Opalesque NewManagers Jun 2012

ISSUE 06 June 2012
Opalesques Emerging Manager Monitor
ISSUE 01 June 2012 ISSUE 06 September 2011
2 3 5 6
EDITORIAL EMANAGERS INDICES

May 2012 performance of Opalesques indices of emerging manager funds.
22 Q&A
Sapient: Hedge funds must face changes in central clearing and in collateral management.
25 SEEDERS CORNER
NEW FUNDS IN THE DATABASE PETER URBANI STATISTICS

Sell in May and buy a CTA.
Funds that have recently joined Opalesques Emerging Managers Database.
After closing two vintage seeding funds, SkyBridge is creating a new emerging manager product.
28 SERVICERS SPOT 30 LAUNCHES
BNY Mellon: Do not underestimate the extent of upcoming regulations
12 FUNDANA SERIES 16 FOCUS
How do seed deals impact on fund raising for new hedge fund managers?
A recapitulation of maiden launches in late May and June 2012 so far.
32 PERSPECTIVES
Ex-prop traders meet the challenges and opportunities of the hedge fund world.
Recent views and findings which could be of interest to new hedge fund managers.
25 47N SERIES
The scandal of founders shares.
34 PROFILES
Three emerging hedge fund managers speak to New Managers about their fund: Sahm Adrangi of Kerrisdale Capital Partners; Leon Diamond of Mansard Capital; and Alastair MacLeod of RiverCrest Capital.
New Managers | Opalesques Emerging Manager Monitor - June 2012
Editorial
Welcome to the June 2012 issue of New Managers, Opalesques monthly monitor of emerging and re-emerging hedge fund managers. In Statistics, Peter Urbani looks at research surrounding the old adage Sell in Benedicte Gravrand May and go away, and finds that the Buy a CTA strategy might also prove effective. Fundana examines the possible impacts that initial seed deals might have on new hedge fund managers trying to raise more funds and the choice they face in that department. In Focus, industry experts, including Don Steinbrugge of Agecroft Partners, share their observations on what ex-prop traders bring (or do not bring) to the hedge fund world and on why the closing down of banks proprietary desks might be a boon to hedge funds. 47 Degrees North in 47N warns against founders shares, which might impinge on the fundamental rights of investors to control their money. Mark Israel of Sapient Global Markets discusses current changes in central clearing and in collateral management, and the hedge fund industrys ability to recycle in Q&A. Anthony Scaramucci, founder of SkyBridge Capital and author, talks about the death of its two seeding funds and the upcoming birth of a new emerging manager product in Seeders Corner. Mark Mannion, director at BNY Mellon, warns new hedge fund managers against complacency when it comes to upcoming financial regulations in Servicers Spot. Then we have the usual recapitulation of recent maiden Launches and a review of the latest views and findings in Perspectives. Finally, in Profiles, two equity long/short managers speak to New
ISSUE 06 June 2012
Managers about their fund: Sahm Adrangi, whose Kerrisdale Capital fund returned almost 200% last year, and Alastair MacLeod, whose RiverCrest Global Equity fund is playing it tight with European stocks. And Leon Diamond, who manages Mansards global macro fund, shares his outlook on the largest economies.
I hope you enjoy our sixth issue of New Managers. By the way, I will be attending Informas Hedge Fund Startup Forum 2012 in London on July 9th. So I hope to see you there! Please, do contact me if you have any related news. Benedicte Gravrand Editor gravrand@opalesque.com
Past issues of New Managers can be found here: www.opalesque.com/Archive-New-Managers.html
Opalesque New Manager is edited by Benedicte Gravrand. Based in Geneva, Switzerland, Benedicte also writes exclusive stories, special reports, co-edits Opalesques daily hedge fund publication Alternative Market Briefing (AMB) and occasionally moderates Opalesque Roundtables. Benedicte is perfectly bilingual (French/English) and has lived in Paris, Geneva and London. She obtained a BA (Honours) in Philosophy from the University of London, worked in the publishing sector, the hedge fund industry and then joined Opalesque in 2007.
Emanagers Indices
Emerging manager hedge funds and managed futures funds posted losses for the turbulent month of May, according to our first estimation based on the data of 294 funds listed in Opalesque Solutions Emanagers database. The Emanagers Total Index declined 0.74% in May, but is still up 1.69% for the year, thanks to strong results in January and February. Estimates for April and March were corrected to -0.78% and -0.35% respectively. Since inception in January 2009, the index grew 59.4% and outperformed both the global stock market and hedge fund indices. Over the last 12 months, the index lost 2.49% with 8 negative and 4 positive months, compared to losses of 3.95% for the Eurekahedge Hedge Fund Index and 13% for the MSCI World Index.
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Emanagers Total Index loses 0.74% in May (+1.69% YTD)

Last months loss was driven by hedge funds: The Emanagers Hedge Fund Index lost 2.05% and is now up 3.01% year-to-date. All strategies lost in May, with relative value funds performing best (-0.03%) and long-bias equity hedge funds performing worst (-5.46%). On a year-to-date level, event-driven strategies lead the ranking (+7.52%), followed by relative value (+4.01%), equity long-short (+3.80%), equity long-bias (3.58%), global macro (-0.11%) and multi-strategy funds (-0.46%). Managed futures strategies, on the other hand, had their best month since December 2010. Funds tracked by the Emanagers CTA Index were able to profit from the volatile markets in May and gained 2.19%. For the year 2012, however, managed futures strategies are down 1.85%.
Emanagers Indices
established peers this year.
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A comparison of Emanagers indices with the Eurekahedge Hedge Fund Index and the Newedge CTA Index shows that new managers performed worse than their
12-month rolling performance data indicates that managed futures strategies were a hedge against stock market risks with a correlation coefficient of around -0.5. Relatively low volatility led to an MSCI-beta of -11%, compared to +45% for Emanagers hedge funds.
Performance (in %), Volatility and Equity Market Beta (in %)

Index Emanagers Total Index Apr 2012 -0.74 -2.05 2.19 YTD 1.69 3.01 -1.85 12m -2.49 -4.08 -1.00 2011 -1.79 -2.83 0.51 2010 18.73 17.07 19.15 2009 34.51 37.59 20.52 Volatility 5.93 9.38 4.03 Beta (bm=MSCI) 27 45 -11
Emanagers Hedge Fund Index
Emanagers CTA Index
Eurekahedge Hedge Fund Index Newedge CTA Index MSCI World
-1.73 3.00 -8.99
1.70 2.51 -0.42
-3.95 0.29 -13.06
-3.81 -4.52 -7.61
10.79 9.26 9.40
20.60 -4.31 27.07
5.93 6.96 20.02
27 -16 100
- Florian Guldner, Opalesque Research

New Funds in the database

New funds in Opalesque Solutions Emerging Managers Database
Fund name Taylor Fund LP Malachi Red Deer Program Juniper Public Fund, LP Permanent-PLUS Portfolio BlackBox Master Fund LP Mansard Macro SICAV ARX Diversified Options Program ARX Gold Program Theta Advantage Strategy The Sherpa Funds SPC - The K2 Segregated Portfolio Numen Credit Opportunities Fund Inc. Arcoda Global Healthcare Fund LP Rodex Golden Upside Strategy Strategy Equity Long Bias CTA Equity Long Bias Fund of funds Relative Value Global Macro CTA CTA Relative Value CTA Event Driven Equity Long/Short CTA Manager Location Chicago, IL, U.S. Minnesota, U.S. New York, U.S. Florida, U.S. New York, U.S. London, U.K. Pennsylvania, U.S. Pennsylvania, U.S. New York, U.S. Singapore London, U.K. New York, U.S. Schindellegi, Switzerland Eur100m $24m CHF40K Fund AuM $32.35m $3.4M $15.8m $0.2m $9.55m $39.7m $0.4m $0.45m $2M
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Fund Launch date Nov-11 Aug-08 Mar-10 Nov-11 Mar-09 Sep-10 Sep-09 Oct-11 Nov-11 Oct-10 Nov-08 Jun-08 Feb-12
The Opalesque Solutions Emerging Managers Database is an extremely niche and specialised database of Emerging Hedge Fund Managers, and access is available for eligible investors such as Funds of Funds, Family Offices, Pension Funds and UHNWI globally as well as academia and research analysts. For the sake of this database, we define an asset manager as emerging manager if, 1) The firm is less than 48 months old and 2) The AUM of the firm at the time of the firms inception is less than $600 million. If you want your fund to be in the Emerging Managers Database, please send your details to our database team at: db@opalesque.com.
Peter Urbanis Statistics Sell in May and buy a CTA

