Table of Contents

EXECUTIVE SUMMARY

  • Credit crunch
  • New investor groups
  • The urge to merge
  • Niche products
  • Retail ventures
  • Listed life
  • Down the liquidity curve
  • Can you lend me a dime?
  • Exchanging places
  • Speed is of the essence

SECTION 01

INTRODUCTION

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CHAPTER 01

The hedge fund industry – a status quo

By David Smith, Chief Investment Director, GAM Multi-manager

  • Non-correlation – an empty claim?
  • The first hedge fund
  • Growth of hedge funds
  • Illiquidity and the danger of ‘gap correlation’
  • Cyclical and structural correlation drivers
  • Seeking niches and best of breed

CHAPTER 02

Investment banks – a status quo

By David Walker

  • Reversal of liquidity
  • The great leverage unwind
  • Shifting relationships
  • Banks’ funds crumble
  • Changing the PB rankings

SECTION 02

INVESTORS IN HEDGE FUNDS

CHAPTER 03

The changing face of capital introduction

By Jeremy Frommer, head of Global Prime Services, RBC Capital Markets

  • Capital introduction – mirror of the hedge fund world
  • Regulation restricts activities
  • Brokers’ selective approach
  • How cap intro is changing for fund managers
  • Business infrastructure key
  • Institutional investors – a broad church
  • Changing face of events

Viewpoint: Cap intro with an Asian flavour

By Peter Douglas, Principal, GFIA

  • Growth in Asian hedge fund industry
  • Broker events
  • Value of the cap intro function
  • Global investor interest in Asia
  • Room for improvement?

Viewpoint: European private placement regime

By Carmen Reynolds, partner, White and Case

  • Pan-European private placement
  • European Prospectus Directive
  • Markets in Financial Instruments
  • Directive (MiFID)
  • The UK FSA’s approach

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CHAPTER 04

 Sovereign wealth funds (SWF)

 By David Walker

  • Asia’s long-term hedge fund growth
  • Local SWFs seek investments
  • Asian hedge funds outperform
  • Beyond equity long/short
  • Illiquidity danger
  • Future instrument growth
  • Focus: SWFs, Antipodean-style
  • Focus: SWF involvement in hedge funds
  • Intelligence gathering
  • Potential asset growth
  • Hedge fund implications of SWF involvement
  • Focus: SWF investment in alternative funds

CHAPTER 05

Marketing your hedge fund

By Bruce Frumerman, Partner, Frumerman & Nemeth Inc

  • Numbers alone are not enough
  • Sales marketing and communications marketing
  • Case studies
  • Cap intro from an investor’s perspective
  • Third-party marketers
  • Keys to marketing success
  • Developing a storyline

CHAPTER 06

Pensions: the future for consultants and investment banks

By Phil Irvine, Director of Advisory Services, Liability Solutions

  • Industry watershed
  • 1995 Pensions Act
  • Accounting for pensions
  • Controversial suggestions
  • Key reasons for banks’ involvement
  • Consultants – gatekeepers no more?

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SECTION 03

PRIME BROKING

CHAPTER 07

Prime broking – the current situation

By David Walker

  • New instruments in prime broking
  • Hedge funds’ demands
  • Regulatory challenges
  • Sub-prime meltdown
  • Algorithmic gymnastics
  • Ballooning haircuts
  • An uneasy relationship?

CHAPTER 08

What hedge funds should look for in prime brokerage staff structures

By David Walker

  • Key questions to ask
  • Avoiding siloed approaches
  • Unravelling the acronyms

CHAPTER 09

New frontiers in structured credit

By Onur Cetin, Business Analyst, Product Management, Codefarm

  • New investors, new rules
  • Short buckets and macro hedging
  • Active CDO management
  • Restructuring
  • Pricing, ratings and risk
  • New markets, new products
  • Defensive innovation
  • Key future risk factors

Viewpoint: Goodbye Cayman Islands, hello UK?

