Hedge Fund Street

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

Hedge Fund To The Rescue of US Government

After dipping their fingers into every available pie, the hedge fund industry seems to want to fight on behalf of the US government as well. Hedge fund Greenlight Capital recently filed a lawsuit on behalf of the US government against a subsidiary of Allied Capital, Business Loan Express (BLX), which alleged submitted fraudulent loan documents to the Small Business Administration (SBA). Bobsguide.com reports:

The law suit claims that BLX "devised and executed a massive scheme" to defraud the US government by "repeatedly and systematically submitting false claims to the SBA" to guarantee payment of loans made to unqualified borrowers whom the defendants knew or should have known would default on the loans. It is claimed that more than $76 million in loans had been fraudulently originated from the BLX Detroit office.

Read more: Hedge fund sues on behalf of US government

Barclays Fund of Funds Sims For $1bn

Barclays Global Investors (BGI) recently announced the launch of its fund of hedge funds. The AlpEx fund will be exclusively aimed at institutional investors and within the first 18 months the intention is to bring together $1 billion of managed assets. Bobsguide.com reports:

AlpEx will be headed by Stan Beckers, formerly of Barra International, while the US division will be led by Jonathan Morgan, formerly of Julius Baer alternatives.

Read more: BGI's fund of hedge funds aims for $1bn

Your Hedge Fund Is Withholding Information From You!

Secretary of State William F. Galvin’s probe of the relationship between Swiss bank UBS AG and certain hedge funds is still on. Galvin seems pretty worried about the practices of this lightly regulated industry. Trying to stem any problems that may arise from earlier incorrect reports, Galvin emphatically claimed that he had not issued subpoenas to UBS. According to him, bank officials have agreed to provide testimony about the firm's relationship with hedge fund traders who operate out of UBS's Boston office.

One of the things Galvin is interested in finding out is if the hedge funds are paying for the office space through higher-than-normal trading fees to UBS. These funds may not be disclosing these arrangements to their investors. UBS leases space in its Boston and New York offices to the hedge fund traders to entice them into becoming significant clients sometime in the future. Boston.com reports:

Galvin said his regulatory oversight over securities operations registered in the state gives him jurisdiction over UBS's local operations. Moreover, as is the case in other states, Galvin's office said that local anti fraud statutes give him power to sue hedge funds if he determines they have cheated or misrepresented themselves to investors.

Read more: Galvin sees wider hedge fund worries

Ritchie Not So Rich After All; To Sell Hedge Fund & Refund Investors

According to recent reports, Ritchie Capital Management Ltd. plans to discontinue its efforts to restructure its flagship hedge fund, the Multistrategy Global Fund. After consulting with investors, an email was sent to Ritchie's clients revealing their negotiations with an undisclosed buyer for the assets of the hedge fund, and the plan to return the cash to investors. Hedgeco.net reports:

Ritchie Capital has been struggling the past two years with returns that were below average, the fund suffered last year from losing energy bets. Thane Ritchie, the founder of the company, had previously planned to refund 80% of clients' money over the next 2 1/2 years and keep the fund open for at least three years. The fund, which invests in everything from bonds to energy, lost more than 2% through August from the start of 2005.

Read more: Ritchie sells Hedge Fund to Refund Investors

Banks Cash In On Hedge Fund Boom

Conventional wisdom has it that the moment a big bank buys into a sector is the moment for everyone else to get out (just joking). However, now that an increasing number of banks are investing in the ever-growing hedge fund market, I guess it’s time we reinvented our jokes. Financialnews-us.com reports:

Nonetheless, banks are becoming a powerful force in the hedge fund industry. Goldman Sach’s asset management business is the second-largest single-manager hedge fund operation in the world, with $30bn under management, just behind Bridgewater Associates. The bank has developed the business organically on the back of its large proprietary trading desk and investment in quantitative systems. JP Morgan is close behind Goldman Sachs, with $29bn under management. It used the Highbridge acquisition to boost its existing single-manager hedge fund operation.

Read more: Banks place big bets on growth

Energy Is Too Volatile For Hedge Funds

The energy sector doesn’t seem too good for the hedge fund industry. Ritchie Capital, a Geneva, Ill.-based adviser with $2.8 billion under management in several funds, is telling investors it is shutting its Ritchie Energy Trading fund.

This new development follows the over $6 billion in losses suffered by Amaranth Advisors, which was forced to shut down. Not much information is available on the size of the fund Ritchie is closing or whether it had lost money. According to Ritchie officials, the move is part of a broader plan to take the business forward. They want to focus on spaces where they have a definable edge and can capture alpha. Forbes.com reports:

Natural gas and other power trading strategies have certainly tripped up experts before. Last year after Hurricanes Katrina and Rita hit the Gulf Coast, Ritchie had losses of some $100 million from energy trading. Citadel Investment Group lost $150 million and the head of its energy trading desk, who resigned.

Read more: Energy Hedge Fund Bites The Dust

Hedge Fund Activism: Good Or Bad?

Here’s some good news. Hedge funds increasingly are pressuring executives to either shape things up or ship out. However, a new study suggests their demands aren't doing much to improve the financial health of the companies they target. Forbes.com reports:

Researchers at New York University concluded that when hedge funds get involved, businesses often see their profits drop, debt levels rise and assets remain around the same size. The stock prices tend to increase, however, which is just what hedge funds want - even if it does mean business prospects falter.

Read more: Hedge Fund Hindrance

Hedge Fund CEO Fined $2.25 Million

I have spoken time and again about regulations and how they may not be all that good for the industry. Recent events seem to have reinforced my views. External regulation may definitely not work in this industry. One reason is that hedge fund managers prefer to keep their dealings to themselves and generally don’t like external meddling.

