One of my first ever entries in this blog was The War on Hedge Funds, about the vilification hedge funds tend to get in the mainstream press. To be fair, private equity is cleaning up in this area at the moment. Every other story seems to be about whether or not these casino capitalists are good for the economy, whether they should be taxed more or how much they are getting paid.
When the only person you can find to say something nice about you is Tony Blair you know you’ve got problems. Perhaps he has been reading my blog for tips on policy. Well, you never know…
Now Ed Balls has entered the fray. He is calling for increased transparency in valuations. It is not necessarily a bad thing and it is good that his approach is one of increasing dialog with the industry. It is important any changes that are made to the rules happen with the full participation of the industry itself.

The editorial team were recently discussing gambling and risk tolerance. Gambling and trading are not a million miles apart, from my perspective, a view some may balk at but one fairly well covered by numerous authors and philosophers over the years. I am an awkward gambler, and would make a worse trader, I imagine. The recent choppiness in the equity markets must have caused a few moments of apprehension amongst traders. Up, down or sideways? What does the future hold?
The other day I gave my tuppence-worth, noting at some point things will have to come down, and my concern it could be soon.
State Street, in its weekly research briefing, commented on a Shanghai trader decrying the 8.8 percent fall in the local equity market as “abnormal”. “This is a view of normality that makes 130 percent gains in the Shanghai Composite index in 2006 simply a prelude to more of the same in 2007”, it said. “It is perhaps inevitable that your perspective gets skewed in a market in which you more than double your money in a year and when simultaneously your central Shanghai apartment goes up in value by 10 percent a month.”
It countered the spike in volatility and the return of a measure of fear is simply the resumption of normal service, predicting market choppiness for some time to come, though choppiness is not the same as an ongoing and relentless decline.
A fund manager I spoke to this week said he thought equity markets would hold up simply because there was nowhere else to put money, and because, despite the length of market rises, valuations still look fair. It was an interesting thought, and to be honest I hadn’t looked at it like that before. The prospects for the bond markets are no better, he said. Property is a bigger bubble than equity. There is only so much money you can put in uranium, no matter how much you read about the quality of the fundamentals. Most funds have limits on the amount of cash they can hold.
So people will keep their money in equities, and this will prop the market up, despite general concern. At times like this it would seem most rational, on this logic, for the markets to go sideways for a while, but this doesn’t happen: it either goes up or down.
This seems a perverse reason for people to stick with equities but that is not to say the logic is not sound. It is more or less the same logic people use when comforting themselves about the value of their homes, especially here in London. People are always going to need to live in London, therefore the price of my house can never really fall that much, surely.
I am glad I don’t have to make the decision of what to do with someone else’s money. A fiver on a ropey looking horse and the chance of a nice fat pay off as much as my nerves can take.

Those in the know, by whom I mean Blair, Balls, myself and many others, have been saying for a few weeks now that high flying fund managers need to communicate better with the public about the benefits they and their funds bring the world.
Rob Davis, founder of Hedge Funds Care, has answered the call. Speaking to the New York Times, he has come out to the world about the generosity of the hedge fund industry.
“This is the most philanthropic industry on the planet, but you almost never hear about it,” he said.
Hedge fund related charities have raised significant funds for good causes, he notes. Not just his own group but The Robin Hood Foundation raised $48m at its annual benefit dinner last year. The Children’s Investment Fund, currently embroiled in battle with ABN Amro, has a $66m nonprofit arm financed by a portion of the fund’s fees. It is only the most well known fund operating with this model, but is by no means unique.
I know of numerous acts of individual generosity by wealthy fund managers too, either travelling to Africa in their own time to help build schools or donating items to auctions to raise money for children in London.
So what other ways do hedge fund managers help the community? Either through charity, enhanced efficiency of the markets or in other, more subtle ways?
And does it really matter to the hedge fund industry how it is perceived from the outside? Is there any value-added in improving the industry’s public relations? Does anyone see any danger of the current furore leading to increased scrutiny or pressure for tighter controls?

