Wednesday, 25 May 2011

How Hedge Funds Can React to the Insider Trading Enforcement Initatives of the US Govt

According to law firm Baker & McKenzie, the recent conviction of Galleon Group's Raj Rajaratnam serves as a further alert to hedge funds of the heightened risks posed by the US government’s sweeping insider trading enforcement initiative and the need to mitigate those risks proactively. In a client alert partner Marc Litt gave six things you need to know about the government focus on insider trading, and proffered some suggestions as to how hedge fund management businesses  should respond.  As a significant part of the readership of this website is hedge fund managers based in the United States I thought I would share the most relevant parts of the client alert.

Six Things You Need To Know

Among the lessons to be drawn from the government’s ongoing focus on insider trading and the conviction of Rajaratnam are the following:
1. More to come. Although the Rajaratnam conviction marks the highwater mark, to date, of the government’s crackdown on insider trading, it does not mark the end of that effort; there is more to come.
2. Aggressive enforcement tactics. Prosecutors will continue to use aggressive enforcement tactics, including wiretaps, search warrants and recordings made by cooperators, to build criminal insider trading cases.
3. Not just criminal enforcement. Where there is insufficient evidence to bring criminal prosecutions, regulators may instead seek sanctions through civil and administrative proceedings.
4. Reputational damage. Mere association with insider trading allegations visits severe reputational damage on the institutions involved and, especially in the case of hedge funds, can result in dissolution.
5. Compliance counts. The best way to avoid being swept into the enforcement net is to develop a rigorous insider trading compliance program, including a zero tolerance tone from the top, routine training, clear policies on using, or serving as part of, so-called “expert networks,” and spot-checks on whether the compliance program is being followed.
6. Be prepared. Develop a plan and provide training on how to react should the Government knock on the door.

How A Hedge Fund Business Should Respond

1. Review your compliance program, particularly your policies and procedures designed to prevent insider trading. Assess whether sufficient resources have been devoted to compliance.
2. Make sure that the use of expert networks or consultants is carefully controlled. Although the use of such resources is not per se illegal, it is a practice that is under scrutiny. A hedge fund should take appropriate steps to ensure that any information it receives is not material nonpublic information, including conducting due diligence on the source of the information.
3. Provide regular training on insider training geared to the investment strategy followed by the fund(s). Make sure that traders understand the risk to the firms reputation and existence were it to be associated with insider trading or any other illegal activity.
4. Prepare for the unexpected. Develop protocols and train employees with respect to: (a) securing information (hard-copy and digital) in the event the fund receives a subpoena; (b) responding to a search warrant; and (c) responding to approaches by law enforcement.

 For further input go to the website of the law firm ( or contact Marc Litt at +1 212 626 4454 ( or

Wednesday, 18 May 2011

A State Pension Plan Hedge Fund Mandate - It Takes a While

American investing institutions are the dominant source of capital for the hedge fund industry. It is important to understand how and why they act. The Wyoming Retirement System just announced who would be managing its assets for its first hedge fund allocations. The winners of the mandates are not surprising, but here the focus is on the process that resulted in those winners. A search of the internet for references to the Wyoming Retirement System and hedge funds allows you to put together a chronology from the headlines:

June 2001: "Wyoming Studies Alts"

…The Wyoming pension fund is planning to make a decision about whether to push into alternatives investments such as real estate, private equity and hedge funds. ..Plan officials are working with the fund's consultant Buck Consultants.

