Trade Like a Hedge Fund - With an ETF

Can Hedge Fund Strategies be Replicated in an ETF?
It would seem counter-intuitive to assume hedge fund strategies could be replicated by a long only ETF. In fact, it seems almost preposterous that a long only, more or less buy and hold ETF, could possibly replicate the returns of hedge fund strategies such as long/short and arbitrage. However, that is exactly what the IG Mult-Strategy Tracker (QAI) ETF seeks to do.

QAI replicates the tactics hedge funds are famous for, such as short selling and arbitrage, by investing in other ETFs. For example, to create a short position the long only ETF can by ProShares Ultra Short ETFs which ghave inverse exposure. The hedge fund replicating ETF apparently relies on a compex scoring system to guide its investments.

According to Index IQ's website "The IQ Hedge Multi-Strategy Tracker ETF seeks to track, before fees and expenses, the performance of the IQ Hedge Multi-Strategy Index. The Index attempts to replicate the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets."

Key advantages of the ETF versus a portfolio of hedge fund investments : no minimum investment, daily liquidity, relatively low .75% management fee (versus 2% and 20% for most hedge funds), no accrediting required.

Alas, the ETF has only been trading for a few days and it remains to be seen how well it can actually track billionaire managers and their funds employing some of the smartest people in the country. The IQ Mult-Strategy Index, upon which the ETF is based has outperformed the Credit Suisse Blue Chip Index and HFRX Global Hedge Fund Index over the last 3 months, 1 year, 3 year, and 5 year periods. This could be a good sign, or as is often the case with backtested strategies, it could severely underperform once it goes from hypothetical index to actual equity.

Top Hedge Fund Cartoons

Best Hedge Fund Cartoons
Here are some of the best hedge fund comics we have run across:

1. "My dad looted a bigger hedge fund than your dad."

2. "I'm looking for a hedge against my hedge funds."

3. Why They Call it a Hedge Fund

Hedge Funds are Hoarding cash

More Hedge Fund Assets are in Cash
As financial market conditions become more volatile and as the banking crisis appears far from over, many hedge funds are socking away a larger portion of their assets in cash. Edward A.H. Siedle, president of Benchmark Financial Services Inc., an Ocean Ridge, Fla.-based pension consulting firm says "The risk-reward scenario is not favorable right now, and a half-percent return versus another Lehman Brothers-like loss is not worth it."

Horizon Cash Management manages billions in cash for hedge funds. Senior Portfolio Manager, Jill King says "There's a greater need for liquidity in this market, and I think pension funds are sitting on a ton of cash right now." According to Craig Columbus, President of Arizona based hedge fund Advanced Equities Asset Management. "Right now, we're dealing with some of the great challenges of low-yield investing,"

Some other quotes from hedge fund managers regarding their decisions to go to cash:

• Bill Quinn, Chairman of American Beacon Advisors, a Fort Worth, TX based hedge fund: "People have gotten very conservative when it comes to cash, and the Reserve Fund gave a bad blemish to any money market fund not associated with a financial institution with a lot of capital,"

• John Nowicki, President of LCM Capital Management, a Chicago based hedge fund: "We thought it was a no-brainer decision to move our clients' money out of prime money market funds two years ago and into Treasury money market funds,"

• Craig Columbus, President of Advanced Equities Asset Management, a Scottsdale, AZ based hedge fund: "There's lots of concern from a credit quality perspective surrounding [non-Treasury] prime money market funds,"

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Boutique Hedge Funds Hiring Top Talent

Boutique Hedge Funds Still Hiring Top Talent
Despite the difficulties faced by many hedge funds, boutique hedge fund are still hiring quality candidates. In recent years, smaller and boutique hedge funds in NYC, Greenwich, California and Florida, had difficulty finding talented traders and analysts with a growing number of start ups soaking up top talent. Now, as many qualified financial professionals, many with hedge fund experience, hit the street, boutique hedge funds are finding it easier to find new job candidates.

According to an executive search firm, ‘‘The (hedge funds) that still have a lot of assets under management, the hedge funds that have not been hit by redemptions, they are still picking up some of the money-makers from the big banks." HedgeFundJobList.com, a website providing hedge fund contact lists, recently commented on PBS' Nightly Business Report that they "are seeing a surge in qualified applicants."

In an IHT interview, Andrew Sibbald, a founder of Lexicon Partners in London, said boutique firms’ partnership model meant ‘‘creative, bright people who are unfettered by all the woes of the big banks can just get out there and find business.’

