from the vast directory The job of defending the industry has been left to people that will be sitting on the SEC website. like Jim Chanos of the $1 billion short-selling specialist A handful of funds like San Francisco-based Farallon and Kynikos Associates, who in a testimony to a Congressional Connecticut-based Andor are already registered and the committee on Enron, portrayed short sellers as the good guys details of their funds, partners, assets and offices are open to who spotted the accounting misdeeds at the energy giant. the public (see box on page 41). Such funds register for Even Eliot Spitzer, the New York attorney general, seems to various reasons, perhaps because be somewhat bemused that the they run other businesses such as The real fear here for hedge hedge fund industry hasn’t been broker-dealer operations. Even in more active in fighting its corner. the cases of Andor and Farallon, fund managers is not the In a speech in early March to the the information that this obliges Wall Street Hedge Fund Forum, a them to disclose hasn’t done Patriot Act itself, but that it New York-based hedge fund these two notoriously secretive association, he urged hedge funds groups any harm; so it seems may be the start of creeping to take a more active role in unlikely to harm the industry at putting forward their case on large. regulation Capitol Hill. Some other big funds are also Lessons could be learned from registered with another Washington agency, the Commodity the European hedge fund industry, which is already regulated, Futures Trading Commission – those such as Tudor and and is far more homogenous and proactive. It has faced similar Moore that make use of futures and options to execute their attacks from lobby groups and the media and has had certain trading strategies. The CFTC also monitors the futures and of its practices investigated by the UK’s Financial Services options markets for potential manipulation, applying a system Authority (FSA), but it actively defends its corner. called ‘commitments of traders’ reports. These are used to As soon as the FSA announced that it was taking a look at identify large position-holders and sometimes these big short selling, the Alternative Investment Management players may include hedge funds. Association, which counts 520 groups as members, quickly The real fear, however, is that SEC registration for all hedge swung into action. A submission was sent to the FSA funds may be followed by something far worse. Roger Joseph, defending short selling and the regulator seemed to accept partner at the Boston-based law firm of Bingham many of the arguments. McCutcheon, says. “What seems certain is that managers will European managers are willing to be even more proactive. have to register individual funds, which many think puts them Centaurus, Pendragon, Henderson, Jupiter, Lansdowne, on the radar for additional regulation.” Kairos and a host of other hedge funds helped establish a set George Mazin, partner of New York-based Dechert, thinks of guidelines on how European funds should run themselves. there is a similar danger with the Patriot Act, which in itself is The top managers were acting to ensure that the industry not a threat to the industry although it may add unnecessary stayed clean to forestall any criticism. costs. However, he says: “The real fear here for hedge fund There have been few similar industry-wide initiatives in the managers is not the Patriot Act itself, but that it may be the US involving leading hedge fund managers. Most seem to start of creeping regulation.” prefer to batten down the hatches and hope that the regulators Yet, in the face of the prospect of more damaging and the press won’t find them and that the investment banks regulation, the hedge fund industry remains strangely mute. will fight the industry’s corner for it. Rather than coming out fighting to defend itself, the leading This strategy may work. After all, the industry has been figures in the hedge fund business are doing what they have here before. “It might seem that more regulation is just around

40 ABSOLUTE RETURN APRIL 2003 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 Pennsylvania- schemes 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 doesn’t seem may go away. Until now, so bad. It may be the George Mazin of Dechert Roger Joseph of Bingham McCutcheon 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 isn’t 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 further $2.3 billion. Pequot and shows that Andor entered the big name hedge funds The filing also includes the names into new management agreements Athat are already registered of the senior team which were with respect to $8.8 billion of assets with the SEC, and the type of Thomas Steyer, Joseph Downes, that used to be managed by Pequot. information that they are obliged to Richard Fried, Stephen Millham, In the list of owners of the reveal makes interesting reading but Mark Wehrley, William Duhamel, business, it shows that Daniel Benton has hardly impeded the success of Monica Landry, Fredrick Mellin and ‘owns greater than 50%’ of Andor the two firms. David Cohen. Capital Management and that Nevertheless, the Investment Other than the firm’s One Christopher James ‘owns greater Adviser Registration form gives basic Maritime Plaza office in San than 49%’ of the business. Other information, which is enough to help Francisco, Farallon also has offices in executives are Peter Streinger, Jolyne build a thumbnail sketch of the firms, Chicago and Singapore. Caruso-Fitzgerald and Michael including details of the investment The Andor filing gives similar Nexus. team, the products and assets. basic fund information on Andor All in all, the information is According to the filing Farallon Technology, Andor Technology hardly revealing but helps by has $8 billion of assets in its 11 multi- Perennial, Andor Technology providing a basic level of strategy arbitrage products, the Aggressive, Andor Technology Small transparency that can only improve biggest of which are Farallon Capital Cap, and Andor Diversified. Group the reputation of the industry by Partners, which has $2.3 billion of assets are a little over $7 billion. showing that hedge funds are real assets, and Farallon Capital The miscellaneous text explains entities, just like any other financial Institutional Partners 2, which has a the background of the split with organisation, and are not shadowy,

