The least seasoned hedge fund managers have once again outperformed their industry-wide peers. Emerging hedge fund managers — defined as those with track records of less than two years — gained, on average, 11.3 percent over the trailing 12-month period ending in June, according to a new study by Chicago-based data tracker Hedge Fund Research. This compares with a 9.1 percent gain for the HFRI Fund Weighted Composite. Of course, there is no way of knowing in advance which new fund managers will do well or poorly. Regardless, a number of recent studies have confirmed that the bulk of new money flowing into hedge funds over the past few years has been going to the largest firms — those with more than $5 billion under management. Meanwhile, the HFRI Diversity Index, which tracks hedge funds owned by women and ethnic minorities, rose 11.1 percent over the same period.
Separately, HFR reports that 285 new hedge funds were launched in the second quarter. This is virtually the same number that was trotted out in the first quarter (289) and the second quarter of 2013 (288). More encouraging is that 189 hedge funds were liquidated in the second quarter, way down from 272 in the previous quarter. However, the 979 funds that were liquidated in the trailing 12 months exceeded the liquidations in each of the prior four calendar years and were the highest since 2009, right after the financial crisis and global market meltdown.
___
The Securities and Exchange Commission has charged a former hedge fund manager of “fraudulently taking excess management fees” from client accounts and using the money to remodel a multi-million dollar home and buy a Porsche. Sean Cooper withdrew more than $320,000 from a fund he managed for San Francisco-based WestEnd Capital Management, according to the regulator. However, this worked out to far more than the 1.5 percent annual management fee that WestEnd disclosed it was charging for each customer’s account balance. Cooper engaged in this activity for two years until the SEC began examining WestEnd in April 2012, according to the SEC. WestEnd fired Cooper and returned the money to clients when it got wind of Cooper’s scheme, but the SEC charged the firm with failing to properly supervise him. It agreed to pay a $150,000 fine to settle the charges.
“His fraud went undetected because WestEnd had no internal controls to limit Cooper’s ability to withdraw excessive amounts from the fund,” says Marshall Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit, in a press release. WestEnd Capital Management, which managed $105 million at the end of 2013, agreed to cease and desist from committing future violations without admitting or denying the findings. The settlement also requires the firm to retain a compliance consultant. Cooper worked at WestEnd from 2002 through 2012.
___
Family Dollar Stores announced that its board of directors unanimously recommends that shareholders reject the hostile takeover offer from Dollar General and not tender their shares. It also reaffirmed its support for its previously announced deal with Dollar Tree.
“Our board of directors, with the assistance of outside advisors and consultants, reviewed all aspects of Dollar General’s tender offer and concluded unanimously that this highly conditional offer is illusory because, as Dollar General is well aware, the offer cannot close on the terms proposed,” states Family Dollar chairman and CEO Howard Levine in a press release. He adds that Dollar Tree “delivers attractive value in the form of immediate upfront cash and upside participation” in a combined entity, “as well as closing certainty.”
In the announcement, Edward Garden, a Family Dollar director and co-founder and chief investment officer of activist hedge fund Trian Fund Management, a major shareholder, says that the Dollar Tree deal offers Family Dollar shareholders “the highest value with certainty,” adding, “We remain fully committed to the Dollar Tree transaction.”
___
Speaking of Trian, shares of DuPont surged 5.20 percent after the Wall Street Journal reported that the activist investor sent a letter to DuPont’s board urging the chemical giant to break up into two separate companies: one focused on its faster-growing segments such as agriculture and nutrition and another that would include its specialty chemical products, such as Kevlar body armor, which generate strong cash flows. Trian owns nearly 3 percent of the stock, according to the report.
___
Nearly one-third of directors say their board has had some sort of interaction with an activist shareholder “and held extensive board discussions about activism” during the last 12 months, according to a survey conducted by PwC. The report also found that the boards of the largest companies are twice as likely to interact with activists as boards of very small companies. Although more hedge funds have entered the activist arena and have raised large sums over the past several years, it is still somewhat surprising to learn that such a high percentage of companies have had some sort of engagement with activists. Given that activists only pursue one or two targets at any given time, the survey underscores how much communication takes place behind the scenes that the public probably never learns about.
___
Another survey also yielded somewhat surprising results. According to hedge fund due diligence firm Corgentum Consulting, 37 percent of those involved in vetting hedge funds said they do not conduct detailed background investigations on fund managers. The survey respondents included operational due diligence analysts and hedge fund investors, including funds-of-funds firms, family offices, and institutional investors including pensions, endowments, foundations and insurance companies. What’s more, 86 percent conceded that they could do more when conducting background investigations, especially in the area of criminal investigations, litigation searches and tax liens.
___
Eurekahedge is the latest hedge fund scorekeeper to weigh in with August results. The Singapore-based data provider calculates that the average hedge fund was up 4.16 percent for the first eight months of the year. Asia ex-Japan hedge funds rose 7.26 percent year-to-date, it adds. Total assets under management increased by $12.7 billion to $2.14 trillion.