You will no doubt all be familiar with the old market adage Sell in May and go away. This month, we examine this strategy and come up with a couple of suggestions of our own specifically we suggest that one should Sell in May and Buy a CTA. The exact origin of the phrase Sell in May and go away is unknown. However its usage has been traced back as far as the early 1930s and there is now a considerable body of research investigating the origins and efficacy of this old market aphorism. One such study by Jacobsen and Zhang, Are Monthly Seasonals Real? A Three Century Perspective, finds that Over 300 years of UK stock returns reveal that well-known monthly seasonals are sample specific. For instance, the January effect only emerges around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only - yet undocumented - monthly July and October effects do persist over three centuries, as does the half yearly Halloween, or Sell-inMay effect. Winter returns November through April - are consistently higher than (negative) summer returns, indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons. Another by Haggard and Witte entitled The Halloween Effect: Trick or Treat? finds that the Halloween effect is robust to consideration of outliers and the January effect.
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Whatever the exact causes of these seasonal effects, and we suspect largely behavioural biases, the stylised effects thereof can be observed and investigated. The chief underlying intuition behind the Sell in May and go away strategy is the observation that equity returns seem to flag between May and October and then rally strongly over the fourth quarter and into the New Year. This can clearly be seen for the returns for the Standard & Poors 500 Index where the average monthly returns for the months of November to April (inclusive) are +1.42% per month whilst those for the period from May through to end October have averaged just +0.50% per month since 1976.
Peter Urbani
Peter Urbani is the former CIO of Infiniti Capital, a now defunct Hong Kong-based Fund of Funds group. Prior to that, he was Head of Quantitative Research for Infiniti, Head of Investment Strategy, Head of Portfolio Management, Head of Research and Senior Portfolio Manager for number of buyside firms. He started out in stock-broking as an open outcry floor trader in the late 1980s. Some of his VBA code was included in Kevin Dowds Measuring Market Risk and he specialises in Risk Management and Portfolio Construction.
Peter Urbanis Statistics

S&P500 Average Monthy Returns
2.00
2.00 1.86
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CTA Average Monthy Returns

1.72
Average Returns (%
1.42
Average Returns (%
1.60
1.60
1.20
1.20
0.80 0.50 0.40
0.80
0.40
0.00 Avg Nov - Apr Avg May - Oct
0.00 Avg Nov - Apr Avg May - Oct
This observation suggests that Selling in May and going away or This observation suggests that Selling in May and going away or investing in some other asset class like cash might prove to be a investing in some other asset class like cash might prove to be a better better strategy than buy and hold.
strategy than buy and hold.
Various other strategies can be considered also. Specifically we Various other strategies can be considered also. Specifically we suggest that because CTAs have no such significant difference suggest that because in their returns a Sell CTAs have noBuy asignificant difference in also in May and such CTA strategy might their returns a Sell in May and Buy a CTA strategy might also prove prove effective.
effective. A Dynamic Momentum strategy that switches between Equities and CTAs based on whichever was the best performer in the prior month might also be considered, although it would entail higher transactional costs.
Due to the very strong strategy that switches the past generation A Dynamic Momentumperformance of CTAs over between Equities the optimal strategy whichever have been to performer in the and CTAs based on would in factwas the besthold CTAs instead of Equities as this would be twice the return of Equities with only slightly prior month might also haveconsidered, although it would entail more, mainly upside, volatility. However, not that many investors would higher transactional costs. be comfortable with eschewing Equities entirely so some combination of S&P500 and CTAs performance of CTAs over Due to the very strongis more likely to be acceptable. the past
generation the optimal strategy would in fact have been to hold In instead of Equities as this would have twice the Buy and CTAsfact the optimal strategy over the historic period was to return of Hold with only of 30% in CTAs. That upside, would have given Equities a minimum slightly more, mainlyallocation volatility. However, not83% of the upside of CTAs withbe comfortable with eschewing that many investors would only 70% of the drawdown risk of CTAs and only 30% of the drawdown risk S&P500 and CTAs is Equities entirely so some combination ofof Equities. more likely to be acceptable. In fact the optimal strategy over the historic period was to Buy and Hold a minimum of 30% in CTAs. That allocation would have 7 given 83% of the upside of CTAs with only 70% of the drawdown
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The performance of the various strategies are summarised overleaf.

The performance of the various strategies are summarised overleaf.
Summary of Results for various Sell in May Strategies
Peter Urbanis Statistics Summary of Results for various Sell in May Strategies
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As can be seen from the above table the 70:30 Allocation to S&P500 and CTAs was the best in terms in terms of the modified Sharpe As can be seen from the above table the 70:30 Allocation to S&P500 and CTAs was the best strategy strategy of the modified Sharpe ratio whilst the Sell whilst the Sell a May and Buy a CTA strategy outperformed May and go to cash May and ratioin May and Buy in CTA strategy outperformed the traditional Sell inthe traditional Sell instrategy. go to cash strategy.

S&P500, Sell in May and Buy a CTA Strategies
1000000
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S&P500 and CTA's Best Fit Distributions
100000
Best Fit CTA PDF (Modified Normal) Best Fit VaR -4.70% Best Fit SP500 PDF (Modified Normal)
10000
1000
S&P500 CAGR : 10.93% Vol : 15.37% Cash CAGR : 5.55% Vol : 0.92%
Best Fit VaR -6.83% Best Fit CVaR -7.24% Best Fit CVaR -10.53%
100
CTA CAGR : 22.00% Vol : 17.36% Momentum S&P500 & CTA CAGR : 17.24% Vol : 16.56%
10
S&P500 & Cash ( Sell in May and Go Aw ay ) CAGR : 11.36% Vol : 10.26% S&P500 & CTA ( Sell in May and Buy a CTA ) CAGR : 19.09% Vol : 16.13% 70% S&P500 + 30% CTA ( Buy and Hold ) CAGR : 18.26% Vol : 15.92%
1 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
-30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00%
As the abovedifferences in the shape of the index strongly outperformed all Sell in May strategies, equitiesmore than 80% of the return of to the equities and to charts illustrate, the CTA probability distributions for equities and CTAs, it was possible to achieve and cash. However due CTAs strong seasonal effects in allocation and to differences in the shape of the probability distributions for equities and CTAs, it was possible with just a 30% Buy and Hold equities whilst simultaneously significantly reducing downside risk. to achieve more than 80% of the return of CTAs with just a 30% Buy and Hold allocation whilst simultaneously significantly reducing downside risk.
As the above charts illustrate, the CTA index strongly outperformed all Sell in May strategies, equities and cash. However due to the strong seasonal effects in
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Interactive Screening Tool
Interactive Screening Tool
ISSUE 06 June 2012
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Fundana Series
ISSUE 06 June 2012
How do seed deals impact on fund raising for new hedge fund managers?
The Fundana series discusses investments in Emerging Managers, derived from the real world experience of the Fundana team. Fundana is the investment advisor to several Funds of Hedge Funds and directs around half of its new investments to Emerging Managers. The investment process typically involves allocating a small amount Day 1 or Early Stage (within the first year after the funds launch) to new managers who have strong pedigrees. The objective of this series of articles is to share thoughts around our key observations. It does not aim to be statistically significant but to create a dialogue around those observations.
This article from Nick Morrell looks at one of the key non-investment decisions that a new manager faces prior to launch: Since 2008 there has been an institutionalization of the seeding business, with a stronger focus on the large private equity-style funds which have been set up to seed new hedge fund managers. The quantity of capital available has meant that these businesses are often fighting to seed the best managers. The big players in this space include Blackstone, Goldman Sachs, Reservoir and Protg.
Whats the (big) deal?

Every new manager looking at accepting a seed deal will be playing off two factors: how big is the seed deal investment in the fund; and how much of the profits they will have to give up to the seed investor. Typical seed investments range from $20-200m (the average is $87m for those managers in our database) and involve giving up 20-50% of the economics of the business, with the more favourable deals going to those managers with the strongest pedigrees. Whilst a seed deal clearly helps managers to set off on the right foot, this article looks at how seed deals are perceived by other investors in other words, does a seed deal help or hinder a new manager to raise external AUM. In a later article in this series we will develop this theme further, looking at the impact of seed deals on the mindset of the managers to pose the question: Does accepting a seed deal impact on performance? As usual, we will focus on small and mid-sized launches (typical Day 1
Should I look for a seed deal?

The seed deal landscape has changed significantly over the last decade. In the years leading up to the financial crisis the seeding business was relatively idiosyncratic, with money coming from within the industry as well as a small number of institutional seeders. Players in the space included Reservoir Capital and Protg Partners, as well as Julian Robertson with his Tiger Cubs. A number of other hedge fund legends also seeded spin-outs or other new launches such as Chris Shumway (Shumway Capital), David Einhorn (Greenlight Capital) and Jim Simons (Renaissance Technologies).
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Fundana Series
assets under management (AUM) of between $20m and $500m). The dataset has been compiled from all the new investments made in our Funds of Hedge Funds since January 2006, encompassing 69 Day 1 / Early Stage investments in the Long/Short Equity, Global Macro and Event Driven strategies, of which 57 have been operating for more than one year as of the end of April 2012.
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As in previous articles, we will also analyse the same data split between two time periods: the first period runs from January 2006 to July 2008, hence before the industry crisis; and the second period runs from August 2008 to date. Table 2, below, compares the same data as for Table 1, but split across the two time periods. With seed deal External AUM raised Day 1 Pre-crisis Post-crisis <25M$ 25-50M$ 50-100M$ >100M$ 33% 13% 27% 27% 81% 5% 9% 5% No seed deal Pre-crisis 0% 50% 0% 50% Post-crisis 46% 18% 18% 18%
Q1. How does a seed deal affect the ability to attract external AUM at launch?
Here we will analyze all funds in our database to determine whether managers who use seed deals find that this is useful for attracting further assets at launch. For this we will look at external AUM raised at launch which is total AUM less seed deal and the managers personal investment. Looking across all time periods, Table 1 suggests that those funds which have a seed deal (37 funds in our database) in place are twice as likely to launch with less than $25m from other investors than those with no seed deal (32 funds).
External AUM raised Day 1 <25M$ 25-50M$ 50-100M$ >100M$
With seed deal 62% 8% 16% 14%
No seed deal 31% 28% 13% 28%
Table 2: External AUM raised at launch split between pre-and post-crisis time periods
This temporal split highlights two key trends: First, prior to the crisis, a seed investor had more than 50% chance of being accompanied by significant (>$50m) Day 1 external capital (54% vs. 46%). Since the crisis, almost all managers taking seed deals are launching with no other significant external capital (86% vs. 14%). Second, for those managers without a seed deal, prior to the crisis all managers launched with at least $25m, with half of these raising more than $100m. In contrast, since the crisis almost half of the managers launched 13
Table 1: External AUM raised at launch

