All asset managers will have to return to investors in their funds any profits made from lending out securities in Europe under new rules that threaten to wipe out a lucrative source of revenues for some of the world's biggest investment firms.

The rules set by Europe's main market regulator aim to to ensure that fund investors gain the benefit from securities lending, a common practice across the fund management industry.

 With 66% of funds results in for June, there's a pretty good idication of the best funds for the past 12 months. 

Ueli Wick, a former Credit Suisse Group AG banker who in June began running his own Singapore hedge fund, says he isn't bothering to court investors right away. Instead, he wants to focus on performance.

"It's not that easy to go out with a good story and just raise money like that," said Wick, 41, who founded Baruna Asset Management Pte with $15 million of his own money and some from family and friends. "People just want to see more proof and tangible numbers because they've just been too disappointed with hedge funds and are extremely skeptical. To get big money, I need to deliver first."

Baruna Asset Management is among Asian startups opting out of the struggle to raise capital as investors gravitate toward established funds in a region where managers are underperforming global peers. Asian startups gathered $1.39 billion in the first five months of 2012, 51 percent less than the same period in 2011 and a 69 percent decline from five years ago, according to Eurekahedge Pte.

The returns-first strategy, by lowering costs and sharpening focus on performance, may help the latest batch of Asian managers avoid the fate of predecessors. Of the 317 Asia- focused hedge-fund startups since the beginning of 2009, about 74 percent have failed to boost assets "significantly" and 56 have been liquidated, according to Eurekahedge, a Singapore- based research firm.

'Very Challenging'

"It remains a very challenging fundraising environment for young and small managers," said Max Gottschalk, co-founder of Gottex Fund Management Holdings Ltd. (GFMN), which is based in Hong Kong, which allocates $7.6 billion to hedge funds. "By not taking in outside investors, the manager can remain focused on managing the fund and develop a track record without some of the infrastructure needed to attract investors and without the fund raising and client service distraction."

The fundraising drought may prompt managers to take more risks to post returns that will help lure investors, said Paul Smith, chief executive officer of Hong Kong-based asset manager and hedge-fund distributor Triple A Partners Ltd.

"The only way out of this impasse for a smaller manager is to swing for the fences and to try to post two years of back-to- back spectacular investment performance," said Smith. "This will get them noticed quicker. So in a perverse way, I expect this environment to heighten risk taking."

While the number of startups in the first five months of this year increased compared with the same period in 2011, their average size declined. Fifty-nine funds opened in Asia this year through May, averaging $23.5 million at the start, compared with 45 new funds averaging $63.1 million in 2011, according to Eurekahedge.

'Investment Opportunities'

In the U.S., 191 startups raised an average $42 million in the first five months of 2012, while new hedge funds in Europe totaled 105 with an average $36 million, Eurekahedge data showed.

"We do think that this is a great time to launch a hedge fund, given the current investment opportunities," said Wick. "Even though you can raise much less than what you could in a good market."

Wick, former director of ultra-high-net-worth-investment consulting group at Credit Suisse in Singapore, began running his Singapore dollar-based Baruna Global Macro Fund in June, he said. The fund, which will have capacity of S$500 million ($397 million), returned 0.3 percent in the first month of trading, Wick said.

'Uphill Battle'

True Partner Holding Ltd., founded by four former Hong Kong-based employees of Saen Options BV, decided to halt roadshows for about a year, said Chief Executive Officer Ralph van Put. Four months after its inception in July 2011, True Partner principals went on a trip to Switzerland in November to visit family offices and smaller banks and realized raising money for a small global volatility arbitrage fund was an "uphill battle," he said.

Before the four set up the Hong Kong-based hedge fund, they had generated a 70 percent return over two years trading their own capital after leaving Saen, an Amsterdam-based market-maker, in 2009, said van Put.

"We were always doing proprietary trading and never had any clients," said van Put. "So you can imagine for us raising capital is somewhat difficult, not being in the asset-management business for a long time."

True Partner began trading with $22 million from its partners and seed capital from Samena Asia Managers, which backs young hedge funds. True Partner's fund returned 16.5 percent from inception through June, said van Put. It has increased assets to $34 million with investments from wealthy individuals and plans to resume marketing trips in September, he said.

