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18 Jan 2010

Truebeta Launches Hedge Fund Replication Model

New York ( – Independent, factor-based hedge fund replication service, TrueBeta, is launching a dynamic leverage model for hedge fund replication. The company says the application will improve it’s correlation to broad hedge fund performance.

“TrueBeta is setting a benchmark for the replication accuracy,” TrueBeta CEO Rabbe Ekholm said. “The new dynamic leverage model will enable TrueBeta to explicitly reflect the impact of variations in leverage across market cycles.”

The model is based on return trends in major market indices, primarily the S&P 500, adjusted monthly. The company said that through extensive quantitative testing that changes in leverage are primarily driven by broad trends in market returns. TrueBeta’s leverage will move between 1 and 2, compared with a fixed 1.5 of the original model.

For calendar year 2009, the new dynamic leverage model showed a correlation of 0.95 with the industry-standard Hedge Fund Research Index compared to 0.91 of the original TrueBeta model. The dynamic model had a compound 2009 return of 13.7 percent after fees, versus the 10.9 percent achieved by the original model.

TrueBeta will publish both its standard and enhanced methodologies until May 2010, after which the enhanced methodology will become the new standard. During the transition period, it may adjust aspects of the dynamic leverage model based on feedback from clients and other market participants.

TrueBeta LLC develops and markets quantitative financial strategies for institutional clients. It is the first replication offering created expressly with the goal of serving as a benchmark for the hedge fund industry, and it is the only replication strategy with a fully transparent, completely rules-based methodology. True Beta is fully independent and available through licensing to all market participants, including white label options to banks and other financial institutions.

Hedge fund experts predict more due diligence in 2010

HedgeCo News - Experts predict greater market discipline from investors and an increased focus on due diligence by providers and custodians.

Joel Press, Managing Director of Morgan Stanley’s Prime Brokerage Division; Todd Groome, non-Executive Chairman of the Alternative Investment Management Association (AIMA); and Gregory Zuckerman, author and special writer with The Wall Street Journal were among the experts who offered their predictions for 2010 at a seminar for more than 300 members of the financial industry in New York, hosted by international offshore law firm Walkers.

Greater allocations to hedge funds were anticipated at the expense of equities, while the latest regulatory waves and the next likely bubbles in the market were also debated.

“In today’s environment, there can no longer simply be a checklist to confirm a process. Potential investors must look at what motivates and drives the relevant provider,” said Ingrid Pierce, Partner with Walkers and head of the firm’s Cayman Islands Hedge Fund practice. “Custody diligence is very much at the forefront of people’s minds. Key questions include whether counterparties have the ability to move or re-hypothecate assets and whether contracts will hold up in an insolvency.”

Investigative diligence, which looks in a very detailed way at precisely what various providers do, not just what they say they do, has also become a key focus as investors and other players ramp up their policies in this area, according to Ms. Pierce.

“It is important for both funds and investors to work out well in advance exactly what their exit strategy will be and how the provisions in the fund’s documents will actually work,” Ms Pierce said. “The heightened levels of diligence we have seen throughout the investment process are not going to diminish anytime soon. All participants, including legal counsel have to increase our awareness of the issues and address key areas of risk with our clients.”

Highlighting some positive trends in hedge funds, AIMA’s Todd Groome pointed to new allocations going to a variety of strategies. For example, managers in Asia are seeing 75 percent of net new allocations coming from the United States, primarily from pension funds. He also noted the launch of new hedge funds represents a clear increase in confidence.

“Market discipline from investors is back with a vengeance,” said Mr. Groome. “Investors are asking for greater transparency. They want to use the transparency to create a more idiosyncratic contract for their particular situation and a particular strategy.”

On the regulatory front, in this current challenging policy environment, Mr Groome said things will take time and require considerable coordination among financial leaders, policy makers, and investors.

Joel Press of Morgan Stanley offered his personal insights on what can be expected in the hedge fund market going forward. He anticipates hundreds of smaller start ups in 2010 and said that seeding is more important than ever. With inflows still coming into the market, Mr Press predicted that the industry will be worth US$3 trillion four years from now, compared to the current estimated value of US$1.8 trillion.

