Hedge Fund Managers Add Billions to Bottom Line
Hedge fund managers may turn out to have raked in more dough last year than they did in 2006, according to Bloomberg.
Through the first nine months of 2007 alone, three hedge fund managers had made more than $1 billion. Two of them, John Paulson and Paolo Pellegrini of Paulson & Co., earned a combined $2.7 billion.
That figure outstrips the $1 billion pulled in by the 2006 leader, James Simons of Renaissance Technologies.
The Paulson executives profited from bets that the housing bubble was about to pop. Coming in third on the list is Philip Falcone, a principal in Harbinger Capital Partners, who also bet against the housing market. He had earned $1.3 billion as of Sept. 28. Hedge fund managers needed to have earned $240 million just to be included in the top 25.
Majority of Fund Managers Bullish on Growth Stocks
Three out of four money managers are bullish on large-cap domestic growth stocks, and four out of five have a bright outlook on technology, according to Russell Investment Group. However, less than half of the investment managers are bullish on emerging markets and less than a third are upbeat on value.
Investors warmed up to growth stocks in 2007, as the broad-market Russell 3000 Growth Index outperformed the Russell 3000 Value for the first time since 1999. The growth index rose 11.4% in 2007, while the value index dipped 1%.
In addition, growth stocks outperformed value stocks during the year at every capitalization tier by a double-digit spread. The gap favoring growth in the large-cap segment, for example, was 12 percentage points for the year-a complete reversal from 2006.
Driving growth's resurgence in 2007 was the poor performance of financial services stocks, which comprise a large percentage of the value index.
Another reversal in 2007 involved the resurgence of large-cap stocks. The large-cap Russell 1000 Index climbed 5.8%, outpacing the small-cap Russell 2000 Index, which dipped 1.6%.
Chinese Prepare to Help Investors Maneuver Market
Mutual fund managers in China need to improve the way they manage funds and do more to educate investors on their products, Shanghai Daily reports.
After a new report by China Galaxy Securities showed that Chinese net assets in mutual funds quadrupled last year, experts say managers are in dire need to prepare themselves, financial advisers and investors for another year of expansion.
"The industry expanded by leaps and bounds last year," said Sang Yu, general manager of marketing development department with Great Wall Fund Management. "The outlook for this year remains good, as the domestic stock market may continue to boom based on people's positive sentiment."
Sang said the securities regulator is expected to introduce stock index futures, which will allow investors to sell short, as well as a "through train" program that will enable investors to buy into Hong Kong equities through a Bank of China account.
By the end of 2007, there were more than 100 million accounts held in 363 mutual funds, meaning that one in four households opened an account, Sang said.
Despite this growth, many investors don't really understand the differences between the products and need to be informed about the risks instead of simply being encouraged to invest, Sang said.
Va Va Voom': VAs to Thrive in Europe
Global consulting firm Oliver Wyman, in a report titled, "Va Va Voom," predicts that U.S.-style variable annuities could be as successful with European Baby Boomers as they have been in the U.S. and Japan.
According to Wyman, demographic changes in Europe-population aging and Baby Boomer wealth-will drive VAs' appeal.
Wyman reports that in the U.S., variable annuities have overtaken traditional fixed annuities to become the primary form of tax-protected investment. In Japan, where the market has seen a similar movement, VAs are projected to reach $350 billion in assets by 2010.
Asset Management M&As Up 22% to $135 Billion
Asset-management mergers and acquisitions increased by 22% worldwide last year, totaling 122 deals with $1.4 trillion of assets under management, valued at $135 billion. The surge occurred despite the credit crisis, according to investment boutique Freeman.
The number of deals involving investment-management firms with more than $10 billion in assets rose from 23 in 2006 to 28 in 2007. There were only 13 such deals in 2005.
Total deal volume, measured by assets under management, however, declined 36% from 2006.
"In 2008, we expect to see activity driven initially by the market stresses, including divestitures and continued minority investments followed by more strategic acquisitions and cross-border deals later in the year," said Eric Weber, managing director and chief operating officer at Freeman.
Alternatives Haven't Hit Market Bottom Yet
Despite last summer's credit crisis, alternative-asset managers-such as private equity shops and hedge funds-are valued at more than 20% of assets under management, compared to 5% for traditional managers, The Wall Street Journal reports.
One reason may be that alternative managers charge higher fees and trade at about six times revenue, compared to four times for traditional fund groups.
