Vertical Pulse

Back In The Red

It appears that our January hedge fund strategies conference will be held in a nick-of-time. November results for hedge funds bare out troubled times for the hedgies that should persist for awhile. The Wall Street Journal reported today that "average returns look likely to be back in negative territory for the first time since August, judging by the performance of listed closed-end funds. More worrying, those average returns conceal big dispersions not just between strategies but within strategies, with performances varying from as much as 10% down to 5% up, according to prime brokers."

When I was reviewing some of the hedge fund indexes a month or so ago, I noticed that some hedge fund strategies vary by a 15% difference. Quite a gap. Such volatility does not bode well for the industry, considering investors are sold on the idea that hedge fund managers maintain risk-adjusted returns in their strategies. "That will worry prime brokers, too. Most include material-adverse-change clauses in their contracts allowing them to withdraw financing -- and, if necessary, seize assets -- from funds that suffer major drawdowns," the Journal reports.

Speaking of brokerages, major banks have a lot to worry about too obviously from the ongoing debt market problems. Peter Hahn, a fellow at the Sir John Cass Business School in London, wrote an interesting editorial in the Journal's commentary section today, partly blaming weak bank boards for the current mess. It's worth the time to read.

"But November's figures are likely to trigger some soul-searching by investors, who will now have had several months to see how funds perform under pressure. Weak performers are likely to be jettisoned. Given that most hedge-fund investment these days is locked up for three months, the bulk of redemptions won't take place until the first quarter of next year. That could be when the credit crunch catches up with hedge funds," the article states.

For more information about IncreMental Advantage's Jan. 22 hedge fund strategies conference, please visit www.incrementaladvantage.com.

Hedge Fund Returns

Yesterday The Wall Street Journal ran a story about how some hedge fund strategies "are bouncing back in a big way." One of the strategies mentioned in the story was global macro hedge funds, which are enjoying price and value movements in the U.S. dollar and gold. Also, "Emerging-market funds climbed 26% through October, and those that focus on Asia climbed almost 40%." IncreMental Advantage will be hosting a conference in NYC on Jan. 22 that will focus on the 2008 outlook of these two hedge fund strategies, along with others.

"Overall, hedge funds are up about 10.5% in 2007 and may rack up their best year in four years. By comparison, the S&P 500 is up 4%, including dividends, while the Lehman Brothers bond index has gained 5.8%," the Journal reported.

Also in the Journal recently, a story appeared that covered some of the criticism of the U.S. Green Buildings Council's LEED rating system, which was described as being "too impractical and costly." The green materials used to satisfy LEEDs criteria can cost anywhere from $500 to $2,000, depending on various factors. "The rush to focus on green homebuilding comes as the residential real-estate market continues to struggle. Builders are eager to jump on the green marketing bandwagon as a way to differentiate their products," the Journal report concludes, but yet many homeowners rather buy luxury features than "green" ones for their new homes.

Not only are there questions and confusion surrounding the LEED rating system in the residential market, but some doubts linger in the commercial sector. For instance, the standards don't allow for regional differences, so saving water contributes equally to a building's rating in rainy Seattle as it does in dry Tucson. And green measures aren't weighted, so a bike rack scores as highly as buying 50% of a building's energy from renewable sources.

IncreMental Advantage will be hosting a commercial real estate conference in NYC on March 25 and 26 and in California sometime in June. We plan on recruiting leading industry speakers to discuss sustainable development with regards to the LEED rating system and other environmental materials that will clear up some of the confusion and questions about "green" development.

Please check www.incrementaladvantage.com in the coming weeks to view the agenda to our real estate conference.

Anti-Growth Politicians

Corporate America along with every man, woman, and child better be prepared to live under a much costlier tax regime within the next few years, especially if a Democrat wins the White House in 2008. Every day it seems the Democrats (and some Republicans) are calling for new and higher taxes on everything and anything. Don't be surprised if they implement a tax on the air you breathe.

For example, the House Ways and Means Committee just last week passed a proposed bill that would change the tax status of "carried interest" - part of the compensation the general partner receives in various partnership structures. If made law, income would be taxed as ordinary income rather than capital gains - 35% versus 15%.

In a recent study released by the Real Estate Roundtable, there are some 2.5 million partnerships in the United States managing $13.6 trillion dollars in assets, changing the tax treatment of carried interest would result in a tax increase of $13 billion annually.

I don't know if it's arrogance or greed, but politicians must be kidding themselves if they think the law will bring that much revenue into government coffers. It will only change investors', particularly those who acted as general partners, behavior by participating in other parts of the economy. Real estate, private equity, hedge funds, and other entities that use partnership structures will no doubt be impacted and probably move overseas, taking jobs and capital with them.

Let's hear it for Washington D.C.!!!