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In the week ending 18 August, 2016, it was reported that hedge funds are increasingly agreeing to hurdle rates which would be becoming the norm and more creative. While many investors are unhappy with underformance, hedge funds have also broadly avoided big losses despite the Brexit shock. However, Barry Rosenstein’s Jana partners suffered its worst performance in its 15-year history with its main fund in negative territory; Horseman Global lost -2.68% for the month of July (+3.13% YTD); Crispin Odey has emerged as the worst performing European hedge fund manager so far this year; distressed debt hedge funds have missed out on bond rebound, data showed. Meanwhile, Senvest Management has surged back into the black for the year on bets on small, out-of-favour companies; and Matrix Capital returned 8.3% net in the second quarter, outperforming the S&P 500 index which returned 2.5%.
Preqin Hedge Fund Index up 2.17% in July (+3.67% YTD) as industry marks 5th consecutive months of gains;
The HFRI EM: Latin America Index surged +8.9% in 2Q (+24.4% YTD);
The Barclay Hedge Fund Index gained 1.99% in July (+2.99% YTD);
The IndexIQ Hedge Index Family ended last month with all six indexes up;
And the UCITS HFS Index has bounced back with gains of 0.75%.
Eurekahedge said that investors pulled out $5.7bn in hedge funds assets last month; investors pulled out money from Tudor Investment and Brevan Howard because of poor performance; China-focused hedge funds declined in the first seven months of 2016 but still beat their benchmark by a margin of almost 10% for the year; the SS&C GlobeOp Forward Redemption Indicator for August measured 3.86%, up from 2.95% in July; Carl Icahn is losing nearly $500m daily after UBS threw in the towel and turned bearish on his investment vehicle; new data showed that Och-Ziff Capital explored a partial sale of the firm earlier this year; and Paul Tudor Jones has raised his hedge fund’s assets to show his investors he has not lost his mojo.
On the legal scene; Steven Cohen has settled with the CFTC to refrain from engaging in commodities trading until at least Dec. 31, 2017; Point72 and Glenview Capital have cut ties with Anthony Cirillo because of his alleged ties with the mob; a bankruptcy trustee has sued PricewaterhouseCoopers for a record $5.5bn for negligence in mortgage fraud case; the SEC has filed fraud charges against Eden Arc Capital and Donald Lathen over an alleged scheme targeting terminally ill patients; Beachwood Re said it cut ties with Platinum Partners because of the kickback scandal; Jason Thorell was granted immunity for helping authorities build case against Visuim Asset; U.S. authorities said that Samuel Mebiame charged with paying bribes while working for a company set up by Och-Ziff Capital; and U.S. hedge funds sued four big Australian banks over alleged artificial fixing of BBSW-based derivatives prices.
Anna Raytcheva will be leaving Citigroup to launch her own macro hedge fund.
A record number of Chinese managers were forced to liquidate their funds in the first six months of the year; and JPMorgan’s investment unit said it will liquidate a Japan-focused fund after a surge of investor withdrawals.
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In the week ending 12 August, 2016, a survey by Barclays has found that hedge funds assets are declining on insufficient returns because of overcapacity; the Barclays study added that the number of hedge funds are on track to shrink this year. The industry is slowing as returns are down and investors are pulling their money out of the funds. However, data from Eurekahedge showed that hedge funds grew by $19.9bn in 1H despite losses of $5.2bn during the period. Total capital invested in Asian hedge funds decreased to $109.7bn in 2Q, bringing Asian hedge fund capital to the lowest level since 3Q13;

Bill Ackman made $113m as Valeant share prices jump. North Castle Partners has closed its sixth focused fund on $300m, after just over six months; and Mariner Investment has announced the closing of a $503m collateralized loan obligation.

Starwood Capital Group is raising capital to launch a new $6bn ‘panic fund’; Somar Global Fund soft-launches an equity hedge fund with focus on secular changes; Bill Miller is severing ties with Legg Mason after more than three decades to focus on his new hedge fund; Nuveen and Artivest have formed a partnership to launch a new alternatives platform; Parantoux is launching in mid-August a China-centric event-driven long/short fund; and Shaunak Khire has developed Emma AI to start a new fund designed to outsmart humans and computers.

