On 13 December 2018, the Finnish Government published a legislative proposal aimed at eliminating problems in tax legislation relating to the establishment of private equity funds in the form of limited partnerships. The taxation of investors in private equity funds operating in a form of a Finnish limited partnership has, in certain respects, been based on established case law and tax practice. The taxation of foreign investors was originally eased through a special provision enacted in 2005 (Income Tax Act section 9(5)). When the special provision applies, an investor, having limited tax liability in Finland and being a limited partner in Finnish PE fund operating in a form of a limited partnership, is taxed for its share of the income of the fund only to the extent the income would be taxable if received directly by that investor.
Hedge funds continued their uptrend and gained 0.73% in August, outperforming underlying markets as represented by the MSCI AC World Index (Local) which gained 0.15% during the month. Almost all hedge fund strategies ended the month in the green, with CTA/managed futures up 1.24% and macro hedge funds up 1.04% delivering the strongest gains. Across regional mandates, emerging markets focused hedge funds continued to post strong gains relative to their developed market peers contributed in part by the depreciating US dollar which is down almost 9.34% year-to-date.
As founder and Managing Member, Charles Mautz leads CHAM’s strategy and activities. He also oversees all investment activities including research, allocation and manager selection. Charles developed the firm’s focus on investing with locally-based managers throughout Asia and travels there frequently to identify the next rising stars.
Yale University endowment manager David Swensen launched a blistering broadside at the practices institutional investors use to select hedge funds in an interview last year with the Wall Street Journal.
Swensen described fund of hedge funds as "a cancer on the institutional investor world. They facilitate the flow of ignorant capital." His argument was that such funds are self-defeating; investors need to be in the top 10% of hedge funds to succeed and, with a fund of funds, they are likely to be excluded from the best managers.
Recently, voices have been heard in the market claiming that private equity funds of funds are dead. Those voices generally argue that an expected decline in returns will put more pressure on limited partners (LPs) to save costs by investing in funds themselves and they assume that the decline in overall fundraising levels alleviates access problems, which was one of the reasons why LPs have worked with funds of funds in the past.
It is no secret that 2008 was one of Wall Street’s toughest years and perhaps the most challenging year ever for hedge funds. Evidence of this can be found in the dismal performance of the Barclay’s Hedge Fund and Fund of Funds indices, both down almost 21%. Many funds blew up, including Sailfish, Peloton and others. As the year closed, serious allegations of fraud were levied against one of the most famous and respected hedge fund managers, Bernard Madoff. While it is too early to count all of the casualties, the preliminary numbers paint a rather bleak picture.
The number of private equity real estate funds pursuing opportunistic returns amid the fallout from the credit crunch continues to grow rapidly. In a recent position paper, fund of funds manager Clerestory Capital Partners argues that “equitable terms” for all investors is a principle worth defending.
Hedge funds and funds of funds are seeing an increase in redemption notices as the industry plunges deeper into the red amidst regulatory constraints and the global credit crisis.
And while hedge fund managers are watching the notices flood in, pension fund investors are pulling back from their hedge fund commitments. The US$11 billion School Employees Retirement System of Ohio has decided to shelve its hedge fund investments, which currently stand at US$258 million, according to Laurel Johnson, a spokesperson for the plan. Johnson said the plan, which is allowed to invest up to 10% of its assets in hedge fund strategies, is “moving very slowly toward reaching that ceiling” because of problems in the financial markets.
Funds of hedge funds (FoHFs) have been and will continue to be an integral part of hedge fund investing. While many investors can and have chosen to bypass FoHF structures in order to invest “direct”, for the past ten years assets under management (AuM) under the FoHF structure grew faster than AUM for all hedge funds combined.
The reasons for this impressive growth are obvious. FoHFs provide diversity among managers, reduce risk and hold out the promise of net returns higher than the average hedge fund. The long list of casualties in the hedge fund industry and recent high-profile hedge fund losses have also driven investors toward the security provided by a FoHF.
American novelist Mark Twain once wrote that ageing was “an issue of mind over matter. If you don’t mind, it doesn’t matter.” While this may be sage advice for most of us, it’s apparently not applicable to hedge funds of funds.
A recently updated study by Roland Füss of the European Business School, Dieter Kaiser of the Frankfurt School of Finance & Management and Anthony Strittmatter of the University of Freiburg finds that ageing has a dramatic impact on returns.
Over the last ten years, private equity has increasingly become a significant portion of most institutional portfolios. The private equity class is defined as investments in private companies or partnerships that invest in them. During the period from 1996 through year-end 2005, investors committed nearly US$1.6 trillion to private equity funds. Despite a drop in private equity commitments following the bursting of the technology bubble in 2000, investors averaged more than US$166 billion in annual commitments to the asset class in 2003-2005.
With European retail investors still looking for indirect real estate investments, there are good reasons for investment managers to launch real estate certificates. These structured products have been popular vehicles for gaining exposure to hedge funds and private equity, so why not real estate?
