Hedge Fund Reader

G7 to Focus on Transparency in Hedge Funds

-- Pushpa Sathish, Staff Writer

Will G7 succeed where the SEC has failed so far? The summit, to be held later this week in Germany, will focus on the risks from hedge funds to the international financial system and global capital inflows. Berlin has assigned top priority to the issue of transparency in hedge funds; Berlin is interested in bringing more regulation to these investment vehicles, but with the United States and the United Kingdom not showing their solidarity on this point, Germany has agreed to settle for pressing for increased transparency into funds’ operations and business methods, says German finance minister Thomas Mirow.

Whether the meet will actually bring about some changes is a question that remains to be answered.

Protect Investors or Markets?

-- Pushpa Sathish, Staff Writer

If you have more money, does it follow that you are more financially savvy? That you are well-versed to deal with the vagaries of the hedge fund industry and better prepared to cope if disaster strikes as it did at Amaranth and Long Term Capital Management? Well, the U.S Securities and Exchange Commission (SEC) seemed to think so when it proposed a few months ago that the minimum net worth for potential investors be raised to $2.5 million from $1 million.

But as former SEC chairman William Donaldson puts it, the rule does not address problems such as the rapid growth of the hedge fund industry and the lack of investor knowledge. He hit the nail on the head when he urged regulators over the world to focus on the potential threats to the market instead of regulating who is qualified to invest.

Meanwhile, even as regulators look for ways to bring about transparency in the way hedge funds operate, The Managed Funds, the chief lobbying group for the hedge fund industry, is pushing for the minimum investment rule as an alternative to stricter supervision. A natural reaction – not only do they get more money from richer investors, they also get to keep their MO under wraps.

A Closer Look at Lending Risks

-- Pushpa Sathish, Staff Writer

Disclosure and transparency seem to be the buzzwords doing the rounds in the hedge fund industry. Though regulatory agencies have not met with much success in their attempts to get funds to be more open about their investment strategies, they’re trying to minimize the risks to others associated with the industry – like banks and prime brokers who lend leverage amounts to the funds. A committee comprising economists and representatives from the U.S. Securities and Exchange Commission (SEC), the Federal Bank of New York, and the U.K. Financial Services Authority will probe lending practices, counter-party risk measures, and collateralization at large broker dealers, according to the SEC’s commissioner Paul Atkins.

Atkins stressed on the fact that it was not a question of laying down rules for banks to follow; rather, the regulators sought to improve good lending practices and encourage banks and prime brokers to share information with counter-parties and creditors. Being prepared for the risks will make all the difference in how the market copes when a massive collapse occurs – Atkins said that prime brokers were better prepared to deal with Amaranth’s losses of $6 billion than they were when Long Term Capital Management went down in 1998. Reuters reports:

More useful down the road, he said, is to improve disclosure by market participants. "It seems if we can push forward and make sure that the right hand knows what the left hand's doing, that people are involved to a good extent, that the government brings people together so they know what's going on, then that's a very positive thing for the market," Atkins said.

Will Persuasion Work where Force Fails?

-- Pushpa Sathish, Staff Writer

Even as the U.S. Securities and Exchange Commission (SEC) tries every trick up its sleeve to bring hedge funds under its regulatory boundaries, its counterparts across the ocean are taking alternative routes to accomplish the same objective. The Bank of England has proposed a voluntary code of conduct for hedge funds, according to which the latter disclose practices and governance issues of their own accord. The fear of financial instability brought on by hedge funds is very real, and the Bank of England, though no longer the nation’s financial services regulatory authority, is responsible for the stability of the financial system.

Of late, analysts of the $1.3 trillion industry have treaded with caution in regulation issues for fear that too much control will only push the funds and the money they bring in to far-off foreign shores. The European Central Bank and Germany are urging the creation of an international register that will list hedge funds and a ranking of their investment strategies, to ensure a modicum of transparency in their operations and decrease investors’ risk.

But the Bank of England sees no reason for such strong measures as investment positions of hedge funds tend to change on a daily basis. A code of good practices driven by the hedge fund industry itself will be enough to push out the adverse activities, according to the Alastair Clark, adviser to the Bank governor, Mervyn King.

Another Thorn in Hedge Funds’ Sides

-- By Pushpa Sathish, Staff Writer

Times, they sure are a-changing, especially in the hedge fund industry. It’s not enough that the U.S. Securities and Exchange Commission (SEC) is raising the financial bar for those wishing to invest in hedge funds and also searching high and low for ways to regulate the $1.3 trillion dollar industry - the taxman is also now closing in on hedge funds.

If a new IRS proposal goes through, funds may be deprived of the trader status tax breaks they are entitled to right now. Firms that engage in a large amount of short-term trading are allowed to deduct some fund expenses like management fees from their taxes. With hedge funds showing a marked interest in private equities that are generally long-term holdings, the relevance of this tax break has come under a cloud.

Private investments in public equities are considered less liquid than other stocks and commodities used in short-term trade strategies. Hedge funds that buy private equities as a buy-to-hold investment will have to take another look at trader status, according to Gina Biondo, a partner at PricewaterhouseCoopers.

SEC Pulls New Regulatory Trick From Sleeve

-- By Pushpa Sathish, Staff Writer

In spite of the setback it faced in enforcing regulations on the hedge fund industry in June this year, the US Securities and Exchange Commission (SEC) is doggedly pursuing its quarry and trying to bring hedge fund managers within its control. Following a federal appeals court rejecting the SEC’s attempt to bring about more transparency in the operations of hedge funds, the regulatory agency is now hitting the industry where it hurts the most – in its financial pockets.

A new SEC regulation, if passed, will increase the lower asset and wealth limit for potential investors in hedge funds; right now, if you are worth $1 million (value of your home included) or earn $200,000 ($300,000 for a couple) in two consecutive years, you are eligible to enter the hallowed portals of hedge funds. According to the proposed changes, only those with $2.5 million investable assets will be allowed to invest in hedge funds. The planned regulation will effectively reduce the number of people investing their money in hedge funds; only 1.3 percent of Americans will pass the test as against the 8.47 percent eligible now.

The arguments against this regulation are flying in fast and furious from the fund industry; lawyers representing the smaller funds claim that the reduction in numbers will affect only their clients, leaving the bigger fish virtually untouched. Employees of hedge funds will find themselves among the most affected, unable to invest in the fund they manage and work for.

The rule has flaws. For one, venture capital funds are exempted because they provide capital to start-up companies, raising the question of how a start-up company differs from a start-up investment manager.

Opposition to the proposed rule is pouring in, raising questions regarding its effectiveness in being used as a regulatory mechanism. If the larger funds do not have to change their MOs in any way after the regulation is passed, how successful is this rule going to be in getting the hedge fund industry to toe the SEC’s line? Let’s wait and watch!

More Liquidity, More Transparency?

-- By Pushpa Sathish, Staff Writer

While regulatory bodies like the U.S. Securities and Exchange Commission (SEC) are struggling to get hedge funds to bring about transparency in their operations, there’s another option emerging as the fastest way to get them to open up – the fear of liquidity crises like those at Amaranth and Long-Term Capital Management.

Following the IPO by Fortress Investment Group, the first NYSE listing by a hedge fund, Citadel Finance, a unit of the  $12 billion Citadel Investment Group, is now offering to sell its bonds and raise at least $2 million, another first in the hedge fund industry. Citadel recently made news when it lost its head of global stocks.

Citadel seeks to boost its liquidity with this move, but it will also have to make public details regarding how much money it makes and how it rakes in the dollars.

