Hedge Fund Street

Will SEC’s Tricks To Catch Tipsters Succeed?

The SEC is trying very hard to tighten the regulations noose. And with good intentions. I mean I do understand the need for freedom in operation style etc… but if all this leads to irregularities and loss of profits for others, then it is definitely not a good idea. Recently US prosecutors and regulators broke up a family-run insider trading ring. This ring managed to make nearly $4m during the past five years. Their modus operandi? Use secret information gleaned at their jobs.

These cases highlight the precarious nature of the business. This family had set up a hedge fund to hide their efforts to trade on information that was not public. The case also brings to fore the problems associated with trying to pin guilt on unscrupulous traders.

As a Financial Times report reveals, it was difficult to initially pin down this family as the trades were placed under a variety of relatives’ names as well as by Aragon, the family hedge fund. So, what solution do regulators have to this problem? They plan to create a database of hedge funds, their investors and sources of private information. Well, this does seem a tall order if you ask me.

Another method adopted by the SEC seems to show more promise. The regulatory authority has asked big brokerage houses on Wall Street to turn over all their e-mail and trading records for the last two weeks of September. This is the month when mutual funds are most active as they are nearing the end of a quarter.

Gradient Cleared Of Hedge Fund Conspiracy

The SEC’s hunt for fraudsters sometimes nets innocent firms too. The recent instance of Gradient Analytics, an independent research firm is a case in point. Gradient was accused of conspiring with hedge funds to drive down stock prices. Recently, the firm received official notification that the SEC had ended its probe into the firm and no enforcement action has been recommended against it.

The SEC began investigating the firm after receiving a couple of complaints from online retailer Overstock.com, hedge fund Rocker Parnters and Biovail, a pharmaceutical firm from Canada. Wonder what grouse these firms had against Gradient. According to Gradient CEO Brad Forst, the reason could be their trademark independent and objective research. Well, truth can hurt but wonder why anybody would want to get vindictive.

Hedge Funds: The Story

Interested in the hedge fund phenomenon but don’t know enough about it. Doesn’t matter. Here’s a simple and easy lowdown on what a hedge fund is about.

Just think of a hedge fund as a dolled-up, sexier version of your staid and dumpy mutual funds. They have that element of secrecy, a little danger and dallying with the authorities to make them even more enticing. Largely unregulated, hedge funds pursue investment strategies that are out of bounds to run-of-the-mill mutual funds.

And how do they make their money? Simple. They stick to their basic aim of trying to make money in all market conditions. For the supposedly great returns they provide, hedge fund managers do charge a hefty sum. The manager typically takes 20 percent of the profits, plus 2 percent for expenses.

It’s not all smooth sailing sans any rules whatsoever. You have to contend with the ‘lock-in’ period. Since your hedge fund manager has to follow complex strategies, he needs to be assured that you will not pull out your money and walk away anytime you wish. You have to lock in your money for a certain period – usually 12 months. Some funds ask for a two- or three-year lock in as well.

Kirk Wright Hit With $20 mn Fine

Why Kirk Wright did what he did is something we’d rather leave to the philosophers to decipher. As of now, Wright’s in jail, cooling his heels and awaiting trial. The charge: defrauding investors including several American football stars. Wright was recently ordered by regulators to pay a $20 million penalty.

The penalty is supposed to be equal to the amount that he diverted to personal bank accounts. He did this during a nine-year period in which he defrauded around 500 investors to his fund of $185 million.

Wonder if this latest fine satisfies NFL players Steve Atwater and Ray Crockett among others.

Tata Steel's Corus Debt Buyback Plan To Hit Hedge Funds?

Does the Tata-Corus debt buyback plan spell bad news for hedge funds? Insiders believe so. According to certain experts, Tata Steel is likely to buy back Corus debt, something that could cut the value of derivatives contracts worth billions of dollars linked to debt issued by Corus -- and cause losses for investors holding the contracts, such as hedge funds. Forbes.com reports:

Tata has indicated that it would create a bridge finance scheme to buy out Corus' current shareholders and debtors via a special-purpose vehicle that would take over Corus's assets, financed by fresh equity and new non-recourse debt, raised against Corus's cash flows. Tata's decision illustrates how corporate acquisitions can affect the value of credit derivatives.

Read more: Tata Steel's Corus debt buyback plan may hit hedge funds, others - report

And Now, The Plunge

Is this the end of the hedge fund world as we know it – is it Apocalypse now? Sorry for being so dramatic, but then what is a person to do if people heaving theatrical sighs and moaning surround her. Once again, it comes to light that the hedge fund industry is at its roads end and has no option but to dissipate and vanish into the thin air that its dealings are made of.