Anandar Capital Management is shutting down its hedge fund due to a disagreement between the partners.

The HFRI Fund Weighted Composite Index advanced +1.7% in July (+3.0% YTD);
The Lyxor Hedge Fund Index was down -0.7% as of Aug. 2 (-2.7% YTD);
The eVestment Hedge Fund Performance Report said that hedge funds gained +1.89% in July and +3.29% year-to-date;
And the Wilshire Liquid Alternative Index gained 1.17%.

Renaissance Technologies and Viking Global posted positive performances in July as hedge funds extended their rebound; Violin Assets co-owner Christian Reister has proven that string instruments can provide a stable investment with 8% yield per annum; Brevan Howard's main fund was down 1% in the year to the end of July; for the first time since it started 15 years ago, Adage Capital Management is trailing the stock market; Astenbeck Capital lost about 16% in July as crude oil prices fell; Maverick Capital’s Levered fund was up 5.4% in the second quarter; the SS&C GlobeOp Hedge Fund Performance Index for July 2016 measures 1.83%; Lyxor AM said that the post-Brexit market rally in July fuelled directional hedge fund strategies such as L/S equity and event-driven; Magellan Financial Group booked a 14% lift in annual profit, reaching $198.4m for the year through June; King Street Capital has produced unaudited gross returns for the second quarter and first half of 2016 of 1.46% and 1.4% respectively; and Brummer & Partners’ flagship $5.7bn multi-strategy fund is back in the black in 2016.

Ascalon Capital is seeding Hong Kong-based multi-strategy hedge fund Seyon Asset.
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In the week ending 05 August, 2016, hedge funds and alternative investment managers continued making inroads into Asia's institutional investor community with the South Korean government announcing it will gradually raise the overseas and alternative investment proportion in seven state-run pension funds. Likewise, Korea Post will buy more U.S. assets as the state-run fund joins a global hunt for returns amid record-low interest rates. South Korea’s alternative investments had exceeded $233bn last year, and short selling is resurging in South Korea despite rules on disclosure. Hedge funds in Korea are attracting wealthy investors – leading to a surging market, while in Japan the Japan Post Bank said it would extend its hedge fund-of-funds allocations to three managers.

In the US, things look different with the New Jersey Investment Council saying it would cut its $9.1bn hedge funds investment by half. It was also reported that BlackRock’s fund-of-hedge funds unit will get $1bn from New Jersey pension as part of an effort to tap lower fees from asset managers. The Ohio School Employees Retirement System, Columbus, made a direct hedge fund investment of $50m; ING’s pension fund is planning to ramp up its inflation-risk hedge to protect the pensions of its 71,500 participants. U.S. college endowments are poised to take the worst slide in performance since the 2009 recession; the Massachusetts Pension Reserves Investment Management Board returned 2.3% in the fiscal year ended June 30; the Rhode Island state pension fund lost $466m over the past fiscal year, and Goldman Sachs’ retirement plan is liquidating a $350m hedge fund run by Och-Ziff Capital. AIG has reduced bets on event-driven and long-short strategies as it also scaled back hedge fund investments; and Dutch pension SPH will reduce its managers as it switches to passive investment.

Aurelia Lamorre-Cargill is aiming to raise $300m in initial funding to launch a commodity hedge fund; John Pereira is back and is planning to raise $50m for his new India Fund; Blue Pool Capital is in the final talks to seed a new pan-Asia hedge fund to be launched by Avinash Abraham; Schonfeld Strategic is backing a new quant fund from Eric Tavel; Franklin Templeton and K2 Advisors will launch a liquid alternative global macro fund; and Kenneth Brody has come out of retirement to launch a new money management firm.

Nikko Asset Management plans to launch a Luxembourg-domiciled Global Credit UCITS fund.

