If Citi was to be bought and broken up by hedge funds it would surely be a symbolic coronation of the sector as the new masters of the financial universe. It would end any lingering doubts regarding the upper limits of their influence.
Corporate titans such as McDonalds and Coke have had their run-ins with activists in the past, but these have tended to be more like flies swarming around the head of a horse: nobody wants a fly landing on their eye, but in the great scheme of things, the irritation was tolerable. I am thinking of Max Keiser’s Environment Fund, which managed to make a dent in Coke’s profits through a targeted boycott, and Pershing’s battle with the burger giant over a proposed restructure.
To break up one of the largest banks in the world would take activism to a new level. ABN Amro did the same, being arguably the most ambitious target for an activist to date (depending on how you look at it: I’m sure Phil Goldstein would see the SEC as a pretty impressive target, and his victory as the most impressive, a claim to which he would have considerable right), but Citi would move things up again.
At this stage it appears there is nothing more concrete to suggest a move such as this is imminent than a cacophony of whispers, inspired by the events unfolding at the Amsterdam-based bank. It would be foolhardy to write the possibility off, however, as a Citi executive conceded.
Chuck Prince has been warned: in this life, the shareholder is king.

Another notable example for the hedge fund-as-philanthropist-scrapbook: Reuters reports Marathon Asset Management’s chief operating officer Andrew Rabinowitz has set up R Baby Foundation, an educational group and charity concerned with infant death.
The Rabinowitz’s saw their own daughter die last July at the tender age of 2 weeks, apparently of a viral infection.
It is another example of hedge funds getting active in charitable work, which so often concerns children, fitting in nicely alongside TCI, Robin Hood and Hedge Fund Care, among others.
R Baby is holding a fundraising event in New York on 15 May and has already raised more than $1.8m, Reuters said, mostly from finance types.
Nothing can ever alleviate such a tragedy as a couple losing a baby but it is always nice when something good can come out of something so terrible. Infant death is still something of a mystery, there being too many inexplicable cases. Especially, the Rabinowitz family contends, in the US.
Hedge funds make fantastic philanthropists because of their excellent connections to those holding the strings to the biggest purses and wallets in the world, be they other hedge funds, wealthy investors or bankers. Other hedge fund managers active in charity to whom I have spoken view the activity with a very methodical eye, much as they do their investments. It sounds cold, but in fact does the cause a great service, ensuring a maximum value is extracted for every penny spent. For too many charities the beauty and worth of the intent is not matched by equally admirable process, with money ending up in the wrong places. It is a good bet R Baby will use the proceeds it raises to good effect.

I have the fondest regard for CNBC as a television station. It is the institution which launched my (still very much fledgling) career in television, having invited me onto the show on several occasions as a hedge fund guru. This is a label which, having tried it on for size some years ago, I have become very much attached to, though how robust the claim is must of course be open to interpretation.
I was invited on again today, though unfortunately was unable to make it due to a prior engagement. My mandate would have been to talk about UBS, to alleviate concerns from the viewing public that this was, perhaps, the beginning of the end for hedge funds. There had been a sighting of the four horsemen of the hedge fund apocalypse on the horizon, and I was being called in to confirm the authenticity of the sighting, or dismiss it as something no more exciting than a UFO or a sparrow, as the case may be.
The answer to the question is: I am no twitcher, but it is certainly nothing apocalyptic.
UBS reported lower first quarter net profits on Thursday and the closure of its Dillon Read hedge fund arm, which was hit by losses in the US subprime mortgage market, sparking a selloff in its shares, reports CNN. Dillon Read Capital Management ran up losses of $124m in the first quarter, and is consequently being reintegrated into the investment bank, with third-party funds redeemed and the business wound up.
The thing to remember here is that for every hedge fund losing money on one side of a trade, or trades, there is usually another on the other side. There are always winners and losers, and there are often hedge funds amongst both groups.
Interesting to see UBS, the world’s largest wealth manager, according to CNN, get it so wrong. It goes to show that brand recognition is no guarantee of success in investing.

