Tuesday, May 01, 2012
By Amanda Cantrell
With their burgeoning middle classes, comparatively high interest rates and strong growth forecasts, emerging markets should be attracting more attention — and money — from institutional investors. In the three stories that make up AR’s first-ever special report, we examine in depth the opportunities and challenges of investing in these markets.
As Jan Alexander writes in “Quest for Growth,” beginning on page 28, pension funds and other institutions have yet to invest in these markets in a meaningful way. That’s too bad, because with careful due diligence, investors can find some high-quality emerging-markets–based managers from which to choose. One is Hong Kong–based Value Partners. Allen T. Cheng’s profile of the firm, starting on page 34, reveals how co-founder Cheah Cheng Hye, a former crime reporter, uses his sleuthing skills to uncover undervalued stocks in the Asian equity markets. In the process, he has built a long-short equity firm that boasts a nearly 20-year track record and an annualized return since inception of more than 17 percent.
Emerging markets are not for everyone: They’re volatile, directional and high risk. But then, so are developed markets these days. So says Willem (Hans) Humes, another talented manager with a focus on emerging markets. Humes, the founder of New York–based Greylock Capital Management, has fashioned a career out of sovereign debt workouts in emerging markets. Recently, he found himself involved in the Greek restructuring, serving on the creditors committee. The situation had all the hallmarks of an emerging-markets workout. Indeed, as Michelle Celarier’s profile of Humes, starting on page 40, reveals, the manager thinks the lines between emerging markets and developed markets are getting blurred, and that the term “emerging markets” may well become obsolete. If Humes is right — he has an impressive history as a market prognosticator — investors may want to move quickly while there are still inefficiencies to be exploited.
Thursday, March 29, 2012
With investment bankers enduring layoffs, smaller paychecks, media criticism and scrutiny from regulators over the past few years, it’s no surprise that hedge funds are an ever-more-popular career choice for would-be financiers. Another big draw for the industry? Performance fees.
That’s because these fees, typically 20 percent of a firm’s assets under management, can make managers spectacularly wealthy when a hedge fund hits its marks. But when that fund is losing money, managers can’t charge these fees, and that makes it harder to keep the business going.
Enter the humble management fee. Originally envisioned by hedge fund managers as a source of income that would cover the costs of running their businesses in good times and bad, the management fee — which generally falls somewhere between 1 and 2 percent of assets — has become a lifesaver for firms during lean years. But lately, it’s been helping managers do a lot more than survive. Last year management fees at some of the biggest hedge funds in the business helped their founders make hundreds of millions despite modest performance. In our 11th annual Rich List of the world’s top hedge fund earners, 11 managers made the cut after generating only single-digit returns in their funds in 2011, thanks in large part to management fee income. Although the highest earners — Ray Dalio, Carl Icahn and Jim Simons — benefited from stellar returns, plenty of others did more than fine with far less impressive gains.
Small wonder, then, that management fees at hedge funds appear to be climbing, while performance fees are falling. Though hedge funds are off to a good start this year — they earned 3.17 percent in the first two months of trading, according to the AR Composite Index — if performance continues to moderate, the much-vaunted performance fee could take a backseat to its humbler cousin. The performance fee may be what pulls people into the industry, but the management fee may well end up keeping them there.
Thursday, March 01, 2012
If Mitt Romney has taught us anything, it’s that no one likes a flip-flopper. Romney, a favorite of hedge fund managers and the erstwhile front--runner for the Republican presidential candidacy, went into primary season looking as if he had his party’s nomination in the bag. But in February the ultraconservative Rick Santorum emerged at the front of the pack. It hasn’t helped Romney that he has changed his stance on some of the most hot-button issues of this campaign.
Modifying one’s views to fit the fashion of the day is nothing new for politicians. If Romney were a hedge fund manager, he might be more inclined to make bold moves and let the chips fall where they may. But this approach has pitfalls, as two famous hedge fund managers illustrate. Take Eddie Lampert. Five years ago the ESL Investments founder’s huge bet on retailer Sears attracted attention from investors keen to follow the hotshot investor’s every move. Today the stock is one that analysts love to hate, but, as our story on page 40 explains, Lampert is nowhere near cashing in.
Then there’s Phil Falcone. The Harbinger Capital Partners founder placed an outsize wager on the would-be wireless broadband network provider LightSquared, only to have the Federal Communications Commission squash the company’s ambitious network plans because they interfered with GPS devices. Falcone has vowed to fight back, telling investors he is considering a range of options, including an appeal. Unfortunately for him, one of his investors filed a lawsuit in February alleging that Falcone and Harbinger made “deceptive and misleading” statements about the firm’s investments.