It’s finally official. JP Morgan is the new Goldman Sachs, at least where managing hedge fund assets is concerned.
I have been watching with interest as JPM extends its reach over the industry in its relentless signing of deals as administrator or custodian with what increasingly seems like every asset management group on the planet. Overtaking Goldman Sachs is a major step in its goal of world domination. The FT reports its $34bn in assets, following its purchase of Highbridge Capital Management, takes it past Goldman Sachs, with $32.5bn.
JP Morgan has been the global leader in derivatives for some time. It is like it is taking every part of the financial system that strikes fear into the hearts of Joe Public and Mr. Regulator (I don’t know his first name) and trying to harness them for its own evil ends. If derivatives are financial WMD, hedge funds must be The Axis Of Evil, and JP Morgan is religious fundamentalism itself, bent on destroying us all.

So, Man Group got battered last week. Even in the hedge fund microclimate, there is still a tendency to root for the (relatively) small guy, and, conversely, take a small amount of pleasure from the misfortunes of the titans of the industry. Especially when it is something so superficial and transient as this.
Man is like the McDonalds of the hedge fund world. This is not to say it makes you fat and ill, or that it should be used very sparingly. Everyone has heard of it. If hedge funds were sold in restaurants there would be a Man Group chain on most high streets.
Actually, thinking about this analogy a little more I realise it is seriously flawed. Man is very progressive in its policies on environmentalism: it has a carbon neutral London office and encourages green activism in various ways amongst its employees. This amounts to more than the equivalent of a fast food chain offering apples on its 99p menu or McSalad as an appetiser to your Big Mac.
Managed futures can be a volatile strategy. While an 8% drawdown in one week is a hell of a drawdown, enough to fray the nerves of even the most hardened investor, reaction to it has been measured and sensible. Man will probably even see a pickup in business as people seize on the buy opportunity it presents.

Nick Leeson is set to get back into the financial saddle as a prop trader. Good luck to him, I say.
Leeson is the friendly face of fraud. Partly it’s because there is a difference between ripping off a bank and ripping off investors. Right or wrong, the former has a kind of victimless crime feel to it. There was a lack of premeditation to it as well. Covering up losses and taking ever greater risks to win them back is one thing, conning people into investing into a fund only to siphon off the money into your own account is quite another.
Mostly, for me, it is the ordeals he has suffered since he was arrested that alleviate any antipathy I could feel for him. Time in a Singapore prison is hard time, and he has certainly paid for what he did. Add to that a fight against cancer and you have to say he deserves a run off luck now.
I met Leeson once, and it was one of the high points in my career as a journalist to date. It was at one of his lectures on operational risk and compliance, and we chatted in the bar afterwards about his poker and his illness. I thought he was a very nice guy. The points he made in the lecture were valid too. He was no criminal mastermind, so while he takes the blame for what he did morally, Barings has to accept the blame for the failings of its own controls and its inability to detect his haphazard attempts to cover up his mistakes.
“You wouldn’t believe how many people have asked me to manage their money,” he is quoted as saying. That is amazing. It shows how perverse some people can be. Not that I would expect him to run off with my money if I did invest in a fund he managed, but why pick him when there are other people out there with track records of honesty and good performance? He admits himself he used to be “extremely ill disciplined”, and with no evidence of his lesson having been learned, other than his word, I would take the peace of mind offered by investment elsewhere, though given his intention to manage only his own money, all that is academic.

MarketWatch’s Thomas Kostigen is concerned about hedge fund regulation. The proposals by senator Charles Grassley requiring hedge fund advisers to register with the SEC do not go far enough, he thinks.
Are you sitting down? “There is a duty for public officials to protect and serve the public; they're not. Hedge funds managers are the most rogue group of people we've seen since the Robber Barons.” An original and not at all sensationalist image.
We are all at risk, through our pension funds and our insurance policies, the endowments of our children’s’ universities and though retail funds of hedge funds.
As he attests, “pension funds, banks and insurance companies are the backbone of the investment industry.” They do indeed have large allocations, growing by the day. But, being the backbone of the industry, does it not stand to reason these institutions, which are themselves regulated, are in a position to make informed decisions about the funds to which they allocate?
Kostigen worries the hedge fund industry is unaccountable but that is not true. Funds are accountable to their investors. Sophisticated investors. The industry has changed out of all recognition in a relatively small number of years as a result of the involvement of institutional investors. Already, their allocations, which are typically relatively modest as a proportion of their overall assets, have forced through enormous increases in levels of transparency offered by many funds. And where funds are not willing to provide a satisfactory level of information it is down to the investor to take its business elsewhere to someone providing information it is happy with.
With investors conducting adequate due diligence on managers in which they are invested the chances of fraud are greatly reduced. Beyond that, there is no legislating for the criminal intent and deviousness of a manager that wants to fleece his investors. The formulation of new laws for the manager to break will have no increased impact.
It is worth remembering, too, that for an industry of this size, the hedge fund universe is actually very clean. A handful of fraud cases a year amongst 8000 odd funds managing between $1 trillion and $2 trillion. Never nice for those who are affected when they do come along, but we are not talking about an epidemic here.
“A more heavy-handed approach is needed: the hedge fund industry needs to get slapped into shape,” Kostigen says. “Regulators need to examine and understand exactly what hedge funds are, and provide oversight accordingly.”
Those two comments are completely separate. He has given us no indication of what slapping the industry into shape would entail. Are examination and understanding are the extent of his tough justice regime? You’ll be hard pressed to find anyone who thinks a regulator taking the time to understand hedge funds is a bad idea. The SEC can do this with the information they have already, with those that have registered, with information held at the CFTC, by liaising with regulators in Cayman and BVI.
It might be that registration is a good idea. But a real “slap into shape”, suggesting, to me, expensive and draconian measures, is the wrong approach. Better to encourage better understanding and best practices by investors.