G20 Calls for More Regulation

-- By Pushpa Sathish, Staff Writer

On one hand, you have the European Union deciding against further regulation for the hedge fund industry in the fear that it will drive managers to more lenient pastures. On the other, you have the new chairman of the G20 group of economies, Trevor Manuel, calling for greater regulation in this $1.3 trillion industry in order to remove risks to global financial stability. Manuel, who also holds the portfolio of South Africa’s finance minister, revealed the G20’s plans to bring hedge funds under the umbrella of a common policy. Reuters reports:

“There are trends we are concerned about, in particular the quantity of money handled by unregulated hedge funds and the push we've seen towards private equity funds,” he said. “There is a push to take companies out of public scrutiny, a push to be unregulated. In the context of financial stability these concerns merit attention and informed comment.”

Regulation In, Managers Out?

-- By Pushpa Sathish, Staff Writer

The assumption that more regulation will drive hedge funds out of the country is gaining more truth by the day. The European Union has now decided not to meddle with existing regulations that govern the continent’s hedge fund industry, as it does not want “an exodus of its hedge fund managers”, according to Charlie McCreevy, Commissioner of the Financial Services Authority.

This stand is a marked contrast to the scene on the other side of the Atlantic where US Treasury Secretary Henry Paulson and Senate Finance Committee Chairman Charles Grassley are seeking more transparency in the operations of hedge funds. Europe’s regulatory body said it was investigating how funds valued their assets following a request from former Chancellor of Germany, Gerhard Schroeder, to enforce international rules for hedge funds in the EU.

McCreevy says the inspection of hedge funds in Europe was better left at the country-level and that existent rules would limit the consequences of a collapse like that at Amaranth or Long-Term Capital Management.

New Rules for Hedge Fund Investors?

-- By Pushpa Sathish, Staff Writer

The US Securities and Exchange Commission (SEC) is changing tactics to prevent occurrences of fraud in the hedge fund industry. After its attempt to get funds to be more transparent in their dealings fell flat on its face, the regulatory body is toying with the idea of raising the bar for those wishing to invest in these funds.

Current requirements mandate that investors be accredited, i.e., they are worth at least $1 million or have an annual income of $200,000 (single) or $300,000 (joint). While the proposed revisions to these rules are still under wraps, Joseph Borg, president of the North American Securities Administrators’ Association which represents state securities regulators, has suggested that potential investors own assets worth at least $2 million, with real estate not be added to the total.

A meeting between the chairman of the SEC, Christopher Cox, and four other SEC commissioners some time next month is expected to hold the answers to all the questions being raised regarding the new investor accreditation rules.

Listed Funds Head for Amsterdam

-- By Pushpa Sathish, Staff Writer

The fear that the tightening of the regulation noose around hedge funds’ neck will push them overseas is being realized in Europe.  London’s loss has turned out to be Amsterdam’s gain – with the Financial Services Authority banning single-strategy hedge funds from being listed in London, at least two large funds have been floated in Amsterdam.

Following Boussard & Gavaudan, the hedge fund launched by former Goldman Sachs employees, Marshall Wace has also chosen to set up base in Amsterdam. The fund made news recently when it set a target of €1 billion, which, if it attains, will give it the billing of the world’s biggest listed hedge fund. Another good thing going for Marshall Wace is the appointment of Sir Andrew Large, former Deputy Governor of the Bank of England and chairman of the FSA’s predecessor, the Securities and Investment Board.

Marshall Wace makes its money using the controversial “alpha capture” method, where investment bankers and brokers are compensated for ideas that do well. While a section of regulators feel that this reward system may lead to insider trading, the FSA has approved this technique.

The hedge fund has been extremely successful, and is worth €5.9 billion currently. Sir Andrew has been roped in with a one-time fee of £250,000 and an annual director’s fee of £70,000.

Hong Kong Not to Compromise on Licenses

-- By Pushpa Sathish, Staff Writer

Perhaps the U.S. Securities and Exchange Commission should take a leaf from the book of its Hong Kong counterpart, the Securities and Futures Commission. The Asian country’s securities regulator has decided to put its foot down and stand firm on licensing issues for hedge funds. With Singapore exempting licenses for funds that have 30 or less investors, it was expected that Hong Kong would follow suit in order to grab a larger share of the hedge fund market.

Asia is seen as a potent market for the growth of hedge funds, and naturally, funds are expected to mushroom where there are less rules and regulations to tie their operations down. But Hong Kong is sticking to its policy of mandating licenses for hedge funds, irrespective of the kind and number of investors they have, according to Alexa Lam, executive director at the Securities and Futures Commission. The Hong Kong regulator is tying up with the SEC to conduct inspections of funds registered with the SEC and licensed in Hong Kong.

As of April this year, hedge fund managers in Hong Kong doubled to reach 118 from a year ago, with assets under management rising 268 percent to touch $33.5 billion. In contrast, Singapore’s industry grew 51 percent to reach 109 fund managers with assets doubling to touch $6.1 billion over the same period.

Investors Best Suited to Regulate Funds - Snow

-- By Pushpa Sathish, Staff Writer

John Snow’s singing a different tune from that of his successor Henry Paulson. While the present U.S. Treasury Secretary has called for more transparency and liquidity for hedge funds, his predecessor Snow is of the opinion that investors are the best people to regulate hedge funds. The present chairman of the Cerberus Capital Management and former U.S. Treasury Secretary said that the $1.34 trillion industry was too large for the government to monitor effectively. Snow’s statement is a direct contrast to the stance taken by Senate Finance Committee chairman Charles Grassley, who also called for stronger regulation of hedge funds after the fall of Amaranth Advisors. IHT reports:

“The real policing of these pools of capital are the investors,” Snow said Monday during his first interview since joining Cerberus, which is based in New York. Any government promise to increase scrutiny would create “a real risk of moral hazard that implies, 'Don't worry. Now the government is watching over you and there aren't any problems.'”

Naked Short Selling Under Probe

-- By Pushpa Sathish, Staff Writer

Hedge fund Sandell Asset Management Corporation is the focus of an SEC investigation for allegedly being involved in a naked short trade, according to two investors in the fund. The company took advantage of an impending takeover by Hibernia Corp., a bank based in New Orleans, by Capital One Financial Corp. to sell Hibernia shares when they fell drastically after Hurricane Katrina struck. Capital One bought out Hibernia for a much less price than initially offered.

While trading short is a generally accepted practice, naked shorting is not always legal. Short selling is the exercise of selling shares that are borrowed on the gamble that the price will go down, which will effectively leave the seller with a profit margin. Naked shorting involves selling shares that are not borrowed before the sale.

Sandell Asset Management, which trades using event-driven strategies, has done well this year, returning 18 percent so far as against the 9 percent by other funds in the same category, according to data from Hedge Fund Research Inc. The fund manages around $4.5 billion in assets.

More Calls for Regulation

-- By Pushpa Sathish, Staff Writer

Following the example set by Senate Finance Committee Chairman Charles Grassley, Treasury Secretary Henry Paulson has called for more protection for hedge fund investors. He stressed on the need to check if funds are transparent in their operations and if they have enough liquidity, especially in the light of what happened at Amaranth Advisors LLC. Bloomberg reports:

The Treasury department is leading a task force that's examining the impact of hedge funds on financial markets. That inquiry also involves the Securities and Exchange Commission, the Federal Reserve and the Commodity Futures Trading Commission.