Balyasny Asset Management is shutting down a $250m "discretionary" portfolio run by Torbjorn Andreassen who is leaving the firm.

The HFRX Global Hedge Fund Index gained +1.45% in July (+0.62% YTD);
The Lyxor Hedge Fund Index was up;
The MVIS Global Long/Short Equity Index rose 3.95%, down 2.2% YOY;
And the Parker FX Index returned 0.15% in June (+0.97% YTD).
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In the week ending 29 July, 2016, new data showed that institutional investors, like pension funds, stay loyal to hedge funds. A long term study from PGIM has found that institutional investors stick with hedge funds despite performance, pointing out that institutional portfolios have been able to reap the rewards of diversification and higher returns. The Researchers considered a variety of alternative strategies and portfolios over the period from Q1 2000 to Q1 2015 and found that macro and relative value strategies seem to be the lowest risk and also had the lowest drawdowns among alternatives over the study period.

Preqin data showed that public pension funds have increased their hedge fund allocations from $190bn to $208bn in the year from May 2015 to May 2016; a new UTIMCO asset allocation sees more private investments but fewer hedge funds; AP1 reported a 3.5% return in the first half of the year, below the 5% achieved for the same period the year before. Fee-conscious smaller institutional investors see new avenue in low cost solutions; and Kern County Employees’ Retirement Association, Bakersfield, Calif., has added private credit allocation and boosted real estate.

Investment returns for West Sussex Pension Fund were flat over the course of the last year; and a European pension fund has tendered a $100m actively managed hedge-fund mandate through IPE Quest.

Japan’s pension bureau is considering proposals to allow GPIF to engage in alternative investments; Korea Post said it will direct more money into overseas bonds and alternative assets going forward. Also Chinese insurers see their returns tank and are reportedly buying big into alternatives; and Singapore’s sovereign wealth fund has seen a big drop in its five-year annualized return and plans to raise alternatives exposure.

Jeff Feig is meeting with investors to launch a fund focusing on macroeconomic events; Olaf Carlson-Wee is leaving Coinbase to start a new digital currency hedge fund, dubbed Polychain Capital; Aquila Capital and Alpha Centauri have entered a partnership to launch alternative beta strategy; and Tages Capital, in partnership with Anavon Capital, have launched the Tages International SICAV - Anavon Global Equity Long/Short UCITS Fund.

LIM Advisors has forced AMP Capital to shut down the AMP Capital China Growth Fund; and Fortress Investment is liquidating Fortress Centaurus Global as it move away from liquid or easy to trade assets.

The Lyxor Hedge Fund Index was up 0.5% as of end July 19 (-2.0% YTD).
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Given that we’re in a “yieldless” world, also in France the race for alternative assets is going on. While in the past, “hedge fund” has not been a very popular word in France, what we are seeing right now is that the sentiment is turning more positive for some strategies, especially everything which is systematic or quantitatively driven. There is also an increased demand for advice from institutions, and insurance platforms and wealth managers have lifted UCITS funds to make up 50% of retail portfolios.

But, the volatility post Brexit has heavily impacted many investment strategies, and this Roundtable discusses the winners and losers. How have investment managers, for example systematic strategies, adapted their exposure or systems before the vote?

Another Brexit effect is that investors as a whole are holding back and almost nobody is taking any bets from an investment standpoint. This is particularly unfortunate because already since the beginning of 2016 there has been turmoil in the market, and many investors have been sitting on the sidelines since then. Another consequence of that vote is that Roundtable participants don’t see interest rates going up anytime soon.

Regulators insist on UK compliance during transition period

Brexit is not there yet, and there is still a lot of uncertainty. During a transition period, many regulations come into effect and must be implemented, like for example MiFID II and PRIIPs: What will be the status in the UK for these new regulations? Do they need to invest and comply? The French regulator’s view is that different market participants need to have the same rules when they are playing in Europe; this also includes the UK during the transition period. And what will be the status if they are going out of Europe? Also, given that the UK is the country which has the most exceptions, it’s one thing granting an exception when you are in compared to granting an exception when you are out...

