Hedge Fund Street

Hedge Fund regulation: the final countdown!

As February 2006 comes yet closer, different issues, perspectives and arguments are doing the last minute rounds. But even after the deadline goes by one should not be surprised that yet newer issues come to light. There are several hedge funds that are resisting being registered. They are prepared to do what ever it takes to be as far away from the legalities of being registered.

There is one unique way by which the hedge funds are trying to escape the net. Increasing the ‘lock-in’ period. One of the ways that a hedge fund can avoid being registered with the SEC is by simply increasing the period for which the funds of investors necessarily have to be with the hedge fund. Though it may sound simple, it is not so. The partners of hedge funds themselves seem to be averse to the idea of their own money to be locked in. So what it means is that theoretically they are fine with the investor’s money being locked in but not their own. The SEC has made it amply clear that in order to avoid registration, funds invested by general partners, managing partners and their families must be locked up.

Of course the fees that they earn on the investment do not form part of the lock in period. It is their compensation and can use it as they want. The main reason being given for the hesitance of fund managers to register stems from their fear of being sued by their clients. They feel that by registering they will open doors for private civil litigation.

While hedge fund managers are finding ways to stay away from being registered, there are others who are making hay while the sun shines. A new insurance policy designed to protect hedge fund managers from lawsuits has been launched recently. This policy has been launched by Meyer’s group. In depth look into the market has revealed that less than 30% hedge fund managers are really protected from professional liability. This makes them quite vulnerable to collapses and long term credibility loss. With this policy however, the managers will be able to breathe a little easy. They would be sure of the insurance taking care of all the claims arising from allegation of errors and omissions, costs from regulatory investigations etc.

Apart from insurance there is yet another service that is benefiting from the situation. A new spying methodology has been launched by Corporate Resolutions, a New York-based background check and investigative firm. Here any employee of a company can call and give details of an illegal activity or harassment anonymously. The Street reports:

“Hedge funds emulate private equity because they need higher returns and new ideas outside of the realm of publicly listed companies. Private equity shops are turning to hedge funds as a way to retain their top analysts, says Poor.”    

Hedge fund manager pleads guilty to criminal investment adviser fraud

Recently Hedge Fund manager Scott Sacane pleaded guilty to criminal investment adviser fraud. The case is being prosecuted by the U.S. Attorney's Office in New Haven, Connecticut. Sacane was an investment advisor to three funds namely - Durus Life Sciences Fund, the Durus Life Sciences International Fund Ltd., and the Durus Life Sciences Master Fund. While he was associated with them was instrumental in inflating the value of the three funds.

By doing this he was able to charge management fees and performance incentive fees that he was not supposed to get in the first place. He is charged with manipulation of the stock of Aksys Ltd and Esperion Therapeutics Inc. Aksys Ltd is a medical products maker and Esperion Therapeutics is a cholesterol drug therapy company. The latter was later acquired by Pfizer Inc. Reuters reports:

“A U.S. District Court judge in Connecticut has scheduled sentencing for April 28. Sacane faces a maximum sentence of 5 years in prison and a fine of up to $250,000, the SEC said.”

Mellon should spin off key business: Highfeilds

‘Too many businesses are making Mellon to loose focus’ – this seemed to be the accusation of shareholders of Mellon. Their continuous pushing and prodding has resulted in the company spinning off a key business. The key shareholder leading the shareholder activism bid is Highfields Capital. Highfields is a Boston based fund and is one of the 10 largest shareholders of Mellon. Earlier, it has been responsible for bringing about changes companies like Janus Capital and Morgan Stanley.

The fund conveyed its disapproval of Mellon playing two fiddles at the same time. The letter issued out states that Mellon is running an investment management company and a processing firm. This the fund finds objectionable. Apart form this, the letter also states that Mellon had also tried to buy the asset management arm of Merrill Lynch earlier this year. Reuters reports:

"It is time to do something other than hunker down and blame inaction on the limitations of the marketplace and potential transaction partners," Grubman said”

Hedge fund settles $38 million penalty to SEC

Here is evidence that hedge funds cannot always laugh their way to the bank. Recently Veras Investment Partners had to cough up $38.2 million as settlement of penalties to SEC and New York Attorney General Eliot Spitzer. Veras Investment Partners is a Houston area hedge fund based in Sugar Land. They have been accused of breaking mutual fund trading rules.

$38.2 million is a composite of penalties, restitution and interest to the two parties and also Commodities Futures Trading Commission. The funds two top officials James McBride and Kevin Larson, also had to pay a hefty fine. Veras at one point has assets close to $1 billion by using deceptive techniques. They carried out improper mutual fund trades much after the close of trading hours way back in 2002 and 2003. The Chron reports:

“Veras Investment Partners, a Houston-area hedge fund accused of breaking mutual fund trading rules, agreed to pay $38.2 million in a settlement with New York Attorney General Eliot Spitzer and the Securities Exchange Commission.”

South Africa witnesses a lot of hedge fund activity

A lot of activity has been seen in the South African Hedge Fund market in the last six months. Though the industry is relatively un-regulated, it is definitely not scaring the investors. It is not even deterring the newer hedge funds from opening shops. Experts in the field are seeing it as an opportunity for newer investors to enter the game.

The older funds are more or less entering their maturity phase. This implies that they will not be able to take on new investors. Later it will also mean that older investors will also no longer be able to invest in them. Therefore the opening of these funds is being seen as a very positive development.

The South Easter Fixed Interest Fund was the first one to enter the fixed interest opportunities category in these six months. It is managed by Alastair Sellick and Jean-Pierre Matthews from PSG Absolute Investments. Clear Horizon Multi-Strategy Fund, a long/short equity fund was launched in October. It has been started by James Gubb and Fred Bouchard. The third fund to hop on to the bandwagon is Badger Quant Strategy Fund. It is managed by Henk Grobler from DWT Securities. The fund utilizes volatility arbitrage on the SAFEX Financial and Agricultural Product Divisions. Money web reports:

“The BESA All Bond Index experienced a particularly strong month, also gaining 2.4%. The sharp increase in the latter was mainly due to our stronger currency, falling oil prices, recent inflation fears subsiding and lower US interest rates.”

Research paper on Hedge Funds

A thought provoking research paper was presented by the EDHEC Risk and Asset Management Research Centre. The paper will be discussed with institutional investors and hedge fund industry professionals at the EDHEC Hedge Fund Days at The Brewery in London in February 2006. The paper is titled ‘Investing in Hedge Funds: Adding Value through Active Style Allocation Decisions’. It is written by Lionel Martellini, Mathieu Vaissié and Volker Ziemann.