APRIL 2003 ABSOLUTE RETURN 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 York’s 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 that some funds tried to create their own Eliot Spitzer, New York attorney general 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

The rising demand for action

*In March 2003, the SEC invites other national regulators, *In a case related to III Offshore Advisors, the Internal including the UK’s Financial Services Authority, to attend a Revenue Service raises fears that it will challenge or seek ‘global summit’ on regulation of hedge funds. to halt the current practice of US-based managers who defer fee income from their offshore funds for tax *Hearings on hedge fund regulation are announced by the purposes. In Congress, it is estimated that this could raise Senate Banking Committee and House Financial Services IRS tax revenues by some $5 billion over 10 years. Committee in Washington DC. *In November 2002, the SEC alleges fraud and *In February 2003, new SEC chairman William Donaldson performance mis-statement at Beacon Hill. says that the agency will take a “long, hard look” at hedge funds. *In October 25, 2002, moves are initiated to oblige hedge funds to screen all new investors to make sure they have no *In January 2003, SEC commissioner Roel Campos says links with money laundering or terrorism under the Patriot agency officials are discussing a complete overhaul of Act. regulations affecting hedge funds, including potential limits on short selling and leverage. *In May 2002, the SEC begins a study into whether changes may be needed in relation to rules for hedge funds sold to *Having overhauled practices on Wall Street relating to IPOs, retail investors, and into potential conflicts of interest for New York attorney general Eliot Spitzer turns his attention to hedge funds run by mutual fund companies. hedge funds, investigating allegations from companies that a group of hedge funds had conspired to manipulate their *In February 2002, the SEC launches an investigation into stock prices. the Lipper convertibles fund after its NAVs are re-stated to reveal large losses.

42 ABSOLUTE RETURN APRIL 2003 GUEST COLUMN

Why regulation can be good

writes Neil Wilson

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

APRIL 2003 ABSOLUTE RETURN 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 Asia. The figures for the US come from two and there are no signs – on the basis of last leading investors who monitor start-up activity, Syear’s activity or anecdotal evidence this while the European and Asian numbers are year - that it is slowing down in the US or derived from our sister publications, EuroHedge anywhere else in the world. What does seem to and AsiaHedge . be happening, however, is a polarization of the Already this year, the start-up business in NEW FUNDS 2002 BY REGION market. the US is off to a brisk start with some monster US still dominates the start- Experienced managers who have split with launches. John Hurley raised $300 million for a up business despite recent their existing firm are still finding it relatively technology fund. Ira Unschuld at Brant Point gains in Europe and the easy to attract money as are well established opened and closed on day-one with $160 emergence of an Asian brand names that launch second, third or million; and David Webb raced to $800 million hedge fund industry fourth products. However, within a few months with his Verus fund. start-ups without an Each of these managers came with a big New funds 2002 No. of funds Assets ($m) overwhelmingly obvious reputation from their previous employer. US (est.) 400 17,000 pedigree are struggling to Hurley was at Bowman Capital, while Unschuld Europe 181 8,813* reach critical mass. worked at Schroders in New York where he Asia Pacific 66 1,680** Total 647 27,493 To some extent this had established one of the best mutual fund