Oh and before I forget, here are the tell tale signs that so-called experts have been flaunting. The first one of course is the IPO of hedge fund Fortress – the first ever US hedge fund to go public. Priced at $18.5, it closed its first day at $31 – a nearly 68 percent hike. So, how can this be bad news?

Well, you see hedge funds by their very nature, are supposed to be exclusive. Only the investors and the managers knew what really went on behind those closed doors – they really had no obligation to tell anybody what they did. Well, all that is going to change, for FIG at least. They are going to be, hold your breath, accountable to the investors that bought their shares!

The next sign is the heavy influx of both investors and so-called managers. As one expert succinctly put it, just about everybody with access to resources now wants a share of this supposedly huge pie. But you know what, here I must agree. Just because you have access to a huge cache of funds doesn’t automatically qualify you for this job.

Oh, and the final sign is of course Hollywood. Experts have it that if you ever find Hollywood exploring a topic or industry for a movie/ TV series, it is a sure sign that the lemmings are all ready to jump.

That completes this list. Don’t say you weren’t forewarned.

SEC On Tricky Ground With Tipping Issue

Last week, I’d written about how federal regulators are investigating whether hedge funds are being tipped off about buy and sell orders placed by mutual funds. What prompted the SEC to make such a move? It seems mutual funds’ baselines are hurt by such ‘front running’ since this practice makes the stocks they sell less valuable and stocks they are buying more expensive.

This practice is supposed to be widespread but can be difficult to detect. That’s because in such cases, brokerage employee and the hedge fund trader can have secret agreements to swap information. All this can be laid down to the growing influence of hedge funds – which brokerage would want to be on the wrong side of a multi-trillion dollar industry?

In the recent past, hedge funds have trebled in size and power. They cannot be taken for granted as they have become important customers of Wall Street investment banks. All of these are presently assumptions as the probe is in an early stage now. The SEC has only begun the investigations as of now. Morgan Stanley, Merrill Lynch & Co. and Credit Suisse are supposed to be among the firms that have received letters from the SEC.

So, will the SEC be able to nail the suspects? Not so easy say the experts. Firstly, the SEC will have to distinguish between what constitutes proper information and insider information. This will put them on tricky ground as traders routinely share a huge amount of information with their clients on any given day – and this is legitimate.

For instance once a mutual fund places a large order, a brokerage’s employees must find an investor/s who will take the other side of the trade. This means they have to call clients and find out if they are interested in buying or selling shares. Now, this could easily seem like a tip off. So, we probably have to wait and watch how this game develops

Allied Did Spy On Einhorn

New York fund manager David Einhorn seems to have gained an upper hand in his battle with Allied Capital. Allied recently acknowledged that a private investigator it hired illegally, obtained Einhorn’s personal phone records. This is the latest revelation in a bitter battle that has been raging between the $4 billion buyout fund and Einhorn for the past five years. The trouble began when Einhorn criticized Allied’s accounting policies.

It was in 2003 that Einhorn claimed his phone records were hacked into. While he was quick to point fingers at Allied's investigators, it was only recently that his allegations were proved true. Allied made the admission when it began to review documents in order to comply with a subpoena it received from federal prosecutors in the District of Columbia.

Hedges To Have Long & Healthy Life: Analyst

You can fret and fume about their secrecy, about their disproportionately large cache of resources and the inappropriate income of their managers. But you cannot wish them away. Hedge funds accounted for 28% of the fund management industry’s revenues last year, according to research from Merrill Lynch – that’s up from 20% in 2005. investmentnews.com reports:

The increase in revenues is mostly due to high fees and strong sales, and fueling the interests of large investment banks in hedge fund management companies. For instance, JPMorgan Chase & Co. of New York last week bought its fifth hedge fund holding, a 20% stake in Spinnaker Capital. These numbers signal that hedge funds are not just a trend, a Merrill analyst told Financial Times.

Read more: Hedges here to stay, says Merrill analyst

SEC Smells Tip-Off Rat in Hedge Fund Games

The Securities and Exchange Commission recently asked around 10 major Wall Street banks for trading information from the last two weeks of September. The Federal regulators are investigating whether hedge funds are being tipped off about buy and sell orders placed by mutual funds. Hedgeco.net reports:

It's become difficult for hedge fund managers to make money without access to sensitive information, so the SEC examiners will try to determine whether big buy and sell orders placed with the banks by mutual funds in that period triggered any suspicious front-running activity in those same stocks by hedge fund managers or other traders.

Read more: SEC Examines Hedge Fund Tip-Offs