Key industry news from hedge funds for Q2 2024

Movchan's Group

Aug 25, 2024

Industry Trends

The SEC's fight to tighten regulation of certain types of funds ended in victory for the funds

In August 2023, the US Securities and Exchange Commission (SEC) by a vote of three (Democrats) to two (Republicans) required private equity funds, hedge funds, venture funds, and fund managers for institutional investors, such as pension funds and others, to publish quarterly reports indicating performance and fees, conduct annual audits; and also prohibited them from offering individual investors preferential terms for exiting the fund and providing more information on fund positions than to other investors. The rationale for the decision was this: transparency, fairness, and accountability will increase in an industry known for its opacity. The lack of transparency harms ordinary investors who have indirect exposure to private funds through pension plans. (Movchan’s Group: indirect exposure should mean that ordinary investors invest in such funds through pension funds, and pension funds are the largest investors, and if anyone benefits from preferential terms, it should be them).

This decision was challenged by representatives of the fund management industry in the form of six fund manager associations. The appeal stated that if this regulation is followed, investors will be overloaded with unnecessary information, and compliance costs for the industry as a whole will increase by $500 billion.

In June, the Federal Appeals Court overturned the SEC's decision by a vote of three to zero (all Republicans). According to the court, these measures are excessive for "very advanced" professional investors. Fund management industry representatives commented on this court decision as an action that prevents the SEC from making decisions beyond the powers granted to it by Congress.

Assets in actively managed exchange-traded funds (ETFs) could quadruple by 2030

BlackRock forecasts that global assets in actively managed exchange-traded funds (ETFs) will quadruple from $900 billion to $4 trillion by 2030. The forecast from the world's largest asset manager points to growing investor demand for active management due to increased market volatility, as well as the attractiveness of the ETF structure. "We believe the asset management industry is at a turning point where active ETFs are becoming an integral part of investor portfolios worldwide," wrote Stephen Cohen, BlackRock's Chief Product Officer, and Rich Kushel, Head of Portfolio Management Group. "Investors are shifting to active strategies and increasingly turning to the ETF format to access them. This dynamic is ushering in a new era of innovation in active ETFs," they added.

BlackRock executives emphasized that in the first half of this year, 41% of global ETFs launched were actively managed compared to 2021 when they accounted for about a quarter. Active ETFs also account for a larger share of net asset inflows into the industry: they represent 22.4% of ETF sales in the first half of the year and 21.4% in 2023 compared to 16.6% in 2022, according to BlackRock data.

BlackRock also pointed to the growth of active ETFs in Europe, the Middle East, and Africa, where assets under management in such products increased by 25% by the end of June this year compared to the end of 2023. "We expect further growth in the popularity of active ETFs due to changes in the investment landscape, including the growing acceptance of ETFs in general and the development of digital capital management platforms," the report said.

US authorities intend to strengthen the protection of hedge funds from money laundering The US Treasury Department and the SEC have proposed new rules aimed at preventing the use of investment companies for money laundering or financing terrorism. The new rules apply to hedge fund and private equity fund managers, venture capital firms, and other asset managers.

According to US authorities, they are concerned that investment companies may be used by individuals outside the country to funnel money into the American financial system. The Treasury Department expressed concern that these firms could serve as a channel for money linked to Russian oligarchs or funding that allows Chinese authorities to access technologies with implications for US national security. Under the plan, companies will be required to collect information about the identity of their investors, including names, dates of birth and organization creation, as well as addresses and other data.

Although some asset managers already collect information about clients, many cannot verify the origin of their money, the Treasury Department said in a report published earlier this year. The department believes that, under existing securities rules, the $20 trillion private fund industry has very limited obligations to combat money laundering and terrorism financing.

Notable Companies

Renaissance Technologies founder James Simons has passed away

On May 10, 2024, at the age of 86, James Simons, the founder of Renaissance Technologies, passed away. Simons was an MIT graduate and held a PhD in mathematics from Berkeley. He began investing 60 years ago and became a pioneer in using signals for trading decisions. In 1978, he founded Renaissance, which engaged in and continues to engage in quantitative trading. Its flagship fund, Medallion, was created in 1988 and, according to the company itself, showed a return of 66% per annum over three decades. Only its employees could become investors in the fund. Funds that were open to outside investors yielded much lower returns.

Simons ceased to be the company's CEO in 2010 and fully retired in 2021 when he stepped down as chairman of the board. His personal fortune is estimated at $31 billion.