The paper shows that systematic implementation of active style allocation decisions, both at the strategic and tactical levels can add significant value to a hedge fund portfolio. Well-known Black-Litterman approach has been used to show that when one has views on hedge fund performance, one can make both strategic and tactical style allocation decisions which can be very useful. The paper also states that selecting strategies in line with the investor's existing assets is always better than an approach with standalone funds of funds. It also says that in addition to apt fund picking, a disciplined approach to bets on returns by strategy contributes added value. Hedge Week reports:

“This paper shows that this can be done by customising an optimal hedge fund portfolio and by taking into account the investor’s original allocation to stocks and bonds.”

Tremont looks at Asian Hedge Fund Market with enthusiasm

Hong Kong will shortly have another fund of hedge funds targeting Asian Private Banks and Institutional investors. This fund is being launched by Tremont Capital Management, the Chicago based hedge fund firm. Apparently Tremont is in the process of applying for an investment advisory license from the Hong Kong Securities and Futures Commission. The firm is currently looking at institutional investors but it may also look at attracting retail investors in the near future.

Apart from Hong Kong, Tremont is also applying for license to operate in Singapore. Other countries which currently look attractive to the firm are South Korea and Taiwan. The focus on these two countries comes from their respective governments liberalizing regulations in order to attract more hedge funds in the region. Tax News reports:

“While Japan offers the largest institutional market for hedge funds, Tremont said that it has chosen to launch in Hong Kong to leverage the growing platform of its immediate parent, OppenheimerFunds, and its "grandparent", MassMutual Financial, based in Boston.”

Hedge funds find Ukraine stocks good for their future

Several countries which have till now been low key are now emerging on the radar of hedge funds. Hedge funds are waking to the existence of other economies that can fuel future growth. Chief amongst them is Ukraine. 

The country had emerged from its communist garb in the 1990s. But its liberalization began only in 2004 with the ‘Orange Revolution’ protests. Since then it has been demonstrating steady growth. A growth that has enabled it to earn market-economy status from the EU.

This new found status will help the country to establish trade relations with the 25 member block. Ukraine is also expected to join the World Trade Organization in 2006. This, analysts feel, will give further boost to its economy. In view of the recent developments and future plans, hedge funds are seeing the country as a viable market for generating returns.

Leila Kardouche, manager of the RAB Emerging Europe Fund feels that there is a lot of pent up domestic demand in Ukraine. She has also made the observation that investments have definitely picked up and future growth is inevitable with several entrepreneurs waiting to list their companies. The main sectors that the country is expected to show growth in are banking, industrials, mining and consumer plays. Kardouche’s RAB Emerging Europe Fund has more than $100 million under management. The fund has returned more than 25 % since its launch in 2004.    

Hedge finds are known to be constantly on the look out for avenues to generate better returns. Recent overcrowding of the market by several players has been pushing them even further to look for more money generating opportunities. When the conventional markets dry up, these funds are known to look elsewhere to improve performance.

This adaptability ensures that they almost always perform better than the equity market. The stock market has been throwing up lesser than usual number of opportunities to generate returns and is generally moving sideways. As such the funds are looking at other economies and tools to fuel their growth. Some time back it was the Asian markets that had caught the fancy of these somewhat secretive funds. While Asian markets continue to improve their profits they are keeping their eyes open for better opportunities to exploit.

Other countries that also seem to be attracting their attention are South Africa and Russia. Both these markets seem to have potential but as of now are battling with their own inadequacies. Lately they have had a decent and strong run in the stock market. However Kardouche feels that the markets definitely have good potential for hedge funds. Despite the optimism about the future, she feels that returns will not be as easy going in 2006.

      
Since the time Russia defaulted on domestic debt in 1998, it has been saved by record high oil prices over the last few years. Analysts feel that if oil prices came down to $20 to $30 per barrel, the growth would be phenomenal. On the other hand, South Africa has generally relied on its reserves of precious metals such as gold and platinum. The prices for these metals have also hit record highs in the last few months. Reuters reports:

“Ukraine threw off its communist shackles in the early 1990s along with other east and central European countries like Hungary and Poland and Baltic states such as Estonia.”

Now even the buyout industry is being encroached by hedge funds

Now hedge funds are attempting to takeover the key activity area of buyout firms in Europe. Over the last 18 months, hedge funds have been very successful in the arena and have now focused their attention to Britain. This revelation was made by Bob Wigley, Merrill Lynch’s chairman for Europe, the Middle East and Asia. He said that the hedge fund industry is going all out to expand its scale of funds under management by particularly focusing on private equity.

This move no doubt is giving the traditional buyout firms sleepless nights. First concrete step in this direction has already been taken by Malcolm Glazer who is backed by a hedge fund. He has bought over Manchester United Football Club for £790 million. Times Online reports:

“Bob Wigley, Merrill Lynch’s chairman for Europe, the Middle East and Asia, said that hedge funds were targeting the buyout firms’ traditional turf in Europe after testing the market in the US.” 

SEC takes fraudulent hedge funds to task!!

SEC has yet again set an example for locating defaulters and for making them pay for their erroneous behavior. SEC and Commodities Futures Trading Commission (CFTC) had recently accused two Texas based hedge funds, their investment adviser of fraudulent market timing and late trading in mutual funds. The two funds in question are Veras Capital Master Fund and VEY Partners Master Fund and their adviser who is also in the list of accused is Veras Investment Partners LLC. The accused have reportedly paid a fine of $37.7 million to settle the charges. They have neither confirmed nor denied the allegations however.

The hedge funds are charged with using deceptive means to late-trade and market-time mutual funds. By doing this they were able to illegally profit thereby harming the interests of ordinary investors. The period for which they are being is from January 2002 through September 2003. They apparently also attempted to mask their true identity from the mutual funds during this time. 

Late trading can be quite harmful for ordinary investors. Here the professional traders buy and sell fund shares rapidly to exploit pricing inefficiencies. This harms the profits of average-long term mutual fund investors. The entire thing becomes illegal if the fund absolutely forbids anyone to make use of market timing and still someone goes ahead and does it without fully disclosing their true identity. When traders indulge in late trading, it implies that they are trading at the day’s closing price for the fund long after the deadline to do so has lapsed.

The settlement amount of $37.7 million will be used to compensate those investors who have suffered losses because of the act. The representatives and attorneys of the accused are tight lipped about the episode. Reuters reports:

“The SEC said the defendants agreed to pay about $35.6 million in disgorgement and $645,585 in interest, and Larson and McBride each will pay a $750,000 penalty. Larson and McBride were barred from associating with any investment adviser but will be able to reapply for association after 18 months, the SEC said.”    