But what if someone from within the fraternity committed a fraud, which caused loss of money to the public? You know what is the worst part about a fraud of any kind – innocent investors losing a great deal of money and something more important, their faith in the system. Probably someone from within the industry should play police? Now that’s something I welcome wholeheartedly.

What am I coming to? The recent imposition of $2.25 million fine by securities regulators on Paul Saunders, the chairman and CEO of hedge fund James River Capital Corp. Reason: He allegedly used deceptive practices in trading in the long-term investments known as variable annuities.

The National Association of Securities Dealers, the brokerage industry’s self-policing organization, imposed this civil penalty. The over $2 million penalty is supposed to be the largest fine ever imposed on an individual. It includes restitution of some $750,000 in illicit profits that Saunders allegedly personally made.

Mr. Saunders is alleged of conducting improper market timing -- frequent "in-and-out" trading. He will also be suspended for 60 days from working as a broker. As of now, Saunders has neither admitted nor denied the NASD's allegations. Market timing is not officially illegal. However, it is widely restricted because it tends to skim profits from other shareholders.

Strategizing Volatility

The past few weeks saw so much activity on the hedge fund front, it felt more like the nail-biting finale of a thriller rather than the mundane world of finance. I know hedge funds are anything but mundane. But I’d be lying if I said that the Amaranth collapse had me gripped. Would the market collapse? What would other fund managers do? What strategies would they employ? … too many questions.

It was around this time, I realized that not everybody understands hedge fund strategies. I know you must be wondering if you really need to know about hedge fund strategies. Well, one of the simplest and most basic reasons to study them is because it helps you know the difference between various hedge funds. Investment returns, volatility, and risk vary largely among the different hedge fund strategies.

There are some strategies, which are not correlated to equity markets and are yet capable of delivering consistent returns with extremely low risk of loss. And then, there are others that may be as or more volatile than mutual funds. In case you want to have a successful run in the industry, you should be able to recognize these differences and blend various strategies and asset classes together to create a more stable long-term investment return.

Most hedge funds primarily aim to reduce volatility and risk while at the same time preserving capital. And irrespective of the market conditions, they want to consistently deliver positive returns. This is quite a tall order and hence it makes it doubly interesting to know how you can manage the volatile with the stable to ensure consistent returns.

Yawn... Yet Another Go At Regulations

Legislators recently got the perfect excuse for taking another whack at regulating hedge funds. There is one big problem though: widespread hedge fund regulation is both impractical and unnecessary, especially when there are easy solutions that could keep ordinary consumers out of harm's way. Chicagotribune.com reports:

For individual investors, the solution for hedge fund protection is simple: raise and change the accredited-investor standards, going beyond net worth or paycheck size to create a rule requiring that no more than 10 percent of that asset total can go into a single hedge fund, with no more than 35 percent of all assets placed in hedge funds.

Read more: New hedge fund regulations not good investment

Now, A Bill To Study Hedge Fund Oversight

This just had to happen right? How long could the government sit back and watch the hedge fund industry do as it pleased? So, the U.S. House of Representatives recently passed a bill calling for a federal study of hedge funds. House passage of the bill comes days after hedge fund Amaranth Advisors disclosed the biggest hedge fund loss ever -- about $6 billion -- on wrong-way natural gas market trades.

This step marks the latest step in the government's effort to come to grips with a $1.2 trillion industry that has become a powerful financial force. The bill would require a wide-ranging study of hedge funds, their risks and regulation. The President’s Working Group on Financial Markets, a multi-agency committee, will conduct this study. However, markets have largely shrugged off the Amaranth debacle. This has led some officials to say existing rules meant to minimize the systemic economic risk of hedge funds are adequate. Reuters.com reports:

Massachusetts Democratic Rep. Barney Frank said on the House floor that the bill should be seen by the hedge fund industry as a signal that "this is something we want to look at; we will come back next year and deal with this further."

Read more: US House passes bill to study hedge fund oversight

Amaranth Loss Is Tip Of Melting Iceberg: Analysts

The industry seems to have taken the Amaranth loss quite badly. Analysts are now predicting even more financial carnage after Amaranth told its investors that it is facing severe losses from enormous bets in the energy futures market, just a month after another fund went bust over its wagers in the same market. Theglobeandmail.com reports:

Amaranth Advisors LLC, a hedge fund with $9.5-billion (U.S.) in assets, warned its investors that the value of its two main funds fell nearly 50 per cent this month because of falling natural gas prices. Its warning followed last month's collapse of MotherRock LP, a $400-million (U.S.) fund that blew up after gas prices fell 68 per cent from their peak last December.

Read more: Analysts fear hedge fund losses in energy market tip of iceberg

Post Hedgestock

Please excuse me if you feel I'm exxagerating but I cannot miss the opportunity to say this: The hedge fund world is now divided into two distinct types -- of those who attended Hedgestock 2006 and those who did not! And there were more than 4,000 hedge fund managers and investors from across the wrold who paid £500 a ticket to rock up to this event, where peace and love met wealth and ambition. BBC.co.uk reports:

While the wristbands at the entry gate and the beer in plastic cups gave Hedgestock an authentic festival feel, that was where the similarities ended. Instead of smoking substances more commonly associated with festivals, chunky Cuban cigars were being handed out - rather than passed around - to those perched on bean bags outside the chill-out tent.

Read more: Hedge fund hippies have trip out

HedgeStock’s Here!

Think hedge fund manager and the first image that comes to mind is of a person whose eyes are glued to the screen 14 hours at a time. There is probably not enough time for lunch breaks, and they have to be on call 24 hours, buying, selling and setting new trends. But get ready to rethink this image in June. Just a few days from now (June 7 & 8), you will see how these workaholics chill and play as hard as they work – at HedgeStock.