Hedge Fund Honcho Fined

-- By Pushpa Sathish, Staff Writer

The chairman and CEO of the hedge fund James River Capital Corporation has earned the ire of the securities regulators for his alleged illicit activities during trading in variable annuities. The National Association of Securities Dealers has fined Paul Saunders, a broker, a record $2.25 million and also suspended him from working as a broker for 60 days. The Chicago Tribune reports:

Saunders neither admitted nor denied the NASD's allegations. The NASD said the $2.25 million penalty was the largest fine it has ever imposed on an individual for alleged improper market timing, frequent "in-and-out" trading. That total includes restitution of some $750,000 in illicit profits that Saunders allegedly personally made.

Senator Raises Regulatory Concerns

-- By Pushpa Sathish, Staff Writer

With more and more pension funds investing in hedge funds, a large number of people could be at risk of losing their retirement security, fears Sen. Charles Grassley. The senator, who is also the chairman of the Senate Finance Commission, has written to various financial regulatory agencies seeking more transparency in the way hedge funds operate and expressing concern over the lack of regulations for the industry. He was especially concerned about the lack of public information on the pension funds that had invested in Amaranth, and as a result, suffered losses due to the fund’s mammoth downfall. Chron reports:

Grassley, an Iowa Republican, wrote to Treasury Secretary Henry M. Paulson and sent copies to Securities and Exchange Commission Chairman Christopher Cox, Labor Secretary Elaine L. Chao, PBGC Director Vincent K. Snowbarger, Chairman of the Commodity Futures Trading Commission Reuben Jeffery, and several members of the Senate.

What the Lack of Regulations Can Do

-- By Pushpa Sathish, Staff Writer

Philip Jabre has earned the ire of Bloomberg news columnist Mathew Lynn. And rightly so! The ex-manager of the London-based hedge fund GLG Partners LP was recently in the news over allegations of insider trading. The UK Financial Services Authority (FSA) had fined him a record amount for his illegal activities, but that does not seem to have deterred him one bit.

Hardly two months down the line and Jabre is setting up shop in Switzerland with a financial company that may set up a hedge fund in the near future. A move which leads Lynn to reach the following not-so-flattering conclusions about the hedge fund industry:

• It does not take self-regulation seriously enough
• It cares not a smidgen about the image it projects
• It only wants to make as much money as it can before the house of cards comes tumbling down

With the hands of the authorities tied, Lynn is appealing to other hedge funds and those with pull in the industry to blackball Jabre’s fund in the most polite way they can. After all, a fund cannot survive or make money without investors, bankers, and traders. Isn’t that the only way to do right by those who invest in the industry?

Tighter Regulations Needed?

-- By Pushpa Sathish, Staff Writer

Just a little more than half of the private economists surveyed by the online edition of the Wall Street Journal felt that tighter regulation was needed for hedge funds to stop being a risk to financial markets. Of the 41 respondents of the survey conducted by WSJ.com, only 23 said that present regulations were not strong enough, while 16 felt that they were just right, and two said that they were too tough. Among those who said they were over-regulated was Dana Johnson of Comerica Bank, who felt that a heavy hand might push funds offshore. Forbes reports:

One of the top concerns of economists is hedge funds' borrowing and the degree of exposure lending institutions could have in a crisis. The lack of regulatory oversight on hedge funds means that little is known about their borrowing. Banks have been aggressive in extending credit, sometimes requiring little or no collateral on loans.

Double Enrolment bumped off for the non-US fund managers!

Are you a non-US Hedge Fund Manager? Being one, do you get involved in US hedge funds’ transactions? If ‘yes’ here is a piece of good news for you.

If you are a hedge fund manager covered by the stringent laws of countries like UK, France, then you should be very happy to know that SEC has temporarily taken out the current mandatory requirement of having yourself registered in USA. Following this, AMIA reiterates the persistent withdrawal of double registration for the non-US fund managers and has bespoken the bumping off this existing mandatory requirement from the US market.

AMIA has got plans to coordinate with Asian Regulatory authorities for managers governed by the laws of Australian and Hon-Kong domain.

Click here to know more on the SEC regulations for the non-US fund managers across the globe.

Read more on ‘US Regulations on Hedge Funds’ here.

Banks to Play Big Brother Role?

Banks are ensuring that they keep an eagle eye on the volatile $1.2 trillion hedge fund industry. With trading having the potential to cause regional or global economic instability, financial regulators over the globe should join hands in watching over the activities of hedge funds, said Liu Mingkang, head of the China Banking Regulatory Commission in a statement on the commission’s website.

With the anxieties caused by the collapse of Amaranth Advisors, there seems to be enough reason for regulators to feel that the hedge fund industry needs supervision. Liu issued the statement after meetings held with counterparts from Singapore, Italy, Germany, Thailand and Hong Kong from September 16 to 26.

RBA Warns of Hedge Fund Risk

The Reserve Bank of Australia (RBA) warned the investors to be aware of the risks involved with hedge funds. RBA sources said that lower macroeconomic volatility had been one factor encouraging a marked increase in the debt that households were content to carry in many countries, including Australia.

Financial innovation and competition have been at work on the supply side of the capital market. However, macroeconomic backdrop is critical. RBA said that a long period of low and stable interest rates could prompt people to engage in more risky behavior. In Australia, regulatory authorities draw no distinction between hedge funds and other investment managers. They are concerned with what the entity does.

Read my previous post titled "Most Hedge Funds to Stay Registered" to know more about the future of hedge funds.

Hedge Fund Rules Need Careful Consideration

Experts believe that any possible regulation of the hedge fund industry needs careful consideration. The question of regulation of hedge funds has to be carefully considered, and the Treasury Department is very active in a powerful dialogue in Washington. There is no denying that hedge funds play an increasingly important role in financial markets.

Hedge funds provide the market with increased liquidity. At the same time, they also pose risks to the market with the potential to be disruptive if funds excessively concentrate positions. Those potential risks do not automatically mean that there is a need for direct government oversight of hedge funds. Such funds are investment partnerships that invest in ways not available to traditional mutual funds.

My previous post titled "Hedge Fund Hurricane" provides some interesting information on hedge funds.

Agreement Reported to SEC

Pardus Capital Management is playing it safe and avoiding accusations of “insider trading” by making transparent its agreement with fitness club operator Bally Total Fitness Holding Corporation. The hedge fund reported in a filing to the U.S. Securities and Exchange Commission (SEC) that it has signed a confidentiality agreement with Bally.

According to the agreement, the fitness club operator will allow Pardus access to some non-public information for evaluation, negotiation and transaction purposes. The hedge fund, which owns 14.8 percent of the fitness club operations, has in turn promised that it will not trade in Bally securities till three business days after a deadline that can be set to October 16 or an earlier date.

Hedge Funds and Tax Rates

The taxmen are knocking on the doors of hedge funds; with new investment strategies playing the role of nectar, the tax authorities are the bees being drawn to the hedge fund hives.

There are no fixed standard tax policies regarding hedge funds under European jurisdiction and this makes it difficult for funds to establish taxable presences in the continent, according to Debbie Payne, hedge fund senior manager at PricewaterhouseCoopers (PwC). Hedge funds are thus unable to expand distribution activities across Europe.

Funds are tax transparent in Austria, the Netherlands and France, tax exempt in Germany, Denmark and Ireland, and taxed on income at 20 percent if they are authorized in the UK. Unauthorized funds are taxed at 22 percent. Funds in the Netherlands may be subject to a special tax rule of zero percent income tax and those in Denmark are subject to a final withholding of tax on 15 percent on dividends received on shares in Danish companies. 

