Get used to it

29Aug06

Perhaps we should not have been surprised by the news, but a piece by Theo Francis in the Wall Street Journal reminded us that the old world of retirement savings is going by the wayside. Francis reports that DuPont (DD) is slashing its corporate defined benefit plan in favor of its defined contribution plan. DuPont is not alone in among the ranks of Fortune 500 companies taking this tack.

This trend of pushing responsibilities once borne by corporations and government onto individuals is a part of what Daniel Gross calls “Cramdown Nation.” While some aspects, especially in regards to executive compensation, are particularly odious, some aspects like retirement savings are inevitable in light of the changing economic landscape.

What we found ironic was that on the same day we found a story at dailyii.com on the increasing availability of hedge fund-like strategies in defined contribution plans. We are all for investor choice and making hybrid mutual funds available to employees in their 401(k) plans is certainly an example of this trend. However this is an example of how risk (and responsibility) is being pushed down to the individual level.

The fact of the matter is that our hedge fund coverage has been lax of late in part due to the overwhelming number of items on the private equity industry. While we were focused elsewhere hedge funds kept chugging along with capital inflows in the second quarter of 2006.

Increased asset bases and the pressure to generate returns on a consistent basis are forcing some hedge funds to take actions, that only a short time ago, would have seemed too aggressive. Peter Lattman and Karen Richardson in the Wall Street Journal report on the growing trend of investors, primarily hedge funds, who are playing rough with companies that are in technical default on their bond obligations.

Hedge funds looking to extract bigger returns from the companies they invest in have come up with a new game of hardball: Fail to file a quarterly report on time, and they’ll try to make you pay off your debt immediately.

Of course, when hedge funds become too aggressive companies cry foul. This may be one reason why the UK’s version of the SEC, the FSA, is taking a closer look at activist hedge funds. (via DealBook) We should expect to see high-profile hedge funds remain in the spotlight so long as they remain a thorn in the sides of corporate executives.

On the subject of raising the profile of hedge funds, Alistair MacDonald in the Wall Street Journal (again) reports on a hedge fund planning to go public on the Amsterdam exchange. Not unlike the private equity vehicle that went before it, we are not all that surprised that an alternative investment firm is seeking out the permanent capital available via the public markets.

One of the most interesting, and potentially profitable, investment avenues that hedge funds travel is finding novel areas to deploy capital. One such area, of late, has been in the funding of movies. This topic burst into the mainstream media in regards to the Tom Cruise production company. Going Private, not surprisingly, has an interesting take on the economics of film funding and the advisability, or lack thereof, of hedge funds and private equity funds becoming mini-film moguls.

Jeff Matthews thinks most hedge fund managers have their hands full with standard issue CEOs, and should not even think about getting themselves involved with the mercurial nature of Hollywood types.

One of the most interesting aspects of finance and investments is the fact that the landscape is continuously in flux. Risk is getting transferred from corporations to employees. Hedge funds are being more aggressive in their oversight of corporate management. Governments are becoming more aware of the power of hedge funds. Film makers are sourcing funding from the most unlikely of places. In short, the world is changing. Get used to it.

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