Direct Lending booms

Also in France there is a lot of activity and investor interest in direct lending. Almost every type of investor wants to gain first knowledge in this space and then start deploying capital in substitution of more traditional fixed income assets. For instance, insurance companies are investing in direct lending because they need to invest in relatively safe fixed income proxy assets and at the same time they want to show to the public opinion that they are financing the economy. Private banks are also forced to step into this asset class as their largest clients push them to do so.

French regulator aims to be ahead of the curve

The French regulator AMF aims for a good balance between investor protection and innovation, trying to “give visibility on the regulatory status of the innovation on a very early stage. We do prefer to work even on a draft format with the aim to give guidance and visibility very soon to the financial institution and to the investors in these institutions.” This is very supportive for the local industry. Already two years ago, for example, France created a completely new regime for crowdfunding where investors can grant loans to SMEs, and now the AMF has issued a wholly new guidance concerning asset managers originating loans instead of investing in loans originated by banks. France will be one of the first countries to have a regime that is completely clear on what an asset manager can do on direct lending.

The Opalesque 2016 France Roundtable took place in June at the Paris office of Eurex with:

Xavier Parain, Head of the Asset Management Department and Deputy Secretary General, AMF
Gilles Guerin, CEO, BNP Paribas Capital Partners
David Lenfant, Managing Partner, Laffitte Capital Management
Philippe Paquet, Managing Director, NewAlpha
Nicolas Kageneck, Senior Vice President, Eurex
Robert Baguenault de Viéville, Co-Founder, KeyQuant
Steeve Brument, Head of Systematic Funds, Candriam
Tristan Grué, Founder & CEO, Bolden

This Roundtable also discussed:

Which strategies will do well with Brexit and its potential aftermath?
Will mid-sized asset management players disappear over the medium or long-term?
Why the Brexit vote had made valuations of UK-based FinTechs very questionable
What’s the right way to regulate FinTech?
What will happen to FinTech when rates and defaults are going up?
Why is France the first country to domicile the first three ELTIF funds?
Shrinking liquidity: Not only have volumes shrunk, but also order books in the most liquid markets have become thinner as well. How do funds and investors deal with this?
Are ETFs, as they settle end of day, moving the market from intraday-pricing to close-of-business pricing? What’s the impact of this on both the volatility and on the whole price creation process?
What are the benefits of Eurex’ weekly Bund Options?
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In the week ending 15 July, 2016, a survey by Willis Towers has found that investors’ focus on diversification and value for money will continue to dominate hedge fund allocations; Northern Trust surveyed Nordic institutional investors and found that 80% of them expect allocations to alternative assets to increase within the next five years. Hedge fund managers explained in a Morgan Stanley survey the various reasons why hedge funds are doing poorly (foremost because of crowded trades). Researchers from the University of Oxford have found that the structure of open-ended funds discourages fund managers from investing in mis-priced assets and taking longer term risks in funds and Peltz International has concluded that the current criticism on hedge fund should lead to industry introspection, regrouping and a possible return to its roots. Another Peltz study also found that only 13% of hedge funds have in-house cyber security personnel, with 27% reporting attacks; and hedge fund managers told Preqin they expect fees, transparency and performance would be their main concerns in the second half of this year.

John Barry Purcell has partnered with Kieran Cavanna Nishi Shah to launch a fund of hedge funds that will focus on equities and macroeconomic trends; and Impala Asset is forming a new hedge fund to bet on rising commodities prices.

J8 Capital Management and Pairstech Capital Management will launch a Luxembourg domiciled UCITS fund; and Kepler Partners has raised $81m via its new UCITS platform, Kepler Liquid Strategies.