Hedge Funds now financing energy sector

Hedge Funds never seem to stop surprising industry watchers who are constantly keeping a sharp eye on the lightly regulated investment tool. When equity stopped giving the heady returns, they moved to investing in cinema chains. Hollywood movies came next. Simultaneously came financing of food and retail chains. Then came financing of IT companies and what not.

Now they have turned to the energy sector. Though their focus on the sector is not new, the way they are now associating with the sector is. Earlier they were involved in betting of global prices of oil, energy and related products. Now they have shifted focus to financing oil and gas companies all together. In doing just this they are encroaching onto the territories of banks and traditional money lenders.

Consider the example of Houston-based USA Superior Energy that wanted banks to provide $2.5 million in cash to buy some depleted oil fields in Texas, Kansas and Kentucky. The banks obviously declined as the proposition was far from being attractive. In fact with nothing but a plain idea and a proprietary technology in their hands, banks could not afford to put them selves at risk. The company has however managed a loan of $1 million from North American Globex Group, a New York-based fund at an interest rate of 12%.

North American Globex Group is just one of the eager hedge funds sitting on a large cash reserve ready to finance and make quick money on it. And there is hardly any thing better than investing in oil and gas now days with the oil prices crossing all known boundaries. The hedge funds therefore are not only seen investing directly in oil and gas companies but also in the companies that support them. This includes investing in companies that lease helicopters, sell down-hole technology and provide personnel and staffing etc.

The hedge funds have also been seen lending money for rebuilding the energy infrastructure in the Gulf after Katrina in the hope of literally striking (liquid) gold. One may find it interesting to see this shift of focus of hedge funds from what was known as their bread and butter. It shows the agility for the instrument to adopt newer markets and adapt to completely alien environments and give the local competition a tough time. 

With the ever changing global financial market, the ability of hedge funds to adapt to newer investment tactics has enabled them to survive. For instance, their strategies involving quick entry and exit from markets helped them to make huge profits in market swings. But in a sideways moving market, they have realized that it is wise to invest in something for a longer duration and wait a while for the interest to be generated on it. Hence they are now having a little longer focus of the market when they are in a financing mode. This is especially true in case of oil and gas financing where oil prices are almost always climbing up.

While they are investing in the sector, what is also lucrative is the option to own some part of the equity. And who knows, with an ‘equity kicker’ a hedge fund can reap unprecedented returns if the company is bought over or even when it goes public.    

Though hedge funds are showing great presence in the area of giving loans, they are not the only unconventional players in the market. Pension fund managers have also been spotted lately investing in oil and gas companies or even alternative energy projects.

Therefore what we are witnessing is a part of the evolution process of the financing of energy sector. For instance, not so long ago, most of the small energy startups got their financing from major energy companies, but after the Enron debacle, they have more or less refrained from such involvements. The Chron reports:

“And with all this money pouring in, borrowers may be able to negotiate better terms, said James Benson, a partner in Energy Spectrum Capital, a Dallas firm that advises and invests in the energy business”

Investment Banks find hedge funds less rewarding!

If one were to go by the recent reports from Morgan Stanley, servicing hedge funds is not generating the kind of returns for Investment bank as the rest of the year. Chief factor for this is the phenomenal growth of competition in the arena. It states that prime brokerage firms have made quite a progress by leaving behind the previous year’s performance by over 28%. The next year’s projection is a growth in the vicinity of 11%. The slowdown being experienced right now and what is expected to be is from further stiffening of competition coupled with slowing of rising interest rates. The latter is a phenomenon which while having a positive effect on other areas, affect prime brokerage negatively.

Though the slowdown is a positive possibility, Morgan Stanley assures that the area will continue to show growth. The secret of this lies in how prime brokerages earn their money. They offer settlement, custody and securities lending services to hedge funds and for this they charge the fund a premium over money market lending rates for loans. And since hedge funds are not showing any signs of aging, the industry will continue to flourish.

Some market shifts have been observed however. The share of the pie for Morgan Stanley and Goldman Sachs which was previously around 50% in Europe, has now shrunk to 30%. British-based Barclays Bank and Germany's Deutsche Bank are now heavily encroaching on the territories of earlier market leaders. This development is despite the fact that they face several barriers to entering these markets.

Apart from the above two stated reasons, there is another major reason for the slowdown. The hedge funds have not been performing the way they have been in the previous years owing to the emergence of other alternative investments such as private equity and commodities. Reuters reports:

“Another factor behind the brake on the revenues prime brokers earn is likely to be a slowdown in new assets flowing to hedge funds because of weak returns over the past couple of years and the emergence of other alternative investments such as private equity and commodities.” 

Simpler Hedge Fund Laws for EU?

Can irregular regulation of the hedge fund market lead to stifling of a country’s economic growth? Yes seems to be the answer if we go by what European Fund and Asset Management Association is asking for. It is demanding that the European Union should have similar rules for governing European Union hedge funds and funds of hedge funds. It has given two ways by which this can be done.

As part of the first plan, the association has suggested the steps that can be taken in order to bring similarity of the various hedge fund players across the union. The other plan suggests guidelines to have a control on the kind of investors who would be eligible to buying different types of hedge fund products. The lobby is a representation of asset management worth about EUR 12 million.

This initiative has been taken seeing the irregularity existing in the market. The association has observed that though hedge funds constitute a substantial part of Europe's financial market rules governing then in various countries of the union are different. This gives ground for a lot of interactive problems amongst the member nations. As such it makes it difficult for several hedge funds to be able to sell their funds across European borders. Therefore the suggestions made by the association attempts to harmonize rules pertaining to the funds within the union. These rules suggest ground lines to indicate for example if the small time investor is allowed to buy the risky products. It has also asked for implementation of rules to clearly indicate what constitutes a hedge fund.

Charlie McCreevy, the European Internal Market Commissioner however has made it clear that he is not in favor of excessive new legislation on the issue. The Business Online reports:

“Europe's hedge fund industry has come under increasing attack this year. In April, John Sunderland, president of the U.K.'s Confederation of British Industry, criticized the sector's lack of openness and accountability.”

ECB presents report on exposure of EU banks’ to hedge funds

European Central Bank revealed recently that the exposure of European Union banks' to hedge funds is low at the moment. The bank added that this situation may not last for long and that it is likely to grow with the expansion of the industry. This revelation was part of a report presented by European Central Bank which highlighted links between banks and hedge funds in the EU. The report said that in these banks risk management is generally strict but there is scope for improvement in counterparty discipline and preparations for the risk of several hedge funds collapsing together.