August 2004: "Wyoming Puts Hedge Funds on the Back Burner"

…Wyoming has been slowly continuing its hedge fund education ... and would likely consider a fund of funds to temper its risk…

November 2004: "Wyoming to Decide on Hedge Funds Next Year"

…The plan has been mulling an allocation to hedge funds for more than a year…Mellon Consultants is advising…

March 2005: "Wyoming Appoints PIMCO for Absolute Return Mandate"

March 2009: "Trent May Joins Wyoming as First CIO"

…Trent May joins from hedge fund Deer Creek Capital Partners…

August 2009: "Wyoming Taps NEPC as General Consultant"

November 2009: "Wyoming Considers Its First Hedge Fund Investment"

… The change of tack has much to do with the retention of New England Pension Consulting as an advisor by the retirement system in September…

April 2010: "Wyoming Board Gives Permission to Invest in Hedge Funds"

August 2010: "Wyoming Puts out Combined Search"

…Wyoming Retirement System, is searching for multiple managers to run up to $560 million combined in a global tactical asset allocation strategy and a global macro hedge fund strategy… The system plans to hire three to six managers for a global macro hedge fund mandate, which will make up 30% of the $560 million. Trent May said the number of managers hired for both investments is dependent on RFP responses. The two investments will make up about 10% of the entire portfolio.

As a responsible and accountable public body the Wyoming Retirement System has to make available documentation for its processes and meetings. The source document for the combined search is well put together, and can been seen here.

The selection process uses the Due Diligence Questionnaire (DDQ) as the key screening document. The risk/ return data should reduce the list of all applicants down to long list. And the DDQ can be used to get to a short list that can be evaluated for full-blown due diligence. New England Pension Consultants have put together some great questions to ask in addition to those in the standard questionnaire. They are in the full document for which the link has been given. In this case NEPC have used the Greenwich Roundtable Global Macro DDQ as the starting point – and very good that is too, as are all the Roundtable Guides. The following are extracts from the request for proposals for the hedge fund mandate:

Global Macro Hedge Fund Managers
To be considered for appointment as a global macro hedge fund manager pursuant to this proposal, investment management firms shall have not less than:
  1. $250 million of verifiable total firm assets under management
  2. Two (2) years verifiable Global Macro investment experience

List of Requested Documents & Data

Historical Monthly Returns & Monthly AuM in Excel
Organizational Chart
Biographies of Principles and Investment Professionals
Latest Monthly/Quarterly/Annual Letter & Risk Reports

Proposals will be evaluated and subsequent judgments made taking into account the following criteria:
  • Performance – Return and volatility expectations. While each manager will be evaluated on its relative investment merits the aggregate GTAA allocation will be measured against a 60% MSCI ACWI / 40% Barclays U.S. Aggregate benchmark.
  • Expertise – (a) Similar work performed for other institutions, with references of such funds to be specified in the proposal; (b) Assets under management; and (c) Investment experience broadly defined and experience in global tactical investments specifically.

  • Key PersonnelPersonnel to be assigned to this account, including key professionals, applicable portfolio managers, back-up and other staff assistance, and education and experience of all such key personnel.

  • Fees – Reasonableness and competitiveness of fees.
  • RFP Proposal – Clarity and responsiveness to requirements as requested in the RFP.

  • Philosophy and Style - the extent to which the proposed philosophy and style best complement existing philosophies and styles and meet the requirements and expectations as presented in this RFP.

    Selection Process:
  • All RFP's will be reviewed with respect to the evaluation of the proposal by the Wyoming Retirement System's staff and the Board's investment consulting firm, New England Pension Consultants (NEPC). WRS' Chief Investment Officer, with the approval of the Executive Director, and in consultation with NEPC will be the sole judge with respect to the final selection of the firm(s) hired.

  • Finalists will be notified of the results of the RFP selection process as soon as possible following selection; due diligence visits may be arranged with firms who make the finalist list.

The result of the search is that Moore Capital Management, Graham Capital Management, Brevan Howard, Caxton Associates and BlueCrest Capital Management have each been given $30m of capital, and a further global macro manager is expected to be appointed. Although the RFP gives threshold criteria of at least $250m in AUM and a minimum of a 2 year track record, which give scope for dozens of firms to qualify, it is hard to argue against the selections made. Amongst the five named there is a good variety of style, bias by asset class, and differences in pattern of return. It has taken a while in this particular case, but it is easy to see, given the process, why the hedge fund industry continues to get more concentrated as it is driven by American institutional investor flows.