The HFRI Fund Weighted Composite Index returned +0.8% in June (+1.63% YTD);
The Lyxor Hedge Fund Index was up 0.6% as of July 7 (-3.0% YTD);
The Eurekahedge Hedge Fund Index gained 0.64% in June, with a quarter of funds reporting gains in excess of 2.5% while roughly 15% reported losses exceeding -2.5%;
And the Wilshire Liquid Alternative Index returned 0.36% (+0.85% YTD).
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Matthias Knab

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Compliance concerns are driving more business decisions at hedge funds than ever before, according to the results of a survey done by Cipperman Compliance Services and hosted by Opalesque. Survey findings suggest that hedge fund managers overwhelmingly expect increases in compliance spending to continue over the next two years.
Eighty-one percent of hedge fund managers anticipate spending more on their compliance function over the next two years. Additionally, 71 percent said their greatest concern is "staying current on regulatory challenges."
The survey was conducted through Opalesque during the months of June and July.
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VIOLIN ASSETS, based in Bedburg, Germany, facilitates investments in premium stringed instruments, granting investors access to the finest musical instruments especially eligible for sustainable investment. Investors can also support some of today’s outstanding musicians in a meaningful way by making rare top instruments available to them.
Christian Reister, co-owner of Violin Assets GmbH, says that quality string instruments can be an attractive and stable asset. "Top instruments are extremely stable in value," says Reister. The young company is based at Schloss Bedburg near Cologne and has specialized in trading high-quality string instruments.
He added, "The value of stringed instruments decoupled from other asset classes such as stocks, bonds, gold or real estate." In addition, the instrument market is largely dominated by long-term investors. "This is certainly a reason for the tendency of top instruments to increase in value." Christian Reister continues. According to the Fuchs-Taxe benchmark, quality string instruments have over the past hundred years registered an annual value growth of between 5-8 per cent per annum, and some instruments even significantly higher.
Investment and patronage
With Violin Assets, it’s only a small step from investor to patron, as many highly talented young artists or already established virtuosos have demand for top instruments. Many owners of master violins, violas or celli provide their instrument as loan to an exceptional artist.
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For anyone dealing with hedge funds or alternative investments, it’s probably worthwhile to remind ourselves where we were in January, February of this year, when a number of investors were asking what the value of hedge funds was, relative to the fees paid to those hedge funds, and what they could get from other products?

Fast forward to today, many investors sit back and say, “Well, given the current level of market uncertainty, what has my hedge fund portfolio done for me relative to my other assets? What has my volatility been? Going forward, do I want to own a portfolio of solely long equities and long bonds in an environment where, for example, we have recently seen the entire Japanese yield curve going negative, or should I also own a less correlated portfolio of hedge funds?”

Fact is that investors are still very much interested in hedge funds and CTAs. The mainstream press seem to have focused their attention on the few institutional investors who have exited their hedge fund investments, and not those that are increasing or the real reasons behind any of the above decisions. The underlying trend is that many more institutional investors are actually getting with more and more assets into hedge funds.

Sure, a number of strategies are up, but what if your hedge funds are down?

But it’s also true that investing in hedge funds is a very intensive business, at least doing it properly is. A lot of hedge fund have performed poorly over the course of the last year-and-a-half or so, and many investors had a relatively miserable experience of investing in hedge funds, and they worry that it might be their fault for picking the wrong ones (the trend to direct investing has probably tended to favor investing in the big, brand name hedge funds, which hasn’t always helped). Whoever carried that particular responsibility may not look that smart now, and so quite a few investors are wondering whether they should do it differently as fees on outsourcing this are now much lower, while the cost of doing the work properly is only going up.

The expected return on traditional assets, which don’t look great, is forcing many people into alternatives, even if they’re a bit reluctant. The current returns also explain some of the resurgence of interest in non-correlated strategies: The CTA Index is up 4% as of early July, Short-Term Traders Index is up 6%, Global Macro is up 2, Discretionary is down 2, and Volatility Traders are up 4. Institutional investors sitting on a portfolio of pure long equities and bonds are somewhat nervous. There is a lot of interest in these strategies, and also equity market neutral and stat arb.

How to make a return without resorting to illiquidity?

