Are Hedged Mutual Funds Right for Retail Investors?
By Christine Van Dusen, Robinson Research Report, 9/07

ROBINSON COLLEGE OF BUSINESS, GEORGIA STATE UNIVERSITY What do you get when you take a typical unregulated hedge fund, open only to accredited investors, and marry it with a traditional, regulated, open-to-the-public mutual fund? You get a hedged mutual fund — a new asset management tool that has been growing in popularity, according to new research from Vikas Agarwal of Georgia State University, Nicole M. Boyson of Northeastern University and Narayan Y. Naik of London Business School.

The three researchers conclude that despite their similar strategies, hedged mutual funds typically underperform traditional hedge funds by 3.3 percent per year on a net-of-fee basis. But these hedged mutual funds outperform traditional mutual funds by as much as 4.8 percent, potentially providing retail investors with hedge-fund-like payoffs at a lower cost and within the comfort of a regulated environment.

This research comes at a time when investment experts are questioning the power of traditional mutual funds and the market is concerned about subprime mortgage losses and a greater squeeze on credit — creating “an almost perfect trading environment for hedge fund managers who thrive on volatility,” according to a recent report from the Associated Press.

But some industry insiders caution against going whole-hog for hedge funds. The research from Agarwal, Boyson and Naik examines an alternative.

In their report the researchers explain why hedged mutual funds report stronger performance than traditional mutual funds. Though both are subject to the same regulations, hedged mutual funds have greater flexibility — they can sell short and use derivatives in a way that traditional mutual fund managers disallow in their prospectuses.

There’s a flip-side to this relaxation of regulations, though: increased agency costs. But, according to the researchers, the benefit of loosening constraints outweighs the downside of higher costs.

Another reason hedged mutual funds report strong performance is because they’re most often run by managers with experience managing hedge funds — about half of all hedged mutual funds are currently run by managers who concurrently manage hedge funds.

But why would a manager even bother to run a hedged mutual fund if hedge funds are so much more rewarding? It’s not the poorly performing hedge fund managers who choose to offer hedged mutual funds. The phenomenon is driven by a manager’s desire to diversify product range and to raise additional capital, given that it’s difficult for smaller hedge funds to raise assets due to restrictions on advertising and the like.

In compiling this study, the first comprehensive examination of a new category of mutual funds, the researchers tested their hypotheses using data on various funds and interviews with fund managers.

“These findings,” the report says, “have important implications for investors seeking hedge-fund-like exposure at a lower cost and within the comfort of a regulated environment.”

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Wachovia earnings hard to fathom
By Christine Van Dusen, Atlanta Journal-Constitution, 10/24/01

Wachovia recorded a third-quarter loss of $334 million, or 31 cents a share, in an earnings report analysts described as messy and convoluted.

It was the first report since Wachovia's merger with First Union, a deal that created the fourth-largest banking company in the nation.

The quarterly report, released Tuesday, included three months of earnings from First Union and one month from Wachovia. The same period a year ago included only First Union's earnings; the company did not restate the year-ago results to make them comparable to the latest quarter's.

"We knew it was likely going to be a disappointing quarter," said Nancy A. Bush, managing director of the brokerage Ryan, Beck. "I don't think anybody knew how convoluted it would be. And it's hard to project anything into the next year."

Wachovia did say it expects operating earnings per share of 70 cents for the fourth quarter, but it would not make profit projections for 2002.

The Charlotte-based company blamed its third-quarter loss on problem loans, merger-related costs and the Sept. 11 tragedy.

Problem loans, including $242 million from the old Wachovia, increased to $1.5 billion in the third quarter.

After-tax charges totaled $632 million, including $57 million related to the merger. The integration process, which will span three years, is expected to cost Wachovia $1.45 billion.

Also included in the third-quarter results were $55 million in losses Wachovia attributed to the Sept. 11 terrorist attacks. The company had some trust operations in the World Trade Center and also suffered when the stock market closed for four days.

That loss pushed operating earnings down 5 cents a share to 61 cents a share, the company said. If the Sept. 11 tragedy had not occurred, Wachovia believes it would have met analysts' expectations of 66 cents a share.

"I thought that was a little too convenient," Bush said.

But Christopher W. Marinac, an analyst with SunTrust Robinson Humphrey Capital Markets, did not question the terrorism-related loss.

"Wachovia has the data and is willing to share it,'' he said. ''Other banks are less open." Shares of Wachovia closed at $28.98 on Tuesday, down 7 cents.

