Key industry news of hedge funds for Q3 2024
Movchan's Group
Nov 14, 2024In the third quarter of 2024, we found the following news most interesting:
- Hedge funds are expanding their presence in Dubai.
- The U.S. Securities and Exchange Commission has halted attempts to introduce mandatory disclosure rules for hedge fund fees.
- Nearly half of traditional hedge funds are investing in cryptocurrencies.
- The single-stock ETF turns two years old.
- Point72 plans to return billions of dollars to investors.
- Robert Arnott launches an ETF that will invest in companies excluded from indexes.
- Bloomberg journalists suspect that the Ocean Leonid Investments fund, managed from London, is investing money earned from the sale of Iranian oil.
Industry Trends
Hedge Funds Expand Their Presence in Dubai
Dubai has attracted crypto companies, real estate investors, and Russian billionaires. Now, more and more large fund management companies are opening offices in Dubai. Recently, Millennium Management, BlueCrest Capital Management, Schonfeld Strategic Advisors, ExodusPoint Capital Management, and Balyasny Asset Management have opened offices there. This trend is driven not only by the high concentration of wealthy individuals in the emirate but also by Brexit, which prompted many management companies to open offices outside the UK, and the severe COVID-19 restrictions in Hong Kong. Dubai's efforts to attract industry players, which began in the 2000s, also play a significant role. However, the first attempt failed due to the 2008 crisis. Now, Dubai offers incentives such as reduced license fees and smaller fund sizes if a company registers a Dubai fund.
Magellan Capital Holdings decided to take advantage of this opportunity, launching a $700 million multistrat fund in September 2024, investing in both equities and debt. The initial capital was provided by the family of Hassan El Ali, the founder of Zakher Marine International, who made his fortune selling the company two years ago.
Currently, about a thousand hedge fund employees work in Dubai. This is small compared to the number of employees in the US and Europe (about 100,000), but there is rapid growth. The $69 billion Millennium, having obtained a license in 2020, has already increased its staff to 100.
Neighboring Abu Dhabi, whose sovereign fund totals $1.5 trillion, has also attracted a big name: Brevan Howard Asset Management.
Dubai Is the Newest Hedge Fund Hotspot
Bloomberg, 1 July 2022
Nicolas Parasie, Archana Narayanan, and Nishant Kumar
Dubai Hedge Fund’s $700 Million Debut Set to Bolster City’s Hub Status
Bloomberg, 20 August 2024
Richard Henderson
Hedge Funds Now Employ More Than 1,000 People in Dubai
Bloomberg, 24 September 2024
Adveith Nair and Nishant Kumar
The U.S. Securities and Exchange Commission has halted attempts to introduce mandatory disclosure rules for hedge fund fees
The U.S. Securities and Exchange Commission (SEC) has officially abandoned further attempts to introduce mandatory fee disclosure rules for hedge funds and private equity funds. After these rules were challenged in the Fifth Circuit Court of Appeals on June 5, 2024, the SEC decided not to appeal the verdict to the Supreme Court.
The rules, initiated in 2023, required fund managers to regularly disclose information about fees and expenses and to provide equal terms to all investors. The rules also prohibited funds from passing on regulatory and legal costs to investors if these expenses were caused by government sanctions. However, the court ruled that the SEC overstepped its authority by regulating agreements between funds and qualified investors.
This decision was a major victory for industry associations such as the Managed Funds Association and the American Investment Council, which actively fought against SEC initiatives aimed at increasing oversight of private funds. American Investment Council President Drew Maloney stated that the SEC "made the right decision" by dropping further legal proceedings.
The SEC nevertheless expressed disappointment with the court's decision and noted that it would allocate resources to other projects on its agenda. The regulator intends to continue pursuing transparency and investor protection.
SEC Ends Legal Push to Revive Hedge Fund Fee Disclosure Rule
Bloomberg, 4 September 2024
Madlin Mekelburg and Lydia Beyoud
Hedge Funds, PE Firms Hit With New SEC Fee Disclosure Rules
Bloomberg, 23 August 2023
Lydia Beyoud and Dawn Lim
Nearly half of traditional hedge funds are investing in cryptocurrencies
According to the Global Crypto Hedge Fund Report released by the Alternative Investment Management Association (AIMA) and PwC, 47% of hedge funds dealing with traditional assets are investing in cryptocurrencies, significantly higher than 29% last year and 37% in 2022. The increased interest is attributed to more transparent regulation and the launch of crypto ETFs in the US and Asia, which is driving new investor inflows.
Among the funds that have already invested in cryptocurrencies, 67% plan to maintain their current level of investment, while the rest aim to increase it by the end of the year. Although many hedge funds initially entered the cryptocurrency market by trading tokens on the spot market, they are increasingly using more sophisticated strategies, including derivatives trading. Among the funds involved in cryptocurrency, 58% traded derivatives in 2024, significantly higher than 38% in 2023.
James Delaney, Managing Director of Asset Regulation at AIMA, notes that increased confidence in cryptocurrencies is supported by greater regulatory transparency. This opens up profitable opportunities for funds, as the high volatility of the crypto market can yield significant returns.
As noted by Edward Chin, co-founder of Parataxis Capital Management, applying traditional investment strategies to the crypto market often yields higher profits, given the market's lower efficiency. For example, arbitrage strategies that yield single-digit returns in traditional markets can yield up to 30% in cryptocurrencies.