*EuroHedge **AsiaHedge has always been the case track records in the world, and Webb was the with start-ups, but the star manager at Shaker Heights. polarization is more To a certain extent, some of the new fund extreme today than ever, according to research business is a zero sum game. One start-up wins by Absolute Return , which conducted an assets while another group loses. The most extensive survey of investors and start-up dramatic example of this is Verus and Shaker managers. Heights. Since Webb left Shaker Heights late Another significant trend is the move by last year, assets have shrunk from over $1 investors away from new long/short equity billion to $135 million with part of the money managers unless, of course, they come from a switching to Verus. top hedge fund group. At the same time, start- The pattern mirrors the results from 2002 up credit, macro, fixed income and distressed when many of the big start-ups arose from the funds are finding the going a lot easier than break-up of existing high profile teams, which they did a few years ago. has prompted observers to ask how much To put some numbers on the start-up really new money came into hedge funds last business, last year alone over 400 funds year. A large part of the money appears to have launched in the US, 181 in Europe and 60 in been re-cycled out of one product into another.

44 ABSOLUTE RETURN APRIL 2003 RESEARCH

A look at some of the top 20 start-ups in the Return surveyed, you reach a total of $13 billion US in 2002 – compiled by Absolute Return – of confirmed assets raised by start-ups last year. shows that many of the new funds were the Estimating the size of the remaining 280 result of a ‘divorce’ between two portfolio funds becomes more difficult. If you assume managers who went on to run separate funds. that the sample of 100 funds polled by Absolute Among the ‘divorcees’ were the Midtown Return is representative of the industry then it duo Neil Barsky and Scott Sipprelle, who would mean that the remaining 280 funds raised started Alson and Copper Arch, respectively, a little less than $12 billion. with over $400 million apiece. Another was However, many prime brokers and Mike Au, who split from Intrepid to launch his administrators say that this figure seems high, own Hornet technology fund with around $400 which suggests that the sample of 100 funds million. was not representative of the industry as a Finally, the other category of successful whole. A number of funds did not co-operate launches came from existing hedge fund with our survey, and it seems reasonable to TOP 20 US STARTS IN 2002 groups. Andor led the way with the launch of assume that one reason they were unwilling to Big asset raisers were often David Felman’s Andor Diversified, which raised co-operate was because they did not raise much managers splitting from $1 billion. Other big launches from existing money. established hedge funds groups included BGI, which raised $400 million Furthermore, the types of funds that we such as RedSky or big for the BGI 32 fund; and Viking, which launched were able to find were by definition the more groups rolling out new funds a $250 million consumer fund. serious operations. Prime brokers and like Andor and Citadel Andor Diversified only just crept into the administrators confirm that 2002 launches as it officially began at the end of there are ‘hundreds’ of funds Fund name Est. asset size 2001 but started taking in outside money in that start with $5 million of Dec 2002 ($m) 2002. There was a similar story for the two assets from ‘family and friends’ Andor Diversified Growth 1000 Citadel funds. that would not be on anyone RedSky 1000 Moving beyond the top 20 launches in the else’s radar screen. Silverpoint 850 US last year, information on the remaining 380 As a result, it is reasonable Suttonbrook 670 Citadel Equity Opportunity 500 start-ups is sketchy. No one monitors the asset to assume that the remaining Fortress Drawbridge 500 size of the US hedge fund business accurately new funds raised somewhere Alson Signature Fund 400 Copper Arch 400 but Absolute Return contacted a sample of 100 around $4 billion which would Hornet 400 funds that started in the US last year to see if mean that the total money BGI 32 400 there were any clear patterns. raised by US funds in 2002 is Mackay Shields 400 GRT Topez 400 The answer is that the launch size appears to somewhere in the region of Citadel Edison 300 tail off fairly steeply. Of the 100 fund sample, $17 billion, which is an Avesta 300 only seven had raised assets of over $100 impressive number and is Grange Park Technology 250 Fortress Macro 250 million with three of those being launched by significantly more than Europe Viking New Consumer 250 established hedge fund groups like Clinton, III and Asia. JD Partners 220 and Lazard Market Neutral. Other big money Happily, however, in the Galleon Admiral 220 DE Shaw Laminar 220 raisers were distressed debt or emerging other regions of the world, Total 8,930 market funds. guestimates are not necessary. Interestingly, none were equity funds with Our sister publications, EuroHedge and the exception of the Lazard US Market Neutral AsiaHedge , monitor all start-ups in Europe and fund, which recently lost its managers and has Asia and produce very accurate numbers for the subsequently shrunk dramatically in size. In launch activity each year in those markets. fact, the average size of launch of the 40 equity Europe is showing a similar pattern to the US funds that made up the sample was $38 million with a shift away from equity managers to by the end of 2002. The six macro funds in the macro and fixed income funds, which seems to sample raised an average of $108 million with be gathering even more momentum this year. In distressed funds averaging $82 million. 2002, the 181 funds that launched raised a total Putting a number on the assets raised by US of $9 billion with $2.4 billion coming from start-ups in 2002 is therefore something of an arbitrage, macro and fixed income and $2.5 inexact science. However, when you add the $9 billion coming from macro and fixed income. billion raised by the top 20 launches with the $4 Asian funds are still very much dominated by billion raised by the 100 sample that Absolute long/short equity.