The US Fed said this week hedge fund risk is at its highest ebb since the Long Term Capital Management collapse which did so much to blight the industry’s reputation.
It is easy to dismiss the hyperbolical concerns of some journalists and institutional investors about the threat hedge funds pose to the economy. There are some voices, though, which, when they can be picked out of the sensationalist cacophony, make you sit up and take notice. The Fed’s being on such voice.
Tobias Adrian, capital markets economist at the central bank, wrote: "Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998.”
Those looking for correlations in their news-flow in the hope of discerning how best to proceed with their investments might have been given pause with yesterday’s news about UBS closing its hedge fund arm. It might lend extra credence to the theory that “the hedge fund bubble” has reached maximum inflation point, and is just waiting for a sharp particle of dust to prick its delicate film.
Anyone who read yesterday’s blog will know my humble opinion does not subscribe to this view, though I do not dismiss Adrian’s warnings. As a much wiser man than me once said: hedge funds are not as asset class, so how can they experience a bubble?
Risk might well be high. After years of a barely interrupted bull market it would be surprising if there were not some correlations between people’s returns. Money has been growing on the stockmarket tree for so long people have forgotten the concept of drought, that sometimes things stop growing and die.
I am certainly concerned about the broader financial markets, and wait with a certain level of resignation for the news my house has fallen in value and the stockmarket is in freefall. Many hedge funds may have high levels of correlation at the moment, and could incur severe losses if/ when markets hit the rocks.
To see hedge funds as the major catalyst for a future financial crisis, however, is to overstate the point. They will be part of the problem, and investors in hedge funds that are taking leveraged long bets on the markets may well lose a lot of money. On the other hand, those with investments in more cautious hedge funds and those with robust risk management practices may be grateful for their allocations if the stockmarkets nosedive and they find their losses contained by some well constructed short positions. Hedge funds, in short (no pun intended), are actually in a better position to survive when the going gets tough than long only funds. The catch is they have to anticipate when the market reaches the top, which is, of course, the hardest skill of them all.
The problem is there are so many hedge funds being managed by so many people with so many different levels of skill and experience, there is bound to be correlation. And as more money piles into the industry, the risk increases. The flip side of the coin is with the sheer number of funds out there, there are plenty of winners to offset the losers.
Those who are concerned about risk should look for conservative managers who habitually forgo some of the returns currently available to ensure they are covered when things do turn.
In this game the investor is king.

There was an intriguing article in The Street yesterday about J W Henry. Did you know, if you had invested in his flagship fund when it launched in December 2004 you’d have made less money than you would in US 20 year treasuries?
With this statistic in mind it is less surprising its assets under management have fallen from $2.9bn to $1.4bn, than the fact people have left that much money in there. To think, managers bemoan the lack of stickiness with investor allocations.
It just goes to show the point people make about how sometimes the established players can struggle. Conversely, sometimes emerging managers can be the ones who you want to have allocations to. Yet there are talented managers out there closing every day because they cannot raise the sufficient capital to make their strategies viable.
It shows the timing of a launch is a vital factor in determining the success of a fund. John Henry had success in his early years but has had some problems over the past couple. But he has made his name now. A poor month, let alone a poor two years, can kill your chances of attracting capital stone dead if they come before you reach the two year mark.
This is the same with everything else. An artist who has made a name for himself with wonderful paintings is entitled to turn eccentric later in his career and start churning out rubbish, as are poets, authors, actors and directors. Many do, and people tend to accept it as part of the lifecycle of genius. In such subjective and unquantifiable fields as art, often, if the artist in question has established a reputation as a genius, some critics may even believe the art has some merit which is too subtle for their comprehension.
With money management, however, there is no place to hide, and such returns cannot be dressed up as anything other than failure.

This will be the last blog entry for a while, as I am off on vacation. Normal service will be resumed on 21 May.