The International Herald Tribune’s opinion page last week ran an excerpt from Viken Berberian’s forthcoming book Das Kapital, chronicling his experiences working for “one of the citadels of hyper-capitalism: an offshore hedge fund”.
As a reporter on hedge funds who does not share the daily rigors and pressures of managing money for other people I find it interesting to read accounts of the more social side of the industry.
The first observation Berberian makes in this passage is “being surrounded with so much money I never felt so poor.” It is an indictment to the lifestyle the hedge fund manager lives. As many Continental Europeans would point out, having more money does not necessarily make you happier.
His colleague at the fund, “like nearly everyone else in the office, ate lunch at his desk, never leaving it, except for a toilet or coffee run, or the occasional institutional conference, or when he went to an adjacent office, where he sprawled on the floor: the pain in his back was conversely correlated with the direction of the market.”
My view of hedge fund managers must be skewed by the fact when I see them more often than not we are having lunch at a fantastic restaurant in London, or meeting in a very comfortable meeting room in their Mayfair office. No doubt they have intentionally wound down for their meeting with the press, hidden their nervous twitches and their obsessive interest in their Bloomberg terminal behind a cool façade.
Of course you know they have high stress levels but they seem well in control.
“I was still imbued with a gentler work ethic, having just left the south of France and returned to New York to work as a research associate. Unlike most of the others, I refused to work on Sundays and ate lunch in the conference room, thankful for the natural lighting from the surrounding windows,” he says, contrasting his own disposition to those of his colleagues.
The author comes across as a man who did not make the decision to become a hedge fund manager, but rather went to work at one to research a book. When the fund started haemorrhaging money, Berberian observed that “it happened so fast that none of it seems real — perhaps because it wasn't my money.” This is not an attitude, I suspect, which is going to mark someone out as being a great money manager, though it will save you back trouble in times of stress. Neither is it an attitude I have trouble understanding. We journos sometimes eat at our desks, but only when we are approaching a press deadline. We work as hard as the next group but we enjoy our natural light and our long lunches too.
To be a hedge fund manager you have to have to really care about managing money, take the challenge as a personal one and be prepared to make sacrifices of your own time. Will this book go even a small way to alleviating the jealousy of those calling for salary and bonus caps in the city, or for fund managers to be rounded up once a month so the less fortunate can redress the balance by pelting them with rotten fruit and eggs? Probably not. I doubt some back ache and six lunch dates a week with a Bloomberg terminal is enough hardship to redress the balance. Perhaps it is best fund managers take lunch at your desks. Like landed gentlemen during the French Revolution, they are probably safer indoors.

I am in Copenhagen for the Point Carbon conference. I feel victimised. Al Gore is speaking not 30 feet from where I am standing but I am not able to listen to him because I am a member of the press. That old chestnut.
It is lovely being in Copenhagen though, a fantastic city, one I have had the pleasure of visiting once before. I am staying at a fantastic hotel called Cab Inn City. It is designed like a boat, in that all the rooms are themed to look like boats on a cruise ship: very small and very compact. So cheap. I have always got pleasure out of value. (If I was an equities portfolio manager I would have to be a value investor.) The bathroom is not big enough to swing a cat in, but luckily swinging cats is not on the agenda. As it is I can shower, brush my teeth and use the toilet without taking a single step, but to me that makes sense: why not do those three things in the same place?
Hopefully over the next two days I will get up to speed on the state of the carbon trading market, its future and prospects for increasing hedge fund involvement in the industry. I hope you guys do get more into it: it is a really interesting subject and I want to write about it more.