Fundana Series
with less than $25m of external capital and just 18% had more than $100m.
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Table 4 again shows the same data, but split between pre- and post-crisis time periods. Increase in AUM in Y1 <0% 0-100% 100-200% 200-400% >400% Pre-crisis With seed deal 15% 23% 23% 31% 8% No seed deal 10% 10% 30% 40% 10% Post-crisis With seed deal 7% 64% 21% 0% 7% No seed deal 6% 44% 22% 17% 11%
Q2. How does a seed deal affect the ability to attract additional assets during the first year?
Whilst Day 1 assets are clearly important, the long-term viability of a hedge fund can be better assessed by looking at asset growth over time. This second analysis looks at the same group of hedge funds (excluding those which have not yet reached their first anniversary) and reviews how AUM has changed. Tables 3 shows the AUM growth of all funds over the first year of operations (adjusted to exclude performance gains), split between those funds with (27 funds) and without (28 funds) a seed deal. This suggests that there is no significant difference in ability to raise additional assets in the first year. Increase in AUM in Y1 <0% 0-100% 100-200% 200-400% >400% With seed deal 11% 44% 22% 15% 7% No seed deal 7% 32% 25% 25% 11%
Table 4: Increase in AUM in first year split between pre-and post-crisis time periods
The key observation here is that post-crisis a lot fewer funds significantly increase their AUM during the first year. As highlighted in Table 3, whether the manager has taken a seed deal or not does not seem to have a major impact on ability to increase assets during the first year, across both time periods.
What conclusions can we draw from these results?

The first conclusion is perhaps the most obvious since the 2008 crisis fundraising has become significantly more difficult. 14
Table 3: Increase in AUM in first year

Fundana Series
Anecdotal evidence suggests that securing a seed deal can be extremely time-consuming for a new hedge fund manager. Particularly in the postcrisis environment, it is perhaps unsurprising that new launches with a seed deal often have little other capital at launch, as the manager either does not have the time or the contacts to fund raise effectively from seed investors and other potential external investors at the same time. But our analysis does highlight that there are managers who are still able to raise significant assets at launch without a seed deal. Our experience suggests that these managers typically have one of two things to help them: either they have an extremely strong hedge fund pedigree (such as Joshua Berkowitz of Woodbine Capital who had previously worked for Soros and SAC); or they have the backing of one of the large investment banks (such as Pierre-Henri Flamand of Edoma Capital who had previously been running the prop desk at Goldman Sachs Principal Strategies). Outside of these successful launches, it is also clear that post-crisis many new managers are facing a stark choice: they can either accept a seed deal and give away a significant percentage of their business; or they can launch small and try to build a track record and attract investors in that way.
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Nick Morrell Head of Operational Due Diligence and Chief Risk Officer
Fundana SA
www.fundana.ch
15
Focus Ex-prop traders meet the challenges and opportunities of the hedge fund world
New entrants in the hedge fund world are no longer new, says Mark Israel, director at consultancy firm Sapient Global Markets (1). There are, for example, financial professionals who work at hedge fund firms and realise they can do it themselves, so they start out on their own. Then there are hedge fund firms who find themselves underwater; those return the money to their clients and start anew. There are hedge fund firms who become too big and decide to sub-divide, giving birth to small hedge fund shops. There are other firms where a partner starts a different strategy under a different brand with a new independent status, while still sharing the same office space. Then you have people leaving investment banking and entering the hedge fund arena, either by joining an existing firm or by setting up their own fund. Some industry experts share their observations on these ex-bankers with Opalesque.
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five regulatory agencies drafting the Rule may not have submitted the completed version by then. Another problem is that lawyers cannot agree on whether banks should continue trading their own accounts during the next two years or not. Proprietary trading has been one of the most profitable activities for banks. According to The WSJ, critics say the Volcker Rule would not have prevented the financial crisis, which they say was sparked by bad mortgage loans, not trading. But several large financial firms such as Morgan Stanley, AIG, Merrill Lynch, Deutsche Bank, have suffered big losses due to proprietary trading. Furthermore, JP Morgan Chases recent loss of more than $2bn in a credit derivative trade is prompting some in Washington to push for a tougher Volcker Rule.
In the U.S. most of those leaving investment banking and moving to the asset management industry are doing so because of the Volcker Rule. The Volcker rule, which is part of the DoddFrank Wall Street Reform and Consumer Protection Act, prohibits depository banks from proprietary trading; this rule is similar to some provisions in the GlassSteagall Act (1933-99) and came as a reaction to the 2008 financial crisis. The terms of the Volcker Rule will become effective on July 21, 2012 and banks will have two years to comply. However, the date may be delayed as the
Critics say the Volcker Rule would not have prevented the financial crisis, which they say was sparked by bad mortgage loans, not trading. But several large financial firms have suffered big losses due to proprietary trading.
Nevertheless, since the rule was enacted into law two years ago, banks have been closing or spinning off or moving or selling their prop trading desks. Some of the prop traders have taken that opportunity to launch on their own in the hedge fund world. According to Infovest21 special research report Start-Ups, Seeders and Strategic Stakes, the trend 16
Focus
gained momentum in 2011 and is continuing into 2012. Infovest21 cites Goldman Sachs, Bank of America and Citigroup among those who closed their desks, and teams from JP Morgan and Wells Fargo that were moved. The move from investment banking to hedge funds is not confined to the U.S. This year alone, we heard of the following firms being launched by exbankers around the world, including the U.S.: Atreaus Capital LLC, Portman Square Capital, R Capital Management Pvt, MST Capital, Thompson Global Partners, Whard Steward, Otlet Capital Management, Higgs Capital Management LLP, BFAM Partners (Hong Kong) Ltd, Trient Asset Management AS, Alcova Asset Management, Steinberg Capital Co, Odin Capital Management, Naga Capital, Portman Square Capital and Three Court. Ex-bankers Yoshihito Asakawa, Deepak Gulati, and William Lee are also expected to launch this year. There is also Basel III, another reaction to the financial crisis of 2008. The international banking regulatory framework seeks to improve the banking sectors ability to deal with financial and economic stress, improve risk management and transparency. According to Gilles Thieffry, a solicitor, Basel IIIs increased capital and liquidity requirements will have significant systemic and idiosyncratic effects across the banking industry and capital markets. Some of the anticipated changes would include the transfer of proprietary trading to hedge funds. Although while Basel III is implemented (from 2013 to2018), U.S. banks will also be in the process of complying with the Volcker Rule. US banks will have an easier time [than European banks] meeting Basel III requirements because of Volcker. When Volcker comes into effect it will strictly limit their [proprietary] trading activities to US government and similar capital light securities, Doug Landy, partner at Allen & Overy told The FT. So where do prop traders go after leaving their bank? They might go to the hedge fund sector, into money management, or to the sell side. According to Mark Mannion, director at BNY Mellon Alternative Investment Services (2), the trend is for prop traders to either establish their own start up firm or join a larger hedge fund enterprise and operate their strategy from within that infrastructure. The decision on which path to follow would be based on many criteria not least of which would be the size of seed capital available to the trader, he tells Opalesque. Larger amounts of initial capital make the decision to start a new firm more commercially viable.
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Mark Mannion
Don Steinbrugge
Some of the anticipated changes created by Basel III would include the transfer of proprietary trading to hedge funds.
The number one advantage ex-prop traders have is credibility or brand, says Don Steinbrugge, Managing Member of Agecroft Partners, LLC, a third party marketer based in Richmond, VA. And that is especially the case if they come from a very high quality investing bank like Goldman Sachs, he told Opalesque in an interview, as this will help them a great deal with the capital raising. Another advantage they might have is if 17
Focus
they come with a team which has experience of working together.
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The big challenge facing prop traders when they establish their own fund is that they can no longer simply focus on trading but need to also work on raising assets and establishing the operational infrastructure.
To attract potential investors, ex-prop traders can use their own track record within the investment bank, especially if he or she has been responsible for a large amount of capital and gathered credentials and reputation. However, some prop traders if they come from prop teams may not be able to show historical track records and that can be a problem. Running a hedge fund is complicated, and emerging managers who have worked for hedge funds in the past would be better equipped than ex-prop traders to handle the business side of their new venture. The big challenge facing prop traders when they establish their own fund is that they can no longer simply focus on trading but need to also work on raising assets and establishing the operational infrastructure, Mannion notes. Mannion has also observed that usually, relationships are maintained between the trader and the previous employer. There can be significant business opportunities for the bank arising from the establishment of a hedge fund including prime brokerage, foreign exchange and other products, he says. From the various launch announcements, it would appear that exNew Managers | Opalesques Emerging Manager Monitor - June 2012
prop traders tend to have the largest ones in terms of assets. However, according to Steinbrugge, this is only a small minority. It is very difficult to start a new fund and the success rate for prop traders that spin out are, on average, higher than your typical hedge fund, but it is still a low percentage of those starting hedge funds that are successful, he notes. Most of them are going to have to try to find seed capital, acceleration capital; they are going to have to grow their business very slowly, people are going to want proof that they are able to generate alpha, they are going to want to see a two or three-year track record, they are going to want to see the assets slowly rise It is only a small percentage that starts out with a very large amount of assets from day one.
The success rate for prop traders that spin out are, on average, higher than your typical hedge fund, but it is still a low percentage of those starting hedge funds that are successful.
Sagil Capital, a hedge fund shop based in London, is run by a team spun out of a proprietary trading desk of Rand Merchant Bank; it was backed by former senior executives of Rand Merchant Bank and by Weston Capital, an alternative investment firm. Adrian Landgrebe (3), manager of the Sagil Latin American Opportunities Fund (currently in Opalesques Emerging Managers database) talked Adrian Landgrebe to Opalesque about the challenges of moving from a prop trading desk environment to a fund management environment. 18
Focus
According to him, the major issues are very much on the operational and compliance side of the business. You now need to set-up that infrastructure and basically, as with every emerging manager, you need to start with the same kind of infrastructure that a much larger institution has, he explains. It is not good enough simply to start trading. You need to go through the regulation process, to have proper systems, to be able to report the risks, to be able to be properly accountable to investors just as a much larger fund is. Those are the major challenges that come along. Significant upfront capital, time and effort are required to manage and maintain the operations. So Sagil Capital took a lot of advice from legal and compliance consultants. As for the investment side of the business, its all the same, he says, although he is now accountable to a wider group of investors as opposed to a single one (which used to be the bank, which provided the capital associated with the financing). less trade crowding, and may also let hedge funds pick up from where prop desks left off. Bijesh Amin (4), Managing Director of global financial consultancy shop Indus Valley Partners, told Opalesque that in fact, hedge funds are very excited about the new developments. If the banks are going to give up this activity because the regulators are making it too capital intensive, somebody has to pick it up, he says.
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Bijesh Amin
Hedge funds are very aggressive opportunistic animals, he explains. They see Basel III, they see the [U.S.] re-impose Glass-Steagall, everybody jumping on the back of the bandwagon trying to destroy the proprietary trading model within an investment bank; and they realize that somebody has to do that, to be in the risk intermediation game, to be able to take illiquid assets and somehow transform them, to be able to do proprietary trading. Why not them?
Significant upfront capital, time and effort are required to manage and maintain the operations. So Sagil Capital took a lot of advice from legal and compliance consultants.
The challenges there also relate to dealing with and negotiating with investors and, obviously, there are challenges associated with gaining critical mass and scale and reporting, he adds. Disappearing prop desks may leave more space for others to play, lead to
If the banks are going to give up this activity because the regulators are making it too capital intensive, somebody has to pick it up.
So some hedge funds, he says, are considering going into the syndicated loan business, investing and trading in assets with longer-than-typicalterm durations, picking up illiquid assets and bank rolling them. This potential positive outcome of the tightening of the banks is also noted by Ken Heinz, president of Chicago-based hedge fund data provider HFR.
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Focus
Innovative hedge funds are launching and finding opportunities as large financial institutions look to deemphasize trading activities as a result of anticipated regulation, realized trading losses and enhanced risk management requirements, he recently stated. Execution and risk control are integral components of successful hedge funds and these have been greatly enhanced by the evolution of transparency in recent years. These powerful trends will continue to support launches of new hedge funds designed to monetize inefficiencies in capital markets as financial institutions adapt to new reporting, risk and trading requirements.
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the hedge fund world is to their advantage. The only winning move, in their case, would be to play with the opportunities which the dying prop trading desks their ex-employers are leaving behind.
- Benedicte Gravrand
1. see main interview with Mark Israel (Sapient Global Markets) in Q&A, page 22. 2. see main interview with Mark Mannion (BNY Mellon) in Servicers Spot, page 28. 3. see main interview with Adrian Landgrebe (Sagil Capital) in Focus, May issue of New Manager 4. see main interview of Bijesh Amin (Indus Valley) in Opalesques Alternative Market Briefing.
You are now going to see hedge funds act more and more like dealers, where they will make markets and securities.
According to Steinbrugge, investment banks are constantly buying and selling securities and they are going to lose out by not having an internal prop desk that can take advantage of the inefficiencies of the marketplace; and this will be a benefit to hedge funds. There is a difference between a broker and a dealer, he explains. A broker is someone who buys from this person and sells to that person. A dealer is someone who makes a market and a security, and that is what the prop desks did. You are now going to see hedge funds act more and more like dealers, where they will make markets and securities; a lot of the profits that the middlemen made are going to be eliminated and it should benefit hedge funds.
The hedge funds that would benefit would include of course those run by ex-prop traders. If ex-prop-traders play their cards right, their move into
20
47N Series - The scandal of founders shares