Polo, cricket, parachute jumping, laser shooting and watching The Who, one of the world's most famous music bands, while sipping Pimms – this is a different face of your harried hedge fund manager that you will get to see. HedgeStock is a charity event – at Knebworth a country estate North of London -- organized by hedge fund advisory company Albourne Partners. The event is expected to get people together from banks, other institutions, big corporates and hedge funds. Reuters.com reports:

HedgeStock is expected to attract more than 4,000 hedge fund managers, investors and bankers from around the world, making it one of the world's biggest hedge fund events.

Read more: Hedge fund managers to play and work at HedgeStock

Do we need to worry about regulation?

I guess we all really need to get a grip on this regulation issue. One time you have just about everyone hankering for regulation, then you have U.S. regulators asserting that there isn't a need for further regulation of hedge funds at this time. And then the European companies get fidgety and are wondering if regulation is a good idea after all.

I think we need to know what makes the Europeans so worried. According to certain European executives, it isn't easy to track what hedge funds are doing, in terms of their investments. And this makes them worried. So what does one European government do to assuage these fears? Last month, the German finance ministry said it would force shareholders to make a regulatory filing when their stake exceeds 3 percent. These disclosure rules are tougher than the 5 percent threshold in the U.S. and are tougher than the 5 percent being proposed for introduction across the European Union in January 2007. Meanwhile, the German Bundesbank has called for self-regulation of hedge funds. It wants industry to create ratings for the risk profile of the various hedge funds.

Meanwhile, in the United States, regulators are still not sure if additional monitoring is necessary for hedge funds. Recently, regulators from the Federal Reserve, Treasury Department, SEC, and Commodity Futures Trading Commission testified before a Senate subcommittee that they needed to better understand hedge funds before prescribing additional regulations.

Probably, these increased calls for regulation stem from the fear that given the large amount of money in the business – around $1.5 trillion world-wide – there is a very high scope of indiscretion and even unethical business practices.

Hedge funds and monitoring

Simply put, hedge funds facilitate investors who are relatively uninformed, to make portfolio choices that enhance their investment value. The competitive nature of the market ensures that the pricing is relatively efficient. However, it is the volume of money in the market that makes the Federal Reserve and enforcement agencies a bit jittery and that is understandable.

Probably what is needed is a little tweaking of the market rules. While the ability of hedge funds to operate across different market sectors makes them ensure the fairness of prices across different market contexts and various margins for pricing, it probably isn’t enough. There are certain systemic risks that have the ability to cause losses to the partners involved. Hence they need to be eliminated and that can be done by getting the various parties involved in the hedge fund market, to help the authorities thrash out a solution that is acceptable to everyone.

‘Hedge funds could cause problems in case of a financial meltdown’

Around last month, Europe’s financial regulators simulated a continent-wide financial crisis. This was just to check the veracity of claims that they are ill prepared to stop a problem in one country spreading across borders. And one of the areas that could be troublesome is the hedge fund sector. News.ft.com reports:

However, the report warned that hedge funds and credit derivatives were sources of concern “as related risks remain opaque and they have become extremely relevant in assessing financial stability both across borders and across all financial sectors”.

Read more: Europe simulates financial meltdown

Pershing Square Capital presents Yet another plan for McDonald's

McDonald's Corp. seems to be under yet another attack by shareholder activist hedge funds. Two months back, one of its shareholders Pershing Square Capital Management L.P. and its general partner, William Ackman had put fort a proposal to the company in order to enhance the shareholders value. The proposal included spinning off 65 percent of its company-owned restaurants in a stock offering worth an estimated $3.27 billion. However the proposal was shot down by the company.

The company stated that the spinning off would not benefit shareholders and also that it would be a "distraction" from its primary business of running restaurants. Hence the proposal was shot down at that stage. However the hedge fund has again come up with yet another plan to bring about restructuring of the company’s business plans. The plan was intended to be presented at the Millennium Broadway Hotel in New York on Jan. 18, 2006.

Highlights of the same will be brought to you shortly. The fund states that the plan has been prepared after extensive consultations and discussions with the franchisees and shareholders in the last two months. The well known fast-food chain has been plagued by the hedge fund for quite some time. However the company claims that they are quite satisfied with their existing business plan and has no intention to bring about changes immediately.

Pershing Square Capital Management L.P controls 4.9% stake in McDonald's. Most of this stake is in the form of options. When last contacted, spokeswoman for McDonald's, Anna Rozenich stated that they would wait for the proposal to be presented before making any comments. She also made it clear that the company continues to stand by its existing business strategy. Chicago Tribune reports:

"It remains to be seen whether Mr. Ackman has come up with anything new," Rozenich said, adding that McDonald's was committed to its current business strategy.”

Oil prices continue to soar: thanks to hedge funds and speculators

The oil market is showing no signs of returning even near its acceptable prices. Several factors have been cited for this phenomenon. Chief amongst them is the continued interest of the hedge funds and speculators. Even the beginning of 2006 saw several new contracts suggesting that the hedge funds and speculators are still bullish about the oil market.

Traditionally oil had been trading around $20 per barrel as recently as in 2002. However some inevitable factors like disparity between demand and supply coupled with hurricanes and labor unrest have pushed the prices steadily. Today the prices rest at near $62 per barrel. Little surprise then, that the prices are not even attempting to come back to near normal levels. Taipei Times reports:

“Strong global demand and a thin supply cushion are the underlying reasons, analysts say, and because of these conditions every output disruption -- or potential threat to disruption -- feeds into a bullish outlook, sending prices higher.”

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.”

