Prime Brokerage?

I have noticed an interesting article published yesterday in the daily economic French newspaper Les Echos on the perspective for Prime Brokerage houses in 2009.

Changes in leadership:
The Prime Brokers used to rule the world of Hedge funds. Considered as "the best friend of the hedge fund managers", the investment houses proposed traditionally their services in execution, clearing, lending securities and financing leverage.

The classification of the top 3 in 2007: Goldman Sachs, Morgan Stanley and Bear Stears cumulating 70% of the market shares has changed in 2008. The risk of having one single Prime Broker was clearly identified in 2007 and in September 2008 with the failure of Lehman Brothers, as one of the major operational risks for hedge fund managers and since then, they have re-distributed their brokerage agreements into several houses. The difficulties of UBS as a bank also has triggered some fears of insolvency.

Consequently, the market has been reshuffled with business flowing into medium size players. Credit Suisse in London has managed the crisis better then its peers with less exposure in credit strategies; Newedge has capitalized on its leadership position as a clearer in Futures to enlarge its offering to more hedge fund strategies and HSBC has announced recently, its intention to expand its Prime Brokerage activity.

Changes in activity?
More than 30% fall in hedge funds' assets, the ban of short selling by most regulators during 2008 and the higher costs of financing are all together reasons to believe that the business model of the Prime Brokers is shrinking.

To counter that trend, most of the Prime Brokers are entering the traditional market to expand their historic client base. Thus, the launch of UCITS3 vehicles by hedge funds and traditional managers is an opportunity for them to sell their know how in executing and clearing derivatives.

Outlook:
- development of a second tier Prime Brokerage market for smaller hedge fund managers (under 50 millions euros), rejected by the top 5 players
- increasing use of the CFD market to buy and sell securities as an alternative to short selling
- the use of leverage will diminish over the next 3 years with the overall move towards regulated funds (with limited leverage) and less offshore registrations (allowing unlimited leverage).

Gilles du Fretay

Gilles du Fretay has passed away on August 7th, quietly, after a long period of illness and I have been very affected by this sad news.

He will be remembered as a key figure in the hedge fund sector in France and worldwide. In 1986, he founded HDF FINANCE as a successful billions fund of hedge funds. He always had strong personal convictions and was the pioneer in France to push for a regulated hedge fund market.

Gilles never made any compromise on his business model and investment policy where others have grown their business rapidly to focus only on gathering assets and fees at any price. He and his CIO, Christophe Jaubert, working with him for 15 years, are known for applying strict investment rules that have allowed them to stay away from the major recent hedge fund scandals. HDF remains today one of the rare successful independent boutique focusing on its core investment expertise.

In 2008, the team has managed the crisis pretty well, communicating constantly with their investors and avoiding the liquidity mistmatch issue faced by most funds of funds.

I had the chance to work with Gilles back in 2002 as an advisor, when he wanted to expand his business across Europe. We kept in touch on a regular basis and exchanged often ideas and views on the evolution of the sector. He was a man of honour with strong integrity, highly respected by his peers and a true mentor for me.

We will all miss him and remember his gentle teasing smile!

My feedback from GAIM: the year of the Survivers!

GAIM Monaco is one of the annual rendez-vous of the hedge fund industry. The conference manager, Jenny Adams, knows in and out the sector and has worked on these events for more than 10 years. She always manages to attract key investors and interesting high profile speakers.

Already back last year, one could feel the significant decrease of participants (estimated at 1200 at the peak of summer 2006, 800 in June 2008 and 400 in June 2009)./ However, I have seen more senior people motivated to discuss, exchange ideas and meet the “survivors”. Indeed, the spirit is good, not depressed but people are rather looking to convince peers and investors and demonstrate their willness to move ahead.


Investors / Les investisseurs?
- Switzerland seems highly affected by investments in Madoff/ la Suisse est sinistrée avec les investisseurs meurtris par Madoff.
- Funds of funds are less there / Les fonds de fonds moins présents
- More Pension funds/ Plus de présence de fonds de pension
- Strong presence of the Bank of China Investments that has announced a programm of investments of …4 to 6 bn dollars by the end of 2009 in HF and 10 bn by 2011. They announced that they would choose Managed Accounts and strategic partners to create dedicated products. They only have 4 people dedicated to HF investments. La présence trés remarquée de Bank of China Investments qui annonce un plan d’investissements de …4 à 6 milliards de dollars en hedge funds d’ici fin 2009…et 10 à 12 milliards en 2011; preference pour Managed Accounts et strategic partners. 4 personnes uniquement pour les investissements.

