Hedge Funds: Perform or Pay Back
(Mar 28, 2009)
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In this issue:
With markets testing their mettle, the new mantra for hedge funds is 'perform or pay back'! Hedge funds that enjoyed a one-sided bargain with their clients in reaping handsome fees now need to pull up their socks. For if they don't, they will be losing some of their biggest clients. As per Wall Street Journal, the California Public Employees' Retirement System, popularly known as Calpers, that is one of the biggest investors in hedge funds, is demanding better terms from funds. This includes lower fees and claw-back of fees if performance weakens.
» China's take on innovation in finance
» Infosys is looking at acquisitions
» US i-banks are struggling to retain talent
» Revival process in India to begin soon
» ...and more!
For the uninitiated, the US$ 172 bn pension fund is a bellwether in the money-management business. A Calpers investment can in fact help money managers like hedge funds attract other clients. This move by Calpers therefore underscores the changing dynamics between hedge funds and their clients. Just a couple of years ago, investors clamored to get an entry into these funds, agreeing to pay fees that in some cases reached as high as 3% of assets and 30% of profits. However, lately the same funds have come under fire for failing to live up to their promise to perform in good and bad markets. Besides pressure on fees, hedge funds are likely to face closer scrutiny from regulators, threats of higher taxes and more constraints on their trading strategies, after a year of broad-based losses. We hope the domestic mutual funds are listening.
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"Derivatives weren't the straw that broke the camel's back. The current crisis is the result of a combination of problems. We shouldn't reject the need for innovation in financial services merely because it carries some element of risk with it." These are the words of Jian Jianqing, the Chairman of ICBC (Industrial and Commercial Bank of China) and they perfectly epitomize the approach that the dragon nation has taken with respect to Western practices. Embrace them but with caution.
Small Caps Remain One Of The Surest Ways To Multiply Your Wealth...
Speaking to McKinsey quarterly, Mr. Jianqing, who has done a splendid job in turning around what is now regarded as the largest bank in the world, was of the opinion that although most Chinese banks have escaped the recent financial crisis virtually unscathed, it would be foolhardy to call the Chinese banking system perfectly developed. But he does think that there are a lot more inherent flaws in the Western system of depending very heavily on incentives. According to him, balancing short - and long-term profits, as well as short - and long- term risks is the key. "Effective governance is the means of building and maintaining the qualities that are at the foundation of all commerce: confidence and public trust. It's disheartening to see how many financial institutions lost sight of these basic truths", is how the articulate Chairman chose to put it across.
And while we are on China, the billionaire Li Ka-shing, who predicted that China's stock-market bubble would burst in 2007, is of the opinion that the country will lead a global economic recovery. He believes that China will be the fastest in the world to recover while the recovery in the US will not be too late either. Also known as the 'Superman' by the Hong Kong media, Li believes that investors, who have cash, should consider buying shares and real estate. Also, while he admits that the current crisis is the worst since the Great Depression, he has refrained from predicting whether the worst is over for stockmarkets.
IT major, Infosys is looking at acquisition opportunities in the price range of US$ 100 to US$ 200 m in America. Given the very attractive prices and the company having US$ 2 bn in cash (debt free), any purchase would be a bargain. Infosys is working on re-accelerating its growth in the midst of an ongoing economic slump. And the opportunity exists since the increasing pressure on technology budgets is compelling US companies to look at outsourcing to low cost destinations like India. At the same time, in light of the deepening recession in the US, Infosys is also looking at reducing its dependence on that country, which currently accounts for 63% of its revenues.
Today between 8.30 pm and 9.30 pm, nearly 1 bn people from 85 countries and 2,000 cities across the world (including India) are expected to participate in Earth Hour, an annual international event organised by the WWF, and turn off the lights for an hour.
Started in 2007 in Sydney, Australia, when 2.2 m homes and businesses turned their lights off for one hour, the event has received an overwhelming support this time. Just to note, that if all Indian homes were to do so for just one hour, it could cut down 62,000 metric tonnes of carbon emissions. So are you going to switch off the lights to show your support to save Mother Earth?
Wall Street has caused the worst economic slump in generations. One would expect then, that the job market for the Wall Street types would be dismal. An interesting article on Fortune examines the situation closely. The magazine finds that entire sectors such as capital markets and proprietary trading are dead. In the sectors that survive, only the star performers are able to stick around. Niche companies are doing better than 'brand name' investment banks and are poaching star talent. International investment banks are doing better than American centric ones. All this means that the large American investment banks, who happen to be in the deepest trouble, are desperately trying to retain talent. They are not able to do so and that is seriously damaging the prospects of their recovery.
"The revival process in India should begin in another 3-6 months" says Mr. Suresh Tendulkar. What's heartening is that something like this is coming from someone as high placed as the Chairman of the Prime Minister's Economic Advisory Council. Well, that's not the only good thing he had to say though. He is of the opinion that the stimulus packages and monetary policies will take some time to come into effect and they, along with the low lending rate regime are poised to help the economic situation. The country's robust internal demand coupled with a well capitalised banking system will further help expedite the recovery process. Overall, it was an exported "psychology of doom and gloom" that had inflated the risk aversion sentiment in the country, thus intensifying the slowdown in India.
The top executives from the once hallowed investment bank, Goldman Sachs, may have forgone their bonuses, but they still managed to earn millions from their investments in hedge funds and private equity funds in 2008. For instance, as reported on Bloomberg, the CEO Lloyd Blankfein received US$ 1.1 m in total compensation, which paled in comparison to the US$ 11.3 m that he received in profits and other income from his fund investments. Of course, these payouts are nowhere near what these executives earned in 2007. But it certainly goes to show that they ensured that they had other sources of income in these difficult times.
The Indian markets put up a good show during the week with the BSE-Sensex (up 12%) leading the pack of gainers in Asia. The other Asian markets such as Hong Kong (up 10%), Japan (up 8.6%) and China (up 4.1%) closed the week on a strong note as well. It is believed that Asian stocks posted their biggest weekly gain since August 2007 amid optimism that governments worldwide will succeed in reviving lending and global growth.
|Source: Yahoo Finance
||Source: Yahoo Finance
Other global markets ended the week on a firm note as well. The US and Brazil led the pack of gainers by recording gains of 6.8% and 4.6% respectively. They were followed by the European indices, with Germany, France and UK recording gains of 3.3%, 1.8% and 1.5% respectively.
"One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as 'marketability' and 'liquidity,' sing the praises of companies with high share turnover, but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise." - Warren Buffett
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