Institutional Investor's Alpha Magazine - May 2008 - (Page 6)

CalPERS’s departing CIO Russell Read: Know thy hedge fund. The reports were produced at the behest of the U.S. Department of the Treasury after last summer’s market turbulence reminded people of how the 1998 meltdown of $4.7 billion Long-Term Capital Management had threatened to bring the banking system to its knees. In the past several months, investment banks, not hedge funds, have proved to be the weak link (cherish the memory of Bear Stearns Cos., because that’s largely all that’s left of it). One of the reports was written from the perspective of hedge fund managers, the other from that of investors. Both, issued under the auspices of the President’s Working Group on Financial Markets, ﬁnd ﬂaws. The investor report raises long-nagging questions about just how accountable institutional fiduciaries should be when they put money into hedge funds. Russell Read, the outgoing CIO of the $241.7 billion California Public Employees’ Retirement System and chairman of the committee that drafted the report, says the bar should be set higher than it typically is. Whether to put institutional dollars into hedge funds at all, Read says, “should be guided by a very clearheaded assessment of whether hedge funds should be a consideration in a portfolio.” Translation: Fiduciaries had better understand what they’re doing before they take the plunge. Eric Mindich, founder of $11 billion New York– based Eton Park Capital Management and chairman of the panel that wrote the managers’ take on the industry, thinks keeping investors informed is a no-brainer. “All participants beneﬁt,” he says. His group’s report, in fact, acknowledges that not all hedge fund managers are as accurate as they should be when it comes to placing valuations on their holdings. Central to this concern is the growing use of “side pockets,” separate funds into which illiquid, hard-to-value investments are sometimes put, and which cannot be easily redeemed. Side pockets are also used to give some investors access to securi- Assessing the Turmoil: An Exclusive Alpha Survey* Where many investors see only trouble, hedge funds sense opportunity, as demonstrated by our recent survey in which we quizzed 167 managers around the world on their market outlook. Money is tight and leverage isn’t as fashionable as it used to be, many of those surveyed agree, but most also say the downturn that began last summer and has persisted through this spring gives hedge funds a chance to capitalize on the turmoil. Hedge funds that have clamped down on withdrawals remain the exception, and a large majority of managers aren’t expecting things to turn around anytime soon. Most don’t seem to mind that the Federal Reserve Board has moved aggressively to inject liquidity into the markets by easing monetary policy. Has the investment performance of any of your funds suffered from this year’s market turmoil? Yes 79.6% No 19.1 Don’t know 1.2 Has your ﬁrm seen an unusual increase in redemption requests from investors as a result of the recent market turbulence? Yes 27.8% No 69.8 Don’t know 2.5 Have any of your prime brokers tightened the credit and margin requirements for your hedge fund ﬁrm this year? How long do you expect the current market volatility to continue? Ten months or longer 24.5% Six to nine months 41.7 Three to ﬁve months 17.2 Have you reduced the leverage in your One to two months 4.9 portfolio during the recent market Zero months 1.2 downturn? Don’t know 10.4 Yes 53.7% No 45.1 Is your fund seeing more or fewer Don’t know 1.2 investment opportunities as a result of the recent downturn? Has your ﬁrm put in place any More 57.4% measures to restrict the ability of About the same 23.5 investors to withdraw assets during Fewer 14.8 periods of unusual market volatility Don’t know 4.3 like we’ve recently seen? Yes 4.9% Do you think that the Federal Reserve No 93.8 has stepped in too aggressively to try to Don’t know 1.2 Yes No Don’t know 28.1% 64.4 7.5 stabilize markets by easing monetary policy and increasing liquidity, including opening up its discount window to investment banks? Yes 28.4% No 64.8 Don’t know 6.8 What effect do you think Treasury Secretary Henry Paulson’s ﬁnancial reform plan will have on hedge fund regulation? Regulation will remain about the same. 48.8% It will decrease. 2.5 It will increase. 48.8 * This month’s InvestorForum survey can be found with the Hedge Fund 100 ranking, on page 54. 6 • 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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