“There is nothing riskier than the widespread perception that there is no risk.” – Howard Marks

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Q1 2017 Letters

Hedge fund branding drives asset flows

Since the market correction of 2008, a vast majority of hedge fund net asset flows have gone to a small minority of hedge funds with the strongest brands. A recent report from Hedge Fund Research shows that approximately 69% of hedge fund assets are controlled by firms with over USD5 billion in assets under management and 91% are controlled by firms with over USD1 billion in assets. This is a significant increase from the 2009 percentages of 61% and 86% respectively.

Don Steinbrugge of Agecroft Partners writes that each year many hedge fund investors are inundated with thousands of emails and phone calls from managers requesting a meeting. To filter through the overload of information, investors are turning more and more to a firm's brand when choosing which funds to meet and ultimately invest with. However, having a strong brand is not limited to just the largest managers. For example, many investors will allocate to start-up firms that spun-out of other high profile organizations, despite the fact they have no audited track record. In reality, a strong brand is even more important for hedge funds with less than USD250 mil-lion in AUM. Despite the fact that these managers represent a vast majority of the approximately 15,000 hedge funds, they only represent 2.94% of assets.

A brand is an investor's perception of the overall quality of a hedge fund based on multiple evaluation factors that evolve over time. A high-quality brand takes a long time to develop, but once achieved, it significantly enhances a firm's ability to raise capital and retain assets during a drawdown in performance. Over time, Steinbrugge believes the trend concentrating a higher percentage of assets in the largest managers will reverse. He expects this to happen due to increased sophistication of institutional investors, poor recent perfor-mance of many of the largest, well known hedge funds, the pressure institutional investors are receiving to enhance returns, and the belief that smaller, more nimble managers have an advantage in a performance environment increasingly dependent on security selec-tion. This is especially true for small managers operating in less efficient markets or capacity constrained strategies. For the small number of new hedge fund launches that are successful each year, their high-quality brand was typically created at their previous firm. This may include having held a senior position at another top-quality brand hedge fund, having spun out of a top investment bank proprietary trad-ing desk, or having been seeded by a well-known investor. For the hedge funds not fortunate enough to launch with such fanfare, the key question is, what are the firms that have developed the strongest brands doing differently? There are three critical issues to consider in creating a strong brand and raising assets in today's competitive environment: the quality of the fund offering, the investor's perception of the quality of the fund offering, and the marketing and sales strategy.


Ex-hedge fund chief on suing the government: "I don't think they want the truth to come out"

David Ganek's lawsuit against federal authorities alleging improper conduct that led to the shuttering of his $4 billion New York hedge fund is inching closer to a long-sought conclusion. After Ganek and his legal team prevailed against a motion to dismiss, the government appealed. "Two years ago ... most people would've said we had very little chance of surviving what was ultimately their filing of a motion to dismiss it," the Level Global Investors founder told CNBC.

In February 2015, Ganek filed a complaint in US District Court for the Southern District Court of New York against US Attorney Preet Bha-rara — often referred to as the "sheriff of Wall Street" — and federal authorities involved in an FBI raid of Level Global in November 2010 and the related investigation. Shortly after the raid, massive investor redemptions forced the closure of Level Global. Ganek, who was ultimately never charged, wants to clear his name. With celebrity attorney Barry Scheck and former federal Judge Nancy Gertner in his corner, Ganek argues in the case that the affidavit in support of putting Ganek on the search warrant contained "false statements" that Ganek knew about alleged insider trading at his firm. The complaint accuses Bharara and the other defendants of violating Ganek's con-stitutional right not to be deprived of property or reputation. "I don't think they want the truth to come out," Ganek told CNBC. "And I think they are ... taking the legal limits to suppress the truth."

"If that office can be exposed for what I believe are serious problems and ethical issues, I think that actually has an ultimately powerful effect on the whole system," he said. But in such a fight, Ganek said, "You need resources, you need facts and you need will." In Novem-ber 2010, in addition to Level Global, Diamondback Capital Management of Stamford, Connecticut and Loch Capital Management of Bos-ton were also raided. "On that day, the government raided three businesses [that] in aggregate had $10 billion of institutional assets under management. All three of the businesses were ultimately shuttered, and the requiem to that is there were zero convictions," after an appeals court in 2014 overturned the convictions of a Level Global partner and a Diamondback trader, Ganek said. No charges were ever filed against Loch or any of its employees.


Hedge fund genius fails to cut prison sentence after "throwing stolen data in the Yangtze river"

A Sanderstead hedge fund investment "genius" who stole highly valuable algorithms from his employers and then took them to Hong Kong in a bid to get another job has been told he cannot complain about his sentence. Ke Xu, of Westfield Avenue, decoded confidential algorithms that belonged to Trenchant, which operates the hedge fund G-Research, where he worked as a qualitative analyst. The algo-rithms, which he helped to develop, can predict changes in the stock market and are used for automated trading on financial markets. The 33-year-old Chinese national then tendered his "abrupt and secretive" resignation and flew to Hong Kong on a one-way ticket in Au-gust 2014 to try and make money from the stolen algorithms by using them to land a contract with another firm. But he was arrested in the former British colony, extradited and jailed for four years in September 2015 by Judge David Tomlinson at Southwark Crown Court after he admitted fraud by abuse of position.

The court heard how Xu felt he was not being paid well enough by Trenchant. Despite taking home a £400,000 bonus on top of his £85,000 salary, he felt he should have been paid £1 million. Judge Tomlinson told him: "Most of the people who appear in front of me could only dream of the sort of bonuses from which you would have continued to benefit for many years to come but which, from some of the evidence I have seen, you felt were inadequate." He was also made subject to a serious crime prevention order - which was de-signed to force him to hand over any copies of the stolen algorithms and reveal anyone else he might have told about them. On good behavior,

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