“There is no need for hedge fund fees to go down,” Mr Press said. “If you look at long-term investing, hedge funds are absolutely performing better than any other investment vehicle. Investors are looking to replace equities with hedge fund allocations and hedge funds are increasingly being used as an equity substitute.”

The seminar also featured an in-depth examination of the role of fiduciaries, notably issues of responsibilities and accountability, from Guy Locke, Partner and Joint Head of the Corporate and Financial Restructuring Group at Walkers and Scott Lennon, Senior Vice President at Walkers Fund Services.

“It is a brand new world for hedge fund directors. Questionnaires are more extensive and elaborate and people want to know that manuals have been fully tested,” Mr Lennon said. “With changing standards of care and liability caps for auditors and other service providers, managers are in a tough negotiating environment. It is important to understand the whole picture of risk and where it will fall if things go wrong.”

Hedge fund financing was addressed by Philip Paschalides, a Walkers Partner and head of the firm’s Finance and Corporate Group in the Cayman Islands. Mr Paschalides said that the banking team in Walkers’ Cayman office had its busiest year ever for hedge fund financing, suggesting that leverage may not be a thing of the past. “Lenders are generally quite savvy about the hedge fund world,” Mr Paschalides said. “They keep databases, look at redemptions and gates and will lower borrowing bases to account for liquidity and concentration issues.”

Gregory Zuckerman from The Wall Street Journal said we are in an age of bubbles, citing housing, energy, Asian currencies and technology stocks as examples of bubbles the market has experienced over the past decade.

“The next bubble may be emerging markets, Brazil, China, or pockets of real estate in Asia or Australia,” Mr Zuckerman said. “Everyone is worried about the next investor. There is an incentive to increasingly pile on trades and now it is much easier to express trades using ETFs, synthetic CDS and other types of derivatives. Managers today are fully invested and talking about adding leverage, but they don’t really believe in the long term nature of these investments. It might work out in the short term but long term you wonder if they can all get out.”

The New York event was the latest in the ‘Walkers Fundamentals’ series designed to bring discussions of key financial issues to the world’s investment capitals. Video highlights of the seminar will be posted to Walkers’ website.

“We were delighted to hear attendees use words such as ‘enlightening’ and ‘relevant’ to describe the event,” said Mark Lewis, Senior Investment Funds Partner with Walkers, who opened the seminar. “Walkers believes the best way to ensure best practices in the financial community is through open discussion and education by all the participants.”

Editing by Alex Akesson
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UCITS III Compliant Fund of Hedge Funds Launched By HSBC

HedgeCo News - HSBC has launched a Sterling Class of its HSBC UCITS AdvantEdge fund of hedge funds. The Fund will comply with the new ‘reporting’ tax regime for offshore funds, allowing UK investors to be taxed at capital gains rather than income tax rates on disposal of their interests.

“The Sterling classes will allow UK investors to gain maximum benefit from the opportunities to participate in the hedge fund sector offered by the HSBC UCITS AdvantEdge fund.” Chris Allen, CEO of HSBC Alternative Investments Ltd, said, ” The hedge fund industry is leaner and fitter as we enter 2010 and as weaker performers continue to withdraw we believe the remaining providers will reap the rewards from their stronger platforms in the coming months.”

The Fund combines a number of core strategies that are expected to benefit from opportunities created by the credit crunch, such as discretionary macro, equity market neutral, managed futures, and equity long/short.

The Fund is a new generation fund of hedge funds, designed to enable both retail and institutional investors to participate in the absolute return opportunities offered by current market conditions via a more liquid and regulated vehicle than a traditional fund of hedge funds.

The Fund offers weekly liquidity, and complies with the strict UCITS III rules concerning leverage, counterparty risk and investments traded. The Fund’s investment manager is HSBC Alternative Investments Ltd, an established adviser of funds of hedge funds.

All underlying UCITS hedge funds under consideration go through its quantitative and qualitative investment due diligence process which has been proven over many years.