Problems & Issues: Hedge Fund Headline Roundup

So many 'decline of the hedge fund' stories this morning, so little time.  So here's a roundup of the stories:

• Shorting the hedge fund industry
• Weak Results Dim Hedge Funds Luster
• Fewer hedge funds started in 1st half '06 than '05
• Investors keep hedge funds after two big losers
• Canadian Hedge Funds Should Be Regulated, Group Says
• How the Wreck From Amaranth Was Contained
• Bank of Montreal May Be Hurt by Drop in Gas, Amaranth Collapse
• Pension loss estimated at $105 million [Amaranth]
• Europeans all talk no action on hedge funds

Shorting the hedge fund industry - MarketWatch

When TV commentator Ron Insana starts getting into hedge fund management, it's probably time for everyone else to get out.

This isn't to slight Insana, who is among the most sober and intelligent thinkers on that channel, if he still is on that channel.

But when people who make their living as TV pundits eschew their given profession in the hopes of corralling some easy hedge fund money, it's irrational exuberance time.
The signs are everywhere that the glory days of hedge funds are over.

Sure, the industry will survive. There are still places in the market where savvy traders can exploit inefficiencies. People will always want to make big bets in the market. This is, after all, $1.2 trillion we're talking about. It's the days of massive proliferation of funds and the notion that there exists a bottomless vein of returns that is headed for nostalgia.

Consider the cases of Naragansett Management LP, Vega Asset Management, Pirate Capital and, of course, Amaranth Advisers. Those funds have either suffered massive losses through bad bets in the energy and bond markets or lost key personnel and are facing big redemption requests from investors. The demise of those funds was chronicled well by The Wall Street Journal on Wednesday....

Weak Results Dim Hedge Funds Luster - New York Times

When the hedge fund Archeus Capital opened to investors in 2003, it did so with high hopes and a glittering trading pedigree. Its co-founder, Gary K. Kilberg, was one of the aggressive Salomon Brothers bond traders memorialized in “Liar’s Poker.”

By 2005, investors, enamored of its complex trading strategies, had poured $3 billion into the fund. Within a year, however, some bad bets and administrative troubles resulted in a spate of investor withdrawals and its funds shrank. Now, its assets are down to $682 million, several partners have left and its return for the year is a negative 1.9 percent, making Archeus the latest hedge fund to fall from its gilded perch.

Hedge funds — investments for institutions like pension funds and endowments and the wealthy — have hit a rough patch.

Recently, a well-regarded fund, Amaranth Advisors of Greenwich, Conn., made a wrong-way bet in the energy markets and lost more than $6 billion in a week. It will dispose of its remaining assets. Even the flagship hedge fund run by Goldman Sachs, whose trading prowess has few peers on Wall Street, fell 10 percent in August. A fund at Vega Asset Management, once among the 10 largest hedge funds in the world, fell more than 11.5 percent in September, leaving it down 17.5 percent for the year. Its assets, which once topped $12 billion, are now $2 billion to $3 billion, a person close to the fund said.

"What’s happened is that as some of the opportunities have declined over the past year, it’s been hard to make money,” said Jane Buchan, chief executive of Pacific Alternative Asset Management, which manages $7.5 billion in funds of hedge funds. “And people have had different responses: some have stuck to their knitting, others increase leverage or trade directionally.”.....

Fewer hedge funds started in 1st half '06 than '05 - Reuters

Growth in the $1.3 trillion hedge fund industry may be slowing a bit as less than half as many funds opened for business in the first six months of 2006 compared with the same period a year ago, according to data released on Wednesday.

Chicago-based Hedge Fund Research (HFR), which tracks the industry, said 549 new funds were launched in the first half of 2006 against 1,211 started in the first half of 2005.

At the same time, the number of funds liquidated was also nearly slashed in half with 223 closed during the first half of 2006 compared with 428 shuttered in the first half of 2005.

In the first half of 2006 investors poured more money than ever before into hedge funds, which differentiate themselves from mutual funds by being able to sell stocks short and use borrowed money to boost returns.

HFR said a record $42.1 billion was added in the second quarter after $24 billion flowed in during the first quarter....

Investors keep hedge funds after two big losers - Reuters

Private bankers say clients remain sanguine about the hedge fund industry in spite of billions of dollars in losses reported by two top hedge funds in the past month.

At the Reuters Wealth Management Summit in Geneva, top private banking executives from HSBC, Credit Suisse and Barclays said they had not advised private clients to invest in the Amaranth or Vega Select hedge funds.

Greenwich, Connecticut-based Amaranth Advisors, a multi-strategy hedge fund which in late August had assets of $9 billion (5 billion pounds), lost a reported $6 billion in less than two weeks after leveraged natural gas positions went badly wrong.

Europe's Vega Select, once an $11 billion fund, is said by clients to have shed between 10 percent and 20 percent in September, adding to a loss of 9.6 percent in August after finding itself on the wrong side of an interest rate trade after failing to anticipate a rally in bonds.

The private bankers said their due diligence practices help them identify and, where necessary, avoid high-risk funds....

Canadian Hedge Funds Should Be Regulated, Group Says - Bloomberg

Hedge funds in Canada should be regulated the same way as mutual funds to protect individual investors unfamiliar with their risks, says a task force that reviewed Canadian securities legislation.

