Institutional Investor's Alpha Magazine - February 2009 - (Page 10)

took it back, according to people familiar with the deal. For Duff it must feel a little like history repeating itself. In 2006, when he and two partners sold $5.5 billion FrontPoint to Morgan Stanley, it was considered a shrewd transaction. But behind the scenes, people who have talked to FrontPoint employees say there were tensions, particularly between Duff and staff members. Duff, who was not keen on the idea of selling, was eventually frozen out of the negotiations. — I. R.-S. Secondary Chances T he secondary market in hedge funds is not as little-known as it used to be. Brokers say that big investors are more prone than ever to get out of their positions by selling them — especially in instances where managers have put up redemption gates. Barry Silbert, CEO of New York– based SecondMarket, which makes secondary trading in illiquid assets, says discounts are inherent in the secondary market. Jared Herman agrees. He’s a co-founder of Hedgebay Trading Corp., a secondary-market clearinghouse (listings on Hedgebay include shares in Farallon Capital Management and Marathon Capital Manage- ment). Herman says that in December the average discount was 13 percent of the net asset value, up from 12.5 percent in November. Proponents of the secondary market also note that it can offer investors a way into a fund that might not otherwise be available and that taking a position below a fund’s high-water mark may mean paying lower fees. Managers beneﬁt too because the secondary market offers a way to satisfy disgruntled limited partners who want out. On the ﬂip side, cautions New York–based Watson Wyatt Worldwide hedge fund research chief David Gold, “Many of the offerings are out there for the wrong reason — because the manager is struggling — so that you’re basically inheriting a new set of business risks.” And since each hedge fund has its own criteria for transferring limitedpartnership interests, John Godden, CEO of IGS Group, a London-based consultant, says “managed accounts,” professionally tailored to an investor’s risk appetite, can help expand the secondary market. “We think that there will be a move toward managed-account platforms, where one investor can move more easily from one hedge fund to another.” — Robert J. Rosenberg UPDATE Master of Values: the Zen of Retrenching heah Cheng Hye acknowledges that 2008 was his worst investment year since he and a partner created Hong Kong–based Value Partners Group some 16 years ago. After recording steady gains following its launch in 1993, Cheah’s flagship Classic Fund plunged by 47.9 percent in 2008 (the Hang Seng index, by comparison, was off 46.5 percent). The Value Partners chairman and CEO admits that he completely failed to foresee the credit crisis of 2008. The firm will not announce an exact figure for redemptions for some months to come, but Cheah C says that since October “steady” redemptions are the main reason for the drop in assets under management at Value Par t ners, w hich had $4 billion in assets at the end of November, down from $7.2 billion in the fall of 2007 (see “The Master of Values,” February 2008). Value Partners has been ranked by Alpha as the second-biggest Asia-based hedge fund ﬁrm for two years running, and its Classic Fund returned 20.3 percent on average annually over the past ten years. Much of its success has come from finding undervalued companies in China. Cheah says he has not barred investors from pulling out of Value Partners and that he holds as much as a quarter of assets in cash. He remains bullish on China, where he thinks the economy will continue to grow, international economic strife aside: “Eight percent is doable. China is not in crisis, and we think the worst may be over.” There is opportunity, for example, in Shanghai, where stocks fell by 65.7 percent in 2008. But there are limits to Cheah’s optimism. He worries about unemployment in China and says that “by 2015 or so the country will start to feel the impact of an aging population.” He notes, however, that China overtook Germany to become the world’s third-largest economy in 2007 and projects that it will eventually surpass Japan and the U.S. — Henry Scott Stokes 10 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2009 Illustration by Joshua Gorchov

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2009

Institutional Investor's Alpha Magazine - February 2009 Contents Letter From the Editor Longs & Shorts Digging Out A Call to Mentor Dicey Detroit The Constant Skeptic Cover Story: The Undaunted What Were They Thinking? Dark Days in Greenwich True Stories from the Commodities Files Return of the Native The Quest for Cover Moving On from Madoff

Institutional Investor's Alpha Magazine - February 2009

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.