By Louise Verrill, Partner in Bankruptcy and Corporate Restructuring & Peter Declercq, Structured Resolution Group, Brown Rudnick Berlack Israels

  • Mark to market pain
  • Cayman law outdated, inflexible
  • COMI debate
  • UK the next ‘safe haven’?

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CHAPTER 10

Distressed debt

By Michael Goldman, Managing Partner, Mazuma Capital Management

  • Recent cycles of distressed debt
  • Reading the clues to opportunity
  • Credit crisis consequences
  • Reflections of the past?
  • Gloomy outlook brings opportunities

CHAPTER 11

Next-generation platform: achieving transparency and governance-led marketing advantages through ‘bounded rationality’

By Miroslaw Izienicki, President and CEO, Fifth Capital

  • Transparency and good governance
  • Quant and qualitative – a dangerous disconnection
  • The need for a next-generation platform
  • Cost downside?
  • A survey and its results
  • Accounting for the investment decision
  • Limitations of the 'classical'approach
  • Bounded rationality emphasises uncertainty
  • Appreciate your limitations
  • Normative cues
  • Brand management
  • Reputation
  • A note on implementation
  • Accounting for ‘value added’
  • A summary action plan

CHAPTER 12

Liquidity products

By John Godden, Chief Executive Officer, IGS Group

  • Credit crunch highlights leverage provision
  • Providers’ exponential growth
  • Banks account for risk
  • Meeting Basel II demands
  • Custody arrangements and flexibility key
  • Helping banks help you
  • Price is not all

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CHAPTER 13

Management in the face of activism

By S. Randy Lampert, Managing Director, Head of Business Development and Activist Response Group, Morgan Joseph & Co

  • Activism in context
  • Convergence of factors
  • Market, regulatory, judicial factors
  • Financial character of activist targets
  • How activistm doubles expected returns
  • Target types
  • Management – the rules for engagement

CHAPTER 14

Freighting to the future

By James Leake and Erik Hansen, ICAP Hyde

  • The freight derivatives market
  • Forward Freight Agreements
  • Dry
  • Wet
  • Freight options
  • Recent market growth
  • Key drivers of the market
  • Dry
  • Wet

CHAPTER 15

Agricultural derivatives: hedge funds drive market development

By Sebastian Barrack, Executive Director, Head of Agricultural Commodities and Investor Products, Macquarie

  • In the beginning…
  • The involvement of hedge funds
  • The history of over-the-counter products
  • The investment bank players
  • Types of OTCs used by:
    • Hedgers
    • Hedge Funds
    •  Investors
  • Where to now for OTC products?
  • Why this time is different for derivatives

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CHAPTER 16

Metals investment: seeking sustainable value in a cyclical sector

By Trevor Steel, Chief Investment Officer and Founding Partner, Baker Steel Capital Managers

  • Underlying case is intact
  • Finite mine life drives expansion
  • China, India drive demand
  • Know your fundamentals
  • Gold’s unique qualities
  • Demand remains robust

CHAPTER 17

Emerging markets and securities lending

By Paul Wilson, Global head of Sales and Client Management for Securities Lending, JPMorgan

  • BRIC’s GDP soars, interest grows
  • Discretionary lending
  • Demand and risk
  • Lending models on offer
  • Countries are realising SBL benefits
  • EM lending hazards
  • Accessing new markets

CHAPTER 18

The future of prime brokerage

By Sameer Shalaby, CEO, Paladyne Systems

  • Evolving relationship with prime brokers
  • Hedge funds in driver’s seat
  • Multi-prime movers – pros and pitfalls
  • Roadmap for prime brokers
  • Institutional pressure mounts
  • ‘Hearsay’ reporting

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SECTION 04

CONVERGENCE OF HEDGE FUNDS

CHAPTER 19

Hedge funds and private equity: an interview with Jon Moulton, managing partner, Alchemy Partners

By David Walker

  • Jury out on hedge fund skill
  • Over-reliance on spreadsheets
  • PEQ experts enlisted
  • Valuations a sticking point
  • PEQ targets hedge funds

CHAPTER 20

SPACs: opportunities and issues for alternative asset managers

By Tina Pappas, Managing Director, Head of SPAC Capital Markets, Morgan Joseph & Co. Inc