Athos Capital

Athos Capital Ltd., a Hong Kong-based manager of an Asia- Pacific event-driven fund that started trading in April, plans to focus mainly on building a track record of positive returns during its first year instead of "doing a broad marketing push," said a person familiar with the matter.

Athos is 35 percent-owned by Ascalon Capital Managers Ltd., an Australian hedge fund incubator backed by Westpac Banking Corp. (WBC) It has returned 2 percent since inception, the person said, asking not to be identified because the information is private. Matthew Moskey, Athos's chief investment officer, declined to comment.

Asset 'War'

Less than 6 percent of investors anticipate allocating to hedge funds with assets of less than $100 million this year, according to Deutsche Bank AG's annual alternative-investment survey released in February. Twenty-nine percent of all investors demand hedge funds have minimum track records of six months to three years before they would consider an investment, according to the survey, which polled 376 investors with $350 billion of hedge-fund assets.

"In the current war for assets it is important to differentiate -- if you can say you have a great team, story, infrastructure plus a say one year audited track record it will make it easier," said Mark Wightman, global head of alternatives strategy in Singapore at SunGard, a provider of trading systems for financial firms. "Most of these new guys are coming from prop desks, so some investors are nervous as to whether they can succeed without all the infrastructure they had around them."

Samena Asia Managers, a Hong Kong-based unit of Samena Capital Management Ltd., is trying to discourage the managers it provides startup capital to from taking expensive international marketing trips during their first year, said managing director Julius Wang.

"If you are just starting up, people are skeptical," Wang said. "Why would they give you money unless you've actually demonstrated you have performance?"

Salaries, Expenses

Salaries for fund marketers start at $100,000 per year plus about $50,000 for travel and expenses, and would be "a lot more" for someone competent, said Peter Douglas, principal of Singapore-based GFIA Pte, which advises investors seeking to allocate money to hedge funds.

Demand for Asian startups before the global financial crisis in 2008 was stronger, helping them raise money more quickly, said Samena's Wang. Between 2006 and 2007, new hedge funds in the region were often seen going on two- to three-week marketing trips to the U.S. and Europe before trading even began, he said.

"Difficulty in fundraising has certainly been a global issue, especially over the last twelve months," said Farhan Mumtaz, a hedge fund analyst at Eurekahedge in Singapore. "However, Asian and European hedge funds suffer more from this than North American funds. The last time we saw some healthy allocation activity was in early 2011, and at that time most of the capital flowed to North American funds."

'Make Sense'

In 2007, 89 funds started in the first five months of the year in Asia, raising an average $50.9 million, more than double the amount for 2012, according to Eurekahedge.

"The current environment is not going to ease any time soon," said Triple A's Smith. "If you estimated that it would take three years to build a fund pre-2007, now it will take you five years."

For Shuhei Komatsu, a former equity-derivatives trader at Merrill Lynch & Co. in Tokyo, joining a proprietary-trading house to build his track record before setting up his own fund made more sense.

Komatsu, 29, began working for Singapore-based Phi Management Pte after leaving MAM Pte, a Japan-focused hedge fund also based in Singapore in March. Komatsu currently manages about $20 million investing in derivative markets in Japan, including credit default swaps and equity derivatives, he said. The fund has returned about 15 percent since inception in March through the end of June, Komatsu said.

The Sidelines

"Looking at how so many people have failed to just go out there on their own and struggling to raise money, joining a prop-trading firm and building my track record made more sense," Komatsu said. "This would allow me to focus on trading and raise decent-sized money once I do decide to go solo."

Ryo Ishiyama, a former Deutsche Securities Inc. banker, says he is starting a hedge fund investing in global commodities futures in Tokyo, and is in no rush to raise funds. Japanese hedge funds have faced increased scrutiny following the fallout of AIJ Investment Advisors Co., which allegedly lost more than $1 billion with hedge-fund strategies.

"As we've seen in AIJ's case, you don't run a fund for the sake of raising more money -- you run a fund to make returns," said Ishiyama. "For now, I want to focus on managing private money, which is mostly my own money, to build my track record."

Tough Times

Ishiyama said he will not start raising money for the first year or two.