47 Degrees North Capital Management is a specialist alternative investment firm, and a pioneer in early-stage hedge fund investing. It was selected as one of three successful candidates out of 97 applicants to manage the emerging hedge fund managers program at CalPERS. 47N is a leading proponent of corporate governance in the hedge fund industry; so the objective of this series of articles is to discuss and inform on current corporate governance issues.
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The trust company scandal involving the Winchester House Group in Britain during the 1890s is an early example of the disadvantages of founders shares for ordinary shareholders. The Economist of July 15th 1893 remarked; Again and again we have warned investors against having anything to do with companies where founders shares have existed.... Wise words indeed. Founders shares give control to the operators rather than the shareholders of an investment vehicle. In the case of Winchester House it was not until things had gone badly wrong that investors woke up to the knowledge that the unscrupulous founders had enriched themselves at their expense via the founders shares. To add insult to injury, the damaging actions were later judged to be perfectly legal under the terms of the founders shares arrangement. Almost 120 years later, the problem of founders shares still exists and with equal disregard by most hedge fund investors. But, as both distant and more recent history has taught us; the existence of this type of share class can represent a major headache for ordinary shareholders. While
hedge fund founders shares do not participate in the funds returns, they can ultimately control the fund. Of course, this feature becomes more toxic when the interests of a funds investment manager and the shareholders diverge not an uncommon occurrence. No one is suggesting any impropriety along the lines of the Winchester House scandal, but when we hear from one manager, demanding to extend his lucrative management contract against the wishes of shareholders, and holding a paltry $100 worth of founders shares (against $275 million of shareholders ordinary shares); Im a shareholder too and my rights must be considered the red mist comes down. The shareholder argument against founders shares is, quite simply; its our money and well keep control of it. The ubiquity of founders shares is the result of an all-too-common and illconceived attempt by the lawyers who draft the fund governing documents to protect the founders interests. While acceptable in a legal sense such structures breach the boundaries of good corporate governance. Young hedge fund managers rightly take a proprietary attitude to the money they manage, sometimes because they have a great deal of their own money in the fund, and sometimes because the launch of their fund represents the culmination of a lot of hard work and is the highlight of their financial careers. We applaud this attitude and it represents one of the best alignments of interest between manager and shareholder in the early-stage manager area. However, there is a limit to this proprietary instinct; when it impinges on the fundamental rights of shareholders/investors to control their money. In no way should any legal share structure impede that right. The Economist publication of July 15th 1893 went on to elegantly observe that the Winchester House Group had forced themselves in a particularly disagreeable manner upon the attention of those who have invested in them. This now begs the question; has anything changed in 120 years? - Fraser McKenzie, Managing Partner, 47 Degrees North. 21
Fraser McKenzie
Q&A
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Sapient: Hedge funds must face changes in central clearing and in collateral management
Mark Israel helps lead the Investment Management practice at Sapient Global Markets, in Boston. Sapient is a consultancy firm that tackles key issues within financial services. It does a lot of work with regulatory bodies, central banks, and other market participants such as clearing houses. Israel talks to Opalesque about some the operational challenges that new hedge fund managers must deal with. He also comments on the hedge fund industrys ability to recycle. Mark Israel Opalesque: What operational challenges must new hedge fund managers deal with nowadays? Mark Israel: One of the things that we are seeing right now from the operational side is the changes in central clearing and in collateral management, which will have an impact on anyone who trades derivatives, including hedge funds. Right now, there are sweeping changes of going into central clearing and how that is going to affect tri-party agreements all the way through to their ISDA agreements, and what theyre dealing with, and then how they deal with the collateral, and how they actually manage their collateral going forward. We see that creating an interesting dynamic. Q: Tell me more about this new dynamic. Mark Israel: That dynamic affects a few things. One, it affects all their processes all the way up to the portfolio manager.
That means people who make the investment decisions will have to change their measurement techniques.
We are seeing people take the collateral and the swap in the same strategy and same measurement strategy, so they can actually measure performance of that strategy including the drag that collateral has on the performance. That is a very difficult thing to do, and its really the cutting edge. In the past, people who managed the derivatives books measured just on the return of that derivatives book. And no one ever looked into the fact that the return on the derivatives book was great but the return on some of the collateral they had to post and particularly in the variance collateral actually put a drag on the overall funds. That was not included in their performance measurement. Now, people are realizing they need to include that measurement, and wondering how to do that. That is how collaterals effectively affect the investment decision process.
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Q&A
But these changes also affect trading. You want to get multiple requests for quotes and get those values back, but you also want to include your cost of collateral, your cost of clearing, and the true cost of the transaction. You need to include more of the cost as part of the execution process. It becomes pretty difficult to estimate the true cost. People need to determine whether they need to change their best execution policies around this, and how to do that. Q: Not all new entrants need to register in the U.S.
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Mark Israel: No, they probably will not need it. It depends on what you are going to do for your derivatives exposure and strategies.
New entrants may end up choosing their strategies a little bit more wisely and delay having to file for registration for long as possible.
At Sapient Global Markets, we tend to see firms who have been around a year or so who all of a sudden receive some sizable institutional money and have to scale up. New entrants are no longer new. Those who start now expect to grow fairly rapidly and want to know how to set it up for success up front, so they do not run into growth problems two years down the line. You also have the other side of the spectrum with firms like Soros, which are getting out of this because they do not want to deal with regulatory challenges. Q: You said new entrants are no longer new. What do you mean by that? Mark Israel: We also see a lot of hedge funds churn, firms starting and going out of business, and starting new firms again.
Most firms are saying they wont change their best execution too dramatically, but they definitely want to include more of the costs and have visibility into that as part of their execution process.
Obviously, this entails change in the middle office, and in settlement clearing. It has less of an effect on the asset managers if they are already trading and using electronic venues for derivatives. That involves a technical challenge rather than operational challenge, which has a number of implications. Then there is the back office issue of managing collateral and working with whats accepted. Those are the big operational changes on the clearing side. There are a couple of other changes now in the US; if you are a sizeable enough hedge fund, Form PF is a registration issue and, obviously, if you are a new fund, you have to register and deal with that headache. But most firms have figured out how to deal with registration a process standpoint. At the end of January, beginning of February, everyone woke up and realized they had to fill out Form PF by June.
I do think that there is a rotation.