McDonald's faces pressure from Pershing Square Hedge Fund

Some companies are facing the interference of outside investors in the regular management of the companies. Sometimes this is also referred to as shareholder activism when the stake holders force the company’s management to undertake major policy changes. These are cases where the outside investors buy a major stake in the company and hence acquire the right to be party to the management’s decision making process. They do it primarily with the intention of improving the stock prices so that the shareholders are benefited.

A recent case will illustrate how an outside investor who has stake in options but not in the shares of the company is attempting the company to make structural changes in its business strategy. The victim company is McDonald’s. The stake holder having 4.9% share in options is Pershing Square Capital Management. William Ackman who is the managing partner of Pershing, has asked McDonald’s to spin off 65 percent of its 8,000 company-owned restaurants. He has also suggested that the fast food giant borrows $14.7 billion against its real estate. This he feels will increase the share prices of the company by at least 50%.

However, Jim Skinner, McDonald's chief executive officer has downright rejected the recommendation. Another stake holder Vornado Realty Trust who has 1.2% stake in the company, had suggested that the land underneath the McDonald’s restaurants should be converted into a Real Estate Investment Trust. This suggestion was also shot down by Jim Skinner.

The case of Mc Donald’s is just one amongst the several attempts being made by the edge funds to make profits out of restructuring the management’s strategies. The case of K Capital Partners and OfficeMax is just another example. Media giant Knight Ridder Inc is up for sale following the pressurizing of Private Capital Management Inc. CFO reports:

“Recently, Vornado Realty Trust purchased a 1.2 percent stake in McDonald's, which came on the heels of market speculation about whether the fast-food chain would convert the land underneath restaurants into a real estate investment trust.”

Hedge funds push for merger of Deutsche Boerse & Euronext

Attempts are being made for merger of European bourse operator Euronext and rival Deutsche Boerse. The effort is initiated by some hedge funds that have shares in either of the two or both. They feel that the merger will crate value for shareholders. The hedge funds want the merger to be ‘nil-premium’ which therefore implies that the surplus cash that would be generated due to cost cutting, would be shared with the funds. This is how they hope to improve shareholder value.

In the last one year, European exchanges have been the target of hedge funds. The reason for this affinity lies in the fact that these exchanges are natural monopolies with strong steady cash flows. They also have large reserves since they are floated with little or no debt. What also happens is that when there is a build up of liquidity on the exchange, it attracts more liquidity and makes it difficult for others to enter the business. This takes place even though there are no legal hurdles. 

When one sees objectively, there are some similarities that the two suitors possess. For instance, both of them have vertical business models which include an exchange and a clearing house and both have large derivatives businesses. They also control approximately 50% of all the global exchange traded derivatives business. In Europe however, both of them put together, control the entire market. Therefore there is not surprising that the two are being ideal fit for each other.

The talk of the merger is not new and dates back to early 2004. At that time the proposal was shot down since the two had the aura of being two very strong personalities. There was also some regulatory concerns from the German and French governments. The merger would have initiated a lot of unemployment and that is the very consequence that the two economies could not afford just then.

The similarity also extends to their approach toward LSE. Deutsche Boerse made a bid for the London Stock Exchange last year that did not quite materialize since the hedge funds opposed the move. The opposition was led by The Children's Investment Trust and Atticus Capital. Euronext also talked about merger with the LSE around the same time. But where share holder relations are concerned, the two have had a very different history. While Euronext always preferred to take its shareholders into confidence, Deutsche Boerse did just the opposite. Reuters reports:

“Hedge funds would like what is known as a nil-premium merger between Euronext and Deutsche Boerse which would allow cost-savings to be shared equally between the shareholders of the two companies.”

South African hedge funds market due for strict regulation

Amidst the chaos and uncertainty that exists in the hedge funds market, here is a breather for those who seek profits but are wary of the risks involved. The Financial Services Board (FSB) is on its way to regulate a substantial part of the hedge funds industry. Though an unregulated hedge funds industry will parallely coexist, the majority of them will have to be registered.

This was made clear by Jurgen Boyd, the head of collective investment schemes at the FSB. He was speaking at the Hedge Funds World conference, in Cape Town earlier this month. He also announced the setting up a regulatory framework wherein collective investment schemes would be able to offer regulated hedge funds. This option will be made available by the first quarter of 2006 after clarification on tax related issues.

My Boyd said that more and more collective investment schemes and unit trust companies want to invest in hedge funds to boost their profits. These are primarily those Funds that invest short and make use of leverage. The current legislature prevents them from doing so due to the immense risk that they pose to the retail investors. By making investment in regulated hedge funds possible, FSB will enable the schemes to offer better returns with lesser risk.

However there are some ‘stoppers’ also placed. The law will make sure that such schemes comply with all the other requirements that unit trust funds and other collective investment schemes have to generally meet. These requirements include buying back investors' units whenever they want to sell and of course give pricing of the units on a daily basis. These requirements are easier said than can be possibly implemented. Especially with regard to hedge funds that invest in instruments that are not listed or priced daily and also in instruments that cannot be liquidated easily.

The move has the backing of Association of Collective Investment Schemes (ACI), the Alternative Investment Managers Association (AIMA) and the Investment Management Association of South Africa (Imasa) on the issue. However this big bang approach was not accepted. Therefore now a two step process is being put in place. The first is to allow functioning of collective investment schemes that comply with the regular requirements of unit trust funds, and other collective investment schemes. The second step will involve the daily pricing and liquidity factors. 

Also what is being put in place is the fit and proper requirement for hedge funds manger to follow. This is being put in to place via Financial Advisory and Intermediary Services (FAIS) Act. The act will allow some incubation period in order to implement the same in a phased manner.