I usually skip the technology section in the Economist. I have barely enough time in the week to get through the sections I am interested in as it is and it seems like the most obvious place to cut. In my travels to Copenhagen I had more time to devote to it than usual this week and found myself reading an article about bioengineering. It was an incredibly interesting article, with a lot of implications for the Point Carbon conference I am in town for. The long and short of it was that there are technologies being developed not to reduce emissions but instead to reduce the amount of the sun´s rays hitting the earth.
If hedge funds are alternative investments, and emissions-trading is an alternative strategy within the hedge fund armory, then bioengineering, by my calculation, is alternatives³. I am sure there are venture capital funds around allowing you to invest in the area.
At one end of the scale you have a giant filter being launched into space, towed to a spot exactly between the sun and the earth where it can absorb a small amount of rays, enough to cool the planet. At the other, boats can be deployed around polar areas in their summer, spraying water into the air, forming a reflective cloud. It is a fascinating idea. The mind boggles at the potential for unintended consequences here.
One of the key themes that has come out of the event (and for more on this ready the next issue of Hedge Funds Review and keep your eye out for a special report on the web) has been the uncertainty that is still pervasive in the carbon industry. This is one of the things keeping some hedge funds away. On the other hand an under-researched industry with a high perception of risk, where time spent studying the data can bring financial rewards, sounds almost like a lonely hearts advert designed to appeal to hedge funds. All it is missing is liquidity. So you can imagine the more hedge funds get in, the more appealing it will get. Exponential growth for hedge fund involvement on the cards, then.

Talk about being screwed up by your parents. We all know nobody can reasonably be expected to take responsibility for their own actions when there is a perfectly adequate parent available to take the blame. If they are not hugging enough then they are hugging too much. If it isn’t being starved of love it is being crowded out by invasive and pushy parents.
So it was with amazement that I read that hedge fund manager wannabee Hakan Yalincak has found it within himself to forgive his mother, Ayferafet Yalincak, for her part in the demise of his dastardly plans.
Ayferafet had told a judge he forced her to get involved in his scheme, a straightforward pretend you run a hedge fund and fleece whoever you can find gullible enough to believe you caper.
She admitted “posing as the matriarch of a wealthy Turkish family to woo investors and make the fund appear credible,” according to The New York Post. But, in this she was merely bending to the will of her child, she claimed.
I am not claiming, by any means, that a 52 year old Turkish mother is incapable of coming up with a scheme like this herself. Or that it is outside the realms of possibility that he was swept away by her enthusiasm for the plan, that she was unable to contain her excitement whenever they met for a family dinner, and that her cooking was suffering as a result.
It does seem more likely, however, that he hatched the plan himself and implored her to play her role to make the whole thing more believable. So in that sense, you have to ask what he is even forgiving her for. She, after all, faces up to four years in prison for doing him a favour, though doubtless one she stood to profit from. If it was me I would be apologising to her.
I do like the fact the Yalincaks are supposed to have given $1.25m of their ill-gotten gains as a down payment on a $21m donation to New York University. That gives it a more Robin Hood feel to it. Rob from the gullible to give to those in need of education. It feels almost apt.

A pretty good article by Bloomberg’s Chet Currier today. “Are hedge funds really the disruptive, destabilizing force their critics make them out to be?” he asks, “or do these free-wheeling partnerships of wealthy and institutional investors actually reduce volatility and help make the financial markets run smoother?”
His answer is that if current market troubles end quickly and painlessly we can thank hedge funds, but if they are long and painful we can blame them. For pain, blame the carry trade. For fast relief, thank improved market liquidity and efficiency.
It seems fair enough to me. Life is not simple, not black and white. “Hedge funds” are not “good” or “bad”, heroes or villains, shady, spectacled fraudsters or crusaders on a mission to create the perfectly efficient market.
They are, for better or worse, the purest incarnation of free market capitalism. Overall they bring benefits to the system as a whole. In some instances their actions, while perhaps benefiting their own investors, are to the detriment of the rest of the system.
If this is wrong, which it is not hard to argue it is, then so are the actions of thousands of other corporations around the world. Companies act purely out of self-interest and the interest of their investors, not necessarily for the community, country or world in which they operate.
In some instances it is illegal for a company to act in a way that might be considered humane, progressive or to the benefit of society as a whole, if it is to the detriment of their shareholders. A company’s legal responsibility is to maximise shareholder value. This works, despite the occasional human collateral damage, because healthy corporations bring employment, and therefore wealth and happiness, to people, at least in the medium and longer term.
It is the same for hedge funds. Why hold the two groups to different standards?