The banks that were surveyed by ECB had a strong emphasis on collateralization while having strict requirements for exposures to hedge funds. On the issue of regulating hedge funds a little more in EU, ECB stated that the same is possible only if US also cooperates with them. As a conclusion, ECB placed a seal of approval on the rules and guidelines that were laid down subsequent to the collapse of Long Term Management in 1998 and said that the same are still relevant. Reuters reports:

“Some EU politicians have called for more regulation of hedge funds to boost transparency in the sector, though the ECB has said that any new rules would need the cooperation of the United States, where many hedge funds are managed”

UK Pension Funds seen investing in Hedge Funds

The official figures of the extent of involvement of pension funds in hedge funds are out. According to the National Association of Pension Funds about 20% of the large pension funds in the UK have in some form or the other invested in the hedge funds. What it implies is that out of every five larger pension funds, there is at least one fund that has placed its money in hedge funds that have for long been called secretive and not transparent at all.

The report added that some of the pension funds have also increased their allocation to the risky funds. NAPH however found no evidence of any fund having decreased their allocation or having withdrawn their investment altogether. The research report is a compilation of responses collected from 420 pension funds. For long, pension funds have been seen to be testing hedge funds waters. The relatively risk averse category has been consistently been drawn towards the hedge funds in search of better returns and diversity. IPE reports:

“The European Fund and Asset Management Association, EFAMA, yesterday said the European regulatory framework “does not foster a single market for hedge funds”.

McDonalds fights shareholders wanting it to spin off it’s restaurant chain

McDonalds Corp is in the midst of a fierce battle between the management and the larger shareholders (read hedge funds). William Ackman who is a general partner of New York-based Pershing Square Capital Management LP is demanding the company to do some dramatic restructuring. As is the case with all the shareholder activism efforts, this one too is with the aim of improving share holder value. Ackman has asked the management to spin off its capital-intensive company-owned restaurant division known as McOpCo. A move that Management of McDonalds is definitely against.

This effort of Ackman is definitely being lauded by his peer hedge fund community. They feel that he is definitely on the right track. Shareholder activists like him are continuously on the move to look for underperforming companies that have a capacity to improve. More and more active and confident managers like him are engaging in confronting the managements of the companies in which they are investing. The core reason for this movement is because there is a lot of pressure on the hedge funds to generate high returns.

This is especially in the era when the stock market is showing a sideways movement. Investors are unable to make money in such a market condition. So the more demanding ones with deeper pockets are urging their hedge funds to generate more returns on their money. Consequently the fund managers are investing a whole lot of money in underperforming companies such as McDonalds and after they have a major clout, they voice their demand with authority.

Ackman is not alone in making this demand from McDonalds. Whitney Tilson, who runs T2 Partners LLC and is a McDonald's shareholder is also adding weight to the demand. Tilson adds that mutual fund industry is quite passive in their functioning. This is true with almost all areas pertaining to capital allocation, executive compensation, options etc. As such, though mutual funds do buy stake in the company, rarely does one hear even a whimper from them. On the other hand, hedge funds look for buried treasure and go all out to get them.

McDonalds is already in the process of spinning out its 461-store Chipotle Mexican Grill Inc. chain in 2006. What Ackman is demanding is that the stock of the company should be freed of operating about 8,000 stores. This way the remaining company can generate a large amount of cash that can then be used for share buybacks and to announce higher dividend. By doing this the company can collect franchise fees from spun-out stores and this would increase the value of the shares from $33 to over $45. Chicago Tribune reports:

“At Wendy's International Inc., for instance, Ackman and others successfully prodded management to spin off its Tim Hortons doughnut shops. McDonald's is doing something similar by spinning out its 461-store Chipotle Mexican Grill Inc. chain early next year.”

Industry concerned about pension funds investing in hedge funds

The argument in favor an against pension funds investing in hedge funds continues. Several market watchers have observed that the pension funds are not by standers any more. They have taken the plunge with gusto. Though most of then are still at the fringes of the deadly hedge funds waters, there are several others who have been seen to be investing as much as almost 40%. One quick example of this is Weyerhaeuser, the Federal Way-based paper company that has 39 percent of its pension fund's assets in hedge funds. According to some estimates, almost 40 percent of all institutional money is coming from pension funds these days.

Estimates also suggest that large institutions will be investing as much as $300 billion in hedge funds by 2008. Therefore one can imagine as to the extent of pension fund money that is likely to flow in. What is further likely to make things easier for pension funds is the amendments being pushed for in the congress. These changes will enable more inflow of money from pension funds into hedge funds. More and more pension funds are today looking at hedge funds today as they look forward to getting better returns on their investments.

The sideways movement of the market has dampened the spirits of most pension officials and hence they have shifted to the more lucrative hedge funds. However industry analysts feel that the move is quite untimely since the hedge funds are not giving the kind of returns that they have been in the past. In the 1990s for instance, the returns were quite heady nearly touching 30% on several occasions. Managers such as Michael Steinhardt and George Soros made huge bets and showed many investors how much their investment was capable of generating returns. Today the returns are in the vicinity of 5.7%.

Analysts and academicians are also arguing if this kind of risk taking is necessary for pension funds at all. The sole purpose of hedge funds is to pay out a predetermined benefit to the retiring workers. In such a scenario it may be completely unwise to subject the investor money to unnecessary risk. 

Hedge funds make money by investing away from the conventional direction of the general market. As such they are at several times able to capitalize on the opportunities arising from such situations. However the betting can go completely wrong and thus can result in heavy losses. Hedge funds were designed primarily for wealthy investors and larger institutions that were sitting on a lot of money. Therefore even if they lost some money in the bargain, it did not seriously affect them.

However, people invest in pension funds primarily thinking about their life after retirement. The time when they will be old and may not have much by way of income to help them survive. They invest in pension funds by saving dollars from their day to day expenses. How wise is it then to subject all this hard earned money to so much risk. What the pension funds are doing is merely jeopardizing the future of the retirees all together.

Just to give an idea of the extent to which the pension funds are investing in hedge funds: General Motors fund is one of the first pensions to start working with hedge funds. It is also the nation's biggest corporate pension fund with over $90 billion. In 2003 the fund had merely $2 billion. We can clearly see the extent to which general public is investing in pension funds just so that they are able to secure their old age. Seattle Times reports:

“Most pension funds have modest stakes of less than 5 percent, according to a recent J.P. Morgan survey. Verizon has 3 to 4 percent of its portfolio invested with hedge funds, and is considering adding to its investment, said William F. Heitmann, senior vice president for finance.”

Will SEC be able to regulate the hedge fund industry?

What was being seen as a regulatory scare may actually be a hollow threat after all. SEC, in a bid to regulate the much opaque hedge fund world, had announced that by Feb 2006 all the funds have to be registered with them. Registration implied that now finds would not only have to do extensive initial paperwork but also be on their toes while maintaining daily records. The funds could be asked to come up with compliance reports as and when the commission would deem fit. Any irregularity or even a whiff of non compliance would be dealt with seriously. We had seen a lot of uproar amongst the hedge fund community. A lot of them scrambled to put their house in order and meet the deadline. But then there were others who took a deep look into what it really meant and the kind of time that they would be required to spend on it and then just gave it up. They preferred to stay away from all the action and instead spend their energies on what they do best – make money!

