Hedge Fund Exchange

GETTING PERSONAL: IRS Memo On Hedge Fund Loans Stirs Tempest

By Arden Dale for DOW JONES NEWSWIRES, September 25, 2009

 An Internal Revenue Service memo targeting loans that some offshore hedge funds make to U.S. businesses and others is causing deep concern among the funds and their investors.

It raises the chances that the IRS could decide to tax income from some of these loans, which could deeply pare funds' profits in those cases, up to 60% or 70%. While the income has always been taxable, funds in some cases have acted as though it isn't, and not paid taxes.

Roger Lorence, a partner in the tax group at law firm Sadis & Goldberg LLP in New York, calls the memo "one of the most important tax developments we've had in the hedge fund world in many years."

The memo from IRS Associate Chief Counsel, International Steven A. Musher doesn't affect all hedge funds, many of which invest in securities but don't loan money.

Dated Tuesday, it directs Kathy Robbins, IRS director of Field Operations, Manhattan, Financial Services, to look into cases involving offshore funds that may have used certain strategies "to originate loans in the United States giving rise to effectively connected income."

"We encourage you to develop these cases, and we stand ready to assist you in the legal analysis," Musher wrote.

The IRS isn't declaring any new rule of law, but "simply applying well-settled rules to a particular fact pattern," says Lorence.

John Schrier, a New York-based asset management and tax lawyer, says the development is capturing the attention of foreign and tax-exempt hedge fund investors such as charities, pension plans and private foundations that invest in offshore funds managed by U.S. fund managers.

These investors, he adds, "may be wondering if they want their money in a fund at risk to IRS litigation."

Over the past 10 years, U.S. funds have increasingly moved beyond traditional trading practices to become involved with loans and other financing, Schrier says. These managers often maintain offshore funds for foreign and tax-exempt investors that run parallel to their U.S. funds. They "bend over backwards trying to find structures that won't subject the offshore investors and the funds through which they invest to U.S. taxes," he adds.

The IRS memo notes one such strategy, and concludes that it doesn't work.

Law firm Sadis & Goldberg is among numerous law and accounting firms sending out analyses to clients on the development. In a tax alert published Thursday, it explains that when an offshore fund acquires debt obligations of U.S. borrowers in the secondary market, U.S. taxes are generally limited to a 30% U.S. withholding tax on the amount of any contingent interest.

An offshore fund that originates loans in the U.S., however, may be treated as a finance company engaged in the conduct of a U.S. trade or business. In that case, it is subject to regular corporate income tax on its net income from carrying on its U.S. business, as well as secondary tax known as branch profits tax, and state and local income taxes.

The result, notes Sadis & Goldberg, is an effective income tax rate of 60% to 70% on the income in question.

The IRS didn't immediately comment.

 

 

Geneva Funds See Inflows for First Time Since Madoff

By Warren Giles for Bloomberg, September 29, 2009

Sept. 29 (Bloomberg) -- Geneva’s funds of hedge funds saw client inflows for the first time in 11 months in August, halting a slump that accelerated after losses related to Bernard Madoff’s Ponzi scheme.

Net inflows were $30 million, after withdrawals of $2 billion in July, according to data compiled for Bloomberg News by Singapore-based Eurekahedge Pte. Total assets in Geneva-based funds of hedge funds climbed almost 1 percent to $14.3 billion, after slumping 74 percent during the previous 19 months.

Geneva funds of funds have been slower to recover from the financial crisis than single-fund managers worldwide, who have posted net inflows for the past four months. Union Bancaire Privée and Banque Syz & Co. have started new funds to rebuild investor trust in the products after the city’s banks reported $7 billion of Madoff-related losses.

They’re “still not out of the woods,” said Drago Indjic, project manager at the London Business School’s Hedge Funds Center. “It will be 2010 before there’s clarity on liquidity” because some funds may still face redemptions after previously blocking withdrawals by investors, he added.

Funds of funds earn fees by picking a basket of hedge funds for clients. While the strategy is designed to diversify risk and banks are responsible for vetting fund managers, at least six Geneva-based institutions reported Madoff-related losses.

New Funds

They include UBP, Banco Santander SA’s Optimal Investment Services, Genevalor Benbassat & Cie., Hyposwiss private bank, Banque Benedict Hentsch & Cie., and Notz, Stucki & Cie.

UBP started a fund of funds in May, while Lombard Odier & Cie., Geneva’s oldest private bank, said in June that it planned two open new funds after shutting two others. The bank hasn’t yet released details.

“The question is whether these inflows are going to old portfolios, or new funds of funds with liquidity,” Indjic said.

Geneva funds of funds returned 1.2 percent in August, compared with a 1.4 percent gain the previous month, Eurekahedge said. The city’s funds of funds fell 22.4 percent last year compared with an average 19 percent drop in hedge funds worldwide.