A majority of liquidity provisions is 90-day liquidity or less, and so the collapse of liquidity provision for people trading less liquid securities, notably single name credit for example, is really striking. All of the liquidity has moved into index trading [see our discussion of ETF trading and consequences on price discovery in our recent France Roundtable]. This means that quite a lot of conventional and very successful hedge fund strategies, for example some of the credit long/short strategies, can only be done on longer time horizons than managers have for their client capital. Managers and multi-managers are shying away from anything that looks less liquid, even though the expected return from it is clearly better. The challenge is how to make a return without resorting to illiquidity? Find out in this Roundtable script how the industry has innovated to get fees down and capital efficiency up to address this key issue.

Unstable managers: Fund turnover is the hedge fund investor’s biggest headache

The biggest problem with our entrepreneurial industry is the large fund turnover. It’s incredibly hard when you look at the industry now to remember what it looked like in 2006, so just ten years ago. It’s astounding how many of funds have disappeared, and when they disappear they normally take you for a loss at the same time; generally they don’t go out at the top. But if you do the work an underlying pattern becomes visible, and the reality is that there are certain strategies in which the turnover is much higher than others. This Roundtable discusses certain inherent characteristics of strategies and identifies typical blow up strategies and also some that can be much more stable.

The Opalesque 2016 U.K. Roundtable, sponsored by Societe Generale and Eurex, took place in early July at SG’s London office with:

Heath Davies, Global Head of Hedge Fund Research, HSBC Alternative Investments
Keith Haydon, Chief Investment Officer, Man FRM
Paul Marriage, Head of UK Dynamic team, Schroders
Jean François Comte, Managing Partner of Lutetia Capital
Dr. Murat Baygeldi, Senior Vice President Business Development, Eurex
Bill Geake, Multi strategy Prime Brokerage Sales, Societe Generale
Duncan Crawford, Hedge Fund Sales & Capital Introductions, Global Head Prime Services, Societe Generale

The group also discussed:

How were UK equity hedge funds positioned going into Brexit? Why did some investors mix their EURO STOXX 50 position with VSTOXX before the vote? What’s their strategy now?
How does the London financial elite interpret the outcome of the Brexit vote? What’s the real risk longterm? Should Brexit happen, how do UK based hedge funds see their future?
How can investors come to terms with the problems of investing in hedge funds via very small teams?
Which fund vehicle is the best understood onshore structure? In which respect is a 40 Act fund quite different from a UCITS?
Why are low fee and high fee investments often better than those sort of mid fee investments?
How do fundamental equity managers compete with quants?
Fees are a price for capacity. But what are ‘fair’ fees?
What’s the difference between smart beta and alternative beta?
What is required from a prime broker to be identified both as strong and partnership-oriented?
Can also a fund with zero assets attract Man FRM’s interest?
Is merger arb an alternative to bonds?
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In the week ending 22 July, 2016, On the regulatory front, European Union watchdog ESMA said no significant obstacles would exist to extend the AIFMD passport to Canada, Guernsey, Japan, Jersey and Switzerland. However, market access equivalency concerns remain in respect of Hong Kong, Singapore and the United States, and changes may be required to Australia's regulatory framework before it will be eligible for the passport extension. ESMA also said it can’t give definitive advice with respect to the Cayman Islands or Bermuda until each has implemented its proposed new regulatory regime. ESMA also confirmed that further assessment of the Isle of Man current regime needs to be undertaken..

This new passporting rule is also seen as a post-Brexit blueprint. Separately, ESMA will force hedge funds to verify their OTC derivatives transactions independently in a regulatory update. Sean Tuffy said that the Brexit would not be a threat to UCITS fund passport; hedge funds are also reportedly building a “Brexit task force” to lobby politicians on the implications of the UK’s vote to leave the EU. Luxembourg’s Reserved Alternative Investment Funds is a revolutionary solution for alternative investments; the MFA has submitted a comment letter in support of the CFTC’s proposed rules on the mandatory clearing of certain additional interest rate swap classes; and hedge funds are facing more scrutiny from regulators as they expand into currencies businesses.

