Alpha - September 2007 - (Page 12)

investment-grade ratings at face value, Tsujimoto says the best managers ignored the ratings and did their own fundamental research on the bonds underlying each structureddebt portfolio. “Several of them have proﬁted hugely in the subprime area,” he says. One such winner is New York–based Paulson & Co., whose $4.5 billion Credit Opportunities Fund I and $2.3 billion Credit Opportunies Fund II were up a respective 26.67 percent and 32 percent in August. For hedge funds and credit traders on the wrong side of subprime, the acid test will be how their investors feel about acknowledging that they own the losers, says Judy Posnikoff, a managing director at Irvine, California–based Paciﬁc Alternative Asset Management Co. To avoid public scrutiny, insurance companies, pension funds and other institutional investors may dump sour funds before year-end. “There is more pain to come,” says Posnikoff. — Neil O’Hara Deeper H edge fund managers be warned: Investors may be watching you more closely than you think. In the wake of blowups among some of the industry’s highest-profile funds, and given their vivid memories of past hedge fund scandals, investors are doing more homework on potential managers than ever before. “Background checks are becoming standard practice for institutional investors,” says Guy Simonian, CEO of West Hartford, Connecticut–based CheckFundManager.com — an investigative ﬁrm that caters to institutional investors, capital lenders, private equity firms and funds of hedge funds. “The trend is toward recurring due diligence and annual background investigations.” According to Simonian, one out of every six investigations raises some sort of red ﬂag, a third of which involve something serious enough to make investors walk away. These range from regulatory infractions and criminal records to the fabrication of employment or educational histories. Investigators also try to uncover managers’ own financial problems, looking for bankruptcy filings, judgments or liens, pending lawsuits — or even just bad press. New York–based First Advantage Investigative Services offers investors a hedge fund product called the BackTrack Report, which combines court-record reviews with credentials checks and interviews with people who know the manager in question. Randy Shain, First Advantage’s vice president, says the firm’s investigations unearth signiﬁcant ﬁndings roughly 15 percent of the time. “We ﬁnd some criminal activity — sexual abuse, theft, forgery — but most of the problems involve investigation subjects lying on their résumés about their education or hiding a dispute with partners,” he says. Morgan Creek Capital Management, a Chapel Hill, North Carolina–based asset management firm that invests on behalf of foundations and endowments, has turned to hedge fund investigator services on occasions when potential investments involve illiquid markets and opaque pricing. “When there aren’t as many independent eyeballs looking at a market, a manager can wander off the reservation,” says Michael Hennessy, a senior investment ofﬁcer with Morgan Creek. Specialty investigators charge as much as $1,000 for the most basic background check, even as online services such as Intelius charge as little as $75. Private investigators admit that the Internet is a good starting point, but remind investors that many courts have yet to move their records online. A thorough background investigation involves trips to the courthouses in all the jurisdictions a subject has ever lived or worked. Digging Scoreboard Hedge fund returns by strategy, sorted by investment process, asset class and geographic focus, through June 30, 2007. Monthly return Composite, equally weighted Composite, asset-weighted Process group Directional trading Systematic trading Discretionary trading Relative value Arbitrage Convertible arbitrage Fixed-income arbitrage Mortgage-backed arbitrage Merger arbitrage Statistical arbitrage Multiprocess Security selection Long bias No bias Variable bias Short bias Specialist credit Distressed securities Long-short credit Multiprocess group Multiprocess Event-driven Asset class indexes Equity Fixed income Diversiﬁed Currencies Geographic area Developed markets Europe North America Japan Developed markets, diversiﬁed Emerging markets Combined Asia-Paciﬁc Global markets * Annualized. 3.00% 0.00 –0.55 –1.69 0.72 0.24 0.27 –0.68 0.82 1.09 –1.55 0.74 0.72 0.81 0.78 0.78 1.00 1.38 –0.81 0.39 –1.92 0.82 1.48 –0.93 0.87 –0.41 –0.38 –1.31 –0.41 –0.62 –0.47 0.58 –0.57 2.48 2.53 2.90 YTD return 7.51% 7.49 4.10 2.50 5.62 4.83 4.93 3.81 5.13 6.18 3.64 4.45 6.61 9.91 11.19 11.19 9.16 –0.47 6.45 9.38 3.45 9.36 9.95 7.74 9.45 5.23 5.35 2.20 5.83 6.06 6.18 3.96 4.68 13.44 14.04 13.72 3-mo. return 3.27% 2.83 2.76 2.36 3.17 1.46 1.34 0.39 1.61 2.61 –0.35 2.38 1.86 4.51 4.97 4.97 4.62 0.72 1.27 2.88 –0.48 3.20 3.96 1.15 4.30 1.18 2.63 0.03 2.09 0.77 1.81 3.29 2.42 7.76 8.53 7.20 12-mo. return 13.82% 14.09 8.73 6.89 10.71 8.31 8.72 8.95 8.23 9.66 8.30 6.00 11.66 18.34 21.41 21.41 17.07 –8.66 12.30 17.09 7.85 15.45 15.51 15.13 16.77 9.48 10.53 8.62 11.26 13.50 11.82 5.29 9.14 24.02 22.94 23.41 3-yr. return* 11.05% 10.84 8.25 7.11 9.26 6.25 5.45 4.90 6.49 7.02 7.62 6.55 8.52 13.96 16.24 16.24 13.27 –2.38 11.36 16.08 7.72 12.30 11.93 12.88 12.91 9.03 9.51 5.27 9.65 11.80 10.01 6.85 7.96 18.44 14.87 16.39 3-yr. std. dev.* 3.74% 3.56 4.81 6.88 3.50 1.56 1.83 3.31 1.01 1.15 2.84 1.79 1.87 5.11 6.37 6.37 4.89 7.74 2.48 3.40 2.27 3.56 3.32 4.59 4.46 1.68 4.26 4.52 3.56 3.96 3.73 6.16 4.04 5.67 4.97 5.21 Source: MSCI. 12 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007 http://CheckFundManager.com http://CheckFundManager.com

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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