Analysis: Hedge funds register, wait for SEC to visit

Hedge fund managers are increasingly nervous about getting a knock on the door from U.S. securities regulators now that a new rule requires them to register as investment advisers and provide lots of data about their inner workings as a result.

Hundreds of large managers, which already employ sizable legal teams, took the mechanics of meeting the March 30 deadline in stride, industry consultants say.

The cost of paying lawyers and adding compliance workers to ready for the new requirement, which was part of the Dodd-Frank financial reform act, generally proved most burdensome for funds with less than $500 million in assets. And all types of funds --large and small -- had to commit hundreds of hours going through the process of checking boxes and writing narratives.

Now a far bigger concern for the industry is what the U.S. Securities and Exchange Commission will do with some of the information they are required to provide. Some fear a possible "witch hunt" from regulators eager to make an example of a fund that has been sloppy in enforcing the new rules, industry analysts say.

"What worries big hedge fund managers the most right now are the chances of having an SEC examiner show up at their doors," said Gary Watkins, a founding partner at consulting firm ACA Compliance Group. "And the chances are that there will be visits sooner rather than later."

The new rule, among other things, requires funds to provide information about any affiliates, potential conflicts of interest and details about their investors.

The push to require hedge fund managers with $100 million or more in assets under management to register with the SEC has been a long time coming. An earlier registration rule was struck down by the courts in 2005. But the idea made a comeback in the aftermath of the financial crisis and the collapse of giant Ponzi schemes like the one orchestrated by Bernard Madoff.

Now, for the first time, powerful hedge fund managers like Tiger Global Management's Chase Coleman, Tudor Investment Corporations' Paul Tudor Jones and Moore Capital Management's Louis Bacon will have to share information with the SEC and some of that with the general public as well. The fund firms did not immediately respond to requests for comment on the matter.

Thanks to the registration process, anyone with access to a computer can now look up some of the basic information hedge funds must now provide to regulators on the SEC's Investment Adviser Public Disclosure website.

"Registration does not mean hedge funds can now sit back and relax, as they are effectively on the line now," said Jonathan Saxton, who advises hedge funds on compliance at Kinetic Partners. "Now, the SEC could pay a visit, and firms are definitely nervous about that."

To be sure, for some big and well-known hedge fund managers the arrival of the registration deadline is no big deal. Managers like John Paulson of Paulson & Co, David Einhorn of Greenlight Capital and Bill Ackman of Pershing Square Capital Management have been registered with the SEC for quite a while.

John Nester, an SEC spokesman, says concerns about regulators using registration to embark on a campaign against hedge funds is overblown.

"I'm not aware of anything that would provide a basis for such a view," he said.

So far this year, the SEC has received registration information from about 1,300 hedge fund advisers. To handle the new volume of work, the regulatory agency has hired 10 additional examiners to review investment advisers and companies in fiscal 2012 and has the ability to hire more in fiscal 2013.

Examiners are likely to look most closely at which prime brokers, accountants, and auditors hedge funds use; how much money they have under management and whether that number fluctuates dramatically; and what types of investment strategies managers are pursuing, lawyers and consultants said.

"The exams that will be done now are all risk-based," said Marc Elovitz who works with hedge funds as a partner at law firm Schulte Roth & Zabel. "Previously when the SEC came to review a fund, they knew nothing about you and it was very much a fact finding investigation. Now they are doing a lot more to get information on the front end."

In addition to the data the funds have to submit this week, many will be required to submit a so-called Form PF starting in a few months. That data is meant to be used by the Financial Stability Oversight Council only and is meant to remain confidential. However, some people worry it might fall into the wrong hands.

"There is also significant concern about the protection of the proprietary information collected through this process, though the SEC has made clear it is taking all the necessary steps to keep our members' data secure," said Richard Baker, President of the industry lobby group Managed Funds Association.