I also think there is still movement of people from investment banking to 23
Q&A
hedge funds as well. You see people who were working at someone elses hedge fund. Then they realize they can do it themselves. Or there are firms that find themselves underwater; they decide to just give the money back and start over. Then you see firms that have gotten too big and decide to sub-divide. Or all of a sudden some of the partners go off and start a different strategy on a different fund. They may actually still share office space. They may still be somewhat affiliated, but are trying to stay smaller and nimbler. And there are a number of people leaving investment banks and going to asset management side; that inevitably means a large percentage of people who want to start their own hedge funds and trade profit, particularly with prop desks no longer being allowed.
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Seeders Corner
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After closing two vintage seeding funds, SkyBridge is creating a new emerging manager product
Anthony Scaramucci launched SkyBridge Capital in 2005 with no capital. Last year, he told Opalesque in a TV interview last year the firm had almost $8bn in AuM in seeding, fund of hedge funds and advisory businesses. A great self-promoter, the ex-Goldmanite also authored a couple of books on hedge funds, appears regularly on TV, and his company has been organising the popular SkyBridge Alternatives Conferences (SALT) for the last three years (last one was in May). He throws his net in all seas when it comes to investors, and apparently, at least 63% of SkyBridges 17,000 investors are small investors. Anthony Scaramucci New York-based SkyBridge started out as an incubator. But as opportunities abounded after the financial crisis of 2008, the firm acquired Citigroup Inc.s fund of hedge fund (FoHF) business, adding $4.2bn to SkyBridges assets and bringing the firms assets under management (AuM) to $5.6bn then. At the end of May 2012, several media reports said that SkyBridge was closing the two seeding funds and returning capital to investors due to lacklustre performance. The two funds SkyBridge I and II, launched in 2006 and 2008 respectively managed $260m assets or about 4% of the firms $6.4bn assets. The hedge fund seeding business is a lot like venture capital, Scaramucci told Opalesque in a recent interview, where there are only so many variables that you can control one of which being the investment cycle. He believes now that 2005, 2006 and 2007, which were periods of accented leverage that lead to 2008, were not the best time to start in incubation. I think that the business is still a good business and we still have one seeding fund that has done quite well, but the funds that we started in 2006 and 2008 respectively clearly, we could have selected better managers, but we were victimized by a 50%, 60% drop in market and with correlations on almost every asset, he explains. Our early stage managers could not withstand that financial hurricane. He is not the only seeder who started out during this period, he adds, and who got out of it.
The hedge fund seeding business is a lot like venture capital, where there are only so many variables that you can control one of which being the investment cycle.
The firm made a client-friendly decision, released the investors from the funds lock-ups and gave them the choice to either redeem or redeploy in other SkyBridge products.
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Seeders Corner
Not wanting to leave the seeding business behind completely, SkyBridge is in the process of creating another emerging manager product, a fund of funds, which would be more focused on early or later stage investing, as opposed to Day One. We basically believe that there is a group of smaller managers that we can give capital to and potentially have or get some economics from them or price concessions that would be beneficial to our clients, he explains. That it is a little different from seeding This would be later stage. SkyBridge generates its revenue from its fees. It keeps the seeding part of the business separate from the FoHF part. Indeed, through its main FoHF business, it does not invest in products that have less than a three-year track record and at least $250m in AuM. The firm also aims to expand its FoHF business. Smaller managers are still out of fashion, Scaramucci says, as most of the assets raised by the hedge fund industry go to the top 300 managers. But this trend will turn. What typically happens is you go through almost like a fashion cycle in investing - we think we are in the investment business, but we are also in the fashion industry, he says. Macro guys were very much in favour in the late 90s, now they are out of favour. Long/short [funds], which make up the preponderance of hedge funds having done super well over the last three or four years, have become less in vogue.
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Smaller managers are not in vogue because investors are wary of the failure risk attached to them. That is, he believes, the biggest factor going against smaller managers. But nothing is permanent, he adds. And he is optimistic. The current downward slope will stop once excesses are cleaned out of the financial system. Then the sturdier smaller managers who manage to survive through all this will turn out well and will become the opportunity that was. Another project that SkyBridge is working on is building its conference business in Asia. The next Asia SALT conference will be held in Singapore in October. Scaramucci is optimistic about the hedge fund business at large too. He believes the industry will triple in terms of assets in ten years. If you have $2 trillion and the industry performs at about 7% in total. If you do the compounding of that, over ten years, the industry will grow from $2 trillion to $4 trillion. So, all you need is a 7% return to get it to double. Then if the industry were to raise $200 billion of assets per year over the ten years, that is another $2 trillion and now you are at $6 trillion.
The industry will triple in ten years.

From the trends and the way assets have flowed to the industry, he does not think the suggestion that there would be an additional $200 billion of allocations from the worlds individual investors and pension funds is ridiculous. I think that the prospects for this industry are incredible despite what is going on in the world because the industry, over the last 17 years, it has done a good job, he notes. So, there will be a natural gravitation of 26
Smaller managers are still out of fashion, as most of the assets raised by the hedge fund industry go to the top 300 managers. But this trend will turn.
Seeders Corner
assets. He accepts there appears to be some overcrowding in the space he points to technology as the issue. Today, we have a tsunami of information washing on the shore of every major city, and what looks overcrowded may not in fact be so. Thomas Malthus said that we would be all starving by now, he adds. If you looked at the logarithmic movement of population growth, he said that would grow exponentially, but food would grow in a linear way and we would all be starving. That did not happen. The Little Book of Hedge Funds is his second book. Two years ago, he published Goodbye Gordon Gekko: How to Find Your Fortune Without Losing Your Soul. Published by Wiley in May, the new 235-page book aims to introduce hedge funds to the world especially the world of smaller investors. He believes hedge funds should be accessible to those who have $1m or $2m of net worth. Scaramucci included the SkyBridge due diligence questionnaire at the end of the book, a 25-year study of what is important in the industry. For me I really want to give people a chance to get more education about the industry. So, I wrote that book more in laymans terms. certainly super sophisticated people may not find that book to be worthwhile, but a lot of younger people or people that are just getting started in the industry or want to learn more about hedge funds will have a much better understanding what is going on. He points out that blue-collar American workers have money in the hedge
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fund industry and are not aware of it; as indeed they have a pension fund which might invest in the hedge fund space.
Blue-collar American workers have money in the hedge fund industry and are not aware of it.
I believe that the industry is adding value, he concludes. There are people out there who think it is not. I try to give both perspectives in the book. I am always curious about what the other side is saying, because there are a lot of smart people who think differently.
See Opalesques reports from the May 2012 SALT conference: Opalesque Exclusive: New managers may be facing a perfect storm of obstacles: Click here Opalesque Exclusive: $5bn the magic number for hedge funds: Click here
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Servicers Spot
ISSUE 06 June 2012
BNY Mellon: Do not underestimate the extent of upcoming regulations