Global single-manager hedge funds attracted net inflows of $12.6 billion in August, according to Eurekahedge.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether asset prices will rise or fall.

 

BNY Mellon/Dreyfus Launch Two Fund of Funds

By Alex Akesson for HedgeCo.net, September 30, 2009

The Dreyfus Corporation, part of BNY Mellon Asset Management, announced the introduction of the Dreyfus Satellite Alpha Fund and the Dreyfus Diversified Global Fund.

“Many individual investors are seeking a professionally managed solution that enables them to invest in non-traditional asset classes that have low correlations to traditional asset classes, especially in the wake of the recent financial crisis,” said Phil Maisano, Vice Chairman and Chief Investment Officer for Dreyfus and Chief Investment Strategist for BNY Mellon Asset Management. “Dreyfus Satellite Alpha has been constructed within a 1940-Act platform to provide exposure to non-traditional asset classes such as commodities, currencies and real estate in addition to inflation-protected securities and global stocks and bonds.

“Dreyfus Diversified Global fund is distinctive among global funds; the underlying funds are managed by an array of BNY Mellon Asset Management affiliates with different points of view and investment philosophies which differentiate this fund from other global funds that only deliver a single viewpoint,” Maisano said.

The Dreyfus Corporation, established in 1951 and headquartered in New York City, is one a leading asset management and distribution company, currently managing more than $400 billion in mutual funds and separately managed accounts.

BNY Mellon Asset Management is the umbrella organization for BNY Mellon’s affiliated investment management firms and global distribution companies.

Hedge funds find new sweet spot in sugar

By PAUL THARP for Bloomberg, September 30, 2009

Sugar is the new crude oil for investment-hungry hedge funds, which are pushing sugar prices near 30-year highs and ushering new global shortages.

After their infamous and massive bets on crude oil sent prices doubling and brought $5-a-gallon gasoline a year ago, hedge funds are now pouring their billions into raw sugar.

Sugar prices have doubled since springtime, causing US officials to consider lifting tariff barriers so that more imported sugar can reach food and candy makers.

Analysts say hedge funds are in search of high profits on commodity gambles, since returns on stocks and bonds are meager and less certain.

"The fundamentals and macroeconomic factors are coming together and more money is there," said economist Sergey Gudoshnikov of the International Sugar Organization. "Sugar is one of the better commodities for investing and the fundamentals are helping."

Weather problems at major producing areas in India and Brazil, along with increased use of cane for creating ethanol, have helped fuel hedge funds' sugar highs.

In trading here yesterday, raw sugar surged as much as 4.4 percent to 25.15 cents a pound before settling at 25 cents, up 3.5 percent, the highest close since 1981.

Betting by hedge funds and large speculators that sugar futures will jump has soared 77 percent this year, said the US Commodity Futures Trading Commission.

Demand is expected to remain high, in part from production that's already in short supply. The International Sugar Organization projected a record deficit of 10.4 million tons in the current season.

Sugar consumption is also surging faster than expected, with consumers currently using 8.3 million more metric tons of sugar than is produced -- up dramatically from the 5.1 million shortfall forecast in June.

 

Man Group Assets Rise on Lower Outflows

By The New York Times Dealbook, September 30, 2009

Man Group, the world’s largest listed hedge fund firm, said slowing outflows helped lift assets to an estimated $43.8 billion at end-September, at the top end of forecasts, boosting its shares.

The firm, which is seeing private investors put money into its products even as institutions withdraw cash, said on Wednesday net client outflows slowed to $500 million in the third quarter, well below the $1.4 billion in the previous quarter, Reuters reported.

“The mix has shifted towards private investors, which is good for margins,” chief executive Peter Clarke said on a call to investors and analysts.

Man Group shares were up 5.4 percent at 324.8 pence at 9:12 a.m., strongly outperforming a marginally higher FTSE 100 blue chip index.

Net redemptions by institutional investors slowed in the past three months and they looked set to further improve, Man said, with net redemptions of $700 million set to be paid at the start of its third quarter.

“The trend in institutional redemptions is encouraging and the outlook shows a further improvement in Q3,” Numis analyst Gurjit Kambo said in a note.

Man Group, whose share price has more than doubled since its year low in March, said in July it expected to return to overall net client inflows in the six months to March 2010.

But while private clients supported the business, net sales to such higher-margin clients still fell, and were down to $800 million from $1.9 billion in the three months to June.

UBS analyst Carolyn Dorrett attributed the fall in private investor sales to the weak performance of Man’s flagship AHL Diversified managed futures strategy, which is heading for its first calendar year of losses since launch in 1996.

“This shows the negative impact that nine months of weak AHL performance is having on demand for Man’s high margin retail funds,” she said in a note.