APRIL 2003 ABSOLUTE RETURN 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 Pincubator. 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 Leslie Rahl of L2 headquarters in New York and are given all the necessary infrastructure to enable them to run the RWaall hStrle eat nvedter aPnso Llesslkie yRa hrle anudn Listae Po alskty Lha2 ve operations side of the business efficiently. teamed up to launch L2, a new breed of hedge fund While Perry clearly hopes to make money from its consultancy. The service aims to go beyond providing investment in these managers, one of the main traditional risk consulting, strategy selection and valuation reasons for the new incubator programme is the capabilities by offering to manage client portfolios post attempt to create a flow of information between these structuring. Customization, greater education and more managers and Perry itself. comprehensive risk management will also be key focal Bill Vernon who runs the program at Perry says: points of the new company. L2 forms an extension of Rahl’s existing hedge fund advisory boutique, Capital Market Risk “All of the managers are people we would have liked Advisors, which she founded in 1994. CMRA offers a range to have hired but who wanted to run their own fund. of risk management consulting services including due By incubating them, we can still get much of the diligence, hedge fund manager selection, risk management benefit from them in an exchange of ideas and outsourcing, budgeting and governance, new product research while enabling them to run their own development and financial forensics. shows.” Rahl and Polsky first met at Citibank, where they co- Each of the managers is responsible for building headed its derivatives business between 1986 and 1991. their own investment teams and for marketing the Rahl spent 19 years at Citibank, including nine as head of the firm’s derivatives group in North America. During this funds. At the same time, each manager brings some time, she has been credited with launching Citibank’s caps different research skill and knowledge to Perry’s and collars business in 1993 as an extension of the investment team. proprietary options arbitrage portfolio she previously ran. Bob Friend, formerly at UBK is running the Recon Polsky was most recently a managing director at Merrill Arbitrage fund, a hybrid distressed, convertible bond Lynch, where she headed collateralized financing services and capital structure arbitrage fund. Christian Leone, including prime brokerage, swaps, repo, stock loan and who was at Goldman Sachs before becoming a margining. Prior to that she was a managing director with successful Silicon Valley entrepreneur is managing Morgan Stanley, overseeing global risk, credit and Luxor Capital Group, a credit arbitrage and equity insurance for the firm. 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. PApracihvea Ctaepit alla isb thee la tfeust nmadnsag efmreontm gr oAupc toc bee sads ded Vernon says that he is looking for up to two more to a new ‘private label’ marketing platform that is being funds to incubate over the next 12 months. assembled by Access International Advisors, which is best known for raising money for Clinton, Cerberus and the Bass Brothers.