Read more on this at Personal Finance

DIFC head chairs Hedge Fund Conference

The 8th Annual Hedge Funds World, Asia 2005 conference was organized in Hong Kong recently. The event is considered to be one of the important gatherings of the international alternative investment community. The conference was chaired by Sandy Shipton, Head of Asset Management and Fund Registration, Dubai International Financial Centre (DIFC). Shipton has is a sound background of the financial services and asset management industry.

He stated at the conference that hedge funds have become extremely popular with money managers world wide so much so that even the most conservative asset allocator is now looking at the industry for its ability to give absolute returns. To stress up on this point he mentioned that for DIFC too Asset Management and Fund Registration is one of the six key sectors of activity. DIFC is an organization that offers asset management firms and private banks which are not based locally to conduct their services close to where their client base is. Go Wealthy reports:

“The event, which is considered one of the most important gatherings of the international alternative investment community, was chaired by Mr Shipton, who has a wealth of experience in financial services and asset management industry.”    

Behind doors at Refco....

With the recent collapse of futures brokerage, Refco several stories of non compliance have surfaced. One such account is of a hedge fund manager, Niederhoffer. Niederhoffer was an ace trader from early 1960s to 1990s. He had developed a unique approach to making money by creating a predictive model that could give directions to analysts regarding daily and hourly movements between stocks, bonds and other markets. He made a lot of money for his investors and also for the industry lion George Soros by setting up a $100 million account. His investment styles were unique and quite often against the tide. This led him to nail biting recoveries and profit raking.

He claims that Refco had promised him that should he receive a margin call, he would be given grace time in order to generate cash to meet his obligation. This promise was not honored in a particular incident in Oct 1997 when the market was going through a turbulent phase. As he could not come up with cash at that instant, Refco suggested that he should trade his fund's positions for their own account and transform some of them into cash. Niederhoffer now states that Refco would have made a sizable profit out of this situation while he himself went out of business. The Street reports:

“An iconoclast, Niederhoffer soon spread his wings and figured out how to apply his techniques to markets as far afield as Turkish bonds, the Mexican peso and Japanese stocks. He also bought and sold private companies, made venture-capital investments and earned numerous awards en route to making his partners increasingly wealthy”

Hedge Fund Barington attempting sell off A. Schulman

Another case of shareholder activism, this time it is spearheaded by Barington Capital Group. The group represents a group of investors that own approximately 8.8% of the company's outstanding shares of Akron-based plastic company A. Schulman Inc. Barington is demanding Schulman to elect three board members, who would vote in favor of selling the business.

According to a statement released recently, the group is unsatisfied with the way the business is being handled by it’s current directors. The company’s stock has apparently gone down by over 37% in a span of 10 years. This is being translated as inefficiency on the part of its current managers. The current decision makers are being blamed for showing insensitivity towards the ultimate aim of maximizing shareholder value for its stockholders.

Barington Capital Group LP is a New York based hedge fund and is playing leader for the group of shareholders. It has offered to nominate three directors who if elected, would be key instruments in selling the company so that the share holders get what they deserve.

In the business of hedge funs, share holder activism is quite rampant. The funds identify companies that are distressed or are undervalued. After acquiring a substantial stake in the company, they try to bring about policy changes in the firm. These changes can be in the form of mild or major restructuring, selling of a business that is making losses or even selling the company. Through this activity, they are able to enhance the value of shares and therefore maximize profits for themselves.

Right now the three people that Barington has nominated are Phillip Ashkettle, former CEO of Cleveland-based plastics company M.A. Hanna Co., Thomas Bohrer, former president of International Specialty Products Inc. and James Mitarotonda who is the CEO of Barington. Crainscleveland.com reports:

“Barington represents a group of investors that own 2.6 million shares of Schulman, or approximately 8.8% of the company's shares outstanding, according to Barington's filing with the Securities and Exchange Commission.”

Hedge funds to exercise caution: Jim Riepe, Rowe Price Group

What happens when too much money chases, too few options to generate money: Some win, some loose. Law of the universe spares none and hedge funds are no exceptions. Jim Riepe , vice chairman of money manager T. Rowe Price Group Inc recently made it clear to institutional investors that the hedge funds industry is bursting at its seams. He was speaking at the company's annual investment symposium.

He said that the market is full of hedge funds that are in perpetual lookout for ‘alphas’. Most of them are today facing disappointment. By using similar strategies and by attempting to exploit similar opportunities, they will reach no where. He added that the hedge funds should also be responsible by not only refusing to take on more attests for management when the chips are down but also use strategies judiciously. They should also be confident of the strategies that they are using and not do it mere because a competing fund is using it.

He said that hedge funds market today seems to be following a path similar to the tech boom and its collapse in the 1990s. He also warned the institutional investors saying that it would be wise to keep a tight check on the hedge funds and their investment plans and strategies. He also reminded them of the recent hedge funds disasters like that of Bayou funds and Wood River Partners LP.

Over all he advised that it is imperative that one should not be in the game for short time gold hunt. Instead, it would be meaningful to have a long term perspective of the investment plan. Today desperation to make profits is driving the industry to make irrational moves which can be quite detrimental to the overall health of the fund. The onus of having ones money to give him returns lies with the investor himself. Today.reuters.com reports:

“He recalled investors who poured money into venture capital in the late 1990s only to get burned when the tech bubble burst. They had chased the fabulous returns in the early 1990s from investments made much earlier.”

The tale of one hedge fund and a coffee shop

The story has its’ beginning in 2001 when an Ohio based stock broker struck upon a novel idea to make quick money. His coffee shop was drowning and he needed money to take it out. So he launched a fictitious hedge fund! The fund was called Applegate Investments after his own name Gregory Applegate. He claimed to his unsuspecting investors that he ran the fund for Regis Securities, a brokerage where was working since Jan of that year.