Dare Trustees Trust Hedge Funds?

Trustees of pension funds are burdened by the constant need to be on the lookout for good investment opportunities. Hedge funds are beckoning, but the trustees are wary; they do not want to play for high risks.

Of the 700 billion pounds of assets in the UK corporate pension schemes, less than 1 percent is invested in hedge funds, says Jamie Murray, head of institutional business development and sales at HSBC Republic Investments.

But this situation is set to change with an influential regulatory body for the hedge fund industry and UK pension laws that offer some form of protection. Murray predicts that hedge funds will form up to 5 percent of pension fund asset allocation in another five years’ time.

SEC Not to Appeal Court Decision on Hedge Fund Rule

The US Security and Exchange Commission (SEC) has decided not to appeal a court decision that struck down an agency rule imposing tighter controls on hedge funds. However, the SEC may tighten its fraud protections and raise income and asset requirements for individual hedge-fund investors. Since the appellate court's decision was based on multiple grounds and unanimous, the SEC decided not to raise further controversy by appealing against it.

SEC Ponders Next Move

Following the decision of the U.S. Court of Appeals for the D.C. circuit to disregard the U.S. Securities and Exchange Council (SEC) rule that requires hedge funds to register with the agency, the SEC is pondering its next move. But time is running out – the regulatory body has only a couple of days left to decide its course of action with the August 7 deadline heading closer.

Mitch Nichter, partner in the law firm Paul Hastings, says that the SEC has the following options:

• Petitioning for a re-hearing in D.C.
• Petitioning for a stay pending an appeal to the U.S. Supreme Court. It has time up to September 21 to file the appeal.
• Avoid petitioning and wait for the legislature to come up with an alternative solution.

While the first two options would buy the SEC the most time, SEC Chairman Christopher Cox is wary of the second option fearing that a second loss would set a very bad precedent.

The SEC will not put the regulation issue to bed, according to Terrence O'Malley, a partner in law firm Fried Frank, not after having spent a lot of time and effort over the past year in relation to regulating hedge funds and their business practices.

Cox also testified before the Senate banking committee last week that he was recommending that the SEC reinstate a few provisions of the earlier rule, including some that are beneficial to hedge funds, on an emergency basis. Only time will tell if the SEC succeeds in dragging hedge funds under its scanner, or if the funds succeed in slipping through the holes in the SEC dragnet.

Will the Pension Bill Benefit Hedge Funds?

The dream may soon become a reality. If the US Congress passes the current bill on pension system, hedge funds may be entitled to manage more pension fund money. Negotiations are going on about a bill shoring up the country's defined-benefit pension system. Under the provisions of the bill, the lightly regulated investment pools would be allowed to do away with a ceiling on how much money they can take from pension plans.

These types of transactions will allow pensions to reduce costs and give pensions more flexibility and options for diversification. The House will vote on this bill on 4th August and the Senate will consider it next week.

MarketWatch reports that -

A short provision in the massive bill allows hedge funds, the lightly regulated investment pools, to do away with a ceiling on how much money they can take from pension plans. They have traditionally limited the amount of pension-fund money they will take to 25% of their total assets.

Cox For Anti-Fraud Plan

The past five years have seen a sharp rise in the number of hedge funds and in the subsequent growth of the industry to its current mammoth proportions. The downside of this development is that the frauds and wrong-doings of these funds have also grown proportionally.

The numbers have increased exponentially, from four cases of insider trading, alleged stealing of fund assets, and hushing up the truth about fund performance, to more than 60 today. The US Securities and Exchange Commission (SEC) has charged fund managers of defrauding investors out of more $1 billion over the last five years.

So it comes as no surprise that the SEC  Chairman Christopher Cox has stated that he would advocate new emergency regulations for these high-risk investment pools. Cox outlined his plans for an anti-fraud rule that will ensure that fund managers are responsible for investors, before the Senate Banking Committee.

The plan will also meet the legal objections of the appeals court that invalidated the SEC regulation that required hedge funds to adopt transparent dealing strategies. The appeals court had also noted that a few federal anti-fraud regulations are not limited to fraud against clients.

Will Regulations Rein Hedge Funds?

An article on honesty in a magazine caught my eye the other day; it propounded the theory that people are more straightforward when they feel they are being watched.

An experiment was carried out in an office cafeteria to test the extent of its employees’ honesty. Workers in the office could help themselves to beverages from the machine and drop the money in a box on the counter. It was found that the amount in the box increased during certain periods and decreased during others, even though the amount of coffee dispensed during each period remained almost the same.

A deeper investigation into the matter pinned responsibility for the discrepancy on a picture frame tacked to the cafeteria wall near the coffee machine. The frame contained a different picture every week, one of which was a human eye. I know it sounds ridiculous, but employees actually paid for their coffee when they felt they were being “watched by the eye”.

If perceived supervision itself is such a forceful deterrent to malpractice, imagine what actual regulation will do. So is it too much to ask that hedge funds, the $1.3 trillion industry, be regulated by the US Securities and Exchange Commission (SEC)?

Federal Reserve Chairman Ben Bernanke is of the opinion that court ruling or not, hedge funds need be monitored so they don’t take excessive risks or leverage, and in the process, threaten the US financial system. He advocates two measures; the first is to supervise large banks and investment banks that transact with hedge funds, and the second is to ensure that investors in hedge funds are extremely rich and sophisticated in their dealings. 

Hedge Funds Leave SEC

The impact of the ruling that hedge funds do not have to register with the US Securities and Exchange Commission (SEC) has spread deeper into the hedge fund industry. A month on, and ten hedge funds have left the fold – they have withdrawn their registrations with the SEC. This comes as a slap in the face for the regulatory body after the blow dealt by the court which threw out the regulation that mandated hedge fund advisers to provide basic information about their funds to the SEC and allow it a peek into their operations. Reuters Today reports:

The court ruling essentially allowed hedge funds advisers, if they wish, to deregister with the SEC. When the court decision was made the SEC had on record more than 2,500 advisers who managed more than 13,800 hedge funds.

Front-Running Taints Hedge Fund Industry

Voices are whispering and talking out aloud about the rampant practice of front-running in the hedge fund industry. Hedge fund managers are looking to make profits by front-running their unit/investment trusts with their hedge funds, that is, they buy a particular stock for their hedge funds and then follow up this purchase with a similar one for their unit/investment trusts. They thus gain by any rise in the share price because of the first purchase.

In a bid to combat this practice, most hedge funds are monitoring the activities of their managers while others are making it worth their while to refrain from such practices. No wonder hedge fund managers take home hefty sum as performance fees!

US Regulations on Hedge Funds

Investment companies registered with the US Securities and Exchange Commission (SEC) are subject to strict limitation on the short selling and use of leverage. These are part of hedge fund strategies and are regulated by the SEC. It has been noticed that hedge funds choose to operate as unregistered investment companies. As a result, interests in a hedge fund cannot be offered or advertised to the general public.

There is a presumption that hedge funds are pursuing more risky strategies in order to avoid the US regulations. Such a strategy might result in heavy losses for the investors. The hedge funds that are regulated by the SEC are more likely to offer greater returns to the investors. In addition, they are less risky and more reliable.