The firm also said performance fees for the six months to September would be an estimated $30 million, ahead of Citi analysts’ forecasts of $20 million and despite AHL’s weak performance.

“With significant momentum across the business, new products and new market opportunities, Man is strongly positioned for growth,” Mr. Clarke added in a statement.

Like many hedge fund firms, Man has been hit by the downturn in the industry and client redemptions. A year ago Man’s assets were $70.3 billion.

 

BofA to Sell Asset Management Unit For $1 Billion

By Elinor Comlay for Reuters, September 30, 2009

Bank of America Corp <BAC.N> has struck a deal to sell a long-term asset management business, part of its Columbia Management division, to Ameriprise Financial Inc <AMP.N> for about $1 billion.

The bank expects to close the sale of the unit, which had $165 billion in equity and fixed income assets under management at the end of June, next spring for between $900 million and $1.2 billion.

Bank of America said it is still considering alternatives for the short-term asset management business at Boston-based Columbia.

The bank has been seeking to sell its Columbia division since earlier this year, as it sought to raise capital to offset rising losses on mortgages and other loans.

The Charlotte, North Carolina-based bank inherited a stake in asset manager BlackRock Inc <BLK.N>through its January 1 acquisition of Merrill Lynch.

BlackRock had been interested in buying pieces of Columbia, according to some media reports, but the New York-based company in June acquired British bank Barclays Plc's<BARC.L> investment arm BGI for $13.5 billion.

Bank of America shares were up 15 cents in premarket trading at $17.31. Ameriprise was up $1.01 at $33.35.

 

Pallotta to invest $10 million in new fund

By Alistair Barr for MarketWatch, September 25, 2009

James Pallotta, who shut down his Raptor Global funds this year, plans to back a new hedge fund that's scheduled to launch in early 2010.

Boston-based Northern Pines Capital will be run by Patrick Dunn and Dan Schiff, former traders at Raptor and Tudor Investment Corp. who reported directly to Pallotta.

Pallotta intends to invest $10 million in the new fund as a limited partner. The launch is expected in the first quarter of 2010, according to a marketing document obtained by MarketWatch.

There were few big hedge fund launches during the first half of 2009 as investors shied away from the $1.4 trillion industry after it suffered record losses last year. However, investor appetite has started to return in recent months.

Investors ploughed almost $20 billion into hedge funds in August, according to HedgeFund.net, which tracks performance and assets in the industry. Roc Capital, a new fund run by Deutsche Bank arbitrage trader Arvind Raghunathan, opened in July with more than $1 billion in assets. 

 Pallotta has been a leading equities hedge fund manager for many years. He began working at Paul Tudor Jones' Tudor hedge fund firm in 1993 and Raptor grew within that group.

The Raptor Global funds returned 13.85% a year on average from Oct. 1, 1993, to the end of May this year, after fees. That was more than double the return of the S&P 500 index.

At their peak in 2007, Raptor Global funds oversaw roughly $9 billion. However, Pallotta lost money last year, and some investors redeemed. As 2009 began, Pallotta separated his business from Tudor. Assets under management dropped to $1 billion. 

By June, Pallotta told investors he was shutting the Raptor Global funds down. However, he was already planning a comeback. 

Northern Pines will trade public equities and will go long and short, concentrating on roughly 30 to 60 positions. The fund will take short positions, or negative bets, to try to generate gains, rather than just hedge long positions, according to the marketing document.

Dunn and Schiff have more than 13 years of combined experience investing in publicly traded stocks at Tudor and Raptor.

Dunn, a former M&A banker at Morgan Stanley specializes in communications and gaming companies and more recently focused on the retail and consumer sectors.

Schiff, who used to work at private-equity firm Bain Capital and Morgan Stanley, has covered basic materials, energy and industrials.

Northern Pines will avoid illiquid investments and doesn't plan to use "gates," the marketing document said.

The hedge fund industry suffered record losses last year partly because some managers had strayed into more illiquid securities, while still offering their investors the option to redeem relatively quickly. After the financial crisis deepened in the second half of 2009, gates were used by some hedge funds to try to hold back a wave of redemptions.

Northern Pines plans to charge a 1.5% management fee and a 15% performance fee. However, the performance fee will rise to 20% if the hedge fund generated a gross annual return of 10%, the marketing document said. 

John Paulson Mulls CIT And IndyMac Merger: Report

By Biswarup Gooptu for Reuters, September 29, 2009

Hedge fund manager John Paulson is considering merging troubled U.S. finance company CIT Group <CIT.N> with failed mortgage lender IndyMac Federal Bank <IDMCQ.PK>, the New York Post said, citing people familiar with the matter.

According to the paper, the merger, a plan floated by a number of CIT's creditors including Paulson, is not part of any formal discussions between CIT and IndyMac.

The New York Post also said the plan of merger was one of several being discussed.