46 ABSOLUTE RETURN APRIL 2003 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. GlobeOp may be on 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 block the Stewardship Group, Elite Performance Convertibles und administrator GlobeOp, the firm founded by Fund managed by the Argent Financial Group and Elite former Long-Term Capital Management Statistical Arbitrage Fund managed by Trident Advisors. A Fprincipals, may be on the block, according to fourth single-manager vehicle, the fixed-income focused industry insiders. Elite ‘AAA’ Carry Fund, managed by Apache Capital, will be GlobeOp, which has operations on both sides of the added in May. Atlantic, has built an impressive list of clientele in the “One of the reasons you have seen so much interest in funds of funds has been that investors like the idea of three years since its founding. Among the clients who having an outside group doing due diligence on funds and tap GlobeOp for its daily risk management and data handling risk monitoring. We’re taking the same idea and collection and reconciliation services is Man applying it to single-manager funds,” says Ted Dumbauld, a Investment Products, a firm managing an estimated $11 partner at Access International Advisors. billion in alternatives including a growing array of In order to avoid potential conflicts of interest, Access hedge fund-linked structured products. International Advisors will refrain from taking an equity Officials at GlobeOp declined to comment on stake in underlying managers and their funds. It will earn rumors that the independent firm had been approached its money from a straight-forward marketing fee for assets by a prospective suitor or whether the firm was actively raised in the new structure. 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 RIn ea sfigcno th ast tlaargretr scle aprirnigm firmes barre olokokeinrg afogr ae n edge Ltd, which at the time took a 12.5% equity stake in in the once overlooked foreign-exchange prime brokerage GlobeOp through its Mezzanine Management Fund III. arena, futures giant Refco in March inked a deal with forex Since its inception, GlobeOp has focused on specialist Currenex to add enhanced-trading capabilities providing its hedge fund clients with rapid data aimed at attracting new clients among the ranks of hedge funds, managed futures trading advisors and institutional aggregation and extensive risk management tools, investors. adding a level of oversight that has become a The strategic move is perhaps less than surprising. Once prerequisite for investment by institutions looking to the ugly duckling of the prime-brokerage universe, forex tap hedge funds. And using the same data and trading and its promise of higher revenues and keeping information, GlobeOp has leveraged its capabilities to more client volume in-house has already led UBS and other offer additional services to hedge fund managers such clearing houses to boost their the size of their forex as the preparation of monthly investor newsletters. operations and trading capabilities. GlobeOp’s chief executive is former LTCM risk- A weak equity market combined with stronger performance and inflows for managed futures advisors and manager Hans Hufschmid. Other founding members global macro funds – segments of the alternatives universe are Didier Martineau, a senior LTCM strategist, and traditionally more active in currencies – has led many players Jerome Barraquand, a fixed-income specialist who had like Refco to identify forex trading as a growth market. worked previously for Sanwa International and Salomon Refco’s deal allows the group to offer its clients Brothers. Currenex’s online trading platform called FX Clear. New With offices in London and in the New York City York-based Currenex ‘s business model has not been to suburb of Harrison in Westchester County, the firm has build a prime-brokerage unit itself. Instead, the group has roughly 100 employees and is apparently poised to leveraged its online trading capabilities by striking deals grow. with groups like ABN AMRO, Barclays Capital and Standard Chartered.

APRIL 2003 ABSOLUTE RETURN 47 PERFORMANCE

ACSOSNEVT EARLTLIIBALNECS E Alta reaches a new high as CB arb players thrive ne of the most successful players in the convertible arbitrage field has been the $720 Omillion 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 Chart of the month: Campbell Campbell & Co.’s Global Assets fund has had a right across the premium-grade and credit spectrum. storming start to the year, as the chart above shows. Other convertible bond houses have also done well The firm, which now runs some $4.5 billion in CTA with Lydian now up 7.88% for the year, Alexandra strategies, trades about 50 different financial futures Global up 6% and Canyon up 5.3%. contracts in the Global Assets strategy. It has The fund’s macro process involves initially skilfully exploited the prospect-of-war theme which, identifying the cheapest convertible exposure on a in turn, has created significant investor uncertainty relative basis, and then applying a delta neutral hedge and consequent market volatility. As the value of the on the underlying equities. Bond exposure is then US dollar declined over the past year, the fund has addressed by means of total return swaps on high yield generally been short the greenback and long on indices – giving an overall macro hedge against all long other major currencies. It has also benefited from a convertible exposure. sharp rise in interest rate futures throughout the According to Creedon, the particular benefit of the world and from shorting stock indices as global swaps is that the indices have an embedded pairing markets continue to see-saw. However, the winning effect to the non-investment grade exposure in the streak went into reverse in mid-March, just before portfolio. As a result, the short provides an important the onset of hostilities in Iraq. The reality of war liquidity hedge, which has held up well in various forced an abrupt reversal in trends, resulting in a liquidity crises, such as September 1998, the end of loss of 4% for Global Assets in March. 2000, and September 11, 2001. The final step is a gamma trading discipline, using a November and December, quant-based programme whose model is akin to Black- EVENT-DRIVEN having rebounded from Scholes, which is mechanically executed on a near- October lows. continuous basis. This last has been an important Risk arb was also profitable AOneg eolf oth me obetostr-pse arfhoermading factor in generating constant returns even in times of in January, mainly due to funds this year is GAM the portfolio’s holding of lacklustre volatility, generally accounting for between Arbitrage, managed by German speciality chemical 80 and 160 basis points of return per month. New York-based John company Degussa AG- Over the last few months – since around November Angelo of Angelo, Gordon whose agreement to be – the fund’s performance has prospered partly thanks & Co. acquired by RAG was to an infusion of liquidity into the convertibles market, The fund is now up 5.29% stopped by the German year-to-date. Much of this particularly in the small and mid-cap area. courts in December. good performance came Angelo ratcheted up the Creedon puts this down to a number of factors, from prices in the distressed exposure in the including the lack of new issuance and the re-entry of distressed sector, which portfolio significantly going managers who had lightened their gearing in accounted for 79% of assets into the rebound, moving anticipation of redemptions that never occurred. continuing in January on from 58% at the end of July the uptrend that began in to 73% at the end of