Calpers Demands New Terms from Hedge Funds

Calpers, the California Public Employees' Retirement System, which manages over $190 billion in assets for California's state employees, is also one of the largest and most influential investor in hedge funds and fund of hedge funds. Calpers is demanding new terms from hedge funds it invests in amid poor performance and limited transparency.

While just a few years ago, investors were fighting each other to get a chance to place their money with high-flying hedge fund managers (3% and 30% instead of 2% and 20%), now powerful investors are gaining leverage over funds and asking for better terms.

Among the new terms Calpers is asking for from hedge funds are "clawbacks" on fees if performance weakens and lower prices. Calpers does business with 26 hedge funds and nine fund of hedge funds. However, Calpers is not asking all funds to follow the same restrictions.

One of the more interesting proposals / demands from Calpers is the possibility of setting up separately managed accounts. Calpers assets would be segregated from other client assets at hedge funds the retirement fund does business with. This would prevent Calpers from facing the same withdrawal and redemption restrictions faced by many hedge fund investors. What implications will this move have for other institutional investors who are growing impatient with lengthy redemption periods amid the recent poor performance?

Here are some of the hedge funds utilized by Calpers: The Rock Creek Group, 47 Degrees North Capital Management, PAAMCO, Ermitage Group, Europanel Research and Alternative Asset Management (ERAAM), Vision Investment Management, SPARX Group, and Mosaic Investment Advisors.

Communities Around Hedge Funds Collapse

Greenwich, CT used to be the US hedge fund capital (outside of New York). It used to be difficult to find a parking spot for your Porsche or Mercedes in Greenwich's downtown. As banks and hedge funds shut down, boutique stores all around Greenwich are shutting down. While difficult retail times are being seen around the US and even the world, the evaporation of wealth in areas like Greenwich is much more severe. There are more than 100 hedge funds in Greenwich.

Some projections have the hedge fund industry cutting 20,000 jobs this year, nearly 14% of the industry. As these employees lose their jobs, and remaining employees lose their bonuses, high end stores in areas with a high concentration of financial services jobs are likely to be hit hardest.

End of Super-Sized Hedge Funds?

Is the end near for huge multi-billion dollar hedge funds? According to a former principal trader at giant hedge fund SAC Capital, says last year's markets spell the end for large investment pools.

At Reuter's Private Equity and Hedge Fund Summit in New York, ex-SAC Capital Management trader Thomas Grossman said he expects "redemptions, losses and loss of talent" to shrink the sector's biggest funds.

Worst Performing Hedge Fund Managers - 2008

Alpha released its 8 worst performing hedge fund managers for 2008, ranked by loss in personal wealth. Atop the list was Ken Griffin of Citadel Investment Group. Other notables include Steve Cohen of SAC Capital, Carl Icahn, and T. Boone Pickens Jr.

Combined, the eight hedge fund managers on Alpha's list lost an astounding $6.2 billion in 2008. For comparison, they earned a combined $3 billion in 2007.

Here are the 8, ranked by personal wealth lost in their hedge funds:

Ken Griffin, Citadel Investment Group

• 2008 - ($2 billion)
• 2007 - + $1.5 billion

Edward Lampert, ESL Partners

• 2008 - ($1 billion)
• 2007 - + $1.1 billion

Steve Cohen, SAC Capital Advisors

• 2008 - ($750 million)
• 2007 - + 950 million

Jeffrey Gendell, Tontine Partners

• 2008 - ($625 million)
• 2007 - + 190 million

Stephen Mandell Jr., Lone Pine Capital

• 2008 - ($550 million)
• 2007 - + 710 million

T. Boone Pickens Jr., BP Capital Management

• 2008 - ($450 million)
• 2007 - + 370 million

David Tepper, Appaloosa Management

• 2008 - ($425 million)
• 2007 - + 350 million

Carl Icahn, Icahn Enterprises

• 2008 - ($400 million)
• 2007 - + 300 million

Hedge Funds to Face Greater Regulation From SEC

Mary Schapiro, Chairman of the SEC, is expected to tell Congress today that the SEC is seeking greater regulation for hedge funds, according to the WSJ.

Though many hedge funds managers already register with the SEC, the new proposal would bring all or must funds under the SEC umbrella. They will also seek to regulate individual hedge funds, as opposed to current regulations on the greater fund company. Regulating individual funds would presumably provide greater transparency into the systemic risk posed by larger funds.