If I worked in a restaurant kitchen, the chances of scores of people getting very ill from food poisoning are quite high. Those who escaped this fate would only do so, in all likelihood, because the food on their plates would be so unappetising to them they would not eat enough of it to do themselves harm. But this is not to say restaurants are dangerous places or diners need worry excessively about the taste of their foie gras in the eateries of New York, Paris or London. It merely means only people who know something about cooking should be employed in kitchens.
The same is true of investing, and especially so when investing in hedge funds, the pork of the financial universe, (which is to say it is delicious, though some people will prefer to avoid it entirely, and it must be cooked properly or you will get worms.)
When hedge funds became the investment buzz-word and institutions everywhere looked at ways to gain exposure there was always a danger the lunchtime stampede would benefit a few unsanitary kitchens. But what investors must realise is hedge funds offer some of the finest investing ingredients available. It is just that they must be chosen carefully by someone who knows what they are doing, to ensure returns are healthy.
Lani Lutar, president of the San Diego Taxpayers Association told the LA Times that "Amaranth is a glaring example of the loss that can take place and the risk that exists when public pension systems invest in hedge funds.” He was not wrong. “At the end of the day taxpayers could be left holding the bag," he added, which is also true. But the lesson is not to avoid hedge funds, but to ensure thorough due diligence, both at the outset and on an ongoing basis, along with sufficient diversification, and consideration when selecting which strategies to allocate to, with a view to ensuring a suitable blend with the other assets in the portfolio.
Regulating fund managers, as the FSA already does, ensures, to continue with our analogy, the kitchen is clean and levels of hygiene are of an acceptable standard. (Regulating food suppliers, for our purposes, is the equivalent of overseeing the banks which have relationships with funds, another means of ensuring hedge funds are not serving any meat of too dubious an origin.)
Further regulation, to ensure dishes do not exceed certain levels of salt or fat, or that menus contain at least 10 main courses and are not overpriced, would not be helpful for the restaurant industry. Diners are able to decide for themselves if they like fatty food or whether they want a large amount of choice.
Similarly, further regulation of hedge funds would limit choice and could lead to higher levels of correlation between hedge funds, which would only increase risk and adversely impact returns. The more flexibility managers have to pursue different strategies, the more varied their strategies will be and the more benefit they will bring to the markets.

When you are asked to do something voluntarily it usually means failure to do so will result in you being forced to do it anyway, like when you are asked to hand in your resignation, knowing failure to do so will mean you are fired. It is a face-saving offer. Doubtless Germany’s proposal to the G8 that hedge funds being asked to ‘voluntarily’ and ‘spontaneously’ (meaning suddenly and essentially at gun-point) develop a regime of strict self-policing was meant in just this way, so news from the FT that the hedge fund community has said “nein, danke” makes it interesting to see what happens next. This situation is different. This is far more likely to be a bluff than when your boss asks for your resignation. Given the lack of enthusiasm by several key countries, including the US and UK, it is hard to see the G8 pushing hedge funds where they refused to jump.
Hedge fund managers and associations representing their interests rightly judged the feebleness of the German position after they retreated from their previous, firmer stance, that the industry be shackled in stringent regulations designed to protect investors and the global economy.
I have argued before the best way to achieve a well functioning, self-policing industry is to ensure investors are highly educated about best practices. The great strides the industry has already taken in cleaning up its practices have come about because investors demand a certain level of transparency and risk management, and hedge funds have realised they must deliver in these areas to attract investment. And the industry has come a long way in recent years for this reason, as increasing institutional money has flooded into hedge funds.
So Germany is likely to end up looking like the boss who tried to fire one of his staff, only to find the employee in question was his own boss’ best friend and golf partner.
Alternatively, it may be able to convince the doubters to back it up in its plans to impose stricter rules on the industry, but don’t count on it.

In some ways I can’t wait for the bear market that must, one day, come. Of course, I am not looking forward to seeing the value of my investments get hammered. Or the value of people’s pensions with large equity allocations. Or the financial misery of anyone else. And I am not relishing the angst and stress it will cause the people I know in the industry.
But it will be an interesting time, both as a journalist, and for hedge fund investors, when we can sort the wheat from the chaff. Alpha is so much harder to spot when the market is falling, when you can see who has managed to preserve capital, and who the real gems who managed to actually make money are. If half the people who say they will preserve capital in volatile or plummeting markets manage to do it, it is likely to facilitate an even greater surge of allocations into the industry from institutional investors.
What is interesting, too, is that on the other side of the coin there are those who worry hedge fund strategies, far from benefiting (relatively speaking) from these tough market conditions, are insufficiently robust to withstand them.
David Uren, writing in The Australian, warns “complex hedge fund products may not be able to withstand an increase in market volatility, posing a threat to investors and financial market stability.” Although he is actually taking his sentiment from an OECD report, he says. He goes on to talk about hedge funds’ “fastest-growing line – ‘structured products’”. Someone needs to tell him structured products are not a type of hedge fund product, but that is a different issue.
There is certainly concern out there that certain credit derivatives, leveraged loans and emerging markets orientated strategies are likely to be among the hardest hit when the global economy hits a rocky patch. As the OECD report points out, some of the most complicated funds are so opaque it is difficult to know how they will react in different situations, and the less obvious it is, the more important it is to find out.
It all comes back to the thing which is fast becoming the blog mantra: investor education. (And for this, of course, could I recommend buying Hedge Funds Review?)
It is another case of hedge funds being too diverse a group to be usefully given one name. Some hedge funds will certainly profit from falling equity markets and recession, while some will not.