His charisma and convincing power helped him to collect a whooping amount of over $5.8 million. The best part is that he never promised the sun, moon and the stars to his investors. He just offered to get them returns of 8% on their investments. And he still got money from them. Why? Because he promised not to charge them any fee for managing the assets. He would simply keep all the earnings over and above the 8% for himself, which obviously no one had a problem with. No body had a problem with the proposition because he also promised that should he fall short of giving the guaranteed returns, he would fund the short fall from his own pocket.

Between 2001 and 2005 the ingenious Mr Applegate was able to collect almost $6 million from about 140 investors. He sold his fund to the investors by telling them that the Applegate fund would be investing in tax-exempt securities. To make his dealings more credible, he produced false monthly client statements for his investors. His older clients never suspected any thing because he used new investors' funds to pay off earlier investors.

With the money he collected, he propped up coffee shop - Friendzy's Coffee Shop. He also went ahead and like a good citizen donated close to $76,000 to the Ashland Community Art Center, where Applegate's wife served as the executive director way back in 2003. He was considered as a trustworthy community leader with diverse tastes. He apparently loved animals and led a program to rescue abandoned and homeless dogs. Every thing seemed to be just right, and then the bubble burst!

Like every thing else, his good period ended when an investor’s financial adviser discovering that the share price on one of the financial statements for Applegate's supposed hedge fund was not the actual market price. The police, FBI and SEC – all swung into action and now the investigations are on. Only the future will tell if the investors will get some of their money back.

Moral of the story: Do your homework and check all credentials well before you commit your money anywhere.

Read more on this on Businessweek.com

Hedge fund task force: What will it do?

Hedge Funds industry regulation requirements by SEC are now being seconded by several players in the marker. Though it was being scoffed at earlier, investors and analysts are seeing merit in putting some scrutiny checks in place. Recently, Richard Blumenthal, Connecticut Attorney General spoke in favor of regulation at a hedge fund conference sponsored by Institutional Investor magazine in New York City.

Referring to some high-profile scandals and collapses, the Attorney General said that the need for regulation is there. In fact it is more now than ever especially in the light of recent collapse of Stamford-based Bayou Management which indicates how far the roots of fraud can percolate in the society. He showed concern about SEC being overburdened with enforcement and regulatory responsibilities. He said that the need of the hour was for states including Connecticut to lend a helping hand of sorts by supplementing and backstopping the activities of Securities and Exchange Commission.   

Mr Blumenthal added that a hedge fund task force has been put into place for the job. The task force will make recommendations on state and federal regulation. It also plans to look into issues pertaining to disclosure requirements, conflicts of interest, government enforcement, fraud penalties and auditing requirements. Courant.com reports:

“Government oversight and scrutiny, indeed regulation, is no longer a question of when or whether - the time is now - but how much and what specific steps," Blumenthal said, according to a prepared text released by his office.” 

Hedge Funds go the cinema way!

With the small tubes gaining popularity, bigger screen are taking a back seat. What is happening the world over is happening in the US also. So much so, that the cinema house owners are calling it their ‘bleakest time’ ever. The sales of cinema ticket have hit an all time low. Hedge funds no doubt are looking at this as an opportunity to make money.

Wall Street Journal recently reported that a lot of hedge funds have been seen buying shares of theater chain Carmike Cinemas Inc. Carmike Cinemas is the third-largest film distributor by number of movie screens in the US. Hedge funds are hopeful that the stocks of the chain are at an all time low and will soon recover.

Carmike has reportedly only recently invested a huge sum on what it calls ‘improvement’ of the chain. The halls are primarily located amidst small communities as against big cities that have no dearth of entertainment. What is keeping the investors upbeat is that a big number of good family entertainment movies are soon to hit the theaters. This should get the cash registers ringing and therefore translate into more value to the shareholders.

Just to give figures the three major hedge funds that have invested into the chain have a combined stake of 18%. These funds are Stadium Capital Management (Bend, Ore), Fine Capital Partners (New York) and Watershed Asset Management (San Francisco). Seeing the flurry of activity in the recent weeks, it is but natural for rumors of ‘takeover’ to do rounds. Money.cnn.com reports:

“Despite the industry's woes, investors are buying up shares in Carmike, a Columbus, Ga.-based theater chain that is little known outside of small and midsize markets, the Journal said in its "Heard on the Street" column.”

Christopher Cox sees Internet as a way to nominate corporate directors

In what ay considered to be a rather bold and revolutionary step, chairman of the Securities and Exchange Commission, Christopher Cox has made some bold statements pertaining to nomination of corporate directors. He has suggested that large number of shareholders in a limited company should be able to nominate their own representative on the board. Currently the procedure being followed is called 'plurality voting'. Here, nominees however unpopular with the shareholders can be on the board if they can get a single vote in single-slate elections. This is not very good for the shareholders as the elected representative may not be able to keep their interests in mind while making a decision.

But quite sadly, the SEC proposal for increased powers that never came to a vote. It winded up in complex discussions pertaining to increased (read prohibitive) costs of mailings to shareholders for launching a slate of director candidates on their own under the current system.

The chairman hinted at the possibility of using modern age technology to solve the problem. He said that Internet could be used quite effectively and economically in order to do the job. This, he assures, will dramatically bring down the costs of communications to and among investors. This then could pave the way for more shareholder-inspired competition to company nominated directors.

He equaled shareholder democracy to political democracy and said that it can be enhanced by Internet communications. Cox's argument and perseverance in this direction is in continuation to his views at the Senate Banking Committee hearing held in July to weigh his confirmation.

