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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: YanivBA who wrote (54594)	8/10/2006 4:31:02 PM
From: regli	Respond to of 116555

”… This is a game of heads - I win. I provide you the investor with high returns and low volatility, I take 20% – tails - I go bankrupt, you the investor find that nobody answers the phones anymore and since I was trading on margin my bank is looking at a big black hole where once there was a juicy client. …” The hedge fund risks are huge and I don’t believe that we have seen anything yet. We had a relatively predictable market during this hedge fund explosion. With estimated assets under management of $1.2 trillion that are entering ever riskier and more leveraged trades because of the competition in the industry, I agree that we have lots to worry about. From HedgeWorld.com: ”Tremont Capital Management Inc., Rye, N.Y., said that according to its figures, hedge funds added $38.3 billion in assets during the May through June period, a 4.19% increase in assets Tremont uses as a base for the quarterly Tremont Asset Flows Report. Overall, Tremont estimated the hedge fund industry had $1.2 trillion in assets as of June 30. Earlier, Hedge Fund Research Inc., Chicago, estimated that hedge funds took in $42.1 billion in new assets in the second quarter, and projected the size of the industry to be $1.225 trillion Previous HedgeWorld Story. In the Tremont report, fixed-income arbitrage strategies led all gainers, taking in new assets equivalent to 7.28% of the amount those strategies had in assets at the beginning of May. By the same measure, global macro grew 7.16%, managed futures 5.87%, emerging markets 5.83% and equity market neutral 5.07%. Rounding out the strategies Tremont tracks, long/short equity hedge funds grew 3.86%, dedicated short bias 3.84%, multi-strategy 3.11%, convertible arbitrage 3.01% and event-driven 2.28%. Overall, Tremont's report showed that hedge funds attracted assets at "a remarkable rate." The growth in fixed-income arbitrage and global macro strategies were indicative of investors looking for diversification into strategies that could capitalize on fluid interest rates, according to Tremont. "... [I]nvestors are opportunistically diversifying their portfolios," said Robert I. Schulman, chief executive of Tremont Capital Management, in a statement. "Money is flowing into hedge funds generally, while within the industry investors are adjusting their portfolios to take advantage of the changing opportunity set." Despite raking in the biggest percentage of new assets in the second quarter, fixed-income arbitrage didn't immediately reward that new money with good performance. According to HFR's monthly performance indices, the strategy earned 0.2% in July, compared with a negative 0.21% return for the HFR composite index. For the year fixed-income arbitrage managers are up 4.21%, about in the middle of the pack for all strategies. The HFR composite index is up 5.83% year-to-date through July.</b Leading the field in July were emerging markets managers concentrating on Eastern Europe and the former Soviet states. They earned 2.38% for the month and for the year are up 21.04%, far and away better than any other strategy tracked by HFR. Latin American emerging markets managers earned 1.59% in July, according to HFR, and are up 9.11% for the year. Merger arbitrage (up 1.05%), healthcare/biotechnology (up 1.76%) and real estate (up 1.68%) specialist managers were the only others to record returns above 1% for the month. They are up 9.83%, 6.58% and 9.04% year-to-date, respectively. Equity market neutral managers in the HFR indices earned 0.28% in July and are up 4.92% on the year. Equity hedge managers lost 0.79% last month, dropping their return this year to 4.55%. Emerging markets Asian managers, diversified fixed-income managers, macro managers, market timers, and Regulation D specialists also posted negative returns for July, as did specialists in technology and short selling and funds of funds managers included in the composite. Hedge funds tracked by Eurekahedge returned negative 0.5% in July, but are up 4.98% so far this year.”

To: YanivBA who wrote (54594)	8/10/2006 4:39:19 PM
From: regli	Respond to of 116555

Again from HedgeWorld: August 7, 2006 Monday NEW YORK (HedgeWorld.com)-Common Wall Street wisdom has it that beta is cheap and alpha is scarce. An index gives you exposure to the market of your choice, but above-market returns are hard to get. That's the basic idea behind pension portable alpha programs, a fast growing form of institutional investment that seeks to enhance returns. The typical arrangement uses a swap to get the market return with no more than, say, 15% of the capital used as margin. The rest of the money is put to work in less-exploited niches or alternative investment styles in pursuit of extra profits. This alpha source is typically a fund of funds or a portfolio that combines a fund of funds with individual hedge funds. But not every market can be accessed via an inexpensive benchmark. In some markets the structure is not in place to cheaply replicate the market index, said James Norman, managing director of the Deutsche Asset Management Quantitative Strategy Group. This is the case with fixed-income markets, because they have large exposure to credit risk and mortgage-backed instruments. It's harder to track an index and more money has to be put to work. The result: Less is left to allocate to managers that aim to outperform the market. One way around the difficulty is to trade futures or other instruments to generate alpha, thereby minimizing the capital that needs to be committed to that component of the investment program. Mr. Norman's group uses derivatives to extract above-market returns from multiple asset classes, allocating long/short positions across countries to equities, bonds and currencies. This overlay or unfunded strategy is a capital-efficient way to get alpha returns, requiring only a small margin, possibly no more than 2% of assets for every 1% target alpha, he said. Reversing the usual structure where the bulk of the capital goes into hedge funds, here most of the capital stays in the desired fixed-income market. The Deutsche group manages both the derivatives-based global macro strategy and the fixed-income investment. By contrast, other managers have started offering portable alpha products that focus on using leverage to put more of the assets into an alpha-generating portfolio. For instance GAM recently launched one that finances the index exposure and allows all the capital to be invested in a chosen fund of funds. Whether an investor channels almost all the capital to the alpha portfolio or the beta-earning index depends on the nature of the desired market exposure: The easier it is to get that return with a derivative, the more can be allocated to the pursuit of over-market performance. Many firms offer portable alpha services, including Pacific Investment Management Company, the big bond manager, which runs programs that target alpha returns from fixed-income strategies. Pimco also creates portable beta overlays to hedge high-yield risk. Some pensions prefer to develop their own portable alpha programs, but that requires the ability to administer swaps or futures over time. Deutsche Asset Management's quantitative group manages $15 billion in portable alpha programs and overall manages some $64 billion in currency, long/short equity, global macro and other alternative and traditional strategies.