Mark Mannion, head of relationship management for EMEA at BNY Mellon Alternative Investment Services, an awardwinning fund administrator, believes that fund managers should not underestimate the extent of upcoming regulations especially in three very important areas. First, Mannion told Opalesque in an interview, from the U.S. perspective, managers will have to register with the SEC. And subject to certain thresholds and exemptions, they may need to file very extensive Form PFs on a quarterly Funds now need to put themselves into a position where they will be ready to comply with the FATCA Act in 2014, Mannion explains. At the point of launch, we ensure that the new hedge funds application forms and documentation will work from a FATCA perspective, by collecting that information that you need in order to set-up each investor on the correct basis in the Transfer Agency System. That will allow us to report, where that is appropriate, to the appropriate regime on an annual basis or indeed, in certain instances, to withhold tax in respect of certain investors. And the third area is the AIFMD. The European Union will start implementing the Alternative Investment Fund Managers Directive (AIFMD) next year. Ahead of that, hedge funds could look at the possibility of adopting the UCITS (Undertakings for Collective Investment in Transferable Securities Directives) fund structure. UCITS, not being captured within the AIFMD, means that you can go down that route subject to the investment strategy being appropriate, Mannion notes. But if managers keep their offshore or EU-domiciled (nonUCITS) funds as such, they need to ensure that they are well positioned from an AIFMD perspective when those regulations do come into force. As the largest provider of custody depository services in Europe, we are well placed to be in a position to advice new hedge funds as to how we see the particular regulations playing out, and what that is likely to mean in terms of the future need for a depository for non-EU funds, Mannion adds. He also points to the possible increase in cost around custodial services 28
Mark Mannion basis.
Indeed, the new SEC rule requires investment advisers registered with the SEC who advise one or more private funds and have at least $150 million in private fund assets under management to file Form PF with the SEC effective March 31, 2012. As significant amounts of portfolio data have to be included in that Form, BNY Mellon can help fund managers through its completion to ensure they are compliant with the SECs requirements. The second area is FATCA. Foreign Account Tax Compliance Act (FATCA) is part of U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.
Servicers Spot
associated with the Directive. Because there are additional duties placed at the custodian in terms of tracking the activities of a hedge fund, but also and probably more importantly, the liability aspect will change significantly to include strict liability in certain instances. Name: BNY Mellon Headquarters: New York, U.S. Other offices in: 36 countries
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Established in: BNY Mellon was established in 2007 from the merger of Mellon Financial Corporation (founded in 1869) and The Bank of New York Company, Inc. (founded in 1784). Core service offering: Provider of financial services for institutions, corporations and high-net-worth individuals, offering investment management and investment services. Related services: The firm also offers a wide range of cash management, foreign exchange, collateral management, trust, operational outsourcing and custody services to the alternative investment industry. Serving: more than 100 markets. Assets: BNY Mellon Alternative Investment Services has more than $450 billion of assets under administration for single manager hedge funds, funds of hedge funds and private equity. BNY Mellon has $26.6 trillion in assets under custody and administration and $1.3 trillion in assets under management. The group services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. Contact: www.bnymellon.com/contact/index.cfm Website: www.bnymellon.com/alternativeinvestmentservices/index.html
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Launches
New hedge fund launches in 1Q-12 increased to a level not reached since 2007 as hedge fund capital rose to a record level of $2.13 trillion, according to the latest Market Microstructure Industry Report, recently released by hedge fund data provider HFR (Hedge Fund Research, Inc.). New fund launches totalled 304 in the first quarter, narrowly eclipsing the 298 launches in 1Q-11 for the highest quarterly total since 4Q-07. Whats more, hedge fund liquidations also increased during the first quarter, with 232 funds closing, the highest quarterly liquidation total since 240 funds closed in 1Q-10.
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5. John Park, ex-portfolio manager at CQS Investments, formed New Jersey-based JPark Capital, and will launch his maiden hedge fund next month. 6. Toby Bartlett, a former manager at Citadel LLC and Highbridge Capital Management LLC, plans to start his own Asia-focused hedge fund in Hong Kong, Arena Capital, as soon as next month. 7. Two former managing directors of Och-Ziff Capital Management, Manoj Jain and Sohit Khurana, are starting their own hedge fund firm, Maso Capital, in Hong Kong by the end of the year. 8. Lawrence Greg Whalley is starting a new hedge fund called Copperwood with personnel from Centaurus Energy, a natural gas hedge fund that shuttered in May. 9. Bruce MacDonald and Dr. Patrick McSharry, who worked together at Winton Capital Management, set up UK-based Capitis Capital and launched their maiden hedge fund, the Rudolf Wolff Global Portfolio.
We recently heard of the following ex-hedge funders striking out on their own:
1. Aesir Capital Management LLC, formed in February by the former fixed income group of troubled hedge fund Diamondback Capital Management, is starting a new fund, Aesir Credit Master Fund Ltd, this month. 2. Robert Lacoursiere, a former partner at Paulson & Co, is launching equity hedge fund Petrarca Capital, together with former Paulson colleague James Fotheringham. 3. The first hedge fund from Dallas-based Commerce Street Investment Advisor, the firm that recently reunited former Highland Capital Management veterans Kurt Plumer and Richard Jakob, is launching this month. 4. The Crescent Point Group, an emerging markets private equity firm, formed Crescent Hill Capital Management, in Singapore. The new firms maiden offering, the Crescent Hill Asia Opportunities Fund, will debut 1 July with approximately $50m.
Former bankers starting new funds:

10. Odin Capital Management, a UK-based proprietary trading firm run by Goldman Sachs and Credit Suisse veterans, is launching its first hedge fund on 1 July. 11. Former Citigroup portfolio manager Yang Yeo and Janice Dunnett, who earlier ran Morgan Stanleys convertible bond franchise in the Asia Pacific, are preparing to launch a hedge fund, Naga Capital Master Fund, in Q32012.
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Launches
12. Sutesh Sharma, the former head of proprietary trading at Citigroup is to launch his new London-based hedge fund, Portman Square Capital, with around $500m this autumn. 13. PMorgan Chase & Co.s Deepak Gulati is holding talks with investors as he and a team of traders consider leaving the bank to start a hedge fund.
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New seeding ventures and platforms:

14. Mariner Investment Group LLC is starting a pool to invest in new hedge funds. The firm will hire people to manage capital allocations to start-ups, spinouts and new Mariner-advised or Mariner supported funds.
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Perspectives
New trading techniques for new managers
The link between social media and finance is stronger than ever, and new trading techniques incorporating social media are beginning to emerge, according to SBWire.com. Investors and traders around the world have been using social media trading signals to buy and sell stocks. Unlike complicated quantitative tactics, monitoring social media trading signals is something that anyone can do with an impressive 87.54% accuracy rate, as proven by a 2010 study done at Indiana University, the report says. (See related Opalesque Exclusive here). Meanwhile, hedge funds are sharply reducing spending on equity research from brokerage firms, in a sign that volatile markets are hurting demand for brokers lucrative client services, according to a survey by Greenwich Associates. A coincidence, surely.
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Japanese hedge fund industry is becoming Japanese-speaking

Ed Rogers, head of research and investment firms Rogers Investment Advisors, Wolver Hill Asset Management and Wolver Hill Advisors said during the recent Opalesque Japan Roundtable that 10 years ago, 95% of people who wanted to launch a hedge fund in Japan were foreigners; the rest were from Japanese managers. But the situation now has been completely reversed as almost all the new managers he speaks to in the Japan hedge funds space are Japanese who come from a proprietary trading desk or from another hedge fund or asset management company. Rogers said. There are quite a few people with deep experience running billions of dollars of investments, and they are all Japanese. That is actually a nice thing for people like us who operate from here because many of them do not speak a word of English. It is getting harder and harder for overseas investors to find those managers to invest in because if you do not speak Japanese, it is impossible to do the due diligence. (See Opalesque Exclusive here).
Seeders in Asia benefiting from 2008s severed ties

According to David Walker, 2008 was beneficial for allocators and seeders in Asia. Some of the worlds largest hedge funds in America then cut loose Asian experts managing local assets for them, he says. Thus, an allocator did not need relationships with the likes of Citadel, Highbridge Capital or DW Zwirn to access the best managers in Asia. These managers, with experience of the worlds most competitive hedge funds, started looking for start-up capital. And local seeders benefited in this buyers market.
Starting a hedge fund is a chicken and egg conundrum even in Singapore

