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The Long and Short of Hedge Funds

(following are my notes on a hedge fund seminar I attended this morning)

The Long and Short of Hedge Funds Breakfast Seminar,
presented by The Deal

Tuesday, October 5, 2004

VENUE
The Yale Club of New York
50 Vanderbilt Avenue
New York, NY 10017

Thedeal recently closed partnership with hedgeworld because of increasing importance of this area.

First panel:
ron orol, thedeal, moderator.
ben bornstein, prospero capital. $25m under management.
elizabeth fries, goodwin procter.
sandra manzke, tremont capital
patrick mccarty, commodities futures trading commission
stephanie pries, managed fund association.

elizabeth fries, goodwin procter.

Oct. 5 is deadline for RIAs to have written compliance in place.
Compliance is not enough: You have to write everything down. Identify conflicts of interest.
SEC rules are built for traditional long-only funds.
Registration takes more time and money than people thought.
example: difficult to formally register shares in emerging markets, particularly if you trade a lot.

ben bornstein, prospero capital.
They are a registered $25m fund. it costs $50-$70k extra to register. They use a midwest law firm, which is 75% less expensive than the fancy NYC law firms.
Ongoing costs are $25-50k per year.
They submit all holdings 2x/year, with a 60 day lag.
Investors feel more protected.
Some types of accounting fraud are harder with SEC registration.
Right now, it’s too easy to start a hedge fund. Most hedge fund investors are not used to running a business.

stephanie pries, managed fund association.
MFA is trade association for alt. investments. MFA is vehemently against registration.
problems with registration: investors will not pursue certain strategies because of fear of disclosure, etc.
Also, registration opens door to future restrictions.

sandra manzke, tremont capital
cost of compliance are low relative to profits in this business.
USA is only country where you can manage $ for people without registering.
registration legitimizes the business.
Original logic of exemption was that you could only have 99 investors.

patrick mccarty, commodities futures trading commission
disclaimer: don’t rely on anything I say.
I’ve seen the future and it’s in compliance.
8000 funds and $850b managed in hedge funds.
75 to 80% of top 100 hedge funds are registered with either CFTC or SEC.
Registration could create a moral hazard; people will think fund is safe.
$25m is the cutoff above which you have to register.
Registration does not address systemic risk. The Fed (theoretically) does that.
Friends and family fraud is usually with funds under $30m.

second panel:
kirstin fox, hedgeworld
alissa grad, TAG associates
Geoffrey stern, muirfield capital
hunt taylor, stern asset management
keith weiner, UBS alternative investment solutions

hunt taylor, stern asset management
1. ‘prudent man’ vs. ‘sophisticated investor’ shift.
prudent man has someone overseing him: he has career risk and is always backwards looking.
2. Why do hedge funds make $? Because they provide liquidity to global markets.
Hedge funds are dangerously overfunded. The managers are making more money than the people with the money.
There’s overt and covert beta in hedge funds.
Outlook: not sanguine. there will be a market shock very soon. Creative destruction is coming.

alissa grad, TAG associates
Works with 80 families.
for clients, hedge fund investing is a bond surrogate.
Factors: interest rates are going up, which is bad for absolute return strategies.
Credit market is overbought.
They mainly invest via onshore vehicles.
If you’re managing levered funds, you’re vulnerable to the other managers whose positions could blow up.

Geoffrey stern, muirfield capital
F of f. $500m under mgmt.
Talent is in the hedge fund space. He is pro-regulation.
Problem today is ‘death by boredom’. His fund is up about 5%.
Huge amounts of capital coming in.
Overcrowding in perceived safe areas.
Expect low returns going forward.
A very large fund is going to lose half its assets soon.
Risk is priced out of the market.

keith weiner, UBS alternative investment solutions
$9b managed.
Pension funds have taken 5-6 yrs to get into this space.
HNW investors focus on returns; Institutional investors focus on asset allocation.

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