Joe Cornell is launching new hedge fund with the backing of Chilton Investment; Alp Ercil has raised $1.3 billion for a new fund which invests in distressed assets; Contour Asset co-founder Seth Wunder to launch his own fund; investment advisory firm SJL Capital has launched its maiden fund, the SJL MarketDNA Hedge Fund; Andrew Wiltshire is co-founding a new firm and seeking about $500m to launch funds that will allocate to timberland and agriculture; David Ma has started Composite Capital Management and has received a license from Hong Kong’s securities regulator last month; and SCI has received approval from the South African Financial Services Board to offer both retail investor hedge funds and qualified investor hedge funds.

Columbia Threadneedle has launched a liquid alternatives fund aimed at high net worth investors.

Troubled hedge fund Solo Capital has shut down, reports said; Laurion Capital is closing down its $1.1bn hedge fund that bet on macroeconomic; Mako Global is shutting a European equities hedge fund it launched just 19 months ago after lacklustre returns; and Platinum Partners is reported to be liquidating two of its funds following the municipal union kickback scandal.

The HFRX Global Hedge Fund Index gained 1.03% through mid-July(+0.19% YTD);
The Lyxor Event–Driven and Long Biased L/S Equity Indices were up 1.5% and 2.2% respectively (-0.1% and -3.7% YTD respectively) as of July 12;
And the IQ Hedge Market Neutral Index returned 1.16% in June (+3.95% YTD).
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Joe Taussig is one of the most accomplished experts on insurers and reinsurers which invest their assets in alternative investments, also known as “hedge fund reinsurers”. He was instrumental in the creation of Greenlight Re, Third Point Re, and SAC Re, among many others. Joe believes the term “hedge fund reinsurer” is a misnomer and poorly understood. He also believes that attacks on hedge fund reinsurers regarding their tax structure miss the point that tax is only a tertiary or fourth level benefit. Joe estimates 70 to 80 SEC registered asset managers have set up reinsurers over the past decade and explains eight reasons why asset managers do so, citing key benefits such as providing investors with better returns and accessing (permanent) capital from sources otherwise not available. Joe believes up to 80% of hedge fund reinsurer assets come from such sources.
Lies, damned lies, and statistics.

Taussig also comments on what S&P and the FT missed when recently writing that “hedge fund reinsurers are not viable” or that they are “lousy underwriters”, commenting specifically that:

Reinsurers set up by asset managers do not need an S&P (credit) rating, but they get good to excellent AM Best ratings on their ability to pay claims,
S&P ignores the time value of money and fact that high “combined ratios” can actually be a sign of quality or prudence, and
Lies, damned lies, and statistics: the time frame in question makes all the difference when you include Fukushima and Hurricane Sandy, for example.
Joe also questions whether Hillary Clinton and Senator Wyden understand insurance accounting, especially topics such as the moral hazards of insurance reporting or the “Underwriter’s Dilemma”, where being cautious is not rewarded.
Even Warren Buffett is taking shots at hedge fund reinsurers saying in 2015 that they do “just enough business to look like they are in the industry”, but are really shams. Joe thinks Mr. Buffett shouldn’t throw stones given he lives in a glasshouse. Both Greenlight Re and Third Point Re, companies Buffett cited as examples, each write more dollars of premium per dollar of equity capital than Berkshire Hathaway. They also have more dollars of reserves per dollar of equity. In fact, some hedge fund reinsurers have been able to write $25-30m of premium per employee versus traditional insurers where that number can be as low as $1.5m.

However, insurance risk pricing has greatly eroded over the last four years (up to 75% in the severity business) as a consequence of contagion and the impacts of catastrophe bonds and ILS, which have both destabilized severity risk pricing. According to Taussig, companies have three solutions available to address this price erosion: 1. Focusing on business with far less moral hazard; 2. Acquiring insurers whose pricing is much less affected; and 3. Writing highly structured contracts for capital relief (Solvency II).