"It really is tough out there given the global economy; people are sitting on the sidelines," said Phil Tye, co-founder and managing director of DragonBack Capital Ltd., which provides support such as accounting, independent risk management and compliance services to hedge funds on its platform. "Marketing takes time in this environment."

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British hedge fund manager Man Group on Tuesday revealed a first-half net loss of $164 million (135 million euros), blaming "turbulent" financial markets and economic uncertainty.

The loss after tax, suffered in the six months to the end of June (see interim report), compared with a net profit of $70 million in the first half of 2011, Man Group said in a statement.

Total funds under management dived almost ten percent to $52.7 billion at the end of June from $58.4 billion at the end of December.

"Against a turbulent market and economic background, Man's funds under management have declined," said chief executive Peter Clarke.

"The result is a marked decline in underlying profitability."

Clarke unveiled another round of cost-cutting measures to save the group $100 million over the next 18 months and steer it back to profit.

John Paulson, one of the world's most closely watched hedge fund managers, told clients on Monday that he sees a 50 percent chance the euro zone will break up, according to an investor.

Paulson underscored his negative sentiment on Europe in a regularly scheduled call with investors.

The investor asked not to be named since Paulson & Co's funds are private.

A Paulson spokesman declined to comment.

Paulson earned billions of dollars betting against the overheated housing market in 2007, but he ranks as one of the year's worst performing hedge fund managers this year.

So far in 2012, his bets against Europe have hurt some of his portfolios. His Advantage Plus fund lost 18 percent during the first six months of the year after losing more than 50 percent last year, investors said.

Paulson is known for making big bets and sticking with them, and he has long suggested that European policymakers' efforts to solve the region's debt crisis will fall short.

 Paulson and Co Inc. is on track to survive a reversal of fortune that sources say very few other hedge fund managers could withstand.

Assets declined $17 billion " 44.9%" to $21 billion as of June 30, down from a peak of $38.1 billion in February 2011. Much of the loss is the result of poor performance over the past year of the New York-based company's flagship Advantage event-driven arbitrage strategy, although there have been modest investor redemptions, sources said.

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Daniel Shak, 53, filed a lawsuit against his former wife Beth Shak last month, demanding 35 per cent of her shoe collection. He claimed she had kept the shoes hidden in a secret room in their Fifth Avenue apartment, meaning he was unaware of their value when he agreed to a $3.25 million divorce settlement.

This week the case came to court, but after a morning of testimony, during which Mrs Shak, 51, described her vast shoe collection as "a sickness", Mr Shak told his lawyer to withdraw the case. The judge agreed, telling Mr Shak: "Well, thanks very much for wasting everybody's time."

According to FT.com, State Street said it will buy the hedge fund administration arm of  Goldman Sach's, as the Boston-based custody bank announced a drop in revenues in the second quarter.

The $550m cash purchase will make State Street the world's largest provider of services to alternative asset managers such as hedge funds, the bank said, as a 1.9% drop in revenues on the year before to $2.43bn illustrated the challenge it faces to grow in volatile markets with interest rates near zero.

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The end of June saw equity markets briefly rally, which gave some hope to the remaining optimists. However standing back and taking a longer term view puts things into perspective. 

Australia's equity market is well and truly stuck between a rock and a hard place, remaining almost 40% below the peak reached in November 2007 in spite of the Treasurer advising all who might listen that the local economy is the envy of the world.

That tells us two things - firstly, he might be talking his own book, and secondly that the rest of the world is in a mess. And of course Australia's economy remains firmly in the grip of those of the US, Europe and particularly China.

Absolute Return and hedge funds have certainly outperformed over the short, medium and long term - and particularly so over the past five years. Meanwhile over the past 12 months any gains have been particularly hard won.

* Based on 31% reported June results.

The above table shows that on a relative basis hedge funds have done well, with 80% outperforming the ASX200 over the past year. However their aim, and in most cases their claim, is to provide investors with an absolute return. On this basis, only 43% succeeded.

No doubt the critics will jump on this fact to claim that hedge funds have failed to deliver, and some have. But the real message is that there are enough funds that do succeed in providing attractive risk adjusted returns to make the reward for finding the exceptional ones well worth the effort.

Regards,
Chris Gosselin