Of course, regulation by the SEC is very contentious. How well has the SEC been able to regulate any of the institutions it has primary oversight of? Given that there are several thousand hedge funds in the US, and the SEC's inability to effectively regulate in the past, couldn't greater oversight just be another disaster in waiting?

One of the dangers of SEC oversight is that it would seem to legitimize hedge funds for the typical investor, when in fact, many hedge fund strategies are inappropriate for all but institutions and select individuals. Though the SEC will disclaim having "approved" the fund or its accounting, it will imply this to less sophisticated investors. Will any of them read the 250 page prospectus each fund will be forced to issue?

Investigating Hedge Funds - Private Eyes

Bloomberg ran article today about investors and institutions who have hired private eyes to investigate hedge funds before investing.

For example, "A probe three years ago by his First Advantage Investigative Services LLC found in public documents that a brokerage run by the pair had agreed to settle regulators’ claims that it improperly used customer assets as loan collateral and had been fined at least 11 times for violating rules at several U.S. exchanges."

The story quotes anectdotal evidence from firms and individuals who luckily avoided troubled funds because of their investigative work.

It will be interesting to see whether hedge funds actually end up getting more scrutiny from the private sector than from regulators. Given the pitiful investigative work by the SEC, the private sector probably has a better chance at regulating funds in the future, particularly given investors' recent skepticism.

Obama Administration to Introduce Hedge Fund Regulations

It appears the Obama Administration will seek some form of hedge fund regulation this week, though it is unclear how exactly they plan to regulate the 5000 or so US based funds. Obama and Geithner also plan to ann0unce regulations that will force certain derivatives onto exchanges with clearinghouses.

Obama and the Treasury are left with the task of convincing foreign leaders and corporations that the US financial system is still safe despite high profile failures of several hedge funds, and the downfall of some of the US' largest banks and brokerages.

Forcing derivatives including CDOs, CDS, and a whole host of other products onto exchanges would be likley to minimize counterparty risk and might encourage the responsible use of the more levered instruments.

John Paulson Eying a Gold Price Spike

John Paulson, the hedge fund manager who made himself famous last year with his large bet against the subprime market, is now making another bet that doesn't bode well for a quick economic recovery.

Paulson & Co.paid $1.3 billion for a stake in AngloGold Ashanti, a South African gold miner. Paulson's subprime bets returned in excess of 100% in some cases. If gold were to rise an equivalent amount, it would likely be a sign of severe economic distress.

Of course, Paulson may be like many hedge fund managers: lucky enough to hit pay-dirt once, but not good enough to do it again and again. Time will tell, but if you want to place your eggs in the same basket with a guy who pretty much nailed the first half of the crisis I can't blame you.

Citadel Group Losing Race to Clear CDS Trades

Citadel Investment Group and CME Group recently teamed up to help the Treasury and guarantee Credit-Default-Swaps, but have been unable to find any customers to clear the trades.

Meanwhile, Intercontinental Exchange (ICE), Goldman Sachs Group (GS), JP Morgan (JPM) and several other banks have also teamed up in the CDS market and were able to clear $7.5 billion in trades last week according to Intercontinental Exchange.

Currently, most trades in the CDS market are inter-bank.

The federal push for guarantees in the Credit Default Swap market comes amidst the failure of Lehman Brothers last year and the forced injection of $100s of billions to AIG.

Preferential Hedge Fund Redemptions

Are hedge funds giving certain clients preferential treatment with regard to redemptions?

SEC Commissioner Elisse Walter believes some funds have done so. “Principals, employees or favored investors of the hedge-fund adviser may have received ‘preferential redemptions’ from the fund at issue.” Walter said in testimony to the House Financial Services Committee today.

More than 1/6 of hedge funds are halting redemptions, limiting withdrawals from certain funds, or altering their redemption schedule.

The SEC is also zeroing in on trading irregularities and lack of due dilligence by feeder funds, such as those that gave money to Bernard Madoff. The SEC claims to be developing new "technological tools" to deal with trading issues such as insider trading and front running.

Geithner Gone by June?

Not everyone has been pleased with Treasury Secretary Timothy Geithner's performance. Though he inherited a financial system in chaos, some would like to have seen more leadership from what is arguably the US' second most important financial position.