So what is happening is that most of the 8000 funds have decided to stay as far as possible from the action at SEC. And what is SECs response to this revelation? Well they have been honest enough in admitting that their current size may prevent them from putting the plan it to real time action. If not completely, they may not be able to totally govern and observe compliance owing to the ‘mammothness’ of the industry.

As they are severely outnumbered they admit that they would be able to at best conduct 1,200 to 1,500 inspections a year. There team of 450 is also burdened with monitoring of 8000 or so mutual funds also. The figure of 8000 hedge funds comes down drastically with the clause that only those funds that manage more than $25million or above assets need to currently register with SEC. Apart from this if they manage assets for less than 15 investors or if their lock-in period is more than two years; they are relieved of this chore.

The SEC provision actually includes most hedge fund advisers but those advisers who manage only private equity funds, venture capital funds and similar funds that require investors to make long-term commitments of capital are exempted from this rule. Given this SEC is still clueless about how many funds will actually require registering with them. Some smart hedge fund managers have managed to be overlooked by SEC by simply increasing their lock in period.

Analysts feel that in the given scenario, less than half of the total number of hedge funds has initiated the process of registering with the commission. A dismal figure if one takes into account that less than two months remain till the deadline set by SEC. SEC has taken cognizance of the situation and instead of blaming the shortage of staff for not being able to abide by its own rules, they are making the most of it. As of now they are focusing on large hedge funds and doing some scanning at the time of registration itself. Only time can tell if the work of the regulatory commission will bear fruitful results. Bloomberg reports:

“Nester added that the agency's enforcement mission will be bolstered by adviser requirements to hire chief compliance officers, the ability to screen individuals in the management companies and to ``identify practices that may be harmful to investors, and provide a deterrent to unlawful conduct.''

Hedge Funds, a force behind M&A deals!

Merger and Acquisition spells ‘big game’ these days. More of M&A activity is being witnessed than ever before more so in the European market. Take over deals that one could dream of less than half a decade back are now happening with a blink of an eyelid. Hedge funds do have a very important role to play in this development. This observation was made by Piero Novelli, who is the newly appointed global head of M&A at UBS. He also noted that the funds are quite cued on to the board room maneuvers of companies. Therefore what happens is that when a company decides on a restructuring plan or plans a takeover bid, the hedge funds swarm in and amass a much stake in the company as they can. Some times this figure has even seen to reach up to 60%. 

At this point, he mentioned the unsuccessful bid of Deutsche Boerse to takeover London Stock Exchange which ended quite tragically with the dethronement of its chief Warner Seifert. Now the move is on to push for merger of the German Boerse and pan-European exchange Euronext. This move is being initiated by stalwarts The Children's Investment Trust and Atticus.

Analysts have observed that the volume of mergers and acquisitions has crossed $916 billion in Europe up to now in 2005. This value is up by 56% from the value of last year. In US however this figure is close to 979.7 billion - A figure that is 34% up from the last year’s performance.   

In Europe, this growth is primarily due to developments such as the introduction of Euro and sale of large state assets. Homogenous accounting standards, move towards standard European takeover regulations and tax harmonization also have a big role to play in this game. Reuters reports:

“Under former investment banking chief John Costas, UBS successfully broke into the so-called bulge bracket of global investment banks alongside U.S. heavyweights such as Goldman Sachs, Morgan Stanley and JP Morgan.”

Hedge Funds want Versatel to change the constitution of its supervisory board

This time the hedge funds may not succeed in their ‘shareholder activism’ bid. Recently Swedish company Tele2 AB acquired 74% stake in capital of Dutch telecom firm Versatel. After this Tele2 replaced all four supervisory board members. They were replaced with its own representatives.

This move was however resisted by minority stake holders. These minority stake holders, chiefly hedge funds have a combined stake of 15.5%. There are three hedge funds involved - Amber Capital Investment Management, Centaurus Capital and Mellon HBV Alternative Strategies.

They are arguing that by replacing the supervisory board members the company is denying the basic rights of shareholders to be impartially represented on the board. They insist that the supervisory board is a kind of guarantor of the shareholder’s interests and rights. They are demanding that they be fairly represented on the board by the inclusion of at least two more members. These members however should not be related to Tele2 in any way.

The three funds feel that Tele2 will initiate a merger with Versatel via a new company and will therefore buy them out. By having a more independent supervisory board I position, they may have a chance of being fairly represented. The minority stake holders have been arguing that according to the Dutch law, the company taking over a firm has to cross a minimum threshold stake of 95%. This however has not been followed by Tele2. Despite this argument, the Amsterdam commerce court refused to grant a preliminary injunction. Reuters reports:

“The hedge funds and other minority shareholders opposed to the takeover have tried to stop the bid, arguing the procedure circumvented a 95-percent threshold required under Dutch law to squeeze out minority investors”

Hollywood Calling Hedge Funds and other investors!

After cinema house chain financing, here is one for cinema financing itself. Film financing is emerging as a very big investment arena for high net worth individuals, hedge funds and the likes. Most of them are not going home disappointed. The caveat is that they have to talk mega-bucks.

Tow movies that are on the market looking for suitable investors are ‘Kiev Nites’ and ‘Layers’. The former is an epic crime drama of the genre of ‘Casino’, ‘Scarface’ and ‘Goodfellas’ where as the later is a supernatural thriller like ‘Sixth Sense’. Both these movies are from the stable of Yuri Rutman who is the writer and producer of the two films. If reports are to be believed, the two movies have already attracted a lot of interest from seasoned, credible investors.

The list of high networth individuals who are generally interested in investing in movies such as these is quite impressive. In Rutmans words, they are the kind of people who really have a lot of money and don’t really know what to do. He also sees them as people who perhaps have a long cherished dream of getting into the movies. However in the same breath, there are others who find investing in movies as a good investment plan.

Irrespective of the category of investors, Rutman has two propositions – one is financing of films in the range of $1.5 to $2 million and the other is larger budgeted films. He feels that the former can be easily sold at film festivals but investors for the larger ones need to be thoroughly scanned. He is actually quite choosy about his investors. He feels that it is important for both the financer and the film maker to be on the same mental frequency in order to a have successful outcome. Click Press reports:

“I am talking with similar guys who recently sold their companies for a gazillion dollars, are bored, looking at the sunset in nowhere, USA, and have always wanted to be in the film business for tax, vanity, or alternative investment reasons".