Bill Ackman canceled the IPO of his company Pershing Square

In June of this year, the IPO of Bill Ackman's company Pershing Square Holdings was announced. It is referred to as either a hedge fund firm or a closed-end fund. (Not to be confused with the Pershing Square hedge fund). The IPO planned to place 10% of the company's shares and raise just over $1 billion. This implied a valuation of approximately $10 billion. The company is traded on the over-the-counter market in the US and in Europe on the LSE and Euronext, and its preliminary IPO valuation roughly corresponds to its over-the-counter valuation. (Movchan’s Group: these news highlight an Americentric perspective. The company is already public, but it is considered to be conducting an initial offering because it is not listed on a US exchange).

The company manages about $20 billion, but there are no assets on the accounts except for a small amount needed to cover IPO costs. Pershing Square has a total of 18 shareholders, with Ackman holding a 17% stake. This IPO was supposed to double his personal fortune, which is currently estimated at $4.3 billion, according to Forbes.

The minimum investment amount could have been $5,000, making investments in Pershing Square Holdings accessible to ordinary investors (unlike the Pershing Square hedge fund, which only accepts money from professional investors).

The Pershing Square hedge fund, created in 2014, has since delivered investors a 9% annual return after fees and expenses (S&P 500 — 13.5%) and 26.5% over the past five years (S&P 500 — 15%). Thus, despite the success of recent years, the fund still lags behind the S&P 500 over the interval since its inception.

Additionally, Ackman was planning to launch a new closed-end fund, Pershing Square USA. It was believed that Ackman intended to raise $25 billion for the fund, although these figures were not publicly disclosed. According to the investment prospectus, the fund planned to invest in 12–20 large-cap North American companies with investment-grade ratings, generating cash flow and growing in the long term. During the fund's roadshow, Ackman stated that his inspiration was Warren Buffett, which, according to Movhan’s Group, is undoubtedly true, but also a strong marketing move aimed at retail investors.

Faced with questions from investors, Ackman twice reduced the amount of funds the company wanted to raise: first to $2.5–4 billion, then to $2 billion. Ultimately, at the end of July, Ackman canceled the offering after Seth Klarman's Baupost Group decided not to invest in the fund. Initially, Baupost applied for $150 million, Ackman wrote in a letter to investors.

One of the largest Asian hedge funds is closing due to insider trading allegations

Segantii Capital Management, led by Simon Sadler, is closing and returning capital to investors amid insider trading allegations. This marks the sudden end of one of Asia's largest hedge funds — Segantii Asia-Pacific Equity Multi-Strategy Fund, which managed nearly $5 billion in assets as of the end of April this year, attracting global investors with its outstanding returns and ability to conduct complex block trades with stocks. Block trades are off-exchange transactions with large blocks of publicly traded shares.

Sadler and the company's CEO, Kurt Ersoy, informed employees that in the interests of investors, the company would be closed, affecting about 140 members of the Segantii Capital team in Hong Kong, New York, and London. According to Bloomberg, the company faced significant redemption requests from investors.

In May, the Hong Kong Securities and Futures Commission charged Segantii Capital Management, Simon Sadler, and one of the company's former employees with insider trading related to a block trade conducted in 2017. In a letter to investors, it was noted that the lawsuit could negatively impact the company's ability to implement its investment strategy. Segantii Capital Management suspended immediate redemptions, stating that "it is in the investors' interest to return their capital in an orderly manner." The company also noted that it could liquidate 84% of its portfolio within a day and 97% within five. According to Bloomberg, the company's illiquid assets include startups Klarna, Ola, Bundl, and Enable. (Movchan’s Group: as of mid-July, the company has already returned more than 90% of client assets).

Sadler, a former Deutsche Bank AG trader, founded the company in Hong Kong in late 2007 with $26.5 million in assets under management. The company opened offices in London, New York, and Dubai and achieved high investment returns from trading worldwide, with a particular focus on Asia-Pacific stocks. Sadler earned a reputation as the king of block trading in the region. From its founding to April 2024, the company's flagship hedge fund delivered returns of over 12% per year, outperforming the S&P 500 Total Return index, which showed returns of about 10% per year over the same period.

A major hedge fund investing in digital currencies has been robbed

The main fund of BlockTower Capital, which manages $1.7 billion, was attacked by hackers. The fund's assets were partially stolen (the exact amount is not disclosed). The hackers have not been identified. The management company has hired investigators.

BlockTower was founded in 2017. It primarily invested in companies involved in the production of digital assets, such as Dapper Labs, Sky Mavis, and Terraform Labs.

Adding intrigue to the situation is the fact that one of the founders of BlockTower Capital is former Chairman of the Commodity Futures Trading Commission Christopher Giancarlo.