Thursday, 12 May 2011

PODCAST FIVE - Sources and Types of Investor Demand As Seen by Third Party Marketers

Two 3PMs (James Palmer and Jonathan Lee) discuss the state of the industry with Simon Kerr.

Clicking on the link will open a page containing the sound file - download (mp3 format) or play in your browser. The use of a graphic equaliser will probably help the listening experience.

PART ONE (19.25)

Introduction to speakers and firms they represent.

2.38 Offices in different locations

4.26 What does a researcher do at a 3PM?

6.08 Testing a potential manager – chemistry, can they pitch and explain their edge? People, pedigree, performance, protection, process and place

8.34 Environment for capital raising? More competitive than ever. Perception of career risk amongst investors. Getting a "no" is easier.

14.02 US leading the way as investors and as providers of appropriate products.

15.58 Monthly liquidity required in Europe, share classes with better redemption terms

18.35 Demand for reporting status amongst UK investors in hedge funds

PART TWO (14.2)

UCITS - only few American funds going that route

1.22 Funds of funds – Some of big US funds of funds doing very well, smaller ones merging

5.04 Marketing and the increasing prevalence of investment consultants

8.34 How do you approach an investing institution with many layers of decision makers?

12.32 Due diligence changed, sales process changed?


Where the demand for hedge fund product is concentrated.

3.20 Bringing American managers to Europe

5.55 Marketability of hedge fund UCITS – new marketing opportunity

8.03 What strategies are in favour? EM managers are still of interest; Increasing interest in market neutral.

12.00 Market environment/cycle good for which strategies? Sector funds have attractions.

PART FOUR (20.43)

Testing prospective managers. The edge, trust, establishing an understanding of outcomes between the external marketer and investment advisor.

3.59 Sourcing managers

6.05 Reporting by managers is response to the greatest current issue of transparency, and helps with capital retention.

10.20 Taking an investor relations role – maintaining dialogue with client

13.22 Dealing with a drawdown – investors buying into a drawdown? Unrealistic expectations from managers. Helping manager manage their time.

16.55 Demand for early stage managers. Critical level of AUM is now $150m. Record in 2008 important.


JAMES PALMER +44 (0)203 178 2108

JONATHAN LEE +44 (0) 20 7004 0900

Previous podcasts: ONE, TWO, THREE, FOUR

Friday, 6 May 2011

Mark Anson’s Top Ten Hedge Fund Quotes

Mark Anson is unusual in having held the top job in a major institutional investor on both sides of the Atlantic. He was Chief Executive Officer of Hermes Pensions Management Ltd., where he was also the Chief Executive Officer of the British Telecom Pension Scheme, the largest pension fund in the United Kingdom.  Prior to joining Hermes, He served as the Chief Investment Officer of the California Public Employees' Retirement System, the largest pension fund in the United States. More recently he joined Oak Hill Investment Management, the firm which grew out of Robert Bass's family office, as a Managing Partner and Chair of the Investment Committee.

Over the course of his career he has listened attentively to many pitches by hedge fund managers, and his notes enabled him to compile in 2007 his "Top Ten Quotations from Hedge Fund Managers" which appeared in print this year*. Enjoy.

10. "If we don't charge 2 and 20, no one will take us seriously."

9. "We are 75% cash because we cannot find sufficient investments."

8. "We charge 3 and 30 because that is the only way we can keep our assets under several billion."

7. "We don't invest in crowded shorts."

6. "I haven't shorted before, but I do have my CFA."

5. "Managed Futures are a better investment than Hedge Funds because Hedge Funds are a zero sum game."

4. "What's a Master Trust?"

3. "Your Head of Equity doesn't understand our Hedge Fund strategy."

2. "Basically, I look at the trading screens all day and go with my gut."

1. "He will be with you in a minute sir, he's still meeting with his architect."

*Top Hedge Fund Investors: Stories, Strategies, and Advice (Wiley Finance)