New seal of approval for hedge funds to provide some relief to investors

Hedge fund is an industry which is marred with unpredictability with frauds and collapses thrown in for extra flavor. This no doubt scares an investor who is aggressively hunting for a hedge fund that has strong fundamentals. Amber Partners now seem to have a solution for this dilemma. They have launched a new service which offers to certify hedge funds for operational risk.

What it really does is go through a hedge fund’s records, trading documents and corporate documents amongst other things. It then gives a firm analysis on the ‘riskiness’ of the fund. A comprehensive document is prepared post analysis which usually runs into 10-15 pages. The analysis is summed up in the form of executive summary.

This report is being predicted to be a good reference guide for investors who are looking at safer funds for investing especially in the backdrop of fund collapses like Bayou. This service might be especially useful at a time when a lot of pension funds, endowments and charities are spending billions of dollars into hedge funds.

Apart from this, key people at Amber feel that this document might be useful for the hedge fund managers as well. They feel that this kind of credibility report from a third party will help them to promote their funds to prospective investors in a better way. The first hedge fund to get this sign of approval is Vega Asset Management, which has lost many investors in the last few months and has seen its assets shrink amidst heavy losses in some of its funds. Amber has already certified 11 hedge funds up till now and hopes to at least double this number in a year’s time. A risk investment report from Amber partners costs a hedge fund anywhere between $40,000 and $500,000. The service may be extremely useful for a service such as hedge funds because of the notoriety of secrecy and usage of unconventional trading tactics attached to it. 

One thing needs to be noted though – the investors should know that the certification being provided is for operational risk assurance and not to give an assessment of a fund manager’s investment or trading risk. Therefore in the wake of recent collapses that have happened purely because of unwise bets rather than poor business practices, this report may not be very useful.

This view is shared by many in the industry including Bradley Ziff, head of the hedge fund advisory practice at consulting group Mercer Oliver Wyman. Despite this apprehension, people at Amber Partners claim that there is a beeline of hedge funds queuing up to have their hedge funds certified.

Amber Partners is a London and Bermuda based specialist. This venture is supported by several private as well as institutional equity investors like Bear Stearns, BNP Paribas, Anchor Asset Management and Alexandra Fund Management. Reuters reports:

“Industry analysts said Amber's services may prove popular in a business long considered secretive and risky even though managers can also deliver huge returns by using techniques that are off limits at traditional funds.”

Hedge Funds lauded for their role in developing market

Recently Ben Bernanke, Federal Reserve Chairman Nominee appreciated the role that hedge funds play in the market in general. He was responding to questions from Democratic Sen. Paul Sarbanes of Maryland before the Senate Banking Committee. He said that hedge funds have made a big difference to the nations financial system. He however added that they still need to be monitored by the US Central market.

He noted that the hedge fund industry has moved quite ahead of the Long-Term Capital Management days in 1998. The industry today is better equipped to prevent such collapses. More sophistication and flexibility coupled with less leverage makes hedge funds the ideal vehicles for investment. None the less the Fed has to maintain vigil on the banks' involvement with hedge funds. Reuters reports:

“I think it's important not to be complacent. It's important for the Federal Reserve to be aware of what's going on in the market," Bernanke said. "Nevertheless....the hedge fund industry has become more sophisticated…”

Cerberus-Gabriel hedge fund buys stake in Leumi Bank

Israel is on its way to privatization. The banking sector is amongst the first ones to take a step in this direction. Bank Leumi was in the market recently and attracted bids from several players. Bidder names include strategic investors like Lev Leviev, IDB and Bill Davidson and also financial contenders like UBS, Deutsche Bank and Citibank. However the winner was an American Hedge fund, Cerberus-Gabriel.

Cerberus-Gabriel has purchased 9.9% of the shares of the bank. The purchase of this stake was for approximately $500 million. The fund also has the option of buying an additional 10.01% in the bank. This will bring the total shares quantum to 20% and is roughly valued at $1 billion. This option of additional purchase has to be utilized with in the next one and a half years.

Ehud Olmert, Finance Minister of Israel, is reportedly quite satisfied with the outcome. He feels that this is a positive development and will help the over all Israeli economy. He is amongst the top promoters of privatization move. In his statement he also mentioned that the purchase will ensure healthy competition between the banks and will definitely contribute a lot to the local market.

Another person quite happy with the development is Yaron Zelekha, the treasury's accountant-general, who led the tender. He sees it as fulfillment of the promise made to the people of Israel about privatization of the entire banking system in 2005. Ynetnews reports:

“Cerberus-Gabriel offered NIS 2.474 billion (about USD 500 million) for 9.99 percent of the bank's shares, and has the option to purchase another 10.01 percent of the shares held by the State within a year and a half, and to reach a total holding of 20 percent of the bank's shares.”

New product from Barclays for retail investors caused concern

Barclays has recently announced that it will be launching a unique hedge fund product in the near future. For this the big high street bank has joined hands with Fortune Asset Management. What is to be noted here is the fact that an ordinary investor will be able to access that product by merely investing £7,000. Hence retail investors are being targeted through this offering. FSA, the regulatory body based in London is apprehensive of all such moves that aim to rope in the unsophisticated small time investor.

Fund managers at Barclays however argue that they have included the clause of ‘anytime exit’ in the plan. This would allow investors to exit on a monthly basis and take away as much as 80% guaranteed of the highest price the fund has touched since they invested. This would make the product relatively safe. Add to this the fact that the investor will be keeping the money in his or her savings bank account and the same will be picked up by the managers for the purpose of investment. Therefore they will not be giving this money to Barclays.

The money will be placed in Barclays ‘Market Wizards’ Protected Plan which will be linked to the performance of Fortune’s Market Wizards fund. The Market Wizard fund has about 30 hedge funds in its portfolio. The selection is such that it promises to give positive returns in any type of market condition. The returns also are not too far fetched. They are pegged at 8.5%, net of all charges and fees. The fees being charged by Barclays is 2.4%. This figure includes a management fee of 1.5% and an additional 0.9 per cent to pay for the guarantee and other charges. What is also included in the plan is payment to advisers who will be selling this product as well as the underlying hedge funds. The fund will be managed by Jack Schwager who has 30 years’ experience in the hedge fund industry.

Though the offer seems to be quite exciting, industry analysts are rather Luke warm about the product on offer. They cannot see the logic of offering guarantee when the hedge fund concept itself is working properly. A well managed hedge fund will itself produce positive returns in all situations. Apart from this they also have reservations about how much the product will really be able to generate. This is considering the fact that there are several takers for the profits generates that are likely to shrink the profit pie. They include Barclays, Fortune, the hedge funds and the financial advisers. Hence the general feeling is that the investor will get very little by way of returns. Times Online reports:

“We have reservations about hedge fund products being marketed to UK consumers. We don’t yet know much about the new Barclays product, but the low minimum investment of £7,000 does raise concerns.” 