Regardless of where you fall on the political spectrum, being conservative with your investments is rarely a bad idea. GoldenTree Asset Management, the subject of this month’s cover story, has seen some wild swings in its portfolio in recent years but has lately shown it’s getting better at preserving capital in tough times. Though it has been said that fortune favors the bold, those who want to keep their fortunes are better off being prudent.
Wednesday, February 01, 2012
Well, thank God that’s over.
Last year may not have been quite as harrowing as 2008, but it was still pretty scary. Only a select few hedge fund managers made money, and hedge funds took a reputational beating for their lackluster results. It does make you wonder how much longer investors are going to pay hedge fund fees for returns that don’t beat the market — or protect on the downside.
One notable stumble came from King Street Capital Management. True, the firm’s flagship fund fell by only 1.2 percent in 2011, and it was the first down year in King Street’s 17-year history, as our profile on page 40 explains. But the firm is sitting on a large pile of cash. And although that move may have protected King Street from a much larger loss last year, some investors are getting antsy and putting pressure on the firm’s highly secretive founders to start investing again.
Caxton Associates fared pretty well in 2011, returning 0.70 percent. But for the past three years, Caxton didn’t come anywhere near the stellar returns the firm achieved in its early days. Now its legendary founder, Bruce Kovner, has retired, and his successor, Andrew Law, has taken over. As our cover story on page 22 shows, Law steered the firm safely around disaster in 2008 with deft trading; it remains to be seen whether he can return the firm to its former double-digit glory.
That Caxton made its best returns in its early years is true of the entire industry — or so says Simon Lack, whose provocative new book, The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True, is excerpted beginning on page 46. Investors were so starstruck by these heady returns and genius managers that they failed to negotiate for fairer terms, he argues, and the result is an unfair split of the profits that continues to this day. That matters more than ever now that public pension plans are piling into hedge funds, Lack says. If hedge fund managers don’t get it together, and fast, 2012 could be the year that investors occupy hedge funds.
Friday, December 09, 2011
William Browder, founder of Hermitage Capital Management, made his name as a bulldozing activist investor in Russia, waging rancorous and highly public battles against corruption and mismanagement in that country’s companies. For his trouble, Browder was barred from reentering Russia in 2005. These days he’s best known for his equally aggressive human rights campaign on behalf of his former lawyer, Sergei Magnitsky, whom Browder maintains was wrongfully imprisoned in Russia as his proxy. Magnitsky died in prison in November 2009 after months of neglect and mistreatment.
But as our cover story on page 26 explains, Browder is juggling that mission with the day-to-day business of running his firm. Now based in London, Browder is trying to reinvent himself as a global emerging-markets investor. The transformation hasn’t been easy: Once a $4.5 billion firm, Hermitage is down to $850 million, and its global emerging-¬markets fund has delivered an annualized loss since its inception in April 2007.
Browder’s struggles may seem familiar to other hedge fund managers, who are fighting battles of their own. On the investing front, many are laboring in the volatile market environment, as our profile of longtime commodity futures trader Patrick Welton on page 48 shows. The manager’s flagship fund has produced double-digit gains in all but one year since its 2004 launch. In 2011, however, the fund was down by more than 13 percent through October, with market swings tripping up its normally sound models.
On the political front, successful hedge fund managers and other wealthy financiers are facing the wrath of protesters around the globe who are fed up with the widening gap between the rich and the poor, and the bailout of Wall Street banks. But as our story on the Occupy Wall Street movement, on page 22, points out, some hedge funders identify with the protesters, and a handful have given them advice and money.
Some managers are starting to agree with the protesters’ argument that the system is rigged. Take the recent bankruptcy of MF Global. The bankruptcy trustee assigned to the case revealed that as much as $1.2 billion or more of client money has gone missing. That money was supposed to have been kept separate from the firm’s own, raising questions about whether the brokerage intentionally and illegally dipped into client funds. One customer has formed a coalition to make sure the money is returned to its rightful owners and has vowed to fight MF Global’s creditors in court. See page 5 for more on that story.
The mess could take years to unravel. But however the MF Global drama and the protest movements play out, let’s hope the result is a banking system that’s less prone to corruption. After all, no one wins in a system designed to enrich a few at the expense of many.