Sunday, 23 September 2018

A fistful of dollars

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SwissInvest strategist Anthony Peters sniffs changes in the air for hedge funds.

Anthony Peters

Anthony Peters, SwissInvest strategist

I WELL REMEMBER the first time I came across a hedge fund. It was in the early 1990s and I was working for the venerable but highly parochial Canadian firm of Wood Gundy. The fund that had chosen to trade with us was Ross Capital, the vehicle of Wolfgang Flottl, and the salesman who was bringing in their large orders (which always left a bit of juice for the traders) was the envy of the entire salesforce.

Before long, it all crashed and burned in spectacular fashion. But until that moment, any number of traders and salespeople had collected bonuses that would more or less set them up for life.

Over the coming years, the hedge fund plot thickened until it was glutinous enough to spawn Long Term Capital Management, the hedge fund to end all hedge funds … until it ended itself.

For investment banks, hedge funds represented money for old rope, an impression enhanced when once LTCM’s positions were unwound, the banks that put together the rescue package ended up making a handsome profit.

FROM HUMBLE BEGINNINGS when Australian-born Alfred Winslow Jones first formulated the concept of arbitraging the relative value of two stocks without exposing the trade to directional risk in the late 1940s to the height of their powers, hedge funds were driven by individuals with, above all, plenty of confidence in their own abilities and hence no fear of leverage.

There are few other industries in which individuals play such an important role, or in which the owner is better known than the corporate brand. George Soros, Paul Tudor-Jones, Julian Robertson and John Meriwether were the admired few. I could go on.

During the credit boom of the noughties when leverage was as cheap as chips, hedge funds popped up left, right and centre and every halfwit on a trading desk dreamt of nothing more than to jump ship, set up a hedge fund and to become fabulously rich.

The availability of willing capital certainly exceeded the presence of capable fund managers but in the land of the blind the one-eyed man is king and when markets are on fire, the easiest thing in the world is to leverage beta and call it alpha. When the profits are rolling in, nobody cares.

However, in holding with rules that apply in other walks of life, few make it to the top by being nice. The most successful “hedgies” have often proved to be the ones who hired best, were most ruthless in extracting the efforts of their people – and disposing of them if, as and when their performance began to dip. Owners of funds – usually also owners of decently sized egos – have a inherent tendency to own all the trades that went right but quickly attribute losses to those who work for them.

THUS IFTIKHAR ALI, erstwhile head of CDS trading at Citigroup and proprietary credit trading at Bank of America, five years after leaving BofA – You BofA, me Merrill Lynch/you bad, me good/you fired! – and having worked for a number of higher and lower profile credit hedge funds since, has now struck out and set up his own business, Rhodium Capital.

Having been born in Pakistan and growing up in the back streets of Sheffield, Mr Ifti, as he is known in the industry, has been granted no free tickets. Some may remember his charity drive after the 2010 floods in the homeland of his fathers, which raised close to £1m from across the City. With a more than merely respectable track record, he has delivered for several other funds but, apart from promises of “jam tomorrow”, has very little by way of financial reward to show for it.

The failure rate of start-up hedge funds remains eye-watering but as leverage has become more expensive and the appetite to seed new funds has diminished, the fact that this humble man can still raise sufficient capital to launch a new credit hedge funds speaks for itself. Easy it is not and in a world where everybody on the capital-raising trail apparently only ever made money, it has to have been that much more difficult.

THE HEDGE FUND model is not dead but it now has to be set on a more conservative and grown-up footing. The early doors Floettls are gone, the Alan Howards and Izzi Englanders have matured and the doors are open for a new generation of hedgies who have solid credentials and whose low profiles should be an asset and not a liability.

There was a period when the good folks in the investment banks, be that at primary or secondary trading level, appeared to treat every hedge fund ticket as a job interview. Not only was leverage cheap but so was liquidity. This is also now a thing of the past and larger funds might find themselves, as do many of the real-money community, to be muscle-bound oafs who struggle to move their books around as they would like to.

Maybe this is about to become the age of the boutique hedge fund, of a realignment of investor interest with the little guys that would reflect the change in market liquidity and investment bank behaviour.

Like all developments when it comes to asset gathering, they are slow but once they take root they can quickly become the norm.

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