Growing interest in indirect real estate investments European retail investors continue to show great interest in indirect real estate products. In Germany, for example, some investors are, rightly or wrongly, disappointed by the performance of some of the more traditional open-ended fund products and are looking for greener pastures.
The potential benefits of funds of funds are lively debated in the private equity industry. How can a fund of funds manager justify the additional fee layer? Do funds of funds deliver excess returns? We argue that fund of funds investors may indeed benefit from attractive risk-adjusted returns: firstly, because diversification does reduce volatility; and secondly, because diversification may even increase returns. Nevertheless, funds of funds managers that want to justify their services going forward will have to add value beyond the common claim for premier fund selection and diversification.
With information on close to 2,000 global funds of funds now in our database, we decided to take a closer look at the fees charged by these funds. And sure enough, the analysis tossed up some interesting findings, presented here in this write-up.
The performance and management fees for the 1,105 funds surveyed averaged 8.7% and 1.3% respectively. Looking at the distribution of these funds by performance fees charged (Figure 1), one sees that a fee of 10% is the norm (accounting for almost half of the funds), and that it is skewed towards the lower end of the fee spectrum (accounting for another one-third of the funds).
In this article, we try to show that the horizon of a fund's trades has profound implications on the difficulties encountered in assessing performance, on the characteristics of performance itself, especially in times of crisis, and on the diversification achieved by forming portfolios of funds.
The CET Capital investment strategies aim to exploit persistent price behaviour of the small-cap stock indices and mutual funds. While some of CET Capitals' methodologies are proprietary, exploiting persistent price behaviour which is the foundation of what we do is not. Persistency, as defined by Gil Blake, is a combination of volatility and historical reliability. Below I will summarise an interview in Jack Schwagers' book, The New Market Wizards, which eloquently describes how a successful money manager named Gil Blake capitalised on persistency in the 1980s.
In the Korean investment management market, the proportion of funds investing in offshore securities to the market size has grown, up from 2.2% to 4.8% and to 5.6% at the end of 2002, 2003 and 2005 respectively.
The Eurekahedge Global Fund of Funds Database contains information on 1,975 funds of funds. Based on this and related information, we estimate the total size of the fund of funds universe at US$370 billion. While the fund of funds space has grown both in size and number over the past year, the pace of growth (6% by number and 55% by assets) has slackened relative to the frenetic levels seen in 2003 (23% by number and 129% by assets) and 2004 (17% by number and 173% by assets). Figure 1 below gives a more comprehensive picture of the industry growth over the years.
It has been a general perception that offshore funds making profits in Hong Kong are not taxed in Hong Kong or the Hong Kong Inland Revenue Department ("IRD") will not seek to tax the offshore funds. This perception is not entirely wrong. Funds authorised by Hong Kong Securities and Futures Commission ("SFC") and certain unauthorised funds which are "bona fide widely held" and subject to a supervisory authority in an "acceptable regulatory regime" are exempt from Hong Kong profits tax on their profits made in Hong Kong. Cayman Islands, British Virgin Islands and, ironically, Hong Kong are not in the list of "acceptable regulatory regime".
The number of venture capital companies (VCC) totalled six in 1990 and rose to 13 by 1992. The number of VCC almost doubled to 23 by end of 1998, but it was not until 1999, that the pace of venture capital development significantly accelerated with the launch of MSC Ventures, which was allocated a fund of US$31 million.
This is a summary of essential provisions of Circular X/2005 issued by the Spanish regulator, the CNMV, on 3 November 2005. (NOTE: this summary for AIMA members is based on information kindly provided by AIMA members, the law firm of Cuatrecasas, and an English translation of the Circular provided by another law firm.)
It is widely, if not universally, agreed that the world is experiencing a period in which intentions to save tend to outrun intentions to invest. Alan Greenspan and Ben Bernanke, who is Chairman of the US President's Council of Economic Advisors, are among those who have pointed to this probability. If economic policy did not counteract this, the result would be a world recession. Fortunately this has so far been avoided or at least postponed by the easy fiscal and monetary policies.
The Hong Kong Government published the Revenue (Profits Tax Exemption for Offshore Funds) Bill (the "Bill") on 30 June 2005. The Bill seeks to give legal effect to the Government's proposal to exempt offshore funds from Hong Kong Profits Tax after two rounds of consultation. It is scheduled for first reading by the Legislative Council on 6 July 2005.
Interest rates are currently at a historical low. Since in the longer run interest rates will return to their historical average, this implies that bond prices are about to fall. Popular investment advice therefore says that investors should shorten the maturity of their bond portfolios to minimise their losses. This argument, however, skips over the fact that longer-dated bonds pay higher coupons as well as the fact that a substantial rise in interest rates may take quite some time to occur. We examine the combined impact of both and conclude that the current interest rate environment in no way implies that investors should rebalance towards short-dated bonds. Extensive scenario analysis confirms that in an overall portfolio context a longer-dated bond portfolio is more efficient than a short-dated bond portfolio, especially when long-dated liabilities are present.