Somebody get the SEC on the phone. Alert Angela Merkel. Sell all your assets and buy gold in preparation for impending financial meltdown. Florian Leonhard is launching the Fine Violins Fund, according to the FT yesterday, once it has raised $50m.
This is a typical example of the kind of dangers hedge funds pose to the global economy. Forget about credit derivatives. When the chips are down, some people lose a few billion dollars, some other people make a few billion, some people lose their jobs, some people’s livelihoods are wiped out, but life goes on.
Violins though? You can see what is happening here, I assume? Hedge funds are trying to take over music. Today music, tomorrow our lives. George Orwell was almost right with his premonition of future existence, except it wont be Big Brother, it will be Big Brother Investment Management LLC, looking to take over our lives: long our virtues and short our faults; arbitraging the difference between the people we are and the people we wish we were.
Back in the today, however, and for the benefit of those of you unable to read between the lines: The Fine Violins Fund will acquire the world’s most formidable violins until there are none left but a few tatty and battered specimens scattered around primary school music rooms. Deprived of suitable violins there will be a squeeze in the supply of music concerts. Tickets prices for the opera will go through the roof, on those rare occasions Leonhard releases violins for the cultural elite to get their fix. Luckily, the dastardly Leonhard also has a majority holding of Carnegie Hall, a 30% stake in The Royal Opera House and a 22% piece of The Royal Albert Hall.
“It helps to be versatile in your portfolio as an investor,” Leonhard told the FT. Too right. And what works for violins will also work just as well for guitars, books and even costumes: when no theatre in your neighbourhood can get hold of period clothing, remember: you were warned here first by 2 and Twenty. So let’s get more transparency on hedge fund activity, to protect what is really important in the world. To support this cause, send a postcard to The G8 Secretary, Heiligendamm, Germany, declaring your support for more rigorous oversight of hedge funds. Together we can ward off this attack on our way of life.
Or, if you don’t particularly like music, you could invest in The Fine Violins Fund, which targets 8%-12% annually, and promises to be uncorrelated to the broader markets.

While the hedge fund sector is, on the face of it, booming, only the top tier of hedge funds are actually taking in significant assets, notes All About Alpha, analysing the results of Alpha Magazine’s survey of the top 100 hedge funds.
Here are the calculations: The 100 largest international hedge fund firms managed $1 trillion at the end of 2006, 69% all the industry’s assets according to Alpha, (although this itself is an estimation about which we can have very little conviction.) Therefore all hedge fund assets were at that time about $1.45 trillion, leaving those outside the top 100 bracket with $450bn between them.
At the end of 2003 the top 100 had less than $500 billion, 54% industry assets. This puts total hedge fund assets at $820bn, and the lowly funds outside the top 100 club have around $370bn shared between them: a growth for the small guys of 20% from December 2003 to December 2006.
When you consider the growth in the overall number of hedge funds in that time, (which All About Alpha considers a “weed problem,” in that they spring up like…) it means fund sizes have probably actually declined. According to HFR, in this period there have been 5115 launches and 1543 liquidations, a net gain of 3572 hedge funds, although there will be launches and liquidations about which HFR know nothing.
None of this is very surprising at all when you think about it. Everyone has known about the large numbers of hedge funds launching since the bursting of the tech bubble, and everybody knows how hard it is for the smaller guys to attract investment from anyone but their family and colleagues until they reach around $20m and have a two year track record.
Another factor which is leading to the concentration of assets in the hands of the top 100 funds is consolidation in the industry, with those in the top bracket often acquiring the best of their smaller peers, especially when they are looking to diversify into new strategies.
This, All About Alpha proclaims, is taking care of the weed problem. Perhaps, but I would argue the business is not about asset gathering but performance, and the most effective weed killer is therefore poor performance. There will be a number of smaller funds among this number running profitable strategies with small capacities. Other funds are being managed by skilled traders with little marketing nous, who are failing to attract investment from institutions but are delivering value to a relatively small number of high net worth clients in their orbit.
And if the smaller hedge funds are weeds, what does that make the hedge fund behemoths? The botanical gardens? Some funds have reached such a colossal size they have ceased to deliver value and are simply growing fat on management fees. Surely this poses a more serious problem to our gardener… sorry, I mean investor?

