Behind the hedge fund news

Date: Friday, May 16, 2008
Author: Hedgeweek.com

The effects of the credit crunch and a generally harsher economic climate are driving various trends in the alternative investment industry. Hedge funds are become more activist investors, bold enough even to take on the UK government for its nationalisation of mortgage bank Northern Rock; troubled funds and managers are seeking to restructure for long-term survival, like Citi's review of the future of Old Lane and the planned divorce between Absolute Capital and Argo; and alternative managers are themselves increasingly a target for third-party investment and acquisitions.

Restructuring the order of the day?

London-listed hedge fund manager Absolute Capital Management has unveiled plans to spin off its emerging market credit fund business, Argo Capital, as an independent entity. The move aims to disassociate the Argo business, which was acquired by Absolute Capital as recently as January last year, from the European hedge fund manager's recent problems.

The departure of founder and co-chief investment officer Florian Homm led to the company's share price plummeting more than 80 per cent, especially after it emerged that many of the Absolute Capital equity funds contained hard-to-value small-cap stocks, eventually forcing investors in several funds to accept extended lock-ups.

Absolute Capital has now written to shareholders proposing to turn the alternative emerging markets manager into a separate business, Argo Group. Under the proposal shareholders will retain their existing Absolute Capital holding, but receive the same number of ordinary shares in Argo.

'We have carefully considered the best way forward for the Absolute Capital group following the events of September 2007,' said chief executive Jonathan Treacher. Coincidentally the former owners of Argo Capital, Andreas and Kyriakos Rialas now own 33 per cent of Absolute Capital after the cash-and-shares deal they agreed to at the beginning of 2007 had to be restructured.

Meanwhile, Citi is looking at restructuring Old Lane, an alternative fund manager co-founded by Vikram Pandit, now Citi's chief executive, and which was acquired by the group last April in what now looks like a rather expensive USD800m headhunting exercise. Nearly all investors unaffiliated with Citi have requested to redeem their money from Old Lane's multistrategy fund, the group said in a regulatory filing.

The performance of the Old Lane funds, which had assets under management and equity commitments of USD4.5bn at the time of the acquisition, has been disappointing since, and Citi wrote down USD200m of intangible assets linked to the acquisition in the first quarter.

Hedge funds that have been underperforming or have had an impact on the parent company's share price are being streamlined or restructured in order to reposition them in the market and perhaps provide them with the flexibility required amid the ongoing credit crunch and volatile financial markets. Looking at all the alternatives might turn out to be a very smart decision.

Hedge fund places faith in God

The credit crunch, which is still in full flow, has left many seasoned investors praying for a miracle. One of these investors, however, has decided to put money directly into the source of miracles - God.

If ever one needed a clarification of the investment strategies used by hedge funds, the time is now. Reports that leading hedge fund GLG has invested USD30m in a Christian version of YouTube are mystifying many as to where investment opportunities really lie in these uncertain times.

GLG, which is headquartered in London and listed on the New York Stock Exchange, has reportedly injected the money in GodTube, owned by Big Jump Media, as part of a USD150m private equity-style fundraising.

Run by co-founder and former CBS television producer Chris Wyatt, GodTube claims to be one of the fastest growing Christian online video-sharing and social networking sites and seeks to create an online Christian community. The site uses 'Broadcast Him' as its slogan, although the catchphrase 'Jesus 2.0' is also used extensively.

The site is reported to attract up to 2 million users a month and the website has uploaded more than 100,000 videos since its launch last August. This kind of activity suggests that GLG has first-mover advantage in a company and perhaps a sector that is set to attract interest from other investors.

GLG's move follows the success of other Web 2.0 sites like Facebook, which received a USD240m investment from Microsoft last year valuing it at an improbable USD15bn, and MySpace, which was acquired by Rupert Murdoch's News Corporation for USD580m in 2005. So why not invest in a site which has God on its side?

Alternative investment firms are new M&A targets

It isn't every day that a Japanese manufacturing conglomerate, even one with a history in banking, takes a stake in the international asset management sector. So it is quite a big event when Mitsubishi Corporation, Japan's largest general trading company, announces plans to enter the alternative investment business in the US.

Mitsubishi will spend USD39m to acquire a 19.5 per cent stake in credit specialist Aladdin Capital, becoming the second-largest shareholder in the manager of fixed income hedge funds and collateralised debt obligations.

In addition, Mitsubishi plans to invest USD300m as seed capital in investment products managed by Aladdin, which had USD17.5billion in assets under management at the end of March.

This is a classic story of the benefits of partnering with a global conglomerate. Mitsubishi, a previous investor with Aladdin, sees the stake as a good opportunity to enter the business and diversify its portfolio into alternative assets. Meanwhile, Mitsubishi's financial muscle will help Aladdin to capitalise on the numerous opportunities created by recent dislocations in the market.

Alternative investments firms are increasingly becoming acquisition targets. According to Jefferies Putnam Lovell, they accounted for 29 of the 73 deals in the global investment management sector announced so far this year, a record proportion of 40 per cent. More than two-thirds of the transactions, 20 deals, involved hedge fund managers.

Hedge fund takes on UK government

It was anticipated, if not necessarily expected. Hedge funds have been known to come down hard on underperforming corporates and financial institutions, and are now eyeing bigger targets - this time, the UK government.

SRM, the hedge fund that was the biggest shareholder of Northern Rock, the mortgage bank that had to be rescued by the government when the wholesale market funding it relied upon for financing dried up, has joined forces with 150,000 small investors to mount a legal action over its nationalisation.

The Monaco-based fund and the UK Shareholders Association have requested a judicial review of the government's compensation scheme for shareholders, which they argue has been rigged to leave investors with nothing.

The shareholders argue that it is unprecedented for a solvent bank to be nationalised after receiving lender-of-last-resort support. They accuse the government of seizing the bank for commercial gain in a move without parallel in developed markets.

In the face of this vigorous legal challenge, with transparency becoming the order of the day amid the global credit crisis, the government might find it harder than usual to counter some of the plaintiffs' tactics.

This means that a request for the publication of minutes of meetings between the public bodies involved, as well as the report on Northern Rock produced by Goldman Sachs for the Treasury, will probably be granted.

This litigation is set to cause a fresh furore over Northern Rock after the near-collapse of the bank during the credit crunch last September, leading to its eventual nationalisation in February this year.

Hedge funds are powerhouses in activism, as can be seen by their precipitation of the sale of ABN Amro last year. Now they are willing to pose legal challenges to governments. Should the litigation reach court, it is certain to be followed avidly.