Paulson was part of the consortium that purchased IndyMac from the Federal Deposit Insurance Corp earlier in the year.

A merger between the two banks would diversify IndyMac's portfolio from mortgages to commercial loans, since the CIT Group is one of the largest lenders to small and mid-sized businesses in the U.S, the paper added.

Representatives of CIT Group and John Paulson could not immediately be reached for comment outside regular U.S. business hours.

GLG launches fund to buy company debt

By Sam Jones for the Financial Times, September 29 2009

GLG Partners, one of London’s largest hedge funds, has launched a new fund to invest in the debt of troubled UK and European companies.

The fund will be one of the most significant launches in London so far this year, as a growing number of hedge fund managers and investors turn to so-called distressed strategies in pursuit of potentially huge returns.

GLG’s fund already manages about $300m of clients’ money, according to people familiar with the situation. It began trading earlier this month, having previously been run as a component strategy within GLG’s existing credit and market-neutral funds since July last year.

The fund is managed by Galia Velimukhametova, formerly the head of the European operations of King Street Capital, the $16bn (£10bn) US hedge fund.

In spite of a heightened interest in distressed strategies, few new distressed funds have launched this year. Several, such as mCapital, a fund set up by Mark Devonshire, the former head of credit trading at Merrill Lynch, have faced protracted difficulties in securing capital from still-wary investors, in spite of strong records.

GLG’s distressed strategy returned 84 per cent since January, prompting the decision to launch the fund as a separate offering to outside investors.

Emmanuel Roman, GLG’s co-chief executive, has said the company was looking to “opportunistically deploy capital over the next 18 months” when Ms Velimukhametova joined the company last summer.

For distressed funds, which are highly cyclical and typically have only a two- to three-year lifespan, timing is crucial.

Funds that invest in troubled companies too quickly risk suffering big losses if markets continue to worsen. Some of the most prominent distressed specialists were caught by the length and severity of the recent market downturn.

Cerberus Capital suffered huge client redemptions after its investments in Chrysler and GMAC ran into trouble this year.

However, unlike many distressed strategies, the GLG fund will focus on tradeable, liquid securities and avoid protracted restructurings – typically favoured by more “activist” distressed investors.

The GLG distressed fund will also aim to invest primarily in European companies. Historically, distressed strategies have focused on the US market, where a unified legal system presents fewer regulatory hurdles in restructuring and bankruptcy situations.

 

Hedge Funds Reborn

By Anita Raghavan for Forbes September 29, 2009

Hedge fund managers (and would-be hedge fund managers) may finally have reason to celebrate this year -- new fund launches are on the rise. If they keep up at this pace, it could be the first year since 2005 to show some annual growth in new fund formations.

This is on the heels of 2,100 hedge fund failures since the credit crisis. That some managers are dusting off and trying again could be a sign that the smart money sees some opportunity in the markets. It might also be that funds that had posted huge losses closed down so that the managers could start with fresh records, resetting high-water marks so that they can collect performance bonuses without making up the money lost in 2008.

When Hedge Fund Research unveiled its second-quarter data earlier this month, all eyes were focused on the slowing number of hedge fund liquidations. What was little noticed were the hedge fund launches. Since 2005, they have been falling steadily from a peak of 2073 in 2005 to 659 last year. The slide appeared to be continuing in the first quarter when 148 new hedge funds were launched. But, in the second quarter, 182 new hedge funds were launched, just as the equities markets bottomed.

The rising launches are a "constructive development," says Ken Heinz president of Chicago-based Hedge Fund Research. "You are continuing to see risk tolerance and risk appetite improving from the historical lows at the end of 2008.”

To be sure, there are still more hedge funds shuttering their doors than opening them, with 292 going out of business in the second quarter alone, according to Hedge Fund Research. But there have been some notable launches. Among them: Tyrus Capital, with about $500 million in assets started by Tony Chedraoui, a former portfolio manager at Deephaven Capital Management and Roc Capital Management, the brainchild of Arvind Raghunathan, former head of Deutsche Bank AG’s global arbitrage business. Roc Capital launched with about $1 billion in assets with half of that coming from Deutsche Bank.

Some hedge fund re-treads are testing the waters again. Reed Griffith who got flak last year for "gating" investors by suspending redemptions after a disastrous loss of 48% is sounding out investors for two new funds, a Convertible Opportunity Fund and a European Equity Opportunity Fund.

Things have changed for the new start-ups. During the boom years, the bar for raising capital kept rising; now it's lower, says Heinz. Instead of holding out to raise a hedge fund with $500 million in capital, would-be managers are satisfied with starting out with, say, $100 million instead.

That poses a big risk, others say, that this year’s rise could be a temporary blip. Many hedge funds are being set up with small sums on the order of $10 million to $20 million and if managers can’t raise more capital by next year, they are likely to fold as quickly as they launched.