Danny Yong, CIO of Dymon Asia, a Singapore-based Asian Global Macro hedge fund, during the latest Opalesque Singapore Roundtable, said that Singapores increased regulation while good in itself would raise the cost of starting a new fund. He also said I believe it is no longer feasible to launch a fund with $5m to $10m of start-up assets. The threshold would be more like $50m to $100m today. And then the million dollar question is
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Perspectives
how do newer managers out here in Asia get a seed of that size? Starting a hedge fund has become a chicken and egg conundrum. In the past, the issue was more about a perceived lack of talent or experience, but these days, new managers tend to be traders from the global investment banks, sovereign wealth funds or other larger hedge funds, with years of experience and solid track record. So there really isnt a lack of talent in the region. (See Opalesque Exclusive here).
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Citi forecasts less hedge funds but more institutional assets

According to a recent survey from Citi Prime Finance, institutional investors are increasingly embracing the risk management and diversification that hedge funds offer, and hedge funds are developing new products that compete with traditional, long-only managers. These trends could contribute to a sharp rise in hedge fund assets over the next few years. Indeed, institutional investors are refocusing allocations based on risk budgets rather than dollar-weighted allocations alone. And there could be an additional $2 trillion in new allocations to hedge fund firms in the form of regulated alternatives and long-only products. The report, however, does not forecast an increase in the number of hedge fund managers.
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Profiles
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How an equity long/short open mandate fund, with a dash of activism, can return almost 200% in a year
Kerrisdale Capital Partners LP is a fundamentally based, value oriented hedge fund currently featured in Opalesques Emerging Managers database. The Fund has an open mandate and seeks to benefit over the long term through the purchase and sale of securities trading at meaningful discrepancies to their intrinsic values. Additionally, the Fund looks to exploit market dislocations in uncrowded trades. To us, this means concentrating and navigating the portfolio towards newer or distressed areas of the markets that currently represent attractive risk-reward profiles, he explains. This approach is only effective when it is the principal tenet of your strategy. Without this commitment, the significant research bandwidth spent scouring capital markets for attractive opportunities and then becoming an expert in the space just isnt worth it.
Sahm Adrangi
And it has done very well. Launched in July 2009, it returned 38% that year, 66% the next year, 198% in 2011, and is up 11% YTD after losing 2% in May. Comparatively, the HFRI Equity Hedge Index posted its largest decline since September 2011, -4.1% in the month, paring its YTD gain to +1.8%, with losses across Growth, Energy and Emerging Markets strategies only partially offset by Short Bias funds, which gained over +7%. The fund now manages almost $27m, and the firm has grown from $15m to $112m in total AuM over the last year. According to Sean Donohue, Director of Marketing & IR at Kerrisdale Capital Management, LLC, the New York-based firm goes on the belief that broad markets are relatively efficient over the long-term and that the attractiveness of the risk-reward opportunity in specific asset classes can change dramatically over time as a result of capital market conditions, investor psychology and asset flows. So the firm invests with an Open Mandate.
Kerrisdale Capital Partners LP, performance from July 2009 to May 2012.
Open mandate means concentrating and navigating the portfolio towards newer or distressed areas of the markets that currently represent attractive risk-reward
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Profiles
profiles.
Sahm Adrangi, Kerrisdales founder and CIO, told Opalesque in an interview that he approaches the portfolio from two different directions. The first is what he calls the core book; long term investments that tend to be long-biased. The second is different. Our second approach is a bit unique is that we take our research and we share it with others, he says. We are not a very secretive hedge fund. Indeed the firm spreads the word through mailing lists, third-party websites and blogs (such as www.kerrisdalecap.com/blog.php.) Following the original hedge fund model of alerting the investing community about potentially shoddy stocks, it issues red flags and warnings about certain listed companies after researching them thoroughly. Kerrisdale, in its short life, has become famous for exposing USlisted Chinese companies. We were one of the first funds to begin exposing US listed Chinese companies that we believed were defrauding investors, he explains. Given that we take our research and we share it with others, it was a way for us to essentially employ a, sort of, activism That research can have a meaningful impact when we are enlightening investors about the dangers of owning given stocks. You can watch Adrangi explain his foray into listed Chinese companies in detail on Opalesque TV.
ISSUE 06 June 2012
The firm has since shifted to other sectors, as the US-listed Chinese reverse merger space has been down of late and many of the stocks in that space are depressed or low. We own a number of emerging market wireless companies, Adrangi notes. We own MTN Group in South Africa. It is Africas largest wireless operator. It is also the largest operator in countries like Syria, Iran, and Afghanistan. We think that that stock trades at an attractive valuation and it is going to continue to grow earnings as a lot of these countries in Africa and the Middle East increase cell phone penetration. The portfolio is also long a couple of derivatives exchange operators; Intercontinental Exchange (ICE) and the CME Group. Both are benefiting from international customers becoming increasingly active in the derivatives market. On top of that, ICE is expanding into Brazil and CME into Dubai. Kerrisdale is a bottom-up fundamental investor, Adrangi reminds us. Its goal is to invest long in good businesses that will go the long run and to invest short in frauds and business failures. In both cases, those stocks are going to either go up or down to zero regardless of how the market does.
That research can have a meaningful impact when we are enlightening investors about the dangers of owning given stocks.
The fund can be found in Opalesque Solutions Emerging Managers Database, which is available to Opalesque subscribers (you can subscribe here: Source). If you want your fund to be in the Emerging Managers Database, please send your fund details to Opalesques database team: db@opalesque.com.
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Profiles
ISSUE 06 June 2012
Global macro hedge fund Mansard predicts USD will outperform over the next 12 months
Leon Diamond believes that the next 12 months will see the US dollar outperform other developed market currencies. In an exclusive interview with Opalesque, the head of Mansard Capital, a London-based global macro hedge fund shop launched in July 2010, said that investors are already showing signs of concerns over the creditworthiness of the worlds major economies. Leon Diamond We continue to like being long USD vs developed markets, Diamond said. regional, and country-specific level. The fund seeks to invest in liquid market instruments allowing the fund to go completely to cash during times of uncertainty.
Strategy
Mansard Macro was launched in September 2010 with $1m in capital. Today, the funds assets are $40m with the money coming from fund of funds, high net worth individuals, internal money and wealth managers. The fund is an EU-domiciled SICAV fund domiciled in Malta and structured as an open-ended Maltese Professional Investor Fund with four currency share classes; USD, EUR, GBP & CHF. It is currently featured in Opalesque Solutions Emerging Managers Database. Mansard Macro focuses on G10 markets and adopts a thematic investment approach which allocates capital to macro investment themes on a global,
Mansard Macro SICAV, performance October 2010 April 2012.

The strategy proves to be working for Mansard as the fund was up +3.07% YTD as at the end of May. Compared with leading macro hedge fund indices, Mansard Macro delivered 0.15% (est.) in May, as the Dow Jones Credit Suisse Global Macro Index is up 0.19% (+1.53% YTD) and the Barclay Global Macro index lost 0.71% (est.) (+1.16% YTD).
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Profiles
According to Diamond, Mansard selected discretionary global macro because the strategy complements our investment philosophy which is rooted in theories of behavioural finance namely that Markets frequently over or under react to phenomena and thereby become mispriced relative to fundamentals over time. By employing a discretionary global macro strategy, we are able to look for trading opportunities arising from structural inefficiencies in the global capital markets and so generate persistent alpha over the long term whilst preserving capital. More importantly, Mansard Macro is managed by Diamond who has been running macro strategies since 2006.
ISSUE 06 June 2012
This is because Macro managers have a unique ability to understand and trade large-scale events in highly liquid markets during periods of high volatility and financial crisis. More often than not, Macro Managers do this by engineering convexity in their portfolios by tactically trading liquid markets, adding non correlated trades and exploiting the use of optionality (often long volatility).
Recently, Mansard launched a two times leverage share class to cater for investors that are seeking two times returns on its target return of Libor plus 6-7% (with volatility of 10%). Diamond explained that the fund has also seen demand from its investors for a UCITS compliant fund hence Mansard plans to launch a UCITS version of its strategy in Q3 of this year.
Diamonds global macro strategy focuses on three main areas; liquidity, understanding risk and trying to engineer optionality in the portfolio.
In the application of this strategy, the managers employ drawdown risk budgeting alongside disciplined stop-loss and profit taking principles because they believe that these principles are pivotal to long term success. This strict application of risk management principles means that we can go through periods where 60%-70% of the trades that we put on might be unprofitable, but the remainder of positions can still generate positive returns for the whole portfolio as we run profits. Typically, global macro funds do well during economic and market dislocations and the strategy is one of few strategies to have returned money to investors in all of the major dislocations, including the credit crunch, tech bubble, Russian bond crisis and others, Diamond said.
Market commentary
According to Diamond, Mansards managers see the current market as choppy and they expect these conditions to prevail in the months ahead for a number of reasons. Firstly, the looming U.S. fiscal situation is just beginning to hit the radar screens of investors worldwide. Mitt Romney is the unassailable frontrunner in the Republican nomination contest and, given that the timing of U.S. fiscal decisions that need to coincide quite closely with Election Day the press coverage on this topic is going to grow dramatically in the coming months. Secondly, after a liquidity-driven respite, European woes are surfacing once again. The underlying structural problems have not been resolved. Mansard believes that the market is somewhat complacent that Europeans will eventually solve their 37
Profiles
problems. Yet if this complacency is broken panic selling of European risk could follow. Thirdly, while China continues to grow, the Chinese property market remains weak, with home prices falling in a record 37 out of 70 cities (as tracked by the Chinese government). This means Chinese growth will be lower than it has been for several years (even though a generational change in leadership and numerous policy options make the prospect of a hard landing unlikely). For the rest of the year, Diamond remains confident that his program will achieve its target return of Libor plus 6-7%. We believe our long term portfolio is well positioned to take advantage of an evolving sovereign crisis in the market, while our short term book will offset market volatility from government intervention by tactically trading the markets to help generate alpha over the short term.
ISSUE 06 June 2012
- Komfie Manalo, Opalesque Asia
The fund can be found in Opalesque Solutions Emerging Managers Database, which is available to Opalesque subscribers (you can subscribe here: Source). If you want your fund to be in the Emerging Managers Database, please send your fund details to Opalesques database team: db@opalesque.com.
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Profiles
ISSUE 06 June 2012
RiverCrests global long/short fund goes net short on Europe