New Blog Offers Accurate Survey of Hedge Fund Industry

While we here at Hedge Fund Street firmly believe that we offer the most comprehensive coverage of the hedge fund industry and its news, we are not afraid to point out some excellent alternatives. Largely regarded as one of the best, Hedge Fund Reader provides accurate frequently updated news and information on how to best manage the Hedge Fund Industry during this rather volatile time.

Rangers offshore Synthetics Fund to be marketed by AdvantHedge

Ranger Investment Management, LP has recently announced that AdvantHedge Capital Advisors will market Synthetics Fund in Europe. This is the offshore version of the domestic Synthetics fund that was launched in January this year. The performance of the fund has been fairly good and has returned about 17 per cent net of fees year to date through the end of September 2005. The fund invests chiefly in long/short strategies in US small and mid-cap equities.

Synthetics has the distinct reputation to its credit of being a sub advisor to Rocker Partners LP. Rockers’ is definitely one of the most respected short -biased money managers in the US. They have been around for over 20 years and have survived varying market conditions. AdvantHedge the new marketers of Synthetics is based in London. They are essentially a hedge fund advisory and marketing company for a small group of fund managers. HedgeWeek reports:

“Ranger Investment’s family of investment products are all invested in small and/or mid-cap US equities. Ranger has built an institutional-strength operational infrastructure and research capability allowing the investment team to focus on portfolio management decisions.”

Three new hedge fund indices to be launched

There is an increased demand for hedge fund indices in the market. Observing this need gap, Maxam Capital Management LLC and Eurekahedge are all set to launch three new indices. The three funds will go by the name of MaxEureka Asia, MaxEureka Japan and MaxEureka Global Emerging Markets. As their names suggest, the three indices will cover market sectors including Asian, Japanese and global emerging markets.

The indices are primarily aimed at giving adequate exposure to hedge fund managers seeking to access each of these sectors. Investment products of this nature are quite popular with institutional investors like retirement funds. But before the two firms launch the proposed indices, they have to make sure that underlying funds of the products have an audited track record of one year. Reuter reports:

“Maxam Capital Management was founded in April this year by veteran hedge fund businesswoman Sandra Manzke, who previously was chairwoman and co-CEO of Tremont Capital Management, which she founded in 1984.”

All hedge funds may not register with SEC

Just when one thought that almost every one in the hedge fund industry is scrambling to get themselves registered with SEC, there are exceptions. Not all the hedge funds are willing to register with SEC in February 2006. SEC has given February 2006 as the cut off month for all hedge fund advisors to register with it. However several funds have not done much in this regard till now. In fact half of the eight hedge fund representatives who attended a forum at Queens University of Charlotte have not done the needful up till now.

To cite an example, a New York based hedge fund manager Alex Porter feels that his fund does not need to be registered. He said that amongst the 8000 or so hedge funds there are some who definitely need to be regulated and his fund is not amongst them. He emphasized that his primary aim is to generate money and not to get tangled in several round of discussions just for the sake of registration. Charlotte’s official website reports:

“Of the eight funds represented in the panel discussion, about half have registered, said Porter, a Queens trustee who helped organize the discussion. His $2 billion New York-based fund, Porter Olin, has decided against the move.”

Deadline approaches fast for Hedge Fund Advisors

February 2006 is approaching fast and the hedge funds in the US have to dash for the finishing line. SEC has mandated that by February 2006 all the hedge funds above a certain cut off mark have to be registered with them. This is being done to ensure lower instances of frauds and collapse of hedge funds.

In this direction, SEI Knowledge Partnership hosted a web seminar to highlight the importance of completion of registration procedure before time. SEI is a global provider of asset management services and investment technology solutions. The seminar saw a congregation of several regulatory experts who spoke on different aspects of the registration process. They emphasized up on the point that the funds should not under estimate the extent of registration formalities that one has to take care of.

This web seminar was part of the compliance series being organized by the SEI Knowledge Partnership in collaboration with SEI’s Compliance Advantage program. Eight such seminars have already been successfully organized since SEC mandated compulsory registration.

The seminar brought out the fact that the Chief Compliance Officers should allow sufficient lead time for preparation of the first mandatory annual review of their adopted compliance programs also. Therefore it is not sufficient to just get over with filling up ADV forms. Several CCOs have to make their submissions of their first mandatory annual review latest by March 2006. The experts also stated that a lot of time is required for developing policies and procedures that the hedge funds have to develop to thrive in a regulated environment.

SEC can examine a hedge funds procedures any time after 1st February 2006. Therefore speeding up the registration formalities has to be on the top of the agenda. What should also not be forgotten is the fact that should there be a blaring fault in the registration process; the SEC will not take it kindly. Hence every thing has to be done in a sequential and fool proof manner.

The panelists of the seminar discussed the things that mutual fund CCOs must do to prepare for their first compliance program review and update

The issue of registration gains more importance in view of the fact that today even the retail segment is being pulled to the funds. These retail investors have lower propensity for risk as they do not have the deep pockets that institutional investors or high net worth investors have. The latter are the primary target audience for hedge funds. The less transparent financial instruments are today attracting investors with a fraction of amount that was earlier required to be invested. S-ox reports:

“Volk urged hedge fund advisors to go on the assumption that they could be subject to an SEC exam any time after February 1st. “When the SEC arrives, they will expect to see that since February 1, 2006 you’ve been conducting your business in a manner consistent with their requirements,”

The bonus game: Armstrong Study on Hedge Funds and Investment Banking

Every one harps about hefty payouts to the hedge fund managers and Investment Bankers. But how much do they actually get as bonuses? Here are some findings from a study conducted by Armstrong. Armstrong interviewed at least executives from 45 financial institutions over a duration of two months and compiled the findings. Armstrong International is a London based recruitment firm.

The survey indicates that marketers of hedge funds and investment bankers receive the maximum bonuses in the entire financial services market in Europe. Heavy bonuses to the tune of $4 million will be achieved by experts selling interest rate derivatives to hedge funds. These products are also the top income generating instruments. On the other hand, coverage bankers at director level who have diverse product knowledge are slated to receive upwards of $3 million as bonus. 

The two Wall Street firms that are expected to top the list of hefty returns are Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. This year will be their biggest bonus generating year since 2000 chiefly owing to their involvement in corporate takeovers and high debt trading volumes. 

Armstrong however cautions that in today’s scenario, high number of deals will not necessarily mean higher profits and hence higher bonuses. Earlier there were M&A run organizations that did this job but now financing and fixed-income teams seem to be in charge thereby making it very difficult for investment bankers to generate more income now than it was say five years back.