Best speeches / Les speech marquants:

1- The one from Pierre Lagrange, founder of GLG Partners, who is celebrating his 20 years in the UK. He promotes the model of going public which is more demanding and can become an obcession and is forcing to communicate well, which he thinks HF should do more. He defines his business as being “an asset gatherer” to be able to attract the best talented managers.
Celui de Pierre Lagrange, trés modéré qui fête ses 20 ans à Londres cette année. Il revendique le modèle du listing public, exigents, obsédant mais qui force à communiquer correctement, ce que les hedge funds dit il, devraient faire mieux. Il définit son business comme un “asset gatherer” pour pouvoir avoir les moyens d’investir dans les meilleurs traders “get the right talents on board”.
2- Dr Phillipa Malmgren. Used to work at Washington and participated to the elaboration of the Sarbenes Huxley regulation. She sends a big wake up call to the hedge fund sector mainly in offshore. She predicts that the US governments and all Western Governments need to take money where it is and will link all efforts to extract money from fiscal paradises. We are just at the beginning of a big regulation process which she thinks HF managers totally ignore for the moment. The HF the more vulnerable are the one in lending business.
She also warned the hedge fund managers on the possibility for a sharp rise in interest which will hurt the youngest managers that have enjoyed 10 years of low interest rate environment.
3- Investor’s panels: PGGM, Bank of China, MN Services and Abu Dhabi Commercial banks: all claiming for more transparency, fees aligned to the size of the managers, to the alpha provided or to strategies. They insisted on allocating the right amount of risk to target the right returns and are looking for the best risk adjusted returns.
4-Volatility arbitrage: "No investors can allow zero insurance on its portfolio" says Capstone fund manager. "I had to refuse investors who wanted to invest in my long program when the VIX was at 60% and today they are not interested to buy when it is traded at 30%...". Volatility arbitrage is a strategy where selecting managers is not easy to understand how they trade and what are the underlying risks. However it is certainly a strategy to look at that has capacity (estimated current AUM at $20bn) and a good potential in an environment where we could expect more volatility.


In one year, looking at the sponsors, one can see the absence of the major banking groups. Where are the UBS of this world that used to dominate the market? Now you have HF managers such as IKOS exhibiting and that's new.
The landscape has changed, the actors are changing; the powerful Prime Brokers have left the field, except Newedge who is the big winner these days.

I was disappointed by the lack of fresh and innovative ideas from FoF in asset allocation. Nothing major here.
Some are moving away from the traditional split of strategies and are introducing new ways to classify managers by buckets of underlying risks, volatility, sensibility to beta, leverage, across strategies.
What is also missing is more guidance on why allocating in 2009 in HF? What type of allocation?

One thing true is Bill MacIntosch’s conclusion in his super article today in the Hedge Fund Journal: the best are surviving and will go stronger, wiser and less arrogant.

Rise in employment in hedge funds

This new story about potential job losses in hedge funds come from a vague report produced by a search company announcing unproven numbers that are supposed again to put the hedge fund sector under straight!
How can one predict the number of jobs in the hedge fund sector? This story only creates some sort of anxiety around the myth of the hedge fund sector.
Downsizing business has already happened since 2008 in most of the hedge fund houses. As an entrepreneur, this is the first thing you do and it is the healthier option to survive.
Yes, most funds of hedge funds have reduced staff in sales, in operation and in analysts.
Nothing new here.
Just wind....

Please don't tell my mother that I am in the hedge fund business....

Editorial from Paris: 5 March 2009
Several french managers in France, managing hedge fund type of products, are seriously considering changing camp!

Before 2009, they used to call themselves "hedge fund managers" despite the use of low leverage and conservative ways to manage positions, sometimes far away from the US hedge fund managers.
Now that most institutional investors do not wish to hear anymore about hedge funds or "Gestion Alternative" (as they say in France), because of bad press (and bad investment choices...), the same ones do not wish to be assimilated to the "hedge fund sector"! Active managers? Absolute Returns? Plain vanilla funds? What would be the term to choose?

Is it so terrible to be associated to hedge funds? Respond to our survey below!

INFOHEDGE 10 available now!

Our latest edition, published on the 12th of February, is available in electronic version on request at svs@asterias.com.
Discover our analysis on the evolution of the sector.
Written by professionals for professionals!

SGAM AI' s latest analysis on liquidity issues

10 February 2009

One of the major consequences of the current crisis that engulfed the world financial markets in 2008 has been a substantial decrease in liquidity in almost every asset class. As market players sought to simultaneously deleverage their existing holdings of financial instruments, liquidity suffered severely while the market for certain asset classes came to a complete standstill.

This illiquidity only served to complicate the redemption requests hedge funds received from investors at year- end. The industry was hit with a substantial amount of redemptions – the largest outflow ever reported. In addition to imposing gates, a number of hedge funds that could not accommodate the amount of redemptions placed by investors were forced to create side pockets to hold these illiquid instruments in which they were invested. Technically, most side pockets are merely a new share class created to hold these illiquid assets which is allocated to every investor of the fund.

Société Générale Asset Management Alternative Investments (“SGAM AI”) has attempted to avoid investing in hedge funds which invested in illiquid instruments or had the potential to do so, without such hedge funds having the corresponding structural liquidity terms to support such investments (i.e. we attempt to avoid the possibility of a liquidity mismatch for investors). Given the extent of the illiquidity that has overtaken the financial markets, we generally viewed the creation of these side pockets as a positive. Doing so is the best means for hedge funds to treat remaining and redeeming investors equitably. The side pockets created by our Fund of Funds are a result of those created by the underlying managers. Below, we describe the general
types of side pockets in the Fund of Funds.

The full analysis is available on request.