Despite many of the worries, a number of newcomers to the industry took the process in stride as part of an evolving industry where investors like pension funds simply demand more transparency.

Mick McGuire got busy registering his San Francisco-based Marcato Capital Management more than a year before the impending SEC rules prompted everyone else to get busy too.

McGuire had plenty of experience with registration having previously worked at Ackman's Pershing Square Capital Management, which also registered as a young fund long before it became a darling in the pension fund world and grew to manage roughly $10 billion.

"As a newer fund we had the advantage of being able to establish these procedures at the very beginning and to capture all the information we need to meet the requirements," said McGuire. "But for a multi-strategy fund that has been around for years and has eight offices around the world, I can see how the process might have been more cumbersome," he added.

Read more »

Hedge fund COMAC stays bearish despite rally

Hedge fund COMAC Capital, the $5.2 billion (3.3 billion pound) macro fund run by Colm O'Shea, is bracing for a fresh round of turmoil in European markets, people familiar with the fund said, and is sticking to its bearish strategy despite losing out in this year's rally.

London-based COMAC, down more than 5 percent in the period up to mid-March this year, believes the flood of cheap central bank cash into parched markets is only a temporary fix for Europe's ills, and masks the region's poor economic prospects, these people said.

Most hedge funds are returning to winning ways in 2012 thanks to the rally in equity and bond markets and a bullish stance. The average hedge fund has risen 5.03 percent from the start of the year up to March 15, according to the HFRI Fund Weighted Composite Index.

Bullish funds have benefited from the European Central Bank's one trillion euro cash injection into the financial system and greater confidence that policymakers have finally stopped the Euro zone debt crisis from spiralling further out of control.

But some macro funds are positioning themselves for a new downturn in Europe, at the same time as they see an improved economic outlook for the U.S.

Many have bought options linked to volatility, which will rise in price if there is a resumption of the panic that racked markets for most of 2011, people familiar with the sector said.

"A lot of these funds think all this quantitative easing is just a temporary fix and the underlying problems are still there," one of the macro-investors said.

Macro funds make money by wagering how economic trends will play out across asset classes including in rates, currencies, commodities and equities, and are among the best-known.

Well-known funds in the sector include Brevan Howard, Moore Capital and Tudor Investment, as well as George Soros' Quantum Fund, where O'Shea used to work as a macro trader.

COMAC has made several successful calls in the past. It returned 5 percent in 2011 compared with a fall of more than 5 percent booked by the average fund.

It has returned an annualised profit of upwards of 8 percent since its 2005 inception, data seen by Reuters shows.

O'Shea, who read economics at the University of Cambridge, also performed well in 2008 after several successful bets including one on falling U.S. interest rates.

According to its website, COMAC invests across global markets to try and capture "directional market movements that commonly have a strong fundamental reasoning based upon economic and political analysis."

Investors looking for protection against volatile and uncertain markets have made macro funds among the most popular strategies this year.

In a recent survey conducted by Credit Suisse, investors said macro was the most sought-after strategy in 2012, while also predicting that they would be the best performing.

COMAC declined to comment.

Read more »

Commodity funds BlueGold, Clive miss out on oil rally

* BlueGold down 2 percent on first two months of year

* Clive up 3 percent, but trails broader market returns

By Barani Krishnan

March 16 (Reuters) - At least two major commodity funds have missed out on this year's oil rally, one of the energy market's biggest since the financial crisis, market sources said.

BlueGold and Clive Capital, both based in London and known for taking big bets on oil, have relatively weak returns to show for the first two months of the year when crude prices put in one of their strongest two-month performances since 2009.

Trade data shows that some major speculators, including hedge funds, have started building bearish positions on U.S. crude.

Oil prices have been range-bound since the start of March, indicating the run-up that accelerated last month on supply worries and improving U.S. economic data may have lost steam.

BlueGold, which has more than $1 billion in investor funds and is known for its focus on oil, is down about 2 percent on the year. The fund, led by former Vitol trader Pierre Andurand, logged a 1.5 percent loss in January and a half percent drop in February, according to people who have seen its performance data.