Even companies like Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs have shifted their focus from advising on mergers and acquisitions to a more income generating securities trading and derivatives. 

Though the bonuses are high, it is not lucrative for everyone to thrive. The expectations of a 15 to 20% bonus may therefore seem to be a little far fetched considering the modern financial scenario according to the survey. Bloomberg reports:

“Bankers who can sell products such as derivatives and pension fund advice, instead of only takeover advice, will have the best pay, Kennedy said.”

SEB’s Master Hedge KAG has a new member hedge fund

SEB AG has recently announced the addition of a single hedge fund to its Master Hedge KAG platform in Germany. This is the second hedge fund of its kind. The new fund that goes by the name of TOMAC Global Hedge MH comes from investment manager Heyden & Steindl GmbH. The other single hedge fund on the platform is Aquila Vol Opportunity MH from Aquila Capital.

TOMAC plans to invest in specific trends in the market. These trends have to be identified well in advance for them to be profitable. For this the fund plans to utilize a special program. This program is used by over 40 different futures across the world. After this the company is also contemplating a fund of hedge funds investing in hedge funds running of this platform. Hedge Week reports:

“In April 2005, SEB received authorisation for a Master Hedge KAG from the Federal Office for the Supervision of Financial Services (BaFin) allowing the bank to make the general conditions for issuing funds in accordance with German law available to hedge fund managers.”

CEO of Peregrine all set to launch a new hedge fund

Here is one good example of corporate governance and how it is being proposed to be used. The CEO of Peregrine Systems Inc, John Mutch is going the hedge funds way by launching a $250 million hedge fund. The fund will generate returns by buying stakes primarily in technology firms. Much then plans to prompt some organizational and operational changes within the organization and improve the value of shares.

He plans to select those companies that have a strong base but are lagging behind due to improper governance. Improper governance usually stems from the inefficiencies of the board members. Therefore Mutch plans to buy stake in each of the selected companies in the range of 4.9% to 20%. After doing this, he is confident that the board will listen to the changes that he will recommend. Though he is not vying for position on the board, but he will not shay away from it if it is required. 

The hedge fund goes by the name of MV Advisors and the parent company is based out of San-Diego. The fund promises to generate revenue to the tune of 20% for its investors. This will be achieved by investing chiefly in 10 or 12 companies with strong fundamentals but weak performance. The fund will take long positions on these funds, confident of helping the companies to improve their performance by good restructuring. In order to select the right companies for restructuring, one has to put in a lot of effort. Mutch has already scanned over 3,000 companies for the purpose. Out of these he has found some 30 companies that are worth investing in. The list is expected to be further trimmed.   

Mutch has a first hand feel of restructuring an organization and causing a major turn around. In 2003 he was hired by Peregrine while the bankruptcy proceedings on the company were on. He not only brought it back on its feet, but today the company is being bought over by Hewlett Packard for a whooping sum of $425 million. H-P plans to add Peregrine's technologies to OpenView software offerings. The announcement of acquisition was announced by HP in September 2005.    

Mutch has apparently met several institutional investors, including Hermes Pensions Management Ltd. and hopes to get a good inflow of investment money from them. ‘Investors’ reports:

“He'll sift around for companies with solid businesses, but with changes needed at the board level, such as separating the chief executive officer and chairman positions. Independent directors and a strong auditing firm are also essential, he said.”

Man Group CEO asks regulators to stop blaming hedge funds

Stanley Fink, CEO of Man Group recently lashed back on those making allegations of hedge funds being unethical. Man Group is one of the biggest hedge funds in the world. Regulators have time and again commented on the hedge funds using inside knowledge of debt markets while making decisions on trading companies’ shares. It is actually illegal according to rules.

However Fink said that hedge funds are being unnecessarily blamed. He feels that the conflict of interest really begins at the level of investment banks. He stressed upon the point that these investment banks are traders in equity and debt markets. Apart from this they also have advisory businesses. Hence they are the ones who should be targeted.

FSA has raised concerns about the role hedge funds play in helping out Investment banks when called in to help test the market. These are situations where the banks need the help of outside parties including hedge funds in order to set pricings for shares and bonds issues.

The FSA feels that the hedge funds are therefore able to get all the information and thereafter are able to book huge profits by utilizing that information. Stanley Fink argues that it is a silly argument considering the fact that the investment banks are quasi hedge funds in themselves. On top of this they are also in an advisory role which complicates things further, so why blame hedge funds?

He further stressed that the hedge funds were quite ‘ethical’ in their dealings. If the FSA has to do something, it should make sure that the investment banks do not approach hedge funds to help them with the pricing activity. The Telegraph reports:

“Mr Fink said he believed that most hedge funds were "entirely honourable" and the only way to rid the market of abuse accusations would be to prevent investment banks calling clients like hedge funds before setting prices on bond or share issues.”

How are Convertible Arbitrage hedge funds performing?

2005 has been a bad year for hedge funds practicing convertible arbitrage. But however grim the situation may look for these funds, Convertible issuance is on a comeback spree. The reason for this stems from the fact that interest rates have gone up and therefore companies are finding it cheaper to issue these stock-and-bond hybrids than traditional corporate paper. The trend is therefore to generate borrowed cash and spend it on things like share buybacks, acquisitions, and also to fund research and development. Analysts however warn investors that when a company sells arbitrages they will short the underlying stocks.

They have indicated that in this regard, investors should be specifically cautious of companies like Data, Radian and Weatherford International. The recovery of convertibles was being observed since last summer. But this trend seems to have ended some time back. Slurry of redemptions has hit the convertible hedge fund sector quite badly and has forced fund managers to force sell and, in some cases, also led to the funds shutting down. The Street reports:

“Outright investors are typically institutional investors and multistrategy hedge funds that play the convertible bond market without hedging. They were a major contributor to the summer rally.”

Chicago hedge fund looses $25 million due to wire fraud

A Chicago area hedge fund was swindled off $25 million by three men. The three men who have been identified as Richard E. Warren of Fredericksburg, Va., David L. Myatt of Los Banos, Calif., and Frank L. Cowles of Scottsville, Va. The three people are president, associate and company secretary of the firm in which the fund has invested the amount. The company is a Nevada based firm which goes by the name of American Trade Industries, Inc.

They have been charged with wire fraud. All the three men have been arrested over the last week end. The name of the hedge fund is not known at the moment. If they are found guilty, they may face imprisonment for up to 30 years and a fine of $1 million. Mercury News reports:

“The manager of the hedge fund, identified in the complaint as Individual 1, contacted the Secret Service in October and helped prosecutors by recording a series of conversations with the defendants, authorities said.”