In this Opalesque.TV BACKSTAGE video, Taussig also speaks about:

The five ways reinsurers can be set up
How different confidence curves result in the massive differences between insurers
Why Taussig likes captive insurers and making a business out of self-insurance
When is the timing right for a corporation to set up a captive insurance company?
How enterprise risk captives offer asset managers easy access to insurance business
The benefits for asset managers to run an enterprise risk captive
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The channel island Jersey, a British Crown dependency which has been enjoying administrative separation since 1204, is a fairly small island, but with 118.2 square km it’s also over twice as large as Bermuda. Although Jersey’s allegiance is to the British Crown, it is not a part of the United Kingdom and is not represented in the British Houses of Parliament. This means that Jersey is a self-governing parliamentary democracy under a constitutional monarchy, with its own financial, legal and judicial systems, and the power of self-determination. The EU Commission confirmed that Jersey is within the Union as a European Territory for whose external relationships the United Kingdom is responsible, however it is not fully part of the European Union.

Jersey is currently the world’s sixth-largest jurisdiction by AUM and it is continuing to grow. About 70% of the assets in the jurisdiction relate to alternatives. From a population of about 100,000, over 13,000 people work in financial services across a broad range of disciplines from the professional services, tax advisory, legal, through administration services, management, banking, and fiduciary. Out of an annual cohort of about a thousand people coming out of Jersey’s local education system, 420 came into the finance sector in 2014.

Jersey has been regulating hedge funds since 1988 and is the only offshore centre on IOSCO Committee 5

Jersey has been regulating hedge funds since 1988. It is the only offshore centre that sits on IOSCO Committee 5, which is the one that comes up with the global rules. Jersey’s early implementation of equivalent legislation to the AIMF Directive on an opt-in basis was recognised by the EU and allows Jersey based funds to play in Europe and to access European-based investors using the National Private Placement Regimes. In 2015, ESMA advised the European Commission on the extension of AIFMD passport to non-EU jurisdictions, and their advice concluded that no obstacles exist to the extension of the AIFMD passport to Jersey, putting Jersey at the front of queue of third countries waiting for the AIFMD passport from ESMA. It is important to remember that in this context of EU legislations, third countries here is the whole world outside the EU, including the US, Cayman Islands or Hong Kong. Obviously, managers can also opt out completely from AIFMD and have efficient segregated structures or management vehicles accessing the rest of the world’s capital.

Not affected by Brexit

It is not envisaged that Brexit will impact on Jersey’s existing market access rights to the EU for financial services, as Jersey typically accesses the EU market through its own bilateral agreements which are independent from the UK's relationship to the EU. Managers can definitely market Jersey funds into the majority of the EU/EEA using the Private Placement Regimes, and they are likely to be first in line for the passport when that becomes available to third countries.

Alternative investment managers like Altis, Brevan Howard, BlueCrest or Systematica all have operations in Jersey, attracted by aspects like the time zone, geography, English language, short commutes and because generally Jersey is a beautiful place to live and work.

The inaugural Opalesque Jersey Roundtable took place in June 2016 in St. Helier, Jersey, with:

Mike Jones, Jersey Financial Services Commission
Stephen Hedgecock, Altis Partners
Oliver Morris, KPMG
Rober Milner, Carey Olsen
Alistair Rothwell, Fairway Fund Services
Richard Corrigan, Jersey Finance

The group also discussed:

Jersey’s solution to BEPS and attractive taxation
The three major drivers for a manager to come on to the island
Are proposed changes to the UK’s tax regime surrounding issues like management and performance fees and non-doms likely to have an impact on where managers base themselves?
What is the situation re. staffing, infrastructure, housing and office space in Jersey? Is it true that there’s a 1-gigabit capacity fiber internet connection for every household?
What is Jersey’s financial regulation like, and where is it heading? Why is the island putting a special focus on FinTech?
Altis Partners (Jersey) Ltd. was founded in February 2000 and re-domiciled to Jersey in 2005. What has been Altis’ experience since then? How have they seen the island change and evolve?
What support do managers get in Jersey when setting up funds or locating there?
Higher standards: Why non-executive Directors may need a specific regulatory licence when they have more than six directorships.
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