Could Goldman Sachs’ Global Alpha (GA) fund be going the way of so many other funds which once day appear to have found a way to consistently beat the market, only to later prove themselves capable of no such thing?
GA fell 3.4% to the end of April, Bloomberg has reported, after ending last year poorly. In August 2006 it lost 10% through incorrect directional bets on equity, bond and forex markets, though it was positive year to date in November, shortly before Hedge Funds review reported it.
It looks like déjà vu with recent woes the result of losses in the currency markets. Since its 2005 high, when it rose 40% and attracted more than $3bn, it has dropped 12%.
In some ways this is encouraging. You hear enough complaints about hedge funds correlating with one another, cited as evidence hedgies aren’t doing their jobs. If the average hedge fund has delivered 4.9%, as indicated by Hedge Fund Research, then a hedge fund might be forgiven making losses if seen as evidence it is standing apart from the crowd.
In reality, forgiveness is in rare supply with underperforming hedge fund managers, as JW Henry will also attest. On 8 May I discussed his plight on here and took a different position, although the same could be argued: who is to say the last couple of years of weak performance would not be offset by fantastic returns when the equity markets hit the rocks? These could be two examples of managers taking a stand against irrationally bullish markets, like a manager at the height of the dotcom boom refusing to invest in tech stocks.
It will be interesting to see how GA performs when markets hit the wall and other hedge funds’ performance show themselves to be correlated with the mainstream assets from which investors are supposedly using hedge funds to diversify.
There is also the issue of systemic risk, so often raised in conversations about hedge funds. It often seems to be assumed there is a $1.5 trillion wall of money, invested by a single brain shared by all hedge fund managers, which exacerbates systemic risk in the global financial system. This argument falls down when you see one of the world’s biggest hedge funds is clearly taking positions opposing the majority. From the perspective of the global financial system this is good news, showing the liquidity provided by hedge funds occupies both sides of trades, with some managers buying risk while others are selling it. In a time of crisis, having managers with considerable sums of cash behind them willing to oppose the herd will be good news. It will mitigate some of this systemic risk we hear so much about.
Not that this will provide much comfort to any but the most altruistic investors. Most struggle to find patience with managers who fail to deliver returns over extended periods. It is perfectly understandable; investors are, after all, first and foremost trying to make money. But does explain why so many managers find themselves part of the hedge fund herd, when the industry was born out of a desire to invest in a climate unencumbered with benchmarks.

According to Bloomberg, even John Edwards’ connection with New York-based Fortress Investment Group, and the associated $500,000 salary, has not dampened his appeal to voters. It strikes me as an astonishing possibility, considering the stick hedge funds get from all sides, and the high level of suspicion, even scorn, with which they are held by many on the outside.
On the other hand it certainly helps explain why Connecticut political donors are coming out in greater numbers for Democratic candidates more than in previous years, despite the age-old ties between finance and Republicanism.
For most, you would think the hedge fund association would be a turn-off, bestowing an air of privilege and a lifestyle the average person might regard as being rather out of touch with their lifestyles.
A month or two ago there was a period of around two weeks when you couldn’t open a paper in the UK without seeing someone or other clamouring about executive remunerations, especially for hedge and private equity fund managers. There certainly didn’t seem to be much of an appetite in those pages to take one of these capitalistic panto-villains and elevate them to the top post in the country.
Obviously things are different in the UK and the US: perhaps, in the latter, there is a greater tolerance of unequal distribution of wealth, (although that is utter speculation, from someone with little experience of life in the US). It seems the issues arise either side of the pond though; as Bloomberg reports, Edwards’ “contrasting his self-portrayal as the champion of the poor and middle class with reports about his lifestyle” have made him an easy target for opponents and cynics.
UK-based readers might spot a parallel with our very own champion of the left, better known to most as “Two-Jags Prescott.” That, thankfully for Edwards, is as far as the analogy stretches.
Perhaps an association with a hedge fund does have one major advantage: it must lend an air of economic credibility, suggest financial nous which most have struggled to identify in the current President.