Many participants in the Australian fund market have always been subject to general obligations to avoid conflicts as a matter of common law, arising out of the fiduciary relationship between a particular participant and their client.
Japan is the world's second largest economy, and second largest stock market. Given their close geographical proximity to Hong Kong, it might be expected that Japanese investors would be major participants in the Hong Kong securities market. In particular, the Mainland China enterprises listed in Hong Kong, with their growth potential, might seem a natural choice for investors from a mature developed country. However, in reality, Japanese investment in the Hong Kong market is far below its potential.
We recently spent a couple of weeks on the road in Europe and the Americas hawking around a presentation entitled "Something Wicked This Way Comes." We mentioned some time back that we had been seeing increasing interest in the region from chunky-sized funds who have decided that they want to trade Asia since it has been becoming harder and harder to make money from their traditional strategies. And this broadening of interest in the region was also reflected in the number of non-Asia specialists who attended our various meetings along with their dedicated colleagues.
To construct an optimal fund of funds, the risk and return of each hedge fund included need to be identified. In this article, we will focus on defining the kinds of risk and return required.
First, we have to define what the risk is for a hedge fund investor or a fund of funds investor. Risk is the possibility that, in the future, the investment's value will be lower than today's value or lower than a certain threshold. This threshold might, for example, be the 5% annualised return for a Swiss pension fund. Does volatility measure that? The answer is no. This is why a better measure of risk is downside risk. Downside risk can be the Omega measure, the Modified Value-at-Risk, the Conditional Value-at-Risk or the downside volatility.
The Hong Kong Financial Services and Treasury Bureau ("FSTB") issued its second consultation paper on the proposed exemption of offshore funds from Hong Kong profits tax on 31 December 2004, 11 months after the first paper was issued in January 2004. It is hoped the proposed exemption will provide much needed comfort to Hong Kong fund managers' and offshore investors' uncertainty as to when offshore funds are subject to Hong Kong tax.
Philip Mathews has over 18 years' experience as a fund manager, research analyst and stock broker both in London and Sydney. Philip has a proven track record of over 12 years as chief investment director of two private unlisted funds, which have ranked in the top 1% of hedge fund performance globally. Both funds have multiplied their unit values in excess of 60 times over this period.
The boom in the fund of hedge funds (FOF) industry in 2003 was a hard act to follow. Although the number of launches was down from the previous year, total asset inflows continued at a record pace. Cynics predicted that the massive inflows of that year and slack regulation would be pursued by a rude awakening in the form of whittled returns, bloated portfolios and whip-cracking regulatory commissions searching to make an example as a warning to speculative, secretive managers, who have been blamed for almost every market shift this year - from oil price increases to fraud allegation-induced collapses in companies' stock prices.
With an estimated 4,100 unique single manager hedge funds and more than 1,200 funds of funds, the atmosphere for raising capital perhaps has never been so competitive. Banned from advertising by the Securities and Exchange Commission, emerging hedge funds and funds of funds must find other avenues for acquiring assets. Luckily, there are four strong avenues for smaller funds to find investors: commercial and proprietary databases, industry publications, internal or third party marketing agents and word of mouth. With the proper preparation, hedge funds and funds of funds can take advantage of these capital-raising opportunities and steadily grow their assets under management.
The State of Hedge Fund and Fund of Funds Industries
Investor Select Advisors www.investorselectadvisors.com is a fund of hedge funds advisor, managing assets in 9 multi-manager portfolios primarily on behalf of institutional investors and distributors. It has in excess of US$340 million in assets under management, allocated to 57 hedge funds globally and over a dozen in the Asian time zone. Its 15 staff members include a research team of 6; 3 are located in Asia.
Major market characteristics of the fund of funds market in Asia are:
It has only been in existence for a couple of years and it is still very much in its infancy both in absolute terms and in comparison to the market in the US.
The number of players in it and its overall size are set to increase dramatically.
There are few barriers to entry.
There are currently no dominant players.
It is opaque.
The fund of funds industry has grown exponentially since the first fund, Leveraged Capital Holdings, was launched in 1969. There are currently estimated to be between 1,200 to 1,500 funds of funds globally, most of which were launched in the past decade. The first Asia-specific fund of funds was launched in 1993; it is called Asian Capital Holdings and run by the same group (LCF Rothschild Asset Management) that manages Leveraged Capital Holdings. There now appear to be between 30 and 35 Asia/Japan-exclusive funds of funds. However, most of these new funds of funds have assets below US $100m.
Two recent transactions - Pioneer's purchase of Momentum and Man's acquisition of RMF - have highlighted the issue of valuations of fund of funds companies.