48 ABSOLUTE RETURN APRIL 2003 PERFORMANCE

September, and he began to value specialists. Alex re-invest the cash he had Roepers’ US equity-focused been holding when coming Cambrian is down 0.96% MACRO out of the October slump. year-to-date, after an initial February was fairly drop of 2.18% in January it uneventful, with a 0.67% recovered by 1.25% in return. Angelo saw no February. Global equity major trends on the player Orbis Optimal is distressed side, although down 3.28% so far on the prices were generally firm, year, having fallen 2.6% in while on the risk arb side, February. currently 15% of the Other bigger funds that are portfolio, spreads on both on a winning steak are Pharmacea/Pfizer and Greenlight. It was up 1.2% in Household Finance/HFC February, taking it to 3.43% narrowed. for the year which means Among the other big, that the fund’s annual event-driven funds Perry compound rate of return Partners was up 0.56% in remains at 28.48% since its February, taking it to 3% for inception in May 1996. Tudor Jones piles on the year. Overall the Absolute Return -aul Tudor Jones’ Tudor BVI Global fund was up 2.16% in median for US equity funds February pushing it to 4.62% for the year as macro funds EQUITY is slightly down for the year continued to capitalize on major trends in the market that to date. have been thrown up by the Iraq war and doubts about the strength of the global economy. Kingdon back in form Tudor’s returns follow an outstanding 2002, during which Mark Kingdon suffered MEDALLION something of an ‘annus the fund was up 21.01%. Jones and his team are thought horribilis’ in 2002, the to have gained significantly from long positions in worst year since inception SHiomwo dnose ss Jtiimll Sdiemliovnesr aint g Treasuries over the last 18 months, while also playing the in 1986, dropping 8.44% Medallion International euro/dollar futures game. which followed a fall of continues to deliver the Among the major funds, Louis Bacon’s Moore Global 5.77% in 2001. goods with such Investments has shown even better performance so far Nevertheless, 2003 has phenomenal consistency? this year – now up 4.92% to the end of February, on the begun positively, and the Once again, the notoriously back of a 0.57% gain in February. fund is up 1.23% to the end secretive group appears to Of the other star macro players, Bruce Kovner’s Caxton of February. be up and running and off had a good 2002, with positions in gold thought to have Meanwhile, after a to a strong start in 2003 contributed much of the return. In February, when the fund tremendous 31.83% return with the fund reported to was up 0.37%, leaving it up 1.82% year-to-date, gains in in 2002, David Felman’s be up 4.09%, after a 2.01% financials and energy more than offset modest losses in Andor Diversified has return in January and 2.04% commodities and stocks. begun 2003 well, up 2.54% February. Meanwhile, on the fixed income side, John Meriwether’s so far after a 0.70% rise in Medallion has prospered in JWM Partners Relative Value Opportunity portfolio has also February. the difficult market begun the year well, a slight February dip of –0.13% Lee Ainslie at Maverick, on conditions over the last leaving the fund nevertheless up 3.11% year-to-date. the other hand, has couple of years – a very Over the last 12 months, the major macro players seem to struggled so far this year. strong return of over 25% in have focused on the same themes. Although many will He was down 2.59% in 2002 was surpassed by an have traded around these positions, major plays such as January and flattish in exceptional 34% return in being long Treasuries, shorting the dollar – particularly February, leaving him now 2001. Since January 2001 to against the euro – as well as being selectively long gold down 2.53% on the year. the end of February 2003, and oil and short equity markets have been the basic constituents. This follows a relatively the fund is understood to Absolute Return subdued 2002 by his own have made a total gain of Overall, the median macro fund in the standards – with a 2.6% over 75%. Even more database was up 1.5% in February taking the median fund return. remarkably, the fund did up to 2.4% for the year. The year has also started not have a negative month badly for some of the big over the period.