Hedge funds should be required to disclose all fees, investment strategies, and details on how the fund is valued, said the 12-member group established by the Investment Dealers Association of Canada, the self-regulator for the securities industry.

``Just as a mutual fund regulatory framework for the retail market was established so too should a retail hedge fund regulatory framework be established,'' the group said in a 261- page report released today. ``Retail investors need to be able to access all of the information necessary to make informed investment decisions regarding hedge funds.''

The push to regulate hedge funds is among 65 recommendations proposed by the group to modernize Canadian securities rules. Other suggestions included calls for better enforcement and policing, paperless financial disclosures, an Internet Web-browser system for company filings, establishment of a national court solely for securities offences, and creation of ``senior independent review officers'' to oversee criminal investigations.

The collapse last year of Norshield Asset Management (Canada) Ltd. and Portus Alternative Asset Management Inc. prompted the task force to scrutinize hedge funds. Last month, U.S. hedge-fund manager Amaranth Advisors LLC lost about $6.5 billion after its Calgary-based trader Brian Hunter made wrong- way bets on natural gas prices....

How the Wreck From Amaranth Was Contained - Wall Street Journal

As Amaranth Advisors scrambled to unload its sinking energy investments last month, here is what potential bidders saw:

There were thousands of complicated contracts at the Connecticut hedge fund to buy and sell natural gas, power generation and oil in increasingly jittery markets across the globe. Though some were regulated by futures exchanges, others were one-on-one deals with two dozen or so banks and other investors. Some were in markets with relatively few buyers and sellers, making them vulnerable to big price moves.

In other words, this multibillion-dollar transaction looked like it wouldn't be easy to accomplish quickly without causing broader market turmoil. Yet J.P. Morgan Chase & Co. and hedge fund Citadel Investment Group LLC managed to smoothly assume Amaranth's energy portfolio in under 48 hours.

How they did it illustrates the global markets' resilience to massive blowups at a time when some other hedge funds are struggling.....

Bank of Montreal May Be Hurt by Drop in Gas, Amaranth Collapse - Bloomberg

Bank of Montreal may be the hardest- hit Canadian bank as natural-gas prices decline and the collapse of hedge fund Amaranth Advisors LLC cuts into trading revenue.

The country's No. 4 bank by assets has more at stake in commodity and foreign-exchange trading than any of its Canadian rivals, according to Genuity Capital Markets. Currencies and commodities such as gas futures generated C$250 million ($223 million), or 44 percent, of Bank of Montreal's trading revenue in the first nine months of this fiscal year, Genuity estimates.

That compares with 30 percent at Bank of Nova Scotia and 18 percent at Canadian Imperial Bank of Commerce and Toronto- Dominion Bank. Royal Bank of Canada, the country's largest bank, got only 15 percent of its trading revenue from commodities and foreign exchange over the same period, according to Genuity, a Toronto-based securities firm.

``We think some of the gains that BMO had in that segment are going to start to dissipate,'' Genuity analyst Sumit Malhotra said in a telephone interview. ``They've ridden that wave all through 2006.''

Toronto-based Bank of Montreal's trading revenue more than doubled in the first nine months of fiscal 2006 to C$564 million, outpacing gains at all of its rivals. That growth may slow now that Amaranth, the Greenwich, Connecticut-based firm whose two main hedge funds lost $6.5 billion last month, has exited energy trading and natural-gas prices have dropped 28 percent since Aug. 1, Genuity analysts Malhotra and Mario Mendonca said in a research note published Sept. 21.....

Pension loss estimated at $105 million - San Diego Union-Tribune

The San Diego County pension system's estimated loss in the Amaranth hedge fund collapse has grown to $105 million, the retirement association's CEO said yesterday.

That's more than double the original estimate of $45 million, and $18 million worse than pension officials thought just days ago.

Retirement association representatives met Tuesday with officials from Amaranth Advisors, a once-high-flying hedge fund that lost more than $6 billion of its $9.2 billion in assets last month because of natural gas trades that didn't work out.

The county pension fund invested $175 million with Amaranth one year ago.

Amaranth officials informed them Tuesday that only $70 million of the county's investment in the hedge fund is left in the account. “They're saying that's the amount of money we can expect back,” said Brian White, CEO of the San Diego County Employees Retirement Association.....

Europeans all talk no action on hedge funds - Reuters

European institutional investors have long sung the praises of hedge funds, but have been slow to put money into these loosely regulated portfolios, according to a study released on Wednesday.

European investors have been talking hedge funds up since 2000, when the stock investments amassed losses while hedge funds delivered strong gains for several years.

But consultants at Greenwich Associates found that many Europeans may not have acted on their glowing reviews. Indeed their most recent study shows only a small portion of the roughly $1.3 trillion (690 billion pounds) invested in the world's hedge funds comes from European institutions.

"The enthusiasm is there," said Tobias Miarka, a Greenwich consultant who worked on the study. "But the actual increase in allocations is not as high as one might expect."

In Germany, insurers and pension funds have invested only 2 percent, or roughly 20 billion euros, of their total portfolio with hedge funds and private equity funds, consultants found.

In continental Europe as a whole, data show investors have allocated roughly 50 billion euros to hedge funds and private equity funds of the total 2.5 trillion euros they invest.

U.S. pension funds and endowments are only now committing more money to hedge funds to help boost returns. Earlier surveys found U.S. pension funds, on average, invested only small amounts in hedge funds.....