Banking Committee to Hold Hedge Fund Hearing

The US Senate Banking Committee is going to hold a hearing on the possible tighter regulation of hedge funds. The hearing will be held on 25th July. Hedge funds all over the world are concerned over the outcome of the hearing. They fear that the possible regulation may have negative impact on the growing hedge fund market in the world. The hearing will involve a discussion of the current regulations covering the $1 trillion hedge fund industry. It will also contemplate possible changes in order to protect the funds' investors and stock markets.

Bobsguide reports that -

Hedge fund managers and other investment experts may potentially be called to appear in front of the committee as witnesses, although as yet no formal list of these witnesses has been drawn up.

FSA Tastes Success Where SEC Fails

Why is the Financial Services Authority (FSA), the markets regulator in the UK, more successful at what it does than the Securities Exchange Commission (SEC)? There are a great many perceived reasons and here are just a few:

• The FSA looks to enhance market confidence and public awareness, protect consumers and reduce financial crime by searching for the root of the problems in the funds industry and fixing them. In contrast, there are grumbles that the SEC focuses only on cracking down on the hedge fund industry by charging and imposing fines on managers.
• Authorization is mandatory for any hedge fund manager in the UK. The SEC, which also enforced the same rule, ran afoul of the industry when it relaxed it for a few funds.
• The authorization process is between two and six months long, and the hedge fund has to deposit its 13-week expense amount as regulatory capital. The SEC has no such requirements.
• The authorization process entails a regulator checking the fund’s business plan and its personnel who are in charge of various functions.
• The monitoring process does not stop once the fund is authorized. Risk assessments are carried out every quarter for the top five funds, the next 20 on the list are assessed once every 18 months, while the rest are reviewed once every three years. The tests are conducted over a period of one day or one week, depending on the risk profile of the hedge fund being assessed.
• A typical risk assessment process includes scrutiny of  how illiquid securities are valued, possible occurrence of insider trading, and side pockets.

Backdating Stock Options – Emerging Threat in Hedge Fund Industry

With the Securities Exchange Commission (SEC) probing the numerous irregularities in trading and frauds by hedge funds, there is increasing pressure from all quarters to bring a level of transparency to the way hedge funds operate. 

One commonly perpetrated fraud is the tendency of corporate executives to backdate stock options to increase their payoffs. How does this work?

Executives are usually given stock options in their organization as an incentive to try and increase the market price of the stock. The logic is simple, if the stock price rises, the executive is richer by that amount for each share he/she owns.

Stock options allow executives to buy the shares at a set price. When the options vest after a few years, the executives can exercise their options and make a profit from the difference between the current market rate and the set price. They try to play up this advantage by backdating options to an earlier time when the value of the stock was relatively low.

As of now, more than 60 companies are being investigated by the SEC and federal prosecutors for irregularities in dating options.

US Government planning more Regulation for Hedge Funds

The Bush administration is taking a strong stance on hedge fund regulation and investigation. It believes that the possible fraud in the $1.2 trillion hedge fund industry has cautioned the government to wake up to the emerging threats. Wrongdoings in the lightly regulated investment pools make them prone to scrutiny by prosecutors, regulators and investigators. The corporate-fraud task force is also studying the scandal involving backdating stock options for executives. It is no secret that hedge fund and stock options issues have become part of the Bush administration task force agenda. The hedge fund fraud issue will be discussed at its next meeting later this month. Hedge funds regulating issues have been discussed several times in the federal appeals courts in the recent days.

According to HedgeCo.Net -

Last month, a federal appeals court in Washington threw out SEC rules requiring hedge funds to register with the agency and undergo inspections of their books and records. But McNulty said critics who say his unit should be shut down are wrong. “The corporate fraud task force is alive and well,” McNulty said. “The need for it in our view is still very clear and strong.”

Hedge Fund Investigated for Short Sales

HBK Investments, a $7 billion hedge fund based in Dallas is the subject of scrutiny by the Securities and Exchange Commission (SEC) for the part it played in a series of short sales in 2003. Short sales are gambles on the market that the price of certain stocks will fall. HBK bought millions of shares of Plug Power, a fuel-cell manufacturer based in New York, in November 2003 at a 14 percent discount of their market value. Another transaction of HBK’s that has come under the SEC scanner is the money it paid outsourcing company PFSWeb. HBK was one of the investors that helped the Texas-based firm raise $3.5 million. The Street reports:

HBK is one of the largest hedge funds to draw scrutiny in the two-year-old investigation into manipulative trading in the $20 billion-a-year market for PIPEs, or private investments in public equity. In a typical PIPE deal, a small, cash-strapped company raises cash by selling discounted stock, or a bond that converts into discounted shares, to a group of hedge funds. Shares of a company doing a PIPE usually decline in anticipation of a flood of discounted stock coming into the market.

US Congress Considers Hedge Fund Regulation

The Security and Exchange Commission is still fighting its war to regulate hedge fund despite the fact that it lost a battle last week. Now it has received the support of some members of the Congress. Three Congressmen introduced a bill in the House that would authorize the SEC to require registration of hedge funds as investment advisers. The bill would serve as an amendment to the Investment Advisors Act of 1940. It would also re-establish the authority of the SEC to regulate hedge funds. The three Congressmen who introduced the bill were Rep. Barney Frank, Rep. Michael Capuano and Rep. Paul Kanjorski.

According to The Street -

With the SEC registration rule overturned by the court, the question remains: Will hedge funds remain largely unregulated as they are now? Will Congress or the states step in? The bill is unlikely to be embraced by the hedge fund community. What is clear is that efforts to regulate hedge funds are far from dead, as reported here?

Congress Works on Hedge Fund Loopholes

The Chairman of a Senate subcommittee on finance has called for a hearing on protecting hedge fund investors. The decision was followed the repeal of a rule regulating the investment firms. Senator Chuck Hagel, Chairman of the subcommittee of the Senate Banking Committee said that he would also enlist the help of the president's financial working group. The president's financial working group includes several government agencies. In addition, Democrats on the House financial Services Committee have asked the General Accountability Office for a report on the details of new laws.

According to BankNet360 -

An appeals court last week threw out a recently enacted rule that required hedge funds to register with the Securities and Exchange Commission. The SEC overstepped its authority, according to the court.

Hedge Fund Controversy with Pequot

Pequot Capital Management is facing charges of wrongdoing in hedge fund trading. The US regulators are investigating Pequot's role in possible insider trading. Pequot is a $7 billion hedge fund. Pequot strongly denied of any wrongdoings and dismissed the reports published in a newspaper. It said that the story was based on false allegations of a terminated SEC employee. Earlier, the New York Times reported that Pequot earned $18 million after investing in companies involved in the merger. The letter, which was published in the New York Times, was in fact sent to two US senators.

According to Reuter -

The Securities and Exchange Commission has filed no charges against Pequot. In keeping with its practice of not discussing any possible probes, the SEC neither confirmed nor denied an investigation into the hedge fund, one of America's oldest and best known.

US Court Against Hedge Fund Registration Rule

A federal appeals court has thrown out the Securities and Exchange Commission's hedge fund registration rule. The rule says that the rule was arbitrary because it required funds to register if they had 15 or more clients. The ruling came from the US Appeals Court for the District of Columbia. The court observed that the number of investors in a hedge fund revealed nothing about the scale or scope of the fund's activities. The SEC had begun requiring most US hedge funds with more than $30 million in assets and 15 or more clients to register with the agency. However, after the latest ruling by the court, the registration rule will be cancelled.

