The Art & Science of Hedge Fund Investing

Optima Fund Management 2006 Investor Hedge Fund Conference

New York, 4-5 May 2006

'The Art and Science of Hedge Fund Investing' was the title chosen by Optima Fund Management, for its 2006 Investor Hedge Fund Conference, held at the Waldorf Astoria in New York City on May 4-5, 2006, with sponsorship support from Mellon and HSBC.

The speakers were a select group of people, featuring billionaire financier Carl Icahn, Barry Rosenstein of JANA Partners, Robert Citrone of Discovery Capital, Keith Anderson of BlackRock and Oscar Schafer of OSS Capital. The keynote speaker at the dinner held on the evening of the opening day was Tom Wolfe, author and chronicler of the world of high finance.

Thomas Gimble, Executive Managing Director of Optima, kicked-off proceedings by pointing out that the assembled audience represented some $500bn of investable assets. In addition to university investment officers and representatives of large endowments, he counted 11banks, nine insurers, six charities, 10 pension funds, 44 family offices, 50 recognised individual investors and two non-US family offices.

The fact that Dixon Boardman, Founder and CEO of Optima and his team – currently managing assets of circa US$6bn – were able to call upon such a high profile group of speakers to present to 300 invited guests – many of them very experienced investors – is a clear indication of the high regard in which Optima is held.

In an upbeat assessment of first quarter developments, Gimble said Optima had seen one of the best first quarter performances since investable indices began in April 2003. The performance of 3.81% was second only to the 5.5% of June 2003, and comparing favourably with the 3.76% of the CSFB/Tremont Investable Hedge Fund Index. Performance by strategy was strong across most sectors, particularly in emerging markets, long/short equities and multi-strategy, but weaker in fixed income and convertible arbitrage.

One of the trends Gimble picked out was the capacity squeeze resulting from funds closing to capital. This made access to capacity an increasing priority for investors. Within Optima's qualified list of hedge funds, almost half are currently closed to new investors, while just over a quarter is closed to all investors. It is not surprising therefore that closed managers have generally higher returns (5.40%), even in comparison to top tier open managers (4.73%).

Those funds that are closed to all investors have a performance of 5.49% for the 2006 first quarter, 18.40% for the past 12 months and 29.02% for the past 24 months. Funds which were open only to existing investors had average returns of 5.30%, 16.40% and 25.63% respectively.

Gimble also presented an assessment of the impact of the Securities and Exchange Commission's new regulations affecting hedge fund managers with AUM of more than $25m. The picture that is emerging reveals that many managers are choosing not to register with the SEC, at the expense of their investors' liquidity ie by imposing lock-ups of 25 months and more: out of 141managers in Optima's current qualified list, only 76 chose to register with the SEC. In addition, 'hard lock-ups' are more prevalent: they have grown to 50.4% from 14% of Optima's investors, highlighting the need for even more thorough due diligence and analysis. One manager, Phillip Goldstein of Bulldog Investors, has even chosen to sue the SEC, claiming it has over-reached its authority. Gimble said the case is in the Appellate Court awaiting verdict and that it looks favourable to Goldstein.

For such a New York-focused event, it was interesting that Gimble should choose to mention the announcement by the UK's Financial Services Authority to authorise hedge funds for retail investors, probably starting in 2007. The importance of this development lies in the fact that London is the second biggest hedge fund centre in the world, after New York.

Perhaps the star guest speaker was the legendary corporate raider Carl Icahn, who spoke about his speciality, event driven and activist investing. His risk arbitrage and options trading business, first established in 1968, has taken substantial and controlling positions in some of the most prominent American businesses, including RJR, Nabisco, TWA, Texaco, Phillips Petroleum and others. But most recently, he has been trying to break up TimeWarner, a company that has been having a hard time ever since its flawed merger with AOL.

One of Icahn's allies in the Time Warner fight was another speaker at the conference: Barry Rosenstein, founder of and managing partner of the $5.5bn hedge fund, JANA Partners, who discussed value-oriented, event-driven investing. Rosenstein is also an activist investor, joining forces last year with Christopher Hohn of The Children's Investment Fund to block Deutsche Borse's attempted takeover of the London Stock Exchange, prompting the resignation of the deal's architect, Borse's chief executive Werner Seifert.

Other prominent speakers were Keith Anderson, vice-chairman of BlackRock, where he is responsible for the firm's global fixed income strategy, while also being a member of the US Treasury Borrowing Advisory Committee, which advises on the financing and management of the Federal debt; Oscar Straus Schafer, managing partner of OSS Capital Management, and a long-time member of Barron's Roundtable; and Felix Zulauf, founder and president of the Swiss hedge fund manager, Zulauf Asset Management.

The conference's four panel discussions featured other big names. The first panel discussion centred on emerging markets and the world's fastest growing economies. On this panel, moderated by Optima's Stacy Adam, were founding partner of Discovery Capital Robert Citrone, who earned his spurs at Tiger Management and Fidelity; Satyen Mehta, a partner at Neon Liberty; and Francisco Alfaro, managing member of Miura Global Management.

The second panel, moderated by Optima's Donald Johnston, focused on Optima's long/short equity sector funds. The speakers were Wayne Wilkey, founding partner of Ampere Capital, and James Bell, portfolio manager at Lee Munder Investments.

After the luncheon keynote speakers, Lawrence Kudlow and consultant "Woody" Brock, came the third panel, addressing the question of event-driven investing. Moderated by Optima's Robert Picard, the discussion featured Joseph Oughourlian, a portfolio manager at Amber Capital; Philip Falcone, senior managing director of Harbinger Capital, and Barry Rosenstein.

The final panel discussion, moderated by Optima's Joseph Langeler, dealt with institutional investors in the hedge fund arena. Peakers on this panel were Orin Kramer, chairman of New Jersey State Investment Council; Donald Lindsey, chief investment officer of George Washington University; William Boarman, chairman of the Communication Workers of America and co-chairman of the Council of Institutional Investors; and John Casey, treasurer of the Altman Foundation.