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Atlanta: City migration fuels condo building boom

In Atlanta, the residential real estate market is something of a contradiction. Developers there are planning to deliver 15 residential towers in the center of the city between 2008 and 2010. Some of these buildings will reach higher than 40 stories, remaking the downtown into a place where people can live as well as work. But there is already a 22-month inventory of unsold condos in Atlanta, and in the first six months of 2007 condo sales there declined by 21 percent.

What gives? Part of the explanation is supply and demand; part of it is changing migration patterns.

Ryan Ward of Ryan Ward Real Estate, an Atlanta firm, sees the problem in simple terms. "The oversupply," he said, "is a combination of lending guidelines becoming tighter and [developers] continuing to build more than the market can absorb."

But Judd Bobilin, chief development officer of the Novare Group, builders of Twelve Centennial Park, a new project in midtown that features two 39-story towers adjoining a boutique hotel, has a different take.

"Immigration from places like New York and Chicago is sustaining the demand," Bobilin said "And builders are anticipating strength in the market, otherwise they would cut supply as they've done in other markets." As for the sales decline, Bobilin said developers are anticipating something of a swift recovery and a strong near-term increase in demand.

Demographic figures support Bobilin. According to numbers from the U.S. Census Bureau, Atlanta has had the largest net gains of 25- to 35-year-olds of any city in the country. Rather than move to the suburbs, this group prefers by about a two-to-one margin to live in the central city.

And this is why developers say the up-tick in downtown condo construction isn't just a fad. Downtown Atlanta has reversed the population losses it suffered in the 1980s and 1990s, and it is adding about 6,000 new residents per year, according to numbers compiled by the Atlanta Regional Commission.

Those explanations notwithstanding, there are some who think that the market is doing well despite the glut of unsold condos. "Atlanta's condo market is in relatively good shape" said Kevin Thorpe, an economist with the National Association of Realtors. "Condo prices rose 3 percent in the first quarter of 2007, better than the nation, which rose 1 percent. And with a median condo price of $155,800, Atlanta continues to have highly affordable conditions."

The average prices for downtown condos have remained stable since 2005, at around $300 per square foot.

Perhaps affordability and price stability are the secret to the optimism about downtown Atlanta. They certainly seemed to have convinced Mark Roberts to buy, and developers hope to see a lot more buyers like him.

Roberts was so impressed with prices in Atlanta that he recently bought three condo units at Twelve Centennial Park. The owner of Mark Roberts Christmas Magic, a California-based maker of holiday decorations, Roberts divides his time between California and Atlanta, where his company maintains a showroom at the Merchandise Mart, the city's trade show venue.

"I can spend more time enjoying life around my home, rather than having to travel out long and far to do things, and get things done," Roberts said. He doesn't miss having a yard, and he appreciates the urban feel of the tower, which offers many of the amenities of a hotel, including outdoor pools and a terrace with views of the city.

But convenience isn't the only reason Roberts bought in downtown Atlanta. His company frequently sends employees to Atlanta for work, and Roberts realized that housing them in two of the condos during their stays in Atlanta would be cheaper than putting them up in the city's hotels.

The high-rises being developed in downtown Atlanta represent something of a sea-change for development in its metro region. For years construction has been heavily weighted toward single-family homes in the suburbs. Each day new home building in Atlanta's suburbs claims nearly 50 acres of farmland and forests, a yearly total that is about equal to the size of Manhattan, according to a study by economists at Emory University.

Though downtown Atlanta's development future points skyward, the high point for condo construction in the city actually came in 2004. That year, more than 16,400 units went up, roughly 22 percent of all new home construction in the region. The next year condos declined to only 15 percent of building permits, or about 11,000 units. But in 2006 the number of condos surged again, to 14,100 units, nearly 21 percent of all new homes. Brokers say about half of these condos have gone up downtown.

One neighborhood that's being swept along by the building boom is midtown. The biggest development there is Atlantic Station, a multibillion-dollar project that is being directed by Jacoby Development, an Atlanta-based firm, and is going up on 138 acres that were formerly home to a steel mill. When it's finished in 2009, Atlantic Station will add 6 million square feet of Class A office space, 5,000 condo units, 1,000 hotel rooms and 2 million square feet of retail and entertainment space. Several hundred subsidized housing units are also included in the development.

Many market-watchers agree that the pace of construction has been torrid downtown. They believe that once subprime lending woes ease and conditions for borrowers improve, the trend of population movement back into the city will quicken and unsold condos will start to find buyers.

