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The Morning Brief: New Study Claims Leveraged Funds Not Riskier

A new study found no direct relationship between hedge fund leverage and volatility and downside performance risk. Funds that typically have the highest leverage ratios of all hedge funds, such as relative value or arbitrage strategies, have lower volatility on average and also have posted smaller losses during crises and other periods of market stress over the last 20 years, according to the study, released by industry trade group the Alternative Investment Management Association and the CAIA Association, a group dedicated to alternative investment education.

“Most hedge funds use a modest amount of leverage but as our study shows, even those with higher leverage levels are not inherently more risky than, say, investing directly in equities, commodities or other traditional asset classes,” said AIMA CEO Jack Inglis in a press release.


Individuals who work for hedge funds expect their total compensation to fall this year by 8.7 percent to $522,000, according to an online survey of more than 500 hedge fund investment managers conducted by Odyssey Search Partners. According to a report from Pensions and Investments, respondents to the survey expect base salaries to rise by 3 percent, to $173,000, but bonuses to decline, on average, by 13.6 percent, to $349,000. Portfolio managers, however, are bracing for a 34.4 percent drop in their compensation package, to an average of $704,000. They are figuring on a 44.4 percent decline in their bonus but a 5.6 percent boost in base pay. According to the survey, senior analysts or portfolio managers with at least seven years of experience expect their total compensation to fall by 13.5 percent.

The survey interviewed employees at all hedge fund firms. It should not be mistaken with Alpha’s Rich List, which ranks the highest-earning hedge fund managers and employees. Most of them are principals at their firms, and their total earnings include gains on their own capital invested in their funds and their share of the fees. Several star managers who are not the founders also frequently qualify for the ranking.


Ron Kumar, investment officer for the San Jose Police & Fire Department Retirement Plan is recommending the $3 billion pension fund not pull its investment from Och-Ziff Capital Management, which recently settled bribery charges, according to Pensions and Investments. The plan had committed $20 million to Och-Ziff Real Estate Fund III in June 2014 and has $6 million invested in the fund. In a letter in advance of the investment committee’s meeting October 25, Kumar argued that the real estate fund has no investments in Africa, where the bribery took place. He also stressed the fund is a separate investment platform from the firm’s other multistrategy funds, according to the report.


UBS raised its price target on hedge fund favorite Visa, from $90 to $97, after adjusting its earnings model to look forward to 2017. In a note to clients the bank points out that the credit card company reported strong results for the fourth fiscal quarter but faces “persistent headwinds” and that future guidance was lower than it had anticipated. At the end of the second quarter, Visa was the seventh-most-popular stock among hedge funds, with at least 123 holding a position. However, none of them rank among the company’s largest investors.


Several investment banks altered their price targets on BE Aerospace one day after it agreed to be acquired by Rockwell Collins for $6.4 billion, or $62 per share in cash and stock. Credit Suisse lifted its target from $58 to $62 and raised its earnings estimates but lowered its rating to neutral from outperform, stressing that it likes the company’s business over the long-term “and believe it is a good strategic fit for Rockwell Collins.” On the other hand, UBS, which had previously been more optimistic on the company’s stock, cut its target to $62 from $66. “The deal has been approved by both Boards and we see no reason that BEAV shareholders reject the offer,” it tells clients in a note. As we previously reported, at the end of the second quarter, Highfields Capital Management and Corvex Management were among the top-ten shareholders.

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