Investment opportunities are not limited to tokens: after the 2022 bear market, funds such as Diameter Capital Partners and Canyon Partners bought $874.5 million in debt that the bankrupt exchange FTX owed to BlockFi Inc.
Nevertheless, 76% of funds not yet investing in cryptocurrencies do not plan to change their approach in the next three years. One of the key reasons remains the absence of digital assets in their investment mandates.
Almost Half of Traditional Hedge Funds Are Dabbling in Crypto
Bloomberg, 10 October 2024
Olga Kharif
The single-stock ETF turns two years old
The first ETF was launched in 1993. At its inception, it was conceived as a passive tool—a tool for index replication. It remained so in the 1990s and 2000s. Later, actively managed ETFs emerged, and finally, just two years ago, single-stock ETFs. Currently, the capitalization of all U.S. ETFs is $10 trillion, and single-stock ETFs have already reached $13.4 billion.
One might ask, why are single-stock ETFs needed if you can buy the stock itself? They work with leverage, allowing investors to significantly increase their returns if the stock rises. However, the reverse is also true—losing much more on a decline. In terms of fees, these ETFs are somewhere between ETFs with their low fees and hedge funds. For example, the average ETF expense ratio is 0.7% per year, while the ETF tracking NVIDIA's performance (NVDL) is 1.15%.
Technically, leverage is achieved through options techniques, and while funds may closely track the daily performance of a stock, due to constant rebalancing of options and the costs associated with it, they can significantly underperform the stock's performance with imaginary leverage. A typical example is the London Stock Exchange-listed GraniteShares 3x Long MicroStrategy Daily ETP (LMI3). MicroStrategy's stock rose by more than 100%, while the fund fell by 82%, despite the threefold leverage.
Understanding this, investors do not hold such ETFs for long, instead trying to enter them during sharp stock rises and exit immediately. Hence, the high turnover of assets in such funds. The chart below shows that it is only a few days.
When Jack Bogle invented index investing and index funds, he expected that it would lead investors to behave more calmly. However, over the years, a tool emerged that, on the contrary, brings more excitement and dispels the boredom of index investing.
One-Day-Only ETFs Are Jack Bogle’s Nightmare Brought to Life
Bloomberg, 30 August 2024
Katie Greifeld
Famous Names
Point72 plans to return billions of dollars to investors
Steve Cohen's Point72 Asset Management plans to return some capital to its investors for the first time. The firm is considering distributing profits among clients at the end of the year, according to informed sources. The amount could be billions of dollars, but exact details have not been determined, and changes to the plans are possible.
Hedge fund managers often resort to limiting new fund inflows and even returning capital to avoid becoming too large. Since 2020, Point72 has attracted nearly $12.8 billion and currently manages a record $35.2 billion. According to Bloomberg News, the hedge fund earned about 10% in the first eight months of this year, amounting to over $3 billion. A Point72 representative declined to comment on the situation.
This move reflects a growing trend where the largest management companies, such as Point72, Millennium Management, and Citadel, face inflows exceeding their management capabilities. For example, since 2017, Citadel has returned about $25 billion to clients. Meanwhile, many smaller firms struggle to attract capital, making them less competitive amid the growth of large players.
Point72 Plans to Return Billions as Big Hedge Funds Cap Assets
Bloomberg, 12 September 2024
Nishant Kumar
Robert Arnott launches an ETF that will invest in companies excluded from indexes
Robert Arnott is the founder of Research Affiliates, an advisor to PIMCO. The company was founded in 2002 and specializes in research and asset management. The fund launched by Arnott is called the Research Affiliates Deletions ETF (NIXT) and specializes in investing in companies that have been removed from indexes. The investment is intended for the long term—five years or until re-entry into the index, if it occurs earlier. "What could be better than buying what everyone rejects?" Arnott asks rhetorically. (Exclusion from indexes has a temporary effect—a price drop due to index funds selling the company. However, Arnott is not targeting this. — Ed. Movchans’ Group). Arnott's team calculated over a 30-year interval that excluded companies, on average, fell by 50% before exclusion and outperformed the index by 5 percentage points per year afterward.
Rob Arnott's First ETF Is Designed to Buy (Index) Losers
Bloomberg, 6 September 2024
Katie Greifeld
Bloomberg journalists suspect that the Ocean Leonid Investments fund, managed from London, is investing money earned from the sale of Iranian oil
Allegedly, behind the fund is Hossein Shamkhani, the son of former Iranian national security chief Ali Shamkhani. Hossein Shamkhani traded Iranian oil and other commodities, including Russian-origin goods, from Dubai. Sanctions were not imposed on him. His company transports oil on 60 vessels and sold it to China's Sinopec, as well as BP and Chevron.
Ocean Leonid manages hundreds of millions of dollars. It is a multistrat fund focused on investing in commodities, buying futures and options on oil, gas, and metals. In the past two years, the fund has shown double-digit returns, reaching 30% in 2022.
Ocean Leonid denies any connection with Hossein Shamkhani. (The fund discloses which company is its investor but says it does not know who is behind it. Currently, the fund's compliance procedures seem, to put it mildly, strange: when passing compliance, the ultimate beneficiary must be disclosed, and the fund cannot not know it. — Ed. Movchans’ Group).
Iranian Oil Kingpin’s Hedge Fund Manages Millions From London
Bloomberg, 24 October 2024
Ben Bartenstein