RiverCrest Global Equity Fund is a long/ short global equity fund which focuses on large cap and liquid securities and which seeks to identify and invest in core secular themes across global equity markets, with an investment style that employs both a fundamental and a technical approach. The Cayman-domiciled fund is managed by Alastair MacLeod and Peter Simon. Alastair MacLeod Launched in October 2011, it was down 3% that year and is up 8% YTD after losing 0.52% in May. Comparatively, the HFRI Equity Hedge Index was down 4.1% for the month and up 1.8% YTD. The fund is part of Opalesques Emerging Managers database. RiverCrest Capital is an independent absolute return orientated fund management business based in London, founded by its management team and Pacific Investments PLC, a private investment company (which has historically established and supported a number of asset management companies such as Thames River Capital, Nevsky Capital, River & Mercantile and Liontrust). RiverCrests other fund is the RiverCrest European Equity Alpha Fund, launched in December 2011 on the Dublin domiciled Morgan Stanley FundLogic Alternatives platform, which is also featured in Opalesques Emerging Managers database. Alastair MacLeod recently told Opalesque in an interview that the portfolio is net short in Europe, with a very defensive, very yield-focused long book. The European long book focuses on the tobacco, healthcare, UK telecoms, and
beverages sectors. The European short book has a cyclical bias emphasizing industrials, materials and energy. MacLeod does not think the policymakers can put some closure on European issues. I dont really see that; at best the market trades in a range. What Mario Draghi said recently is very interesting; he highlighted the fact that there is only so much you can do in terms of monetary instruments. Id agree that the central banks have done as much as they can for the time being, they are out of ammunition, and it is really over to the politicians to sort things out.
RiverCrest Global Equity Fund, performance from October 2011 to May 2012.
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Profiles
The risk is that we have another leg down before this all settles down in Europe, he continues. Yes, it all looks a little bit oversold, but I do not think the market looks particularly cheap; there is a clear risk to cyclical earnings forecasts over the course of the next three to six months. I would not be surprised if we started to hear some more negative commentary coming out of this more cyclical part of European corporate market in the course of the next four to six weeks, as we start seeing earnings reports for the first half.
ISSUE 06 June 2012
The fund can be found in Opalesque Solutions Emerging Managers Database, which is available to Opalesque subscribers (you can subscribe here: Source). If you want your fund to be in the Emerging Managers Database, please send your fund information to Opalesques database team: db@opalesque.com.
He sees opportunities in the healthcare stocks and some of the more defensive yield names, but he is not convinced that there is much value in the cyclical part of the market. He expects another round of downgrades.
The fund takes directional views, and would be in a position to take advantage of another down leg through bearish thematic bets, should things get worse. And the fund has a mandate to get short. So it is a case of timing those moves, he adds. As for U.S. stocks, the fund also has a clear defensive tilt even if it is a bit more positive on the housing-related sector, which MacLeod sees as emerging from a seven-year slump. He believes that the recent weakness in commodities and the improving job situation should support the US consumer. However, the European problems might start affecting the U.S. next year and slow down its growth. Technically, the US market looks vulnerable and Im concerned the market is starting to look towards medium term cyclical risks, he explains. At current levels, we would also argue that there is little relative valuation support in US equities.
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Document Disclosure
This newsletter is designed to include a wide variety of industry voices and information. To participate, send your news, events and viewpoints to gravrand@opalesque.com. To be considered for inclusion information must be factual, not promotional in nature and ideally address deep industry issues and reveal insight into how strategies operate, all delivered from a balanced perspective that addresses risk frank terms.
ISSUE 06 June 2012
THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. YOU COULD LOOSE ALL OF YOUR INVESTMENT OR MORE THAN YOU INITIALLY INVEST. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (CTA). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (CFTC) REQUIRE THAT PROSPECTIVE CUSTOMERS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENTS COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. YOU ARE ENCOURAGED TO ACCESS THE DISCLOSURE DOCUMENT. YOU WILL NOT INCUR ANY ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH WILL ALSO BE PROVIDED TO YOU AT NO ADDITIONAL COST. MUCH OF THE DATA CONTAINED IN THIS REPORT IS TAKEN FROM SOURCES WHICH COULD DEPEND ON THE CTA TO SELF REPORT THEIR INFORMATION AND OR PERFORMANCE. AS SUCH, WHILE THE INFORMATION IN THIS REPORT AND REGARDING ALL CTA COMMUNICATION IS BELIEVED TO BE RELIABLE AND ACCURATE, PFG BEST CAN MAKE NO GUARANTEE RELATIVE TO SAME. THE AUTHOR IS A REGISTERED ASSOCIATED PERSON WITH THE NATIONAL FUTURES ASSOCIATION. No part of this publication or website may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher.
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ISSUE 06 June 2012
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ISSUE 06 June 2012
PUBLISHER Matthias Knab - knab@opalesque.com EDITOR Benedicte Gravrand - gravrand@opalesque.com ADVERTISING DIRECTOR Greg Despoelberch - gdespo@opalesque.com CONTRIBUTORS Peter Urbani, Florian Guldner, Komfie Manalo, Fundana, 47 Degrees North FOR REPRINTS OF ARTICLES, PLEASE CONTACT: Greg Despoelberch - gdespo@opalesque.com
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Opalesque NewManagers Jun 2012

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Opalesque NewManagers Jun 2012

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ISSUE 06 June 2012

Opalesques Emerging Manager Monitor

ISSUE 01 June 2012 ISSUE 06 September 2011

EDITORIAL EMANAGERS INDICES

NEW FUNDS IN THE DATABASE PETER URBANI STATISTICS

Funds that have recently joined Opalesques Emerging Managers Database.

28 SERVICERS SPOT 30 LAUNCHES

BNY Mellon: Do not underestimate the extent of upcoming regulations

12 FUNDANA SERIES 16 FOCUS

A recapitulation of maiden launches in late May and June 2012 so far.

The scandal of founders shares.

New Managers | Opalesques Emerging Manager Monitor - June 2012

ISSUE 06 June 2012

Past issues of New Managers can be found here: www.opalesque.com/Archive-New-Managers.html

New Managers | Opalesques Emerging Manager Monitor - June 2012

ISSUE 06 June 2012

Emanagers Total Index loses 0.74% in May (+1.69% YTD)

New Managers | Opalesques Emerging Manager Monitor - June 2012

ISSUE 06 June 2012

Performance (in %), Volatility and Equity Market Beta (in %)

Emanagers Hedge Fund Index

Emanagers CTA Index

Eurekahedge Hedge Fund Index Newedge CTA Index MSCI World

-1.73 3.00 -8.99

1.70 2.51 -0.42

-3.95 0.29 -13.06

-3.81 -4.52 -7.61

10.79 9.26 9.40

20.60 -4.31 27.07

5.93 6.96 20.02

- Florian Guldner, Opalesque Research

New Funds in the database

ISSUE 06 June 2012

New Managers | Opalesques Emerging Manager Monitor - June 2012

Peter Urbanis Statistics Sell in May and buy a CTA

ISSUE 06 June 2012

New Managers | Opalesques Emerging Manager Monitor - June 2012

Peter Urbanis Statistics

ISSUE 06 June 2012

CTA Average Monthy Returns

0.80 0.50 0.40

0.00 Avg Nov - Apr Avg May - Oct

0.00 Avg Nov - Apr Avg May - Oct

Peter Urbanis Statistics

ISSUE 06 June 2012

The performance of the various strategies are summarised overleaf.

The performance of the various strategies are summarised overleaf.

Summary of Results for various Sell in May Strategies

ISSUE 06 June 2012

Peter Urbanis Statistics

ISSUE 06 June 2012

S&P500 and CTA's Best Fit Distributions

New Managers | Opalesques Emerging Manager Monitor - June 2012

Interactive Screening Tool

Interactive Screening Tool

ISSUE 06 June 2012

New Managers | Opalesques Emerging Manager Monitor - June 2012

ISSUE 06 June 2012

Whats the (big) deal?

Should I look for a seed deal?

New Managers | Opalesques Emerging Manager Monitor - June 2012

ISSUE 06 June 2012

External AUM raised Day 1 <25M$ 25-50M$ 50-100M$ >100M$

With seed deal 62% 8% 16% 14%