Since Christopher Cox came into power, he has been under tight scrutiny regarding his work temperament and approach. Many were optimist about him rolling back at least some of the mandatory hedge funds regulatory requirements. He on the contrary went ahead and confirmed that not only did he conform to his predecessors work; he will make sure that the same will be implemented.  Accounting.smartpros.com reports:

"To date, the often-complex public discussion, which included an SEC proposal for increased powers that never came to a vote, has centered on mechanisms that would allow large shareholders, in limited circumstances, to nominate directors who would be carried on company proxy materials"

Specialist research team from Mellon HBV to identify opportunities in Asia

Asia has recently emerged as the hedge funds delight lately. More and more hedge funds seem to be pulled towards the market due to the opportunities existing there. Hedge Funds capitalize on the opportunities arising out of market anomalies and misprising. They also benefit from the event-driven opportunities that a particular market has to offer.

US and European markets seem to be well taped up as far as newer opportunities are concerned. A kind of saturation has set in with the volatility being less and mispricing opportunities already exploited. It is but natural in such a scenario for a hedge fund to look for fresher pastures elsewhere. Joining the bandwagon of making money in Asia is Mellon HBV Alternative Strategies LLC, a subsidiary of Mellon Financial Corporation.

It has recently established a specialist research team in Hong Kong to cover Asian markets. The main objective of the newly founded research team is to identify further event-driven opportunities throughout Asia. It will therefore support Mellon HBV's global multi-strategy discipline. Andy Shpiz has been deputed as the director for Asian research of Mellon HBV.

The company is headquartered in New York and has a wholly owned investment management subsidiary located in London. The combined assets between the two are over $1.1 billion. The amount is essentially invested in distressed and event-driven investment opportunities. The company is understandably ubbeat about the potential of the new market and Mickey Harley, chief executive officer at Mellon HBV has even referred to investing aggressively in Asia as "The Next Frontier". Hedgeco.net reports:

"Mellon HBV Alternative Strategies LLC is an investment management company that seeks superior risk-adjusted investment performance primarily for institutional investors via an array of alternative investment disciplines"

Bayou Fund Collapse: Just how many of us were really effected?

If you thought that hedge funds spelled ‘hefty returns’ think again. ‘High Risk’ is definitely a hallmark of the manna from heaven but how many of us do take the warning seriously. We are all blinded by the fancy numbers thrown at us and we get bewitched. Some collapses or disasters happen and the effected people do fret about them but then a new star is born and all is placed in the archives and labeled as ‘unfortunate’.

Most of us see, read, analyze the situation and finally arrive at the conclusion that some investors did get burnt but it cannot affect me. It cannot affect me because I have several layers of safety built around me. Any way the money I am investing is quite small. Your friendly financial advisor adds to this confidence by saying that you fund of funds is quite safe indeed. You treat each entity of the financial and hedge fund market separate and also operating themselves.

Where we completely miss the point is that all these instruments or players are so deeply intertwined that it is difficult to establish as to how many layers actually exist. And more importantly, are they actually providing you the necessary cushioning to save your money.

Bayou Fund collapse – the $300 million fraud should be an eye opener for all. What you know is that Simon Israel III, launched this hedge fund which had an entry requirement of only $250,000, with no lock up period and which ultimately collapsed in August 2005 without paying off the investors after several promises. A ‘fraud’ is what it was labeled as and the investors – small individual investors and big institutional investors lost a lot of money. Some money ($100 million) was discovered by the authorities in Arizona and whole lot of it was simply siphoned off elsewhere or used to build personal assets and blown up to lead an expensive lifestyle.

What we do not know about Bayou funds is that it had its roots so deeply into the financial market that it would be tough to draw boundaries between who is and is not affected. The pension funds, the endowment plan, the fund of funds, other institutional investors, small time investors investing directly into the fund and just about everybody seems to have invested in the fund.

There are several intermediaries which whose help the fund was able to orchestrate such a big fiasco. These intermediaries came in all sizes and repute. Take for example Trail Ridge Capital, a hedge fund and fund-of-funds company that had clients in Bayou. It steered investors by telling them way back in 2003 that there’s was a ‘unique multifactor risk model’ acting as a road map for navigating risk and providing investors with alternative routes to reach their investment summit. Tall claim indeed and several did buy into it and the promoters are no where to be found.

Investment unit of reputed .P. Morgan Chase is also in the picture. The unit has close to 10% of its assets under management in the now ill-famed Bayou Fund. All at the advice of Trail Ridge which is its advisor for a less than a year old fund called ‘Undiscovered Managers Spinnaker Fund’, which is offered to wealthy individuals. The unit has declared the assets that had been invested in Bayou hedge Funds as zero in its accounts.

‘Investment Consultants’ are a lot that are commonly trusted for individual investments. Even this channel was not spared. These consultants recommended the hedge funds to their clients and received compensation for this. These consultants also include funds of funds that bought Bayou shares for their investors and were also well compensated for driving the money towards the fund.

Pension – a monetary solution for old age financial problems too have been seen to play dirty. Most of the pension consultants have undisclosed financial arrangements with hedge fund managers. Some of these funds have been know to receive partnership interest in the hedge fund to which it was steering clients. This arrangement is a gross breach of trust as the intermediary receives monetary benefit from both sides.

And of course the outside marketers who are either paid a percentage of assets raised or through commissions to the promoters' - designated broker/dealer. So we see just how far and how deep the roots of hedge funds permeate our society and the uncountable tentacles that are itching to get into our pockets in order to get a part of our hard earned money? IHT.nytimes.com reports:

“But actually, the mess at Bayou, which U.S. prosecutors are now calling a $300 million fraud, should be a clarion call for caution among the many investors who have been throwing money at hedge funds recently”

Read More: Hedge fund collapse: Latest lesson on caution, risks and conflicts

Two days ‘World Hedge Fund Summit’ in Canada

Come October and Canada will play host to a spectacular event organized specially for the hedge fund industry. The industry has seen phenomenal growth in the recent years. Changes in strategies, policies and regulations all across the globe has heightened the need for a comprehensive event focusing on various aspects of the somewhat mysterious industry. The two-day event that is being organized at the 5-star Niagara Fallsview Casino Resort between October 16-18 promises to bring the industry experts together to widen the net of the industry.