But every city has its naysayers, including Atlanta. One person who worries is Andy Liakos, a broker with Condo Atlanta. "There are a lot of glass-and-concrete condo towers downtown, and they're not all occupied," Liakos said. "I tell clients they're not a good investment. They're sort of like new Mercedes: They look good, but once you buy one you can't re-sell it without losing money."

 

Fulton County, Ga., Issues $120M Of Tans to Cover Lower Cash Levels
Bond Buyer  |  Thursday, June 5, 2008
By Christine Van Dusen

ATLANTA - Fulton County, Ga., yesterday sold $120 million of tax anticipation notes - twice as much as in 2006 - to cover expenses at a time when cash levels are lower, due in part to the advance payment of an annual subsidy to the financially ailing Grady Health System in Atlanta.

The notes will mature on Dec. 31. Citi was the winning bidder with a net interest cost of 1.6112%. Buyers were expected to be institutions, such as mutual funds and regional banks.

Fulton County receives its property taxes - which make up 79% of projected receipts - by Oct. 15, leaving it with lower cash levels during summer months. And though there are substantial reserves in the capital projects and internal services funds, the county typically needs an extra boost from a Tan issue to manage a somewhat limited cash position.

The notes represent about 25% of the county's 2008 expected property tax revenue of more than $480 million, according to Walter K. Johnson, senior managing consultant with Atlanta-based Public Financial Management, which is the financial adviser on the sale.

Bond counsel is McKenna Long & Aldridge LLP

Analysts assigned top short-term ratings to the notes and said the county is in a favorable economic position with a great deal of coverage provided by borrowable resources. Fitch Ratings gave the notes an F1-plus and also revised Fulton's rating outlook to stable from negative. It rates the county AA. Standard & Poor's assigned an SP-1-plus and Moody's Investors Service assigned a MIG-1 rating to the Tans.

Moody's high ranking for the notes is based on the "expectation of sufficient projected cash flows for note repayment, a favorable forecasting trend, and healthy tax base growth," according to the agency's report.

Moody's affirmed its Aa3 rating on Fulton County's $65.9 million of outstanding general obligation debt.

"A lot of counties in Georgia rely on Tans because property taxes are due later in the fiscal year," said Christopher Hessenthaler, an associate director at Fitch.

In revising the county's rating outlook from negative to stable, Fitch cited improvements to operational and organizational deficiencies in the county Board of Assessor's office, which had been spotlighted in a 2006 review by the Georgia Department of Revenue. Fitch also upgraded to AA-minus from A-plus the rating on $116.6 million of outstanding certificates of participation issued by the Fulton County Facilities Corp. The upgrade reflects the elimination of any pending legal challenges to the Series 1999 COPs.

Fitch said it also was heartened by the county's ability to integrate revenue losses stemming from the recent incorporation of three local municipalities into its budget.

"No further incorporations are expected within the county, reducing uncertainty with regard to budgeting and revenue forecasting," the Fitch report said.

The report noted that Fulton County has a diverse economic base revolving around Atlanta's role as the state capital and center of a broad regional economy. Population growth has outpaced the state's, increasing nearly 22%% since the 2000 census. The county's unemployment rate - 5.2% as of March 2008 - had declined in 2006 and 2007, but has since increased. There has been a sharp downturn in single-family housing starts throughout the Atlanta area and home foreclosures are up significantly. Fitch said it will continue to monitor the impact of the residential housing market on the county.

While the county's annual subsidy payment to Grady Health System is not particularly detrimental, the money seems to have been falling into a black hole. The nonprofit hospital, run as part of the Fulton-Dekalb Hospital Authority partnership, lost more than $20 million in 2006, up from $13 million in 2005 and $10 million the year before, according to Georgia Watch.

The consumer advocacy group faulted Fulton County and funding partner Dekalb County in 2007 for failing to adequately fund the hospital, which as of May of that year had reportedly used all available cash resources. Grady was expected to close down in May 2008 if other funds weren't identified.

In January, the Fulton County Board of Commissioners chose to advance - as a one-time deal - $30 million of the budgeted fiscal 2008 operating subsidy to the health system "in response to the hospital's narrowed cash margins," Moody's reported.

This month, control of the hospital was taken from the Grady board of trustees and given to a new nonprofit called Grady Memorial Hospital Corp.

The Woodruff Foundation promised a $200 million donation that was expected to help Grady get back on its feet.

Moody's believes Fulton County's 2008 cash-flow projections are supported by a conservative forecasting trend and the substantial infusion of property taxes starting in October.