New SEC For Fund of Funds

According to the new regulations announced by the Securities and Exchange Commission (SEC) for “fund of funds” arrangements, investors in funds of hedge funds will benefit through greater transparency in the expenses incurred. Fund of funds fee tables will have to detail their charges and the charges of any fund they invest in. The new rules come into effect from the start of next year, and will allow funds to employ practices that are currently permitted only on individual exemptions. Accordingly, stock or bond funds can now invest in a money market fund, fund of funds that invest solely in funds of the same fund group have more flexibility, and funds that invest minimum amounts in unaffiliated funds have more latitude in structuring their sales charges. Chron.Com reports:

Fund of funds investments involve funds that invest in the shares of other mutual funds or hedge funds. U.S. securities laws impose restrictions on such arrangements to prevent abuses.

Senate Panel to Scrutinize Hedge Fund Sales

The Senate Judiciary Committee will examine the short-selling activities of hedge funds and independent analysts at a hearing in July. The issue has generated headlines and lawsuits alleging collusion and market manipulation. The Committee is finalizing a list of witnesses for the hearing. Recently, the head of the Salt Lake City-based online discount retailer has sued hedge fund Rocker Partners and small stock-research firm Gradient Analytics Inc. It alleged that they made a conspiracy to have Gradient issue negative reports on companies that Rocker had sold. The Senate Panel will look into all these issues. Yahoo Finance has published an article on the Same Topic.

Short sellers borrow shares for sale and profit if the stock price declines. While the practice is legal, Byrne has been vocal in attacking "naked" short sales in which sellers don't borrow shares before selling, which he says may have destroyed hundreds of small companies while enriching hedge funds and Wall Street bankers.

SEC on Hedge Fund Regulation

The US Securities and Exchange Commission hopes that Securities regulators should move quickly to impose clear guidelines on hedge funds value investments. According to them, stricter guidelines will minimize the risk that might upset financial markets. There are over 9,000 hedge funds with $1 trillion of assets. A growing number of pension funds and endowments are using them to boost potential returns. Analysts said that the fund's assets have doubled since 2001 and is expected to double by 2010.

Hedge funds often invest in illiquid or complex assets for which there is no public market. Fund administrators rely on pricing from the fund advisers. Hedge funds typically disclose little about their investment strategies. The SEC already began requiring the funds to register basic information with the agency. While some hedge funds go for long-term investments, others look towards quick profits or higher dividends. Reuters has published an article on the Same Topic.

Last month, at a U.S. Senate hearing, Under-Secretary for Domestic Finance Randal Quarles said hedge funds "could have a disruptive impact if there were concentrations of positions or attempted mass liquidation in illiquid markets."

Hedge Fund Executives Want Changes in Rules

For years, the US securities regulations have restricted the hedge fund industry from defending itself adequately against a bad public image. Now Hedge fund managers have started talking against the legislations and demanded changes to the existing standard and rules. According to them, the rule prevents them from educating the public about the benefits of hedge funds in the financial market. The benefits include increased market liquidity, better pricing of liquid securities and general market efficiency. Reuters has published an article on the Same Topic.

The hedge fund industry has had meteoric growth over the past 20 years to include more than 8,000 funds and $1 trillion for a positive reason: investors think the industry can deliver higher returns than traditional mutual fund investing strategies, they said.

Hedge Fund Managers Defend Reticence

Hedge fund managers have been getting their share of bad publicity, mainly for their reticence in discussing the performance of their funds. They defended this reputation for playing their cards close to their chest though, at a gathering of top hedge funds officials in New York earlier this week. Citing U.S securities regulations as a reason for being close-mouthed, fund managers said that the rules prevented them from informing the public about the benefits of hedge funds, especially about their advantages in the financial market where they are bound to increase market liquidity, improve prices of illiquid securities, and enhance market efficiency. Washington Post reports:

The general solicitation rule is aimed at preventing hedge funds from being marketed to unsophisticated investors who don't understand the risks. But hedge funds are already restricted -- at least in the United States, although rules are less stringent elsewhere -- to high net worth investors, making the rule redundant, industry lawyers argue.

Hedge Fund Regulation

Hedge Fund regulations in the US are not new for the investment companies. Investment companies that are registered with the US Securities and Exchange Commission (SEC) are subject to strict limitations on the short selling and use of leverage. These are essential to many hedge fund strategies. In order to implement these strategies in an effective manner, hedge funds elect to operate as unregistered investment companies. Interests in a hedge fund cannot be offered or advertised to the general public. They are limited to individuals who are accredited investors and qualified purchasers.

As per the guidelines, accredited investors must have total incomes of over US$200,000 per year or a net worth of over US$1,000,000. Similarly, qualified purchasers must own at least US$5,000,000 in qualified investments. A hedge fund is limited to 499 investors. The hedge funds having fewer investors may see few government-imposed restrictions on their investment strategies. There is a presumption that hedge funds are pursuing more risky strategies. The ability to invest in these funds is restricted to wealthier investors who have the financial reserves to withstand a possible loss.

The new rule implemented by the SEC in February 2006 requires most hedge fund advisers to register with the SEC as investment advisers under the Investment Advisers Act. It is applied to firms who manage in excess of US$30,000,000 or more investors. The SEC currently does not have the staff to monitor the estimated 8,000 US and international hedge funds. However, it is forming internal teams that will identify and evaluate irregular trading patterns for individual investors.

Skepticism on Hedge Fund Rules

According to Ben Bernanke, US Federal Reserve Chairman, allowing hedge funds and trading partners to manage risk and impose discipline in the sector is the economic need of the hour. However, he had expressed skepticism about proposals to give regulators more powers and authority.

Recently, the German central bank made a proposal that the world's hedge funds should open up their books for public grading by rating agencies. Introducing a code of conduct is part of a self-regulation initiative to start a debate on how to avoid disasters in hedge funds. Hedge funds help improve the functioning of financial markets. However, it is better to take precautionary measures rather than waiting until a market crisis happens.

More Information: Read Here

Mr Bernanke, who was speaking at a Sea Island, Georgia conference sponsored by the Federal Reserve Bank of Atlanta, raised caution about regulators taking an overly heavy hand.

Hedge Fund Regulation Approved

Financial executives have approved hedge fund's role in the market and also endorsed the required Securities and Exchange Commission registration. The survey conducted by Pricewaterhouse Coopers covered insurance companies, banks, broker/dealer operations, investment mangement, real estate and financial services forms. The finding showed that 71% respondents agreed that hedge funds play an important role in fostering deeper and liquid capital markets worldwide. It was also found that 85% agree with hedge fund regulations.

The findings indicated that the hedge fund industry is being given top preference by the financial services industry. Hedge funds are viewed as well-run organizations that are led by intelligent people. Hedge funds have attracted significant assets in recent years and also attracted a large number of people. Traditional financial services firms reveal that they are not competing with hedge funds for talent.

Hedge funds have begun to realize the full regulatory impact on their day-to-day business. Compliance was named one of the challenged to the entire financial services industry in the survey conducted by Pricewaterhouse Coopers. More than half of the financial executives cite the cost, burden and risk of regulatory compliance as areas of concern.

U.S. regulators to go easy on hedge funds

If this comforts you...yes...the global hedge fund market is worth over $1trillion and this booming industry has a strong presence in the U.S. market. And the U.S. authorities are only too aware of the fact that too strict regulations in the hedge fund industry could prove to be counterproductive.

But then you cannot leave them without any scrutiny. In fact, since February, the Securities and Exchange Commission has made it nearly mandatory for hedge funds to register themselves as investment advisors.

The U.S. Central Bank is a bit more cautious in its approach. Fed Chairman Ben Bernanke is against stiffer regulations as it might reduce existing market discipline.