The event will have over 75 speakers from all across the globe and is intended to provide a holistic idea of the booming industry. With over 600 delegates expected to attend the event, the summit will provide an excellent platform for networking and exchange of views. With fees priced at $670 per delegate, the event will be in the reach of several big and small hedge funds alike. And for pleasure, there is the scenic Niagara Falls which the venue will be overlooking. Other attractions include Canada's wine country and an entertaining social program. Biz.yahoo.com reports:

“The growth in capital committed to these alternative investments which currently stands at over $1 Trillion US, has created the need for a major hedge fund conference such as ours”

Read More: Canada plays Host to the WORLD HEDGE FUNDS SUMMIT in October

Need for review of hedge funds rules highlighted by US Treasury Undersecretary

The issue of how much of freedom to be given to the mammoth hedge fund industry comes up again and again. This time U.S. Treasury Undersecretary Randall Quarles brought forward the aspect of more comprehensive oversight of hedge funds. He was speaking on a panel on financial regulation, which was organized by Institute of International Finance. He questioned the existence of policy response to recent changes in the structure of capital aggregation industry.

Though the SEC has set some basic regulations in order in the US but the question being asked is if it is enough especially taking into consideration that the size of the industry has crossed $1 trillion. He stressed upon the point that the current regulation only offers narrow consumer protection as against a comprehensive, systemic view of the industry, which is really required at this stage. At the same gathering, New York Federal Reserve President Timothy Geithner said that greater sophistication in financial markets and concentration of banks and other institutions into larger firms has made it harder to evaluate the ability of the firms to really withstand financial shocks that are bound to happen. He was of the opinion that regulators and bankers must develop ways to assess and protect against risk. Today.reuters.com reports:

“Recent Securities and Exchange Commission rules requiring fund registration focus on a narrow consumer protection aspect of the loosely supervised, $1 trillion hedge fund industry, rather than a more comprehensive, systemic view, Quarles said.”

Read More: UPDATE 1-US Treasury official-Hedge fund rules need review

Hedge Fund Consolidation Temporarily Ceases

There was much speculation in the hedge fund industry whether or not "take over" deals would occur. While it appears to have been a fleeting thought, there is still talk of hedge fund firms to join large financial companies as a result of the more seasoned managers retiring. These were the main points discussed at the Reuters Hedge Fund Summit last week.

Low returns combatted with the demise of certain credit markets have disabled the positive performers from bringing home a staggering pay day. Still, the hedge fund industry has not exhausted all avenues. Investment banks are finding their way into the industry as a means of new revenue. The question is whether or not the managers will remain or retire, giving way to a new generation of hedge fund managers. According to Reuters:

"I do see large financial institutions who can't attract that capability continuing ... to buy hedge funds and funds of hedge funds," said Jane Buchan, chief executive officer of Pacific Alternative Asset Management Co. "A lot of these large hedge funds are being run by people who are now approaching their late 40s ... do they turn it over to junior or do they try to monetise?"

Read more: Hedge fund consolidation has only stalled

Will Struggling Hedge Fund Stay Afloat?

Currently struggling to stay afloat, The Bailey Coates Management hedge fund, has been suffering due to "wrong bets and tough market conditions." The hedge fund, started by two former colleagues TCI's Chris Hohn, incurred losses of nearly 10% in April which was preceeded by a 5% fall in March. The company has also endured its assets under management drop from $1.3 billion to less then $750 million. Now that Bailey Coates is in a precarious position, the industry is concerned that this could ignite a collapse in the high rolling sector. The mangers of the fund, Jonathan Bailey and Stephen Coates, have been acting hastily by selling big stakes and degearing their portfolio but the damage has been done. According to Timesonline.co.uk:

One hedge-fund manager said: “This month has been brutal. The market has been sliding and big bets have not worked out, such as the non-sale of Woolworths. The real problem is that too many funds have the same bets.

Read more: Hedge fund struggles for survival

Merril Lynch's Hybrid Hedge Fund

Merril Lynch is planning to unveil a new product referred to as a "hedge fund in a unit trust." It is expected to be approved the Financial Services Authority shortly. In the past, hedge funds have generally been reserved for wealthier clients, but the new Merril Lynch product is geared to the middle class investor. This new Merril Lynch hybrid of a hedge fund and unit trust is expected to have the same freedoms of a typical hedge fund, but it will not be allowed to borrow. According to Timesonline.co.uk:

A PIONEERING product viewed as “a hedge fund in a unit trust” and sold without advice across building society counters is expected to be approved by the Financial Services Authority within days.

Read more: Merrill's hedge fund with a difference to hit high street

Wendy's and Hedge Funds

Pershing Capital Square, hedge fund, is attempting to "break up" Wendy International Inc. Wendy's is run by hedge fund manager, William Ackman, who stated that after amassing 9.3per-cent stake in the company, the plan is to break it apart. Ackman went on to say that Wendy's shares are underpriced and intends to meet with shareholders to talk about boosting up the price by potential spinoff ideas. According to Theglobaandmail.com:

Wendy's shares closed down $1.65 to $41.73 in heavy trading on the New York Stock Exchange yesterday. The stock recently hit a 52-week high amid speculation that it was the target of a leveraged buyout.

Read more: Hedge Fund Aims to Chew into Wendy's