Because the fund still gets 5% interest on the whole value of the municipal bond - plus
the additional yield from leverage - and only has to pay 3% on the short-term notes,
industry returns are between 10% and 12%, says Williams.
This compares with annual returns of 5.99% in 2004 and 5.60% in 2005 for Chicagobased
Hedge Fund Research's Fixed Income Arbitrage Index, which incorporates a
variety of arbitrage strategies in fixed-income instruments.
All returns are net of fees. Rockwater declined to disclose specific fees, but fund-ofhedge-
funds managers typically charge annual management fees of between 1% and 2%
and an incentive, or performance, fee of 20%. In addition, investors pay similar fees to
the underlying hedge-fund managers.
Municipal bond arbitrage's still early territory for hedge funds, and while lack of
competition has been good for returns, Williams isn't concerned about new players
entering the field.
"With 55,000 state, county and city government issuers across the U.S.
and unlikely to pull back any time soon, there will be plenty of municipal bonds
available," he says.
At the same time, demand for very short-term municipal paper is high because the
bonds are typically issued for long terms - anything from 20 to 40 years, he says.
The yield curve for these bonds is probably to remain steep even as the Federal Reserve
has raised short-term interest rates, which it did most latterly March 28.
"While the Fed's actions might put pressure on the municipal yield curve to flatten,
historically this hasn't happened and the municipal yield curve has maintained its positive
slope," says Williams.
Once the company builds a track record over a couple of years, Rockwater Hedge plans
on attracting institutional investors interested in this type of instrument, namely casualty
and property insurers, who currently make up the 30% balance of the direct municipal
bond market.
Williams declined to comment on the size of his fund or its performance citing
regulatory concerns and because, at the moment, investment is only by private
placement to high-net-worth every individuals and is not accessible directly to the public.
(Marietta Cauchi covers hedge funds, private equity and mergers and acquisitions for
Dow Jones Newswires.)
Dow Jones Tip Sheet: Rockwater Hedge Reckons Municipal Bonds Are Hot-2
Labels: taatoo |
Dow Jones Tip Sheet: Rockwater Hedge Reckons Municipal Bonds Are Hot-1
Labels: taatoo |NEW YORK (Dow Jones)--Rockwater Hedge LLC's making a bet on municipal bonds.
The lure was irresistible, according to Bryan Williams, managing principal of the
Newport Beach, Calif.-based fund comprised of hedge funds. Just last year, Williams
morphed from being a conventional advisor of high-net-worth individuals into being a
hedge fund manager.
"Never in 25 years in the money-management business had I come across such a timely
and compelling strategy," says Williams who picked municipal bond arbitrage out of a
smorgasbord of hedge-fund strategies because of its potential for persistently high
returns.
"Investors need an alternative. The bull retail in bonds is finishing, there are single-digit
expectations for equities, and there's a load of money in cash," Williams says.
Not generally regarded as exciting investments, the $2 trillion municipal bond market
has been traditionally dominated by individual holders - either through direct investment
or via mutual funds - who comprise 70% of the municipal bond market.
Over the last four to five years, and increasingly over the last two years, however, savvy
hedge funds have been moving into municipal bonds looking for returns that have
become more difficult to find elsewhere.
Rockwater invests its clients' money in some of the 25 individual hedge funds which,
Williams believes, comprise the total number of funds dedicated to municipal bond
arbitrage out of about 8,600 hedge funds and funds of hedge funds, according to data
from Chicago-based Hedge Fund Research.
Money is made by splitting a long-term, triple-A-rated municipal bond into two
certificates: a floating-rate short-term instrument the fund sells to money-market retail
investors and on which it pays 3% interest, and a residual long-term piece which the
fund retains. Leverage is created by issuing more floating-rate certificates than residual
certificates.
The fund also shorts top-quality corporate bonds to hedge against the risk of interest
rates going up on its long-term piece of the municipal bond.
News Corp, Dow Jones agree on WSJ editorial integrity: source
Labels: taatoo |News Corp. has reached a verbal agreement with Dow Jones to safeguard the editorial integrity of the Wall Street Journal, removing a major hurdle in its hostile takeover bid, a source close to the negotiations said Tuesday.
The issue of editorial independence of the heading US business newspaper has been a key obstacle in the five-billion-dollar unwelcome offer made last month by Rupert Murdoch's sprawling media group.
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The Wall Street Journal reported Tuesday many "open items" remained unresolved, but the two sides had essentially forged an agreement.
The source familiar with the talks told AFP the deal was not yet final.
"We're close to agreement, but no agreement has been put down on paper," a person familiar with the situation told AFP.
"Are the parties producing progress? Absolutely. An ad hoc committee has been meeting with their opposite numbers from News Corp. for several days now and their discussions are continuing.
"Progress's being made on editorial integrity and the independence front," said the person, who requested anonymity.
Any takeover agreement requires the approval of the Bancroft family, the controlling shareholders of Dow Jones, one of America's most storied media firms.
Union officials, opposed to the News Corp. bid, said the Bancrofts still have the ultimate say on any deal.
"This group won't be sold unless the Bancroft family accepts," Steve Yount, of the IAPE union which represents Dow Jones & Co. employees, told AFP.
"The family gave a certain set of conditions. And I have seen no sign that they changed their position."
The Bancrofts originally rebuffed Murdoch's takeover approach in May, citing concerns about editorial independence, but industry analysts say the family might be warming to News Corp.'s bid which is valued at 60 dollars per Dow Jones share.
Some Wall Street Journal journalists are opposed to a tie-up with News Corp., claiming Murdoch has interfered in the editorial decisions of a little of of his media outlets. Their stance appears to backed by some members of the Bancroft family, according to US media reports.
The ad hoc committee, which includes Bancroft representatives, has led some of the ongoing negotiations with News Corp. since Murdoch met with several family representatives earlier this month in a bid to allay their concerns, according to the person familiar with the situation.
Murdoch had proposed setting up a system that would guarantee the editorial independence of the Journal similar to the one used by the Times newspaper of London, one of his high-profile British assets, which his media empire acquired in 1981. The Times has a special committee which is empowered to review the appointment of an editor-in-chief.
Dow Jones shareholders reportedly have been putting pressure on the Bancrofts to accept Murdoch's offer due to of the handsome premium News Corp. is offering for the company.
The Bancrofts have nonetheless signaled they will entertain takeover offers from other achievable bidders, although there are no other well-known bidders at this stage.
US conglomerate General Electric said last week that it would not be teaming up with Britain's Pearson, the owner of the Financial Times, to mount a possible takeover bid for Dow Jones, dashing the hopes of some Dow Jones employees opposed to News Corp.'s bid.