Seeking Alpha reports Thomas Schneeweis, an academic, says daily and weekly returns data are superior to the more common monthly data used in the hedge fund industry. “More frequent data means more recent data – and with it, a more accurate snapshot of current portfolio positioning,” Schneeweis reasons. He concedes daily data, despite superior sensitivity to current portfolio positioning, contains too much noise, making it less useful than both weekly and monthly data.
This comes amidst the debate currently raging about the short termism of hedge funds and the injury it causes companies everywhere. Weekly and daily data is only likely to aggravate the issue of (short sighted, dare I say, unsophisticated) investors abandoning funds which have had a back week or a bad day.
Many hedge funds do have a short term investment horizon, and it makes sense this can have implications on longer term performance if it means longer term projects which may hurt in the short term (making omelettes, breaking eggs springs to mind here) get shelved for fear of invoking hedge wrath.
The Sunday Times reports hedge funds are not alone in this short termism, that pension funds are being forced into taking a similar approach. This makes it the investors’ “fault”, though, without wanting to sound like a broken record, investors acting in their own interest is what the financial system is built on.
If there were too many investors looking at things on too short-term a timeframe, it would create (and perhaps has) opportunities for buy-and-hold investors, be they hedge funds with longer lock-ups or savvy investors, mutual funds or institutional investors, taking a longer term view. Quality management will hold their nerve and implement long term improvements, knowing they will ultimately be vindicated. If they get hammered in the short term it creates a buying opportunity for those alert enough to spot it. Funds making profits in such circumstances redress the balance, while management who lose their jobs in such circumstances are unlikely to be out of work long.

Got a call from a newswire today asking for my expert opinion on hedge funds as activists, inspired by events at ABN Amro. I don’t need to recount the details of the conversation as I was able to relay the same message verbally I have given here in writing. Namely that the mainstream media are whipping up a storm about hedge funds (and private equity) mainly because they know it is easy to create fear, and therefore sales, among a public that does not really understand hedge funds. Alternatively, it could be because the hacks themselves do not understand the intricacies of the industry. Either way, the notion that alternative investment funds of either denomination are savaging innocent companies is being overdone, and in the case of a multi-national investment bank is downright laughable.

Those concerned about hedge fund remuneration and sceptical about the benefits funds bring London- and the rest of the UK- might be interested in an article in today's The London Day, which shows hedge fund growth is benefiting the broader economy in Connecticut.
“The number of jobs in Connecticut… tripled between 1990 and this year, according to a recent state labour report,” the article notes.
“Some of the new jobs came when financial services firm UBS moved to Stamford in the late 1990s. But nearly half the total jobs — about 10,000 — are in hedge funds and private equity firms.” 80% of the growth has been in the two sectors since 2001. And the growth is primarily due to managers looking to escape the New York rat-race, looking for a nicer life for themselves and their families.
The experience of Connecticut could be seen as an example of centres outside London looking to get a piece of the action. After all, if Connecticut can survive in New York’s shadow, the same can surely happen in Europe. The question is who can benefit? The challenge is on.
Manchester has recently stated its desire to become the UK’s second financial centre, but it seems unlikely fund managers looking for a higher quality of life outside the urban jungle are going to opt for Manchester, although they could always move into the footballer-belt in Cheshire.
There are some other nice alternatives with a more rural feel and closer proximity to London. Oxford has good links to London, a plentiful supply of educated graduates looking for work and some lovely restaurants. Perhaps something a little more exclusive… Woodstock? Or Abingdon?
The Isle of Man is on a drive to encourage investment managers to move to its shores. It is an undeniably picturesque place, and those who are so inclined can stand in a spot where they can see England, Ireland, Scotland and Wales on a clear day. If that doesn’t inspire you then nothing will.
Or perhaps I am being to UK-centric. After all, the UK doesn’t compete with the US. Europe does. In which case perhaps Paris could offer itself up as Europe’s Connecticut? The Connecticut of Love, we could call it. It has good links to London and a much slower pace to it.
If you were going to decamp from London where would you go?