APRIL 2003 ABSOLUTE RETURN 49 INDICES US funds European funds

istressed debt funds have had a flying start to the year ebruary was another in a series of good months for Din the US with February’s 1% month taking the median FEurope’s convertible arbitrage, macro and fixed income fund in the Absolute Return Distressed Index up to 4.33% managers. Big convertible managers such as GLG and KBC for the year. While this is clearly good, it is still some way again posted excellent numbers, as did big fixed-income behind the returns from US-based CTA which were are up funds like JPMorgan Diversified. Some of the new entrants close to 8% for the first two months of the year - although in the macro sphere, such as the Mail Capital Fountain they have given part of that back in March. Equity Fund and Razor Macro, also entered our tables for the first managers are still struggling with the median US equity time on the back of a series of strong gains. fund down for the first two months of the year. The median It continued to be tough going in other arbitrage technology fund just scraped into positive territory while categories, particularly among the statistical arbitrage and the median global equity fund was down 1.15%. It is better quantitative funds, as well as in the big long/short news for US convertible managers with the median fund categories. On average, global equity continues to be even already up 3% in the first two months of the year. tougher than European long/short.

Absolute Return - US funds EuroHedge Index

Strategy Feb-03 2003 YTD Strategy Feb-03 2003 YTD

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

Global fund of funds Asia-Pacific funds

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

InvestHedge Index Bank of Bermuda AsiaHedge Index

Category Feb-03 2003 YTD Strategy Feb-03 2003 YTD

Global Multi Strategy US$ 0.37% 1.16% Asia including Japan US $ -0.44% -0.16% Arbitrage US$ 0.54% 1.78% Asia excluding Japan US $ -0.01% 1.12% Global Equity US$ -0.31% -0.31% Japan Long/Short US $ -0.16% -0.04% US Equity US$ -0.44% -0.17% Japan Long/Short Yen -0.38% -0.29% European Equity € -0.52% -1.06% Emerging Markets Hedge US$ 0.92% 1.22% Australia Long Short AUS $ -0.85% 0.29% Asia-Pac Funds of Funds US$ -0.38% -0.20% AsiaHedge Composite -0.04% 0.29% Global macro currency debt US$ 1.65% 3.48% Emerging Markets 1.30% 1.55%

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 February Last 3 Last 6 Last 12 YTD Annualized Incep 03 (%) mnths (%)mnths (%) mnths (%) (%) compound (%) date

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

Fund name February Last 3 Last 6 Last 12 YTD Annualized Incep 03 (%) mnths (%)mnths (%) mnths (%) (%) compound (%) date

JAPAN LONG/SHORT FUND US$ Optimal Japan Fund 1.99% 2.70% -2.92% -1.21% 3.34% 8.75% Oct-99 Speedwell Japan L/S Cayman Fund - US$ 1.42% 0.05% 4.42% 2.57% 0.79% 9.40% Nov-00 MW Nippon Fund† 1.42% -0.65% -2.39% -2.60% 0.44% -2.60% Mar-02 Penta Japan Fund 1.37% 5.31% 15.52% 22.57% 4.23% 12.18% May-98 Arcus Zensen Fund - US$ 1.32% 3.59% -0.43% 14.28% 5.72% 13.58% Dec-01 GAM Japan Fund - US$ 1.12% 0.62% -2.62% -7.02% 1.97% 6.33% Jun-98 Asuka Japanese Equity L/S Fund - US$ 1.09% 1.15% 6.61% n/a 1.03% 13.67% Sep-02 Whitney Japan Select Investors Fund 0.69% 4.24% 6.02% 5.05% 2.47% 8.51% Nov-00 Tower K1 Fund - US$† 0.64% 7.29% 6.96% 69.31% 1.77% 51.86% Jul-98 Chikara Japan Fund 0.62% 0.89% 3.75% 9.46% 0.71% 6.02% 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 February Last 3 Last 6 Last 12 YTD Annualized Incep 03 (%) mnths (%)mnths (%) mnths (%) (%) compound (%) date

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

APRIL 2003 ABSOLUTE RETURN 59