Institutional Investor's Alpha Magazine - May 2008 - (Page 10)

These signs are small, to be sure. At the end of 2006, government-licensed hedge funds managed only about Ð1 billion ($1.3 billion). The ﬁgure has since doubled. Spain had only four hedge funds at the start of 2007; today it has 25 single-manager funds and 38 funds of funds. Government sanction of hedge funds is important, partly because the institutional investment culture in Spain is far more conservative than it is in most of Europe, whose culture is, in turn, more cautious than London’s or New York’s. Before 2003, hedge funds operating in Spain were barely regulated and weren’t allowed to accept institutional money. Madrid-based Vega Asset Management was the second-biggest European hedge fund two years ago (with $11.1 billion in assets), but blew up Billionaire Backlash here’s no limit, it seems, to the power of money. Alpha’s story last month on the enormous take-home pay of top hedge fund managers in 2007 triggered a swift backlash among pundits and politicians — as well as comments from a host of people inside the ﬁnancial sector. W illiam Gr os s , t he chief investment officer of bond giant Pacific Investment Management Co., based in Newport Beach, California, told the New York Times that the numbers were unseemly. “There is nothing wrong with it — it’s not illegal. B u t i t ’s u g l y, ” h e said. John Bogle, founder of the Valley Forge, Pennsylvania–based Vanguard Group, said on ABC News that the fund managers cited in the report should be ashamed: “I guess people don’t get embarrassed when it comes to money.” Senator Barack Obama, during a televised debate with Senator Hillary Clinton, his rival for the Democratic presidential nomination, made mention of it within hours of publication. “ We saw an ar t icle t oday w hich showed that the top 5 0 hedge fund managers made $29 billion last year — $29 billion for 50 individuals,” Obama said. “And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.” T The widely cited Alpha article detailed the 50 most highly paid hedge fund managers. Topping the list was John Paulson, who made $3.7 billion, probably the richest one-year Wall Street payday in history. Paulson surpassed the likes of George Soros and James Simons, who ranked second and third, at $ 2.9 billion and $2.8 billion, respectively. T he top 5 0 made an aver age of $581 million each (the median American household income, by comparison, was $60,500 in 2007). “I have clients who earn more than $100 million a year, and they work very hard for it,” says Paul Dorf, managing director of Compensation Resources, a New Jersey company that negotiates executive pay packages. “But there’s a huge difference. I don’t think $3.7 billion is good money. I think it’s gross.” Dorf says he is most troubled by the fact that the bulk of the money was taxed at a capital gains rate of 15 percent, compared with the higher rates most Americans pay on income. “People should be rewarded for their contribution and the results they generate. However, if the amounts become so egregious, the system needs to be carefully scrutinized to make sure nothing is out of balance. In the case of the hedge fund manager making $3.7 billion, it certainly appears to be out of whack.” — Jason Skog in 2006 on bad ﬁ xed-income bets, losing most of its assets and taking virtually all of the world’s Spain-based hedge fund assets with it. It had been able to operate free of government interference in part because most of its investors were foreign (Vega also had ofﬁces in London and New York). Sophie van Straelen, CEO of Paris-based consulting ﬁrm Asterias, which follows hedge funds in Europe, believes Spain holds great promise, though she concedes that the global economic slowdown has not helped the still-nascent industry. “This year has been very difﬁcult,” van Straelen says. For the country to have come even the short distance it has was no easy feat. A 2003 law authorized the regulated development of alternative investments beyond the ubiquitous mutual funds. In 2005 a royal decree speciﬁcally formalized the regulation of funds of funds and single-manager hedge funds. In 2007 a second decree established three provisions requested by fund managers: When an investor puts money in a Spanish hedge fund, he or she agrees to a short lockup period, typically one month; an institution must notify the fund ahead of time if it intends to make a withdrawal; the investor may withdraw only a preset portion — typically 5 percent — of its investment. The new rules beneﬁt everyone, says José Pasqual, a Madrid-based lawyer who specializes in representing hedge funds. “It’s in the interest of investors to let the managers manage,” he explains. Van Straelen notes that Spain’s $80,000 minimum investment in single-manager funds is among the lowest on the Continent. There is no minimum for funds of hedge funds, which can be marketed to individuals. They appeal more to the small domestic investor, who is unlikely to be either familiar or comfortable with hedge funds. As Pasqual points out, “Funds of funds are more diversiﬁed, and not as risky as single-manager hedge funds.” Perhaps the biggest remaining legal hurdle, however, is the one that limits regulated hedge funds to in-country investments. Spain, after all, is hardly the only growth market available to investors. — William Freedman Regime Change I magine, if you will, hedge fund managers sipping mojitos and smoking cigars on a Havana veranda after a hard day of stock-and-bond trading in Cuba. A pipe dream? Some investors say it’s plausible. A few hedge fund managers even seem to think the opportunity is now. Cuba, in fact, is one of several unlikely places attracting hedge fund money. Other so-called frontier markets include North Korea and sub-Saharan Africa. But Cuba holds a certain forbidden allure because of its long estrangement from the U.S., where investors are prevented by law from trading in Cuban assets. Hedge funds Photograph by Alden Gewirtz for Alpha 10 • INSTITUTIONAL INVESTOR’S ALPHA • MAY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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