Wednesday, February 25, 2009

What's Wrong with Risk Management?

Eurekahedge, in a recent article suggests that the biggest problem that relates to risk management is the issue of corporate governance. Within financial institutions, especially in the banking industry, risk management is a must under current regulatory frameworks. The reason for setting up risk management is to balance the benefit between the owenrs of capital and the profit-making function of the bank. Investors provide the capital to financial institutions of generating profit. In turn, these financial institutions then organize resources like proprietary traders, financial engineers, operations support, etc to make use of this capital to generate profits. In return, the compensation of the profit-makers is largely based on how much money they can make. Under these circumstances, the profit-marker has more compensation if it can generate more profit. For the full article, please click here. What further insight can you offer?

Monday, February 23, 2009

The future of Funds of Funds

In a recent article at Bulletin Wealth, they look at the future of funds of funds after last year's downfall in the hedge fund industry. Will this result in a total overhaul for the hedge fund industry? Will the investors possibly have more of a say in what they're contributing their money to? Read the article here.

Friday, February 20, 2009

Tom Berner, Regulatory Reform: Change We Can Believe In

Tom Berner guest blogged for Sunshine Notes a report on regulatory reform and how it will change with the Obama administration. Berner notes two principles which should guide President Obama’s regulatory proposals.

1. You cannot improve or regulate the way the market system works, but most of the world economy operates in a bastardised form of market system where psychology and politics, institutionalized by the existing structure of the economy, alter the way the market functions.

2. The immortal Roman question, “Quis custodiet custodes?” (”Who will watch the watchdogs?”) should never leave President Obama’s consciousness.

Berner expands on both principles in his post. What do you think this will mean for the future of finance? We'd like to hear your thoughts.

Wednesday, February 18, 2009

Questions your hedge fund manager should be able to answer

I recently came across an article at Corgentum written by Jason Scharfman, who will be presenting at Gaim Ops Cayman, and he listed ten questions ever investor should ask their hedge fund manager.

They are:
  1. Appropriate Resources – Are sufficient resources (i.e., staffing levels, budget, etc.) committed to due diligence as compared to other functions such as client service or investment management?
  2. Intensity – What exactly does your advisor’s due diligence process entail (i.e., documentation collection, on-site visits, etc.)?
  3. Documentation – How does your advisor document the due diligence process?
  4. Scope – Is separate operational due diligence performed on operational risk, or is all due diligence – investment and operational – lumped together?
  5. Qualifications – What makes the individuals performing due diligence particularly suited to vet a hedge fund’s investment and/or operational risks?
  6. Diverse Skill Sets – Is there diversity of skill sets among due diligence analysts to ensure a variety of risks are vetted, or do they all have the same general background (i.e., all former hedge fund accountants)?
  7. On-Going Monitoring – After the initial due diligence process is complete, does your advisor perform any on-going due diligence?
  8. In-house or Outsourced – Does your advisor outsource any part of the due diligence process, such as background investigations, to other firms or is all due diligence performed in-house?
  9. Service Providers – Is due diligence performed on a hedge fund’s service providers (i.e., auditors, administrators, etc.)?
  10. Previous Examples – Can your advisor cite recent examples of hedge fund managers they have ever not hired (or fired) because of items uncovered during the due diligence process?

Tuesday, February 17, 2009

Risk Management Key To Funds Of Funds Success

According to Aleksey Matiychenko of FINAlternatives, Barclay’s Global Data Feeder database estimated that about 18% of hedge funds either shut down or stopped reporting performance. Experts agree that the number of funds that go out of business will continue to increase throughout 2009. Matiychenko, using the chart above, teaches what went wrong. Click on the picture for his article.

Follow the link provided above for a sample chart.

Thursday, February 12, 2009

FSA Increases pay

The FSA is set to increase the pay of regulators by 10 million pounds. They believe that by increasing this pay, they'll be able to attract and keep a skilled staff, and will pay will be comparable to the pay of regulators in London. The funds also will help keep the new 'intrusive and directive' supervision. For the full story, see the article at the Guardian.

Wednesday, February 11, 2009

Hedge-Fund Managers Help Raise $1.7 Million at Gala

In lighter news, Bloomberg reports that The annual Hedge Funds Care benefit - - backed by Kenneth Tropin and Michael Vranos -- will downsize from a black-tie dinner to a cocktail party tomorrow night in New York. The nonprofit, which aids child-abuse prevention programs, is hoping a laidback atmosphere will encourage some donors to write bigger checks -- and allow jobless hedge-fund managers to network while eating mini-hot dogs and shrimp instead of filet mignon.

Kathryn Conroy, director of the benefit said she expects Wednesday’s event at Manhattan’s Cipriani 42nd Street will raise about $1.7 million, down from $2.2 million last year. Hedge Funds Care branches in Atlanta, London, Toronto and other cities are scheduling separate fundraisers.

Shows that even in times of trouble, many Hedge Funders put kids first.

Monday, February 9, 2009

Hedge Fund Fee Structures – Economist Discuss how current 2 and 20 Incentivizes Managers

A recent article at the Economist examines a new paper out by two professors at the Case Business School in London. The paper, “Locking in the Profits or Putting it All on Black? An Investigation into the Risk-Taking Behaviour of Hedge Fund Managers”, written by Andrew Clare and Nick Motson, looks at whether hedge fund managers let the fee structure affect the way they run their hedge funds.

A few of the findings from the study include that the hedge fund managers have built in protection from the years where hedge funds perform poorly. Also, that managers who have a solid performance throughout the year typically tend to reduce risk towards the end of the year. For more on this, read the article at the Economist.

Friday, February 6, 2009

The Wild Hedge Fund World: Tamed Through Crisis

According to Michael Maiello of, Forbes was a media partner to Markets Media, host of the Global Markets Summit in New York City. Forbes Intelligent Investing Editor Michael Maiello moderated a hedge fund industry panel that included activist investors Clay Lifflander of Millcap Advisors and Stephen Roseman of Thesis Capital, along with Samuel Hocking, global head of sales for the prime brokerage at BNP Paribas and Kenneth Springer of Corporate Resolutions. Read the transcript from their meeting on Maiello's article here.

Wednesday, February 4, 2009

With changes, current hedge fund model doesn't work

Felix Simon recently took a look on his blog at why the current hedge fund model doesn't work when the value of a hedge fund decreases.

If the value of a hedge fund is rising, then 2-and-20 works as intended: the fund manager gets paid more the more that the value of the fund goes up.

But if the value of the fund falls a lot, then suddenly the fund manager loses pretty much all of his incentives, things start going rather pear-shaped, and there's a good chance that fund investors will end up getting shafted by their fund manager.

What do you think of the situation? Do you agree with Felix?

Tuesday, February 3, 2009

Hedge Funds Quick to Register with SEC

Jeff Benjamin reports, the majority of hedge funds based in the United States are voluntarily registering with the Securities and Exchange Commission, according to Hedge Fund Research Inc. in Chicago and

Almost 55% of more than 2,000 United States-based hedge fund firms are registered with the SEC as of last Friday despite a lawsuit two years ago that overturned a rule requiring hedge fund managers to register as investment advisers.

"It's tough to speculate on exactly why these firms are registering beyond that they certainly feel it is beneficial to be able to show clients they are registered," said Kenneth Heinz, president of HFR.

Is your firm registered? What made the decision for you register or not to register?