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

TCI Says Sayonara S tymied by Japan’s culture of corporate protectionism and suffering from poor returns in his ﬂagship fund, shareholder activist Christopher Hohn, the 42-year-old founder and managing partner of Londonbased hedge fund ﬁrm the Children’s Investment Fund Management (UK), has retreated from the country. After nearly three years of ﬁghting with Tokyo-based energy wholesaler Electric Power Development Co., better known as J-Power, Hohn has given up trying to force the company’s management team to double its dividend payout, appoint independent directors to its board or reduce its cross-shareholdings with other Japanese corporations. In early November, TCI, which was down nearly 26 percent year-to- date through September, sold its entire 9.9 percent stake in J-Power for ¥3,830 ($40.05) per share, for a total of ¥63.2 billion. Though the price represents a 32 percent premium to the stock’s closing price on October 31, it still won’t be enough to stanch TCI’s losses on the position, which could total $130 million, given that TCI began investing in J-Power in 2005, when the stock was trading at about ¥4,585. Hohn’s pullback is no surprise. In May the Japanese government flatly rejected TCI’s bid to increase its stake from 9.9 percent to 20 percent, citing national security concerns. It was the first time that the Japanese government had used its Foreign Exchange and Foreign Trade Control Law against a foreign investment ﬁrm, and Hohn was deeply frustrated with playing the activist-investor role. “Corporate governance in Japan is nonexistent,” he told Alpha in September. — Loch Adamson A Badge to Prove It F THENUMBER .W. Jones famously invented the hedge fund in 1949 by combining the potent one-two punch of short-selling and leverage. He also introduced the now widely adopted 20 percent incentive fee, tied solely to returns. Almost 60 years later, “20” has held as the hedge fund industry’s cut of whatever money it makes for investors: A hedge fund clears a $1 million proﬁ t and $200,000 of it goes into the manager’s pocket. Funds typically levy an additional 2 percent charge to cover the management costs associated with running the business. Together the two fees have practically become a common-law couple: 2 and 20. Variations have emerged over the years, of course. Funds of hedge funds normally charge 1 and 10, and big-name managers with spectacular returns seem to be able to charge whatever they want (Renaissance Technologies Corp.’s James Simons gets 5 and 44 for his Medallion Fund). Until now, maybe. As the credit crisis has picked up steam and many hedge fund managers have been hit with re- A demptions, more of them seem willing to talk about changing their fees. Arguments have even resurfaced over whether hedge fund managers should be paid more like private equity managers, for whom the 20 percent rule is more strictly interpreted and who don’t collect their fee until profits are actually realized and distributed. “If the hedge fund industry truly is about alpha, we expect more investors to question these fees,” says Christopher Addy, principal of Quebec-based Castle Hall Alternatives, which advises institutional investors on due diligence. Paying 20 percent, at any rate, is tough to swallow in this environment, even if it isn’t happening that much. Investors are also not as accepting of rules that don’t allow them to pull out of a fund whenever they want. Even the “2” may be endangered, as more investors remember the halcyon days of A.W. Jones, who for years levied no management fee at all, opting to divvy up the overhead among the partners at his ﬁrm based on their stakes in the enterprise. — Corey Goldman or $1,198 and 75 to 100 hours of study, you too can become a Chartered Hedge Fund Associate, or CHA, a designation earned through a selfstudy course sponsored by an organization called the Hedge Fund Group. (Upon completion of the coursework, the student takes an online exam that he or she must complete in less than two hours.) R ichard Wilson, the Bostonbased founder of the Hedge Fund Group, says 70 people have taken the test since its rollout in July. He offers this hypothetical example as a typical case: “A hedge fund manager in New Jersey may want to register because his expertise is in trading, not running a hedge fund; he also wants to know how his trading strategy is typically classiﬁed within the industry.” The program provides graduates with a certificate to show that they have mastered a fundamental understanding of hedge funds. Of course, most hedge fund managers don’t have it and don’t need it — the Soroses and Steinhardts of the world never got their CHA. But Andreas Voutsinas, a Merrill Lynch & Co. capital changes analyst who is studying for the exam this month, says it “creates a standard for hiring.” He thinks the designation will help enhance the reputation of an industry that is sometimes considered selﬁsh, dark and devious. Voutsinas says that he originally intended to go to law school but has been sidetracked by finance, markets and money management since joining Merrill: “When I realized it was a serious certiﬁcation, I wanted to pursue it to show that I have the knowledge necessary to compete for positions.” The CHA program teaches fundamental trading, brokerage, sales and accountancy by concentrating on six areas that include hedge fund strategies, due diligence and port- 10 • INSTITUTIONAL INVESTOR’S ALPHA • NOVEMBER 2008

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

Institutional Investor's Alpha Magazine - November 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Risk Rewarded The Good Guys: In the Here and Now Interview: Minister of Finance Cover Story: The Agony of Dan Zwirn Strategies: The Early Birds Are Awake Strategies: The Call of Shari’a Profile: Sweet Home Chicago Research Center: What Stampede? Alpha Bytes: Centralize the Data Unhedged: Commentary: Learning from the Wreckage

Institutional Investor's Alpha Magazine - November 2008

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