This alternative beta idea certainly seems to have some legs, if the number of passive, hedge fund replicating products coming to market is anything to go by. It seems there are people out there willing to forego the top percentile of performance in the sector to get an uncorrelated exposure to the asset class, cheaply. The cost is the real key, as has been pointed out before. Retail investors too can access it this way. It makes an interesting alternative to retail funds of hedge funds, which, after two layers of fees have been paid, are typically unlikely to turn heads with the returns they will pay on small, retail-size allocations.
Just this week we have seen the launch of FX hedge fund replicator by Merrill Lynch, offering three different FX strategies (carry trade, US dollar relative value and momentum) and absolute returns, long/ short and emerging markets strategies from IndexIQ. There are probably others.
Merrill Lynch already had some presence in the passive hedge fund space, with the Merrill Lynch Factor Index. It is said to be developing more strategies including long/short, convertible arbitrage, volatility and merger arbitrage.
In December I spoke with Julius Baer’s Yoshiki Ohmura who is looking to develop hedge fund replication strategies. The only thing holding them back is the physical mechanics of replicating some strategies. In some instances it is relatively straight forward: with merger arbitrage, for example, you trade the acquired long and the acquirer short for every merger encountered without discretion. Coming up with a magic formula for global macro, for example, is trickier, but not impossible, according to those working on it.
What is clear is there is a brave new world of passive hedge fund products already coming to market with a whole load more set to flood onto the scene in coming months. This is good news for everyone, with the possible exception of the least talented hedge fund managers. More products means more choice and greater competition will lead to higher performance. And having a yardstick by which we can measure alternative betas will allow us to better identify alpha. The managers consistently achieving better returns than passive products in their strategy will be in a position to justify their fees, and nobody will argue with it. But those that do not will have to either offer their services for less or, if their performance is really not adding value, find another job.

Interesting to read Amaranth’s Brian Hunter is set to launch a new fund, Solengo Capital. And even more so that it seems investors are queuing up to invest, with around $100m already committed.
Amaranth was not comparable to Nick Leeson, who noted people often say they would give him money to manage. Leeson committed fraud, whereas Hunter over-concentrated his portfolio. Leeson hid what he was doing, while Hunter was actually open about it.
There has been much talk about bifurcation in the hedge fund industry. What high net worth individuals want is different to what institutions want. And here is a classic example.
Crudely: institutions are in this industry for diversification; rich individuals are in it for superior returns. To make superior returns sometimes you have to take risk. It sometimes seems to me in the context of investment people regard risk as synonymous with returns: more risk equals more returns. While this is often true over the longer term, risk means risk. It means there is a risk that you wont get any returns, because something bad will happen.
The hedge fund industry has been transformed by institutional money. Returns have suffered in part because there are more funds and therefore fewer inefficiencies to exploit, or other opportunities. But this is not the whole story. They have also tailed off because institutions don’t want funds that blow the lights out one month if they have to tolerate a complete meltdown the next.
There are individuals who are prepared to tolerate this volatility though and rather miss this aspect of investing. It must have been exciting. There are some volatile funds out there, but some believe there aren’t enough. There could be a gap in the market for more funds aimed at high net worth individuals with sexier returns characteristics and more volatility.
Now there is an opportunity to invest in a manager from the old school, though whether he will manage it in the same way as he managed Amaranth and take sufficient risk to earn similar levels of returns remains to be seen.

The FSA today issued its consultation paper on allowing retail investors access to funds of hedge funds, something that has been in the pipeline for some time.
It is a good thing, giving retail investors, not all of whom are financially illiterate just because they happen to not have $2.5m in the bank and $100,000 knocking around to make a single allocation, access to a new set of opportunities.
A lawyer contact put it best when we were discussing the issue months ago when it was first mooted: he said not allowing retail investors access to hedge funds was like sending your grandmother round the gold course but only letting her use a putter. (I love the analogy: the idea of my grandmother playing golf is surreal enough, without taking into account her access to the full range of clubs.)
So retail FoHFs are a small step closer to being reality now, although it is not likely to become reality until 2008 ISA season. They will not allow any kind of investment as an underlying, and there must be demonstrable evidence of sound risk management in place and at least three underlying funds, among other provisions. But the rules are evidence of the FSA’s commitment to the principles-based regulation which makes it one of the most fondly regarded onshore regulators in the world, from my experience. (Offshore regulators always seem to have a very cosy relationship with the businesses on their island.)