Clive, which has about $4 billion under management, is up about 3 percent for the year, after a gain of around 4 percent in February that offset January's 1 percent drop, industry sources said. Clive, led by ex-Moore Capital trader Chris Levett, is also a significant player in metals. But it gained attention in May last year for losing about $400 million in a week on oil after panic selling in crude markets.

This year's star among oil funds appears to be Andy Hall's Astenbeck Management, up more than 13 percent so far, according to an investor in the fund. Astenbeck, based in Connecticut, manages about $5 billion. The better returns mark a rebound for the fund after its first ever annual loss in 2011.

Astenbeck's numbers are not only better than BlueGold's and Clive's. They also outshine the average energy hedge fund, which is up about 8 percent cumulatively for January and February, according to data compiled by hedgefund.net. The broader hedge fund universe, which manages a total of $2 trillion, is up about 6 percent.

Sources that track BlueGold and Clive said managers at the two funds appeared to be deliberately staying nimble with their oil positions, possibly due to skepticism about the rally's staying power.

U.S. crude prices are up 6 percent on the year. Gains in London's Brent crude are more than double that, rising 15 percent.

"They haven't exactly told their investors or anyone for that matter that they don't believe the way this market has been going," said a source who receives performance and other data issued by BlueGold and Clive.

"But their lack of bullish exposure indicates they are ready to pounce the other way the moment prices turn, if they're not already shorting the market that is," added the source.

BlueGold and Clive could not be reached for comment.

Hedge funds and other money managers raised their short positions in futures and options linked to U.S. crude by the equivalent of more than 17 million barrels in the week ending March 6, according to the Commodity Futures Trading Commission.

It was by far the largest addition to short interest in nine months, since the first week of June 2011, when hedge funds and other investors raised their short positions by the equivalent of almost 22 million barrels, in the aftermath of last May's sudden market crash.

Shorting the U.S. oil market remains strictly a minority interest, however. The overwhelming majority of hedge funds remain bullish on the market given its more limited gains since the start of the year compared with Brent. Hedge fund long positions amount to nearly 326 million barrels of oil, compared with just 45 million worth of shorts.

"I know a lot of people who want to be bearish. But the oil price keeps going up, and up, and up, so it's kind of hard for them to take major exposures," said an analyst who speaks regularly with commodity hedge fund managers.

Oil prices have largely run up on investor fear about sanctions on Iranian oil due the Tehran's ongoing nuclear conflict with the West. A slow and steady improvement in the U.S. economy and jobs market have also underpinned gains.

But since February's outsized run that added 10 percent to Brent futures and 9 percent to U.S. crude prices, the market has advanced little. Brent has been trapped at around $125 a barrel while U.S. crude trades faces strong resistance at $110.

"We're at very high levels already, and it'll require another major market shock to propel us further," said Stephen Schork, editor of the Schork Report, an industry newsletter.

"By the same token, if there's any peaceful resolution to the Iranian conflict, we could see a very quick and significant downdraft in prices," said Schork, who estimates a risk premium of at least $15 a barrel over Tehran.

In Thursday's trading, Brent prices initially fell $3 a barrel before paring losses towards the close on news that Britain had agreed to cooperate with the United States in releasing strategic oil reserves later this year.

Fears about demand destruction in fuel could be another reason for fund managers' hesistancy to jump onto the oil rally bandwagon.

The national average for a gallon of regular U.S. gasoline rose to $3.8148 on March 9, according to the survey of gasoline retailers in the continental United States. In the final week of December, the price was just around $3.26.

In the euro zone, motorists are already paying record high prices for gasoline, at above $8 per gallon in euro terms.

"Before the crash of 2008, everything was going up on the belief that the global economy could support anything," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

"Now we know that prices can only rise so much before something has to give."

Read more »