Hedge Fund Report: Equity Hedge Leads, Macro Funds Wane Despite Commodity Gains

(November 8, 2011) — Hedge funds began the fourth quarter with their best performance month in 2011, with equity hedge funds leading the rankings amid gains in energy, technology, and emerging markets, according to Hedge Fund Research.

The HFRI Fund Weighted Composite Index gained +2.43% for October. The gain ended a two-month decline and followed a third quarter drop of -6.5%, the fourth worst calendar quarter performance in history, according to the research firm.

“Hedge funds posted gains for October concentrated in Equity Hedge and Event Driven strategies, as managers adjusted exposures intra-month in response to rapidly improving condition across equity and credit markets,” said Kenneth J. Heinz, President of HFR, in a statement. “The primary focus for managers, as well as the primary catalyst for financial markets, continues to be the European sovereign debt crisis, with the outlook having improved despite the continued likelihood of volatility and unpredictable political developments. In the current environment, fund managers are looking to maintain tactical flexibility to opportunistically adjust exposure to dynamic market conditions, while maintaining core exposures to constructive portfolio themes across equity, credit, commodity and currency markets.”

According to HFR, while equity hedge strategies had the largest positive contribution to index performance in the month, event-driven funds also posted gains on improved equity markets. On the other hand, macro funds posted declines on trend reversals, despite positive contributions from commodity exposures and discretionary managers.

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Institutional investors have responded to hedge fund gains by pumping up their commitment to the asset class. Last month, the roughly $78.6 billion State of Wisconsin Investment Board (SWIB) increased its investment into hedge funds, investing a total of roughly $300 million into the asset class as of August 31, with an additional $100 million in October. There are no final numbers available for the month of September, the fund’s spokesperson Vicki Hearing told aiCIO in late October. “SWIB’s move into hedge funds has been slow and deliberate beginning in January 2010 with the approval of the asset allocation that included a hedge fund strategy,” Hearing said, noting that the money used to fund the hedge fund portfolio came from rebalancing during market changes into cash, or a liquidity fund.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Responding to accusations by state and federal officials of defrauding public pension funds of foreign exchange transactions, BNY Mellon is offering its clients an alternative pricing model.

(November 8, 2011) — BNY Mellon — which has been accused by state and federal officials of defrauding public pension on foreign-exchange trades — is now offering clients an alternative pricing model.

“Our standing instruction services offer clients competitive rates in a transparent market. We have continued to develop and introduce innovative pricing and reporting options to meet our clients’ evolving needs,” Kevin Heine, a BNY Mellon spokesperson, told aiCIO in a statement.

He continued: “Through the standing instruction service, BNY Mellon offers clients with small trades – e.g., those that are not large enough to meet the $1 million minimum for the ‘wholesale’ interbank market – prices that are more attractive than they typically could get from third parties for these ‘retail’ size trades. These prices can be significantly more favorable than the retail prices small trades would otherwise receive, which can be 200 basis points (or more) above the interbank rate on any given day. In addition, clients are able to transfer the costs and risks of these trades to BNY Mellon.”

Mary Jane Wardlow, a spokeswoman for the Employees Retirement System of Texas, previously told Bloomberg that the bank has proposed applying fixed margins over benchmark currency rates when executing currency trades for custody clients.

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Last month, the $46 billion Massachusetts Pension Reserves Investment Management (MassPRIM) said it may drop BNY Mellon as its partner for foreign-exchange trading. “We are testing the market to see what other options are available to us,” said Michael Trotsky, executive director of the fund, to Reuters. “We want to see if we can do a better job,” he added, saying that the scheme aims to interview a range of candidates this month to replace BNY Mellon after issuing a request for proposals. A decision could be made before the fund’s December 6 board meeting.

The news followed assertions by State Treasurer Steven Grossman, who claimed the custodial bank overcharged MassPRIM tens of millions of dollars on foreign exchange trading since 2000. BNY Mellon has denied the accusations. “We reject the notion that [MassPRIM] was ‘overcharged,’” the bank said in a statement. “We value our client relationships and are confident that we offer our clients and their investment managers competitive and attractive FX pricing.”

Custodial banks have battled heightened scrutiny in recent months. The top custodial banks in the United States — BNY Mellon and State Street — continue to fight claims that they took advantage of pension schemes when providing foreign-currency trading services in recent years. Earlier last month, aiCIO reported that State Street Global Markets’ (SSgM) Ross McLellan and Edward Pennings – global head of SSgM’s portfolio solutions group and head of the Europe, Middle East and Africa solutions group, respectively – left the company following a pension fund’s inquiries into fixed-income trading costs during a transition.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742