So with growing outrage over executive bonuses, limited mortgage relief, bailouts with limited transparency etc., what odd would you assign to the probability that Geithner will be relieved of his duties by June? 20%, 40%, 60%?

Well, according to Intrade, a futres site that allows speculation on a variety of outcomes, there is 15% likelihood Geithner will be fired.

If it were not so thinly traded, and I didn't think it improper to bet on the success of our leaders, I might consider placing a long position on this bet. The futures are priced at $15 and would pay $100 if he were fired or resigned by June.


Some other interesting futures bets from Intrade :

• Chance US GDP to decline by 10.0% or more from its peak value between Q4 2008 and Q4 2009: 19.5%

• Dow to close above 7000 on March 31: 83.4%
  

• Dow to close 2009 above 6500: 67%

• Any country currently using the Euro to announce their intention to drop it on/before 31 Dec 2010: 25%

• Richard Fuld (ex-Ceo of Lehman) to be indicted by US Federal Govt on any felony charge on/before 31 Dec 2009: 24%

• Angelo Mozilo (Countrywide) to be indicted by US Federal Govt on any felony charge on/before 31 Dec 2009: 42%
  

US Hedge Fund Manager Arrested

Albert Hu of Asenqua Capital Management in Silicon Valley was arrested in Hong Kong. Hu is alleged to have stolen $5 million or more from investors. Albert Hu faces six counts of wire fraud charges for an investment fraud scheme involving hedge funds he administered from 2002 to 2008, the San Jose Mercury News reported.

According to the FBI, "Hu's materially false statements regarding his hedge funds and their affiliated entities caused victim-investors to wire substantial amounts to entities under his control."

Though the amount of money at stake is 1/10,000 of what Bernard Madoff allegedlyy took from investors, some of the promises were similar. Alber Hu allegedly promised investors steady returns of 20-30%.



Albert is also a Partner at Asenqua Ventures, a VC firm.

Read the full article

2008 Hedge Fund Redemptions - A New Record

Hedge fund redemptions for 2008 reached an all-time high as investors pulled money from performing and non-performing funds alike. In 2008 almost 1500 hedge funds shut down, almost double the previous record of 848. Additionally, half of the hedge fund closures in 2008 came in the fourth quarter with 778 hedge funds closing in Q4 2008 alone.

* We have listed several hedge fund closings before, but here is a short list:

Drake Management
Peloton Partners
Ascot Partners
Ospraie Management ($2B+)
Okumus Capital
Gordian Knot ($27B Sigma Finance Fund)

And what list of hedge fund closures would be complete without Bernard Madoff Investment Securities.
and many more can be found at hedge fund implode

* All in all, almost 15% of the hedge fund industry closed shop in 08.

* Hedge fund openings also fell. The 650+ hedge funds that opened in 2008 was the lowest since 2000.
* The number of new fund starts in Q4 2008 (56) was half of that the previous quarter (117)

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Gordon Brown Speaks of Cracking Down on "Shadow Banking System"

Britain's Prime Minister, Gordon Brown, spoke yesterday of massive changes to the oversight of the "shadow banking system," including hedge funds and investment banks. Brown noted that financial institutions of all sorts should be regulated based on what they do, rather than how they classify themselves.

Hedge fund regulation will likely be a heavily debated subject at the G20 meeting beginning April 2. G20 finance ministers, meeting in Sussex, agreed that hedge funds and their managers should be registered and “disclose appropriate information to assess the risks they pose”.

Madoff May Plead Guilty

It appears that Bernard Madoff may be nearing a plea deal with prosecutors. Madoff was arrested on Dec. 11, 2008 and charged with securities fraud for his leading role in an estimated $50 billion Ponzi scheme. According to Bloomberg, "Assistant U.S. Attorney Marc Litt today filed a one-page document in Manhattan federal court indicating the government will file an “information,” or charging document, after Madoff agrees to waive a grand jury indictment. Defendants who agree to plead guilty to an information often first waive indictment."

According to a former SEC attorney interviewd by Bloomberg, "“Madoff is about to enter his guilty plea. A criminal information is a consented- to criminal charge used to enter a guilty plea.”

The document released today byt the US Attorney's Office does not indicate if Madoff will waive indictment.

In related news today, the SEC announced it has plans to revamp its whistle-blower policy in wake of the Madoff fraud (and presumably the Stanford CD fraud as well). This comes after years of lax enforcement and a culture which seemingly did little to encourage whistle blowers to come forward.