Moody's noted the county is home to a "diverse array of corporate concerns," including headquarters operations for the Coca-Cola Co., Delta Air Lines, and SunTrust Banks. Analysts pointed to the large institutional presence of state government and several universities. Moody's said the region did not experience the very rapid run-up in real estate values seen in some states, though metro Atlanta foreclosure rates remain among the highest nationwide.

Moody's expects the county's debt position to remain well below average, given ongoing tax base growth and limited future borrowing plans. The county's debt burden is low, as the large property tax base results in an overall debt burden of 1% of full valuation and a direct debt burden of only 0.4% of full valuation.

Officials do not anticipate issuing any new general obligation debt during the near term, and Fulton County is prohibited by state law from issuing new COPs until the outstanding balance drops below $25 million. Officials are contemplating approaching voters with a proposed GO authorization for libraries.

 
Seeking answers amid chaos: Banks draw purse strings ever tighter, 'good faith' expectations out of picture
By Christine Van Dusen, Atlanta Journal-Constitution, 7/28/02

In banking, the no-brainer is no more. Gone are the sure bets, the big-name borrowers who -- because of their grand reputations and long-standing relationships with lenders -- could be implicitly trusted to pay down their debts.

The Enron and WorldCom scandals came like a kick to the gut for their lenders and, "in a fundamental way, this shook the confidence of banks," said R. Charles Shufeldt, head of corporate and investment banking at Atlanta-based SunTrust Banks. "We could no longer take on faith what in the past we took on faith to some degree."

This isn't to say the banking industry didn't, in the past, look at borrowers' books or pay attention to credit ratings. The lenders did all that, they say, and were led to believe they could trust what they saw. Now, in light of recent scandals, "It's natural that banks and anybody else taking credit exposure are going to insist on a lot more due diligence and a lot more information than they'd ever insisted on before," Shufeldt said. Said Virginia A. Hepner, managing director of U.S. industries for Wachovia Securities: "It's a tighter lending environment. Lenders aren't necessarily reducing their commitments of capital, but they're making sure their returns are relative to their risks."

Such tightening has been under way since the downturn of the economy, and there's not likely "to be incremental tightening from here," said Jim Moss, managing director of the ratings agency Fitch. "I think what we've seen more recently is some more active risk management."

Corporate lending won't dry up, he and other banking experts insist.

When the stock market was soaring, many investors took their money out of banks and invested for higher returns. Now that the stock market has tumbled, "The banks are getting a flood of deposits," said Arnold Danielson, chairman of bank consulting firm Danielson Associates in Maryland. "So they're trying to put that money to use."

Lenders, industry-watchers say, are in the business of lending and will continue to do so -- just with greater scrutiny, shorter terms and, in many cases, at a heftier price to borrowers. Banks will aggressively push other products, beyond loans, to borrowers to create deeper relationships that generate more revenue.

"I don't think there's any inability whatsoever for corporations to get money in the current market if they want it," said Richard Bove, an analyst with San Francisco-based brokerage Hoefer & Arnett. "They've just got to pay a little more for it."

That will be particularly true for companies in the telecommunications, energy and airline industries, said Meredith Coffey, director of analytics at the Loan Pricing Corp., which tracks corporate loan activity. The strongest companies, those whose debt is rated "A" or better, will be able to go to the banks for capital. Companies with debt ratings of "BBB" or lower may not be forced to give up on the banks, but may seek additional options for financing.

Such was the case for Mirant. The Atlanta-based energy supplier, whose debt is rated BBB-, is trying to renew a $1.125 billion revolving credit line at a time when lenders are backing away from the independent energy sector. Mirant "termed out," converting its revolving credit line into a one-year loan to maintain its cash position. While continuing to talk with lead banker Credit Suisse First Boston, Mirant raised $370 million in convertible debt securities to increase liquidity, according to the Loan Pricing Corp.

"The capital markets, across all sectors, are contracting right now. That's something not just related to the energy sector," said Mirant spokesman David Payne.

Mirant is likely to forge a deal with its bankers, but "like a lot of other deals, it will be done with more difficulty and stricter covenants," said analyst Christopher Marinac of Atlanta-based SunTrust Robinson Humphrey. "Companies do have other options," he said.

Those options include insurance companies, investment funds and other nonbank financial entities such as GE Capital. Asset-based lending -- revolving lines of credit secured by a firm's balance sheet assets -- also tends to be more popular when traditional lending is tight. "Corporations no longer want to have one main bank. They want to spread their business around," Shufeldt said.

Banks still will get big chunks of that business, he said, but will be "much more demanding, and companies will be a little more nervous about whether they really have the support they need."