  • SPAC characteristics
  • Shareholder strength
  • Advantages over PEQ
  • Disadvantages
  • Investment flexibility
  • Cooling market

CHAPTER 21

130/30: extension strategies in a changing investment landscape

By Andrew Wilson, Managing Director, European Equity Finance, Merrill Lynch

  • 130/30 explained
  • US pensions buy in, Europe follows
  • Implementation of 130/30: challenges and considerations
  • The broader UCITS III opportunity
  • Asia’s future promise?
  • Does 130/30 actually outperform?
  • The path to retail – pros and cons

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CHAPTER 22

Asset-backed lending

By David Walker

  • Filling the lending gap
  • Higher quality deal flow
  • Regulation – Basel II bites banks
  • Lure of non-correlation
  • ABL activities broaden scope

SECTION 05

RESEARCH AND INVESTMENT

BANKS’ ANCILLARY SERVICES

CHAPTER 23

Research: opportunities for alternative providers

By Peter Molloy and Neil Shah, Directors, Edison Investment

  • Research
  • Now vs then
  • Spoiled for choice
  • Changing requirements
  • Tactical data still worth paying for
  • Research’s role in compliance
  • Research – beyond the PDF
  • Crucial questions for providers

CHAPTER 24

Sharia-compliant funds and investment banks' role in their making

By Dr Hussein Hassan, Director of Islamic Finance Structuring, and Manar Mahmassani, DeutscheBank UAE

  • Sizing the market and the opportunity
  • Identifying the key drivers
  • Rising sophistication
  • Managing Sharia-compliant hedge funds
  • Structural challenges
  • Sharia-compliant private equity: “the next big thing”

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SECTION 06

LEGAL AND REGULATORY

CHAPTER 25

Long-only and long/short – an embedded conflict?

By Owen Watkins, Senior Consultant, Kaye Scholer

  • 130/30 and UCITS III – conflict accidents waiting to happen?
  • The FSA’s conflicts of interest requirements
  • MiFID’s requirements explained
  • Concrete steps to handle conflicts of interest
  • Where conflicts can arise

CHAPTER 26

MiFID: truly best execution

By Roger Turner, Partner & Jamie Parkes, Manager, Financial Services

  • Regulatory Practice,
  • PricewaterhouseCoopers
  • MiFID and best execution
  • Drafting best execution policies – the must-haves
  • Retail considerations
  • Investment bank considerations
  • Safeguards and annual review

SECTION 07

EXCHANGES AND IT

CHAPTER 27

Dark liquidity

By Frédéric Ponzo, Managing Director, NET2S

  • MiFID and locating dark liquidity
  • The challenge of best execution
  • How to achieve best execution in a fragmented universe
  • What does best execution mean for the buy-side?
  • Worst execution and best selection
  • Should funds turn to the dark side?
  • What of the proverbial wizards from the hedge-funds?
  • Is MiFID worth it?
  • Is fragmentation really happening?
  • MiFID’s costs – 10-year breakeven?
  • Algorithms to the rescue
  • Best execution and investment banks
  • Conclusion – MiFID has true value

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CHAPTER 28

Independent vendors versus bank platforms: new requirements for an increasingly sophisticated marketplace

By Ary Khatchikian, President and Chief Technology Officer, Portware

  • Limitations of broker execution management systems
  • Funds at brokers’ mercy?
  • Meeting demands of a dynamic trading environment
  • The benefits of being brokerneutrality
  • Why one size does not fit all

CHAPTER 29

Intelligent algorithms: the next generation

By John Bates, Managing Director, Progress Apama

  • Market drivers
  • Customisation is key
  • Moving across asset classes
  • Moving across fragmented pools
  • Regulation – policing the trade in real-time
  • Genetic algos – future insight

CHAPTER 30

Quant systems: where to now for systematic approaches after summer 2007?

