Institutional Investor's Alpha Magazine - June 2008 - (Page 18)

ing to change.” Fortescue hasn’t released proﬁt forecasts, but Catlow says it plans to produce 50 million tons of iron ore in 2009 and is hoping for a A$60-a-ton proﬁt. — Giles Parkinson Correction A Longs & Shorts item (“The Anti-Activists”) in the April 2008 issue of Alpha magazine misstated the position of a paper on hedge fund activism published by the Conference Board. The paper outlined corporate strategies for how best to deal with hedge funds. It was not intended to be an anti–hedge fund tract. Nervous Little Guys M aybe the days of starting a hedge fund with two guys and a Bloomberg terminal really are over. Adding to the growing skepticism that soaring hedge fund accomplishment can come from tiny beginnings is a raft of proposed federal best-practice guidelines. Small-fund managers fret that more rules will create more overhead, a burden big-fund managers can better absorb. “Two guys in a garage can outsource the middle and back ofﬁce — proﬁt and loss, net asset value, subscriptions and redemptions — to an administrator,” says John Hagarty, COO at FrontPoint Partners, a $9.3 billion hedge fund ﬁrm that Morgan Stanley bought in 2006. “The prime broker is used for trading, clearance, settlement and ﬁnancing, but pieces like capital acquisition, risk management, technology and legal matters are missing.” Therein lies the rub. The proposed guidelines, put forth this spring by two committees of the President’s Working Group on Financial Markets, were written mostly with the input of big hedge funds. Because the recommendations lack the force of law — and may never have it — worries about their impact on small funds remain largely hypo- thetical, though they lurk beneath the surface. James Kinney, a partner at New York–based accounting firm Weiser, whose clients deal often with hedge funds, says the small-entrepreneur spirit remains alive and well nonetheless. “In my experience there are more folks starting hedge funds today than you would have expected, especially considering the economic times,” he says. “They’re coming out of ﬁrms like Goldman. They think they can do it, watching their costs. They’re highly motivated, extremely bright and conﬁdent. But they’ll have to have a good administrator, be more efﬁcient.” Those who wrote the proposals seem to want to assuage small-fund fears of overregulation. “Not all of the practices in the report will be applicable to all managers,” says a statement issued by one of the committees (chaired by Eric Mindich, CEO of $11 billion, New York–based Eton Park Capital Management). Ephraim Lemberger, an associate at New York law ﬁrm Bingham McCutchen, says administrators at shops with just two or three people have plenty to worry about already, much of it having to do with dotting i’s and crossing t’s. “Complexity isn’t needed or wanted,” notes Brian Tsai, chief operating ofﬁcer of New York–based hedge fund Equinox Partners. — Janice Fioravante CLASS REVIEW Fixed-Income Updraft o many battered ﬁ xed- income funds, April was kind. The sector had been on a bumpy ride for months as the subprime virus jumped from mortgage- backed to other bond species. The market punished every sort. Hedge Fund Research in Chicago repor ts a 12-month loss of 8.27 percent for its RV corporate fixed- income index, compared with a 3.08 percent gain among all hedge funds. In April, though, corporate bond funds snapped back with a 1.70 percent return, compared with the composite index’s 1.56 percent gain. The Extrayield USD Loan Fund at Muzinich & Co. in New York lit up the board with an 11.62 percent T return in April. The $203.5 million fund invests in ﬁrst-lien bank loans of U.S. corporations with highyield debt. Port folio manager David Bowen attributes the success to a return of stability in the bank loan market, where quality and creditworthiness were rewarded. “We stick with long, leveraged positions because we have the conviction to ride out the price dislocation,” Bowen says. There’s still an uphill slog, though, to recover from the industry’s roughly 25 percent loss over the past year. If not quite as spectacular as the Muzinich fund’s gain, Parisbased Dexia Asset Management’s Euro High Yield fund delivered a 6 percent return in April. As with most corporate loan and high-yield vehicles, Dexia’s $1 billion fund was down for the 12 months ended April 30, in its case 7.94 percent. The rationale is familiar: “We suffered more during the crisis because we decided to maintain our core posi- tions where we were confident in the fundamentals,” says fund manager Aude Lagey, whose strategy picked the best of the BB– and Brated bonds of European companies and under weighted the CCC bonds. — Frances Denmark Corporate Bond Snap Back Return (%) One year Three years through through April* April Three-year annualized standard deviation Benchmark April HFRI RV ﬁxed-income corporate index HFRI fund-weighted composite index Standard & Poor’s 500 index * Annualized. 1.70% 1.56 4.87 –8.27% 3.08 –4.68 3.02% 10.26 8.22 6.33 6.86 11.92 Source: Hedge Fund Research. 18 • INSTITUTIONAL INVESTOR’S ALPHA • JUNE 2008

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

Investor's Alpha Magazine - June 2008 Contents Letter From the Editor Longs & Shorts Cover Story: Alpha Hall of Fame Bruce Kovner Michael Steinhardt Kenneth Griffin Louis Bacon Steven Cohen George Soros James Simons Seth Klarman Julian Robertson Jr. Jack Nash Leon Levy Paul Tudor Jones II Alfred Winslow Jones David Swensen Looking Ahead: Back to the Future Research Center: Europe Hedge Fund 50 Unhedged: Let the Sunshine In

Institutional Investor's Alpha Magazine - June 2008

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