ABN Amro has told TCI to get stuffed. Well, it said it would let shareholders decide, while advising them against it. After all, a merger with Barclays is also on the cards, and wouldn’t that be a step in the right direction anyway?
TCI may be in a position to drum up enough support for its actions. Hedge funds are renowned for being pretty good at that sort of thing, although in Holland, with Dutch investors, and a less entrenched hedge fund culture than we have in the UK and US, it may be trickier.
TCI’s main problem seems to be with Rijkman Groenink, the bank’s chief executive, and this is why, despite being a step in the right direction, it might prove to be too small a step. Managers I have spoken to about the situation seem to agree he has not been the most inspirational and competent of leaders. And the deal with Barclays seems to envisage not just an Amsterdam headquarters, but Groenink taking the job as the chairman of the combined group.
It seems the response from the Dutch is not dissimilar to that of the German’s when it comes to Anglo-Saxon liberals throwing their weight around amidst their financial institutions.

There is a lot of sport in the hedge fund industry.
That seems like a strange statement. I will qualify it. We all know that golf is the one thing most hedge fund managers seem to do more of than managing their portfolios. I am constantly reading about charity basketball games between hedge funds and private equity. Then there are the City boxing bouts between investment bankers and fund managers. All fantastic events, of course.
What I would really like to see is a bout between Edhec and the London Business School. The two bastions of hedge fund academia clearly need a forum in which to settle their differences.
At first I thought a debate would be the way to settle it. Cass, lead by Harry Kat, could propose the motion: hedge funds are a complete waste of space, and everyone who wants exposure to them would be advised to replicate them using derivatives. Edhec, under the captainship of Lionel Martellini, would, of course, oppose the motion, (while warning us to be careful of the dangers of manager selection and the importance of thorough due diligence.)
Hedge fund replication is a hot topic, about which you could find something new to read every day of the week, if you were so inclined. All About Alpha has already provided the forum for them to air their views and reply to each other online, while both have contributed or been covered in Hedge Funds Review many times over the years.
Managers rebalance periodically, explains Martellini, enlightening us as to the crucial drawbacks in the concept, while “managing risk according to a risk budget will force the manager to change exposures when the risk budget is spent.” He advises caution.
Ah, retorts Kat: your research did not reproduce our model for hedge fund replication. You don’t know our magic formula. You aren’t doing it right.
If I worked in the events team of Hedge Funds Review I would endeavour to put on such an event, because I would be interested to hear the two highly persuasive and intelligent teams debate. Perhaps they could resolve their differences, although I doubt this.
Would people go though? People are busy, they can’t always get away from their desks; they need something very special to tempt them.
This is how I came to believe a debate was not enough, and this brought me back to sport. And what is the ultimate sport? Anyone who has seen Mad Max III, Beyond Thunderdome knows the answer. That’s right: two men enter, one man leaves. No resolution of differences will be necessary. We will not be sitting around, examining the evidence and concluding once and for all whether we can sack the hedge fund managers and instead give the fees to the investment banking derivatives desks. Whoever is left standing will have the final say, and we must all invest accordingly.
This is, however, probably the reason why I am not working in events production.

The excitement throughout the hedge fund industry was tangible as India announced it would allow hedge funds to operate in its markets, in a limited form, at least.
While conceding the fact hedge funds are already operating there, M. Damodaran, chairman of the Securities and Exchange Board of India, said: “They should come here and invest directly. Let them come from the front door. Let them not hide.”
Only a limited number will be granted permission to operate, so don’t expect an avalanche of launches. Coupled with the fact there are already some hedge funds playing the Indian markets, this is not the momentous, moment-of-truth announcement it might have been.
It does show, if we needed showing, that governments appreciate the benefits hedge funds bring, regardless of the fact some enjoy scoring points by lambasting them in public. This is good news for its financial markets, which will gain liquidity, and for its investors, who will gain access to more local hedge funds, though this will take time.
And while ten years hence we may witness debates in Banglore and Delhi regarding the run-away remunerations of Indian hedge fund managers, likely to make the salary-gap in Europe look rather modest, it will have the same benefits to the broader economy as it has had elsewhere.