By George Nakou, Senior Investment Systems Advisor, Altis

  • Partners
  • Bad press for quantitative strategies
  • Surprising academic explanation
  • Curse of correlation
  • CTAs: The ‘other’ quants
  • Managed futures’ dangerous growth
  • An unhealthy meeting of minds
  • Technology is (only part of) the answer
  • ‘Market coherence’ – the way forward?

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SECTION 08

INDUSTRY ISSUES

CHAPTER 31

M&A: hedge fund managers’ urge to converge

by Benjamin Phillips, Managing Director, Jefferies Putnam Lovell

  • Hedge funds still hold the talent
  • Industry M&A trend predictions
  • Reasons for consolidation
  • Accelerating convergence
  • How to play in the M&A game
  • Buyers become more selective

CHAPTER 32

Incubation and start-ups

by Ian Morley, CEO, Dawnay, Day International Limited

  • The due diligence process
  • How to get it right
  • The psychology of backing startups
  • Managing the business
  • Hedge fund hotels – on unstable foundations?
  • Incubation and prime brokerage
  • Minnows – worth backing nevertheless?
  • Search for the Holy Grail

CHAPTER 33

The hedge fund of the future

 by Tom Brown, Partner and European Head of Investment Management Funds & Giles Drury, Senior Manager, Alternative Investments Group, KPMG

  • Will hedge funds become simply ideas machines’?
  • Starting a fund – moving barriers to entry
  • Why size (still) matters
  • Do funds create value just through ideas?
  • Could a hedge fund become an ideas machine’?
  • Is there a risk of becoming a commodity?
  • Are prime brokers dependable bedfellows?
  • Regulatory concerns
  • Lessons learned – how the future will look

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CHAPTER 34

Listing funds

By David Walker

  • Trends to watch in 2009
  • Boards step in
  • Funds favour London
  • Why some banks are failing funds
  • Favourable fees
  • Range of investors expands
  • Reasons to list

CHAPTER 35

Cluster analysis: performance under pressure

By David Aldrich, Bank of New York & Rory Knight, Oxford Metrica

  • The rise of replication of returns
  • Correlation and covariance of returns
  • Hedge funds challenge indices
  • Cluster analysis useful for hedge fund classification
  • Risk/return plane charts performance
  • Funds of funds clusters
  • Surprising findings

APPENDICES

Comprehensive data on hedge fund performance around the world.

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LIST OF TABLES

  • T4.1 Sovereign wealth funds
  • T12.1 Activist targets and associated demands
  • T12.2 Dealing with activists
  • T13.1 Annual fleet growth, Cape to Handy, 2008-2010
  • T13.2 Annual fleet growth, VLCC to Panamax, 2008-2010
  • T16.1 Percent change per annum in real GDP growth, 2005-2009
  • T20.1 Asset-based lending strategy returns correlation, 01/01/00-01/02/07
  • T20.2 Asset-based lending strategy returns correlation, 03/01/07-01/02/08
  • T24.1 Hedge funds vs. traditional funds
  • T30.1 Largest hedge fund and fund of hedge fund transactions by acquired AUM, 2007