According to Gerald Corrigan, a managing director of Goldman Sachs,"We must avoid the ever present danger that the mathematics and the models become the master and we become the servant."

Read more here

Regulation of Hedge Funds in Europe

In spite of the high risk, hedge funds have become the preferred destination for many investors. In fact policy makers are also aware of its potential. They have instituted national regulatory frameworks to regulate everything concerned with hedge funds.

As far as Europe is concerned, the investment environment is very complex, as various countries follow various approaches. This has led to the proliferation of many domestic-domiciled hedge funds.

Now if you are a hedge fund manager and want to promote funds in Europe, you have to understand the various complexities involved. Just knowing about the regulations of a single country won't be of much help. There are various marketing restrictions in place that you need to be aware of. This literally means that distribution would be possible only through private placements.

Hopefully, more regulatory changes are in the offing. At the same time, it would pay to initiate a dialogue with the European regulators so that whenever the changes are made they can be really beneficial to the industry.

Read an interesting report by PWC on hedge fund regulation in Europe here

Harbinger Hedge Fund in a tight spot with the regulators

After buying more than 7 percent of Portland General Electric's newly issued stock, Harbinger Capital Partners Master Fund Ltd., is finding itself embroiled in an inquiry from the Oregon State regulators regarding its intentions.

Doubts have been raised regarding its intentions as Harbinger is known for its penchant to buy securities of distressed companies. Interestingly, before the stock issuance, PGE was a subsidiary of the bankrupt Enron. And even now, the reorganized Enron continues to hold 57 percent of PGE stock.

As per Oregon Public Utility Commission, Harbinger has to comply with a state law that requires PUC approval before a private entity can own 5 percent or more of a publicly traded utility. This is being countered by Harbinger's attorney Gold who has refuted the need to seek PUC approval, as they have already submitted documents with the U.S. Securities and Exchange Commission, establishing its status as a passive investor.

For more insight Read

Regulators charge Portus co-founders for misleading

Boaz Manor and Michael Mendelson, co-founders of Portus Alternative Asset Management Inc. were charged by the Canadian regulators over the Fund's collapse last year. They were charged for failing to act fairly, honestly and in good faith with clients.

Among the charges was also the charge of unregistered trading and issuing securities without filing a prospectus. Portus was founded in 2002, and attracted about $707 million from around 26,000 investors before it was placed into bankruptcy.

Since then KPMG Inc., the trustee of the fund, has been tracking down the assets and recovering investor's money.

To get more details Read

Short changed on short selling - watchout!

Hedge funds are planning a class action lawsuit against brokers who they feel short changed them in short selling operations. That's a real irony because we often hear of complaints about how hedge funds spread negative stories about companies to bring down their share prices - something that is absolutely necessary for hedge funds to make money out of short selling. Now it is the hedge funds who seem to be on the receiving end. The problem is: hedge funds say that several brokers despite being paid to borrow stocks to cover their, that is, the hedge funds', short sales did not do so forcing the hedge funds to go 'naked' in their short sales. This has often led to market distortions leaving the hedge funds out of pocket. While details are still not available as to who will be sued and by whom - just watch out on this front - a storm is brewing and big names such as Goldman Sachs and Morgan Stanley are likely to face the heat.

Well, in my view a strong enough legal action can create quite a flutter in the market and most importantly it can lead to what investors don't like at all - a high degree of uncertainty ! Be warned and watchout!

Read more: US hedge funds set to sue in short-selling row

Insure Hedge Funds

With the risks that come along with hedge funds, a dire need has been seen for insurance coverage in the sector. The main reasons why coverage is required include the fact that this provides a greater degree of security to investors and service providers. As a result a number of insurance companies are now offering policies. 

Hedge funds can buy different coverage based on their need and requirements. These could include coverage to protect the decision makes of the funds. This is known as Directors and Officers or General Partnership Insurance. In order to protect hedge fund managers, Professional Liability or Errors and Omissions Insurance coverage can be considered. For those funds that are dealing with pension funds, Fiduciary and Trustee Insurance coverage can be purchased. To protect the fund from the risk of being sued by employees, Employment Practices Insurance can be purchased. There are a number of other insurance policies that are available as well.

Federal regulators to supervise hedge funds

As per the new rules from the Securities and Exchange Commission, hedge funds with more than $30 million in assets, 15 or more investors and a lock-up period of less than two years have to register as investment advisors under the Investment Advisors Act of 1940. Thanks to the mandate, there are new requirements that need to be addressed immediately. These include appointing a chief compliance officer, improving record-keeping practices and submitting to periodic audits from the SEC.

Secrecy of investments is still of prime importance to the industry. So, though hedge funds must register with the SEC, they do not have to disclose their investments or investment methods, unlike mutual funds managers. And the hedge fund industry is not going to let go of this privilege. They are committed to fighting further regulation because according to them, maintaining the secrecy of investments and strategies allows it to exploit market anomalies. Charlotte.bizjournals.com reports:

Though long viewed as shadowy, high-risk investments, the number of hedge funds has risen from 600 to more than 8,000 in the last 15 years. Likewise, assets have soared from $38 billion to more than $1 trillion, and according to the SEC, hedge funds account for 10 percent to 20 percent of trading volume in the U.S. markets.

Read more: Hedge funds brought under supervision of federal regulators

Proposed Rule Change For Hedge Funds

With a ‘proposed’ rule change, it might become easier for hedge funds in London to list their shares. This is essentially applicable in case of hedge funds that are transparent about the risks that they take and also publish regular accounts.

This change, if it takes effect, would also lead to greater flexibility in terms of the strategies used. At the same time, it would remove the restrictions on short selling and would allow greater use of derivatives.

Further, in an effort to protect investors, companies would have to ensure that they have sufficient working capital for 12 months. They would also need to elaborate on how investment risks are being spread.
Reuters reports:

The Financial Services Authority (FSA) said the move was consistent with its recent statement that it would consult next year on allowing retail investors direct access to hedge funds. The proposed changes would enable those employing a wider range of investment strategies, including those currently pursued by some hedge funds, to list in the UK for the first time.

Regulators shut down three hedge funds

The financial regulators in Ireland and Britain are getting into action against the hedge funds industry at large. The Irish Financial Regulator in a display of grit, shut down three hedge funds operated by Broadstone Fund Management, a Dublin-based investment management firm. adireland reports:

Meanwhile a study by its British equivalent, the Financial Services Authority (FSA), highlighted concerns over potential conflicts of interest among fund managers and unfair treatment of investors. Hedge funds are specialist financial instruments that aim to deliver returns for investors by actively trading shares, commodities such as oil and gold, and derivatives such as put and call options and interest rate futures.

Irish Financial Regulator and FSA Take Steps to Regulate Hedge Funds

The hedge fund market is usually considered to be highly unregulated. But then, there are times when a sudden interest can truly chop off heads. In a recent case, the Irish Financial Regulator made a move to shut down three hedge funds. These funds are operated by Broadstone Fund Management, a Dublin-based investment management firm.

Also, a study by the Financial Services Authority (FSA), carried out recently expressed concern over potential conflicts of interest among fund managers and unfair treatment of investors. It also highlighted the fact that some hedge fund managers were using unfair practices. The Post.IE reports:

The regulator has declined to say why it issued the order but stressed that investor funds were not under threat. It is understood, however, that issues relating to the firm’s filing requirements were among the regulator’s concerns.

