Monday, November 30, 2009

Getting some respect for hedge funds

Israel A. Englander, the founder of Millennium Partners shared his views on the state of the hedge fund industry in a keynote address at the Absolute Return Symposium in New York. Millennium, like all hedge funds, said Englander, is feeling the pressure to increase “investor friendliness.” He outlines four areas of investor concern that need new focus by the hedge fund industry: transparency, risk management, liquidity and duration of capital, and focus on core competencies.

A few highlights from his remarks follow and the the entire document is linked below:

On valuation and transparency: Englander says it's hard for hedge funds to get respect these days. “When Goldman Sachs puts a value on a position, everybody accepts it. When Citigroup puts a value on a position, everybody just accepts it... When a hedge fund puts a value on a position, first we have to get some highly regarded independent verification that we really do hold that position somewhere, then we have to get independent verification of the value of that position. Why do I feel like Rodney Dangerfield?”

On risk managment: Englander says, "Our risk management practice aren't changing. But the way we communicate these practices to our investors and the level of transparency we provide with regard to our risk management is increasing."

On liquidity: Englander says the industry needs to focus on "better matching the duration of the investors' capital with the fund's investment horizon." At the same time, he says, hedge funds should do "due dilligence" on investors because "it helps in making sure the interests of the manager of a fund are well aligned with the interests investors..."

On investment "style drift": Englander says a lesson for his fund was "to work on keeping the grass green on our side of the fence, and to forget about looking over the fence at somebody else's grass. The grass may look pretty green on the other side of the fence, but the fertilizer can be very expensive."

On hedge fund regulation: Mr. Englander says that oversigh “isn’t something to be too afraid of” because, whether it is a smart response or not, it may result in investors feeling more comfortable about the industry in general.

These investor-friendly trends in the hedge fund industry will combine to deliver superior risk-adjusted returns for investors in the asset class, says fund-of-funds manager Nexar Capital in a new report to investors. Nexar cites new transparency initiatives, lower fees, less leverage and better liquidity terms as factors that should attract investors back to hedge funds.

The kinder, friendlier hedge fund might not be the way forward for some managers, though. According to The Wall Street Journal, Ken Griffin, head of Citadel Investment Group "expressed exasperation at investors' desire to keep dissecting last year's disaster, comparing their fascination with people's inability to look away from a car crash. "I've told the story of 2008 many times," he said."

Israel Englander Keynote Address at the Absolute Return Symposium

Monday, November 2, 2009

Shamrock whips Texas Industries board

In a column in Sunday's New York Times entitled "When Shareholders Crack the Whip," Gretchen Morgenson writes about three directors failing to win reelection at Texas Industries. Shamrock Holdings, the firm that helped oust Michael Eisner from Disney, nominated the alternate slate of directors. The election results, according to the column, "are an example of what happens when shareholders act appropriately -- like the company owners they are."

The story appears to be good news for activists and governance advocates, but the novelty of such shareholder success is in itself a cautionary tale and those seeking to shake up corporate boards still have an uphill battle. Before launching its proxy contest, Shamrock received no response to its suggestions on how to improve governance and perforance issues at Texas Industries. "We had a read tough time getting management to sit down and talk to us...They just stonewalled us," said Shamrock. Shamrock estimates that its campaign cost $1 million and attributes its success to growing interest among mutual funds to support the activist route.

Morgenson notes that "no single election proves that investor attitutes are a-changing everywhere," but that is a major understatement. Pershing Square spent $10 million and failed to get a single board seat at Target. The Children's Investment Fund threw in the towel in its effort to get CSX to switch tracks.

Research by The Corporate Library shows that the more troubled the company, the more tone deaf the directors. A study of financial firms that required government assistance showed that boards ignored withhold votes by shareholders. Another study showed that nearly two-thirds of directors who received majority withhold votes retain their seats.

Fact is that it takes much more than a whip to take on an entrenched board of directors. Activist hedge funds and governance advocates need to get media and the SEC to shine a brighter light into the lack of responsiveness of boards. When it comes to proxy fights, sadly, there is a bigger lesson to be learned from the efforts that fail than the ones that succeed.

Update: SEC Chairman Mary Shapiro has called for changes in proxy access to make it easier and cheaper for shareholders to nominate corporate directors.