LIST OF FIGURES

  • F1 Hedge fund net flows and AUM, 1990–2007 (US$m)
  • F2 Fund of hedge funds net flows and AUM, 1990–2007 (US$m)
  • F3 Strategy by %
  • F4 Distribution of hedge fund assets (%)
  • F1.1 Total number of hedge funds / FoHFs, 1990–2007
  • F2.1 Comparative riskiness of prime broker portfolios
  • F3.1 Estimated number of hedge funds globally by regional investment focus, 2002–Q1 2008
  • F3.2 Asia-focused hedge funds – estimated asset growth, 2002–Q1 2008 (US$m)
  • F3.3 Growth of hedge fund assets by regional investment focus, 2002–Q1 2008 (US$m)
  • F3.4 Management firm location of Asia-focused hedge funds
  • F4.1 Return and volatility of equities and oil
  • F4.2 Top global fund managers (US$trn)
  • F4.3 High influence of SWFs vs. size
  • F6.1 Prime broker share of the global market
  • F6.2 Usage of prime broking services by hedge funds
  • F9.1 Bankruptcy cycle
  • F9.2 Annual corporate defaults by number of issuers, 1981- 2007
  • F9.3 Quarterly global corporate defaulting debt amount, Q1 2000-Q3 2007
  • F9.4 12-month US speculativegrade default rate is expected to rise to the historical average level
  • F9.5 Yearly rate of return, Dec 1990-Dec 2007
  • F12.1 Success rate of seven most common activist demands
  • F12.2 Activist strategies and alpha creation
  • F12.3 2007 Proxy fight analysis: composition by target type
  • F13.1 Baltic time charter averages
  • F13.2 Baltic 5yo prices
  • F13.3 Most liquid dry freight derivative contracts
  • F13.4 Baltic tanker indices
  • F13.5 Baltic 5yo prices
  • F13.6 Most liquid tanker freight derivative contracts
  • F14.1 Corn – non commercial futures-only contracts, 1995-2008
  • F14.2 Over the counter transactions: agriculturals markets are still at early stages
  • F14.3 Investment in commodity index funds are soaring, 1993-2008f
  • F14.4 Index position of agricultural commodities (US$), Jan 2006-Mar 2008
  • F14.5 The oil share, 02/01/08-23/04/08
  • F14.6 Energy versus agriculture correlations, 01/07/04-01/07/07
  • F15.1 Emerging economies beginning to dominate demand for metal
  • F15.2 Decreasing supply, 1993-2007f
  • F15.3 Mining M&A activity, 2000-2007ytd
  • F15.4 Value to be found in mining equities (HSBC GlobalMining Index and Copper Price), 2000-2008
  • F15.5 Gold mining industry supply challenges similar to other commodities
  • F16.1 Real GDP growth (% change per annum), 2005-2009: World, high-income and developing countries
  • F16.2 Real GDP growth (% change per annum), 2005-2009: World, high-income and developing countries, plus selected others
  • F19.1 130/30 structure
  • F19.2 Swap-only option
  • F20.1 Hedge fund strategy performance
  • F23.1 The Islamic asset management opportunity lies mostly within the GCC
  • F23.2 MENASA countries exhibit the best blend of economic parameters
  • F23.3 MENASA real GDP growth, 2002-2006
  • F26.1 The liquidity tunnel
  • F27.1 A closer look: algorithmic trading requirements
  • F27.2 Broker EMSs: the swivel chair problem
  • F27.3 Advanced EMS: consolidated liquidity
  • F28.1 Market factors influencing algorithms
  • F28.2 Complex event processing market growth in capital markets
  • F29.1 Historic versus forecast correlations showing buildup and dissipation of market coherence
  • F30.1 Historical transaction activity involving asset management targets, 1997-2007
  • F30.2 Jefferies Putnam Lovell Global Asset Management Index Performance, 2002-2007
  • F30.3 Cross-border transactions in asset management: US versus ex-US, 2000-2007
  • F33.1 Growth in assets by type (£m), Dec 1996-Dec 2006
  • F33.2 Growth in assets by listing exchange (£m), Dec 1996-Dec 2006
  • F33.3 Dexion Absolute Ltd (gross assets in £m), Dec 2002-Dec2007
  • F33.4 Average discounts of LSElisted fund of hedge funds, Dec 2001-Dec 2008
  • F33.5 Monthly traded volume of LSE-listed hedge funds (£m), Apr 2001-April 2007
  • F34.1 Cluster analysis process
  • F34.2 Fund dimension – 1 of 3019
  • F34.3 Stable clusters total risk and return
  • F34.4 Stable clusters risk composition

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APPENDIX:

  • A1 Top 25 funds in each investment strategy, ranked by past 36-month performance
  • A2 Top 25 funds in each region of fund managers' location, ranked by past 36-month performance
  • A3 Top 30 funds ranked by performance over the past 36 months
  • A4 Top 30 funds ranked by fewest negative months over the past 36 months
  • A5 Top 30 funds ranked by lowest annualised volatility over the past 36 months
  • A6 Details of closed-ended funds

 

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