Increasingly costly debt will continue to hurt firms like Stephen Schwarzman's Blackstone Group by making it harder to borrow money for new acquisitions and making it harder to find buyers who can raise enough debt to take the companies at attractive prices.
State Street Sets $618M Aside for Potential Suits
State Street Corp. has set $618 million aside to cover potential legal claims related to losses from mortgage security investments following the filing of five client lawsuits. The clients said they lost tens of millions of dollars in State Street funds that they were told were be invested in low-risk debt like Treasuries and corporate bonds. The lawsuit asserts that State Street changed strategy and invested in subprime mortgages and related derivative contracts without informing investors.
One fund lost 28% of its value during the summer credit crisis, according to the suit.
The number of securities lawsuits increased by 43% in 2007 to a total of 166, according to a study by Stanford Law and Cornerstone Research.
"This is the first wave of these securities fraud suits," Gregory J. Hindy, a securities lawyer and partner at McCarter & English told The New York Times. "There could be many, many more."
State Street also just announced that William H. Hunt has resigned as CEO of investment management subsidiary State Street Global Advisors.
State Street, which manages $2 trillion for pension funds and other institutions, saw its shares surge after the announcements, closing at $85.37 as of Jan. 3, a record for the company.
Credit Meltdown: Advisers Can't Just Cover Their Eyes
Columnist Hugh Anderson, writing in the National Post, pointed out there isn't enough information to put a value on the securities underlying the $35 billion of frozen asset-backed commercial paper clogging up the Canadian money market.
What this means, more likely, is that the insiders seeking to arrange a bailout have all the information they need, but they don't like what they see.
That's one line of defense for professional money managers who claim to have been blindsided when they parked money in investments that were supposed to be equivalent to cash.
Another line is what criminal lawyers and police call "confession with an explanation."
This was set out remarkably clearly by Henri-Paul Rousseau, head of Quebec Pension Plan manager Caisse de depot in his recent appearance before the public finance committee of the Quebec assembly. The agency put no less than $13.2 billion in now-frozen paper.
How did that happen? "We underestimated the risk," Rousseau said.
It's one thing for amateur individual investors to do that kind of thing. It should be quite another for a highly paid and experienced professional. But in any case, Rousseau explained, they figured that commercial banks and the Bank of Canada would bail them out if it came to that.
As earnings warnings proliferate, advisers would do well to commit to memory frequently used euphemisms and their likely meaning.
A favorite is "challenging," used to describe the earnings outlook. What this usually means is: "We're in trouble, and we really don't have much idea of how to get out of it."
ING Takes Stake In Lincoln Vale
ING Investment Management Americas, the U.S. asset management arm of ING Group NV, has acquired a minority stake in Lincoln Vale, an alternative asset investment firm based in London and Boston.
ING plans to make substantial capital commitments to Lincoln Vale fund launches and will be a primary distributor of its funds internationally.
Lincoln Vale's products include specialty hedge funds, private equity funds and structured products.
The firm was established in 2005 by Phil Cooper, a former Goldman Sachs partner and the founding partner and head of its private equity group, and Katherine Priestley, a European alternative asset manager.
ING Investment Management has $550 billion of assets under management in 30 countries.
Three Times the Charm for PIMCO's Bill Gross
Morningstar has recognized three mutual fund managers for their performance records and superior leadership despite the market turbulence during the second half of 2007.
PIMCO founder and Chief Investment Officer Bill Gross and his team won Morningstar's fixed-income manager of the year award. Gross also set a Morningstar record by being the first manager to be honored three times.
"Bill Gross is a legendary manager who doesn't hesitate to act with conviction and differ from consensus when he believes it will benefit fundholders," said Christine Benz, director of mutual fund analysis for Morningstar. "PIMCO Total Return has a great long-term record, and PIMCO and Gross' predictions about subprime and the weakness in the economy proved to be right on target in 2007."
Fidelity's Will Danoff, who has run Contrafund since 1990 and has managed Advisor New Insights since 2003, won the domestic-stock fund manager of the year award for his flexible approach to investing.
"Will Danoff has shown that managing a huge pool of assets doesn't prevent managers from making smart and timely investing decisions," Benz said. "His style is hard to pin down, but he is consistently able to sniff out trends before other managers and find ways to stay ahead of the market."
Hakan Castegren and his team were selected as the international stock fund manager of the year for their highly disciplined strategy of picking bargain blue chips priced with strong market shares. Castegren has managed the Harbor International fund since 1987 and won the international-stock fund manager award in 1996.
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