Hedge funds need more transparency and better regulations

Investing in hedge fund? Well, you might have certain apprehensions that most investors have when they are looking at this investment tool.

Essentially any tool that offers high returns, also entails high risk. So this makes it imperative for you to ensure that you pick the right hedge fund manger as that is what would decide the future of your investment. Ideally you should pick a hedge fund manager who can manage and control risk in a manner that ensures that you don’t go into losses, even if the returns are not high.

Also, in most markets, the investment areas are now overcrowded. As a result, these areas are vulnerable to quick falls. This can be detrimental and can lead to sudden losses.

The requirement at this stage is a higher degree of regulation in the hedge fund market. This would ensure higher transparency so that an investor knows exactly where his money is going. Also, with better regulation, hedge fund managers would also become more accountable. At the same time it would become much simpler for an investor to research the background of a hedge fund manager before entrusting his money into their hands.

I believe that with these basic prerequisites in place, the hedge fund market would be much safer and as a result would attract a larger number of investors.

Hedge Funds Laws Might Open to Small Investors

In move that is likely to change the whole hedge funds outlook, the city's financial watchdog is to make way for the hedge funds - as an investment vehicle - available to small retail investors. Once this move goes ahead, hedge funds units could be sold to the small investor community. In the current scenario, it is illegal to market hedge funds to ordinary investors in Britain, but the Financial Services Authority is likely to relax current restrictions. This is expected to happen when it finally publishes its recommendations on the future of the sector.

This is a big move away from the earlier rigid stand at the start of the consultation exercise, which began last year in the month of June. This move would allow fund of hedge funds to be set up in the UK and marketed to ordinary investors as well. But given all this lenience, these onshore hedge funds are likely to come with warnings on their risks. This might prove to be a deterrent for many risk-averse retail investors.

You cannot advertise your hedge fund

General advertising of hedge funds is prohibited. So if you are planning to launch your own hedge fund, it is important to keep this in mind.

However, in case you need to set up a web page to communicate with your accredited investors, then this is a possibility as long as certain safeguards are taken. In no way should this be a form of advertising, else it would go against the regulations for hedge funds.

Do you have the money to invest in hedge funds?

Are you looking at investing in hedge funds? Well, don't be surprised if your hedge fund manager asks you if you have the money to do so. It is largely left to the discretion of the hedge fund manager to decide if you qualify as a private investor.

In most cases, rather than posing direct questions, hedge fund managers make prospective clients fill out a lengthy questionnaire. This questionnaire would require you to provide details about your holdings, including stocks, real estate, physical commodities and commodity contracts, swaps and futures.

Essentially private investors can be categorized into accredited investors and qualified purchasers. Accredited investors have to have a net worth of more than $1 million. Qualified purchasers need to have $5 million in investments and this does not include primary residence or any property that is being used for a business.

In most cases you would not need to attach any documents to support the details that you have provided in the questionnaire, but it makes sense to be truthful about your financial standing.

No special regulations for hedge funds in Canada

The Canadian hedge funds industry is a $30-billion industry. Regulators here have decided that the currently existing rules for investment vehicles are sufficient to regulate this burgeoning industry. This implies that no additional rules and regulations would be laid down specifically for hedge funds.
Globeandmail.com reports:

The Canadian Securities Administrators, that is the umbrella organization for Canada's provincial securities commissions, has more or less decided that hedge funds per se do not require their own separate regulatory regime. However, it has also been indicated that regulators are reviewing how some hedge fund-related products are sold to retail investors.

FSA to regulate hedge funds in London

The techniques used for hedge funds operating out of London have been worrying the Financial Services Authority.

To check the functioning of the industry, the FSA now intends to start regulating hedge funds and their managers. The details of this have been prepared after a consultation spread over a six-month period and will be revealed soon.

In the meanwhile a special hedge-fund unit has been set up to determine how the industry can be controlled better. This is being led by Andrew Shrimpton.

The hedge fund industry operating out of London has been estimated at £500bn. The Independent reports:

Currently, London hedge fund managers are being forced to register with the US Securities and Exchange Commission after a change to American law. To avoid any confusion, the regulators have indicated that hedge funds will have to comply with the strictest rules set down by either the FSA or SEC.

Biovail files suit against hedge funds

Biovail Corp., has filed a suit in New Jersey Superior Court, seeking $4.6 billion in damages from 22 defendants, mostly hedge funds and investment researchers. Biovail is one of Canada's largest drug maker and has alleged that the company has been made a target of a fraudulent disinformation campaign. Newsday.com reports:

The Mississauga, Ontario-based pharmaceutical company claims in its suit that the defendants sought to lower its share price for their own advantage. The suit alleges that since spring 2003 to the present, the defendants orchestrated so-called "bear attacks" against Biovail that artificially drove down the price of its stock to the hedge funds' advantage.

New Mexico to Become Hedge Fund Friendly

Although, in the current context New Mexico doesn't come to mind as a hedge fund hub, there is a strong possibility that it might in the times to come. The state Senate has unanimously passed a bill to eliminate the gross-receipts tax imposed on wholesale broker transactions and management fees used to operate a fund. Alternative Investments reports:

And this could be a big deal, as the tax rate ranges from 5.125% to 7.8125%., depending on the county and municipality. Sponsored by state Sen. Sue Wilson Beffort (R-Albuquerque) the bill – part of a tax-reduction plan proposed by Gov.

Hedge Funds Could Pay More

Good News! Well at least we can expect it to be so. Driven by the new hedge funds sector rule, leading hedge funds are likely to pay more in 2006 than they did in 2005 to comply with a new US government registration rule. Reuters reports:

"Roughly 95 percent of the hedge funds that we contacted said their costs had risen in 2005, and nearly half of the respondents expect their compliance costs to rise yet again," said Karan Sampson, director of hedge funds at financial services consulting firm Greenwich Associates.

Effort to improve EU framework for alternative investments

In order to improve the EU framework for alternative investment funds, the European Commission has created a group with hedge fund experts. This group will analyze the current organisation of the funds and will examine the difficulties that the operators in this field face. The HedgeWeek reports:

The experts will produce reports on their findings, which will be discussed with regulatory bodies and other stakeholders in order to test the implications of any recommendations from a broader public interest perspective. In compliance with the Commission decisions on the composition of these groups, experts have been selected on the basis of nominations received from 13 European-level associations.

EU Regulators Reject Hedge Fund Indices

The European Union financial market watchdogs - the Committee of European Securities Regulators - have reportedly rejected industry requests to allow pan-European Union funds to invest in hedge fund indices. The hedge funds indices are perceived as riskier than traditional assets such as stocks and bonds. Reuters reports:

"Given the complexities of hedge fund indices and the fact that they are still developing, CESR cannot recommend, at this stage, allowing hedge funds indices to be considered as financial indices for the eligibility of UCITS," CESR said in a statement.

European Union funds request to invest in hedge fund indices rejected

Hedge funds are usually considered riskier than traditional investment tools like stocks and bonds. Keeping this in mind, the request to allow European Union funds to invest in hedge fund indices has been rejected by EU financial market watchdogs. This decision was taken after the Committee of European Securities Regulators, that are a group of market watchdogs from the 25 European Union member states, examined the new assets that could be included in cross-border funds known as UCITS.

Hedge fund indices are an average of returns from a group of hedge funds. These are used to attract traditional investors such as institutions.

The decision largely stems from the complexities of hedge fund indices and the fact that they are still developing. The committee might reconsider its stand towards the end of this year.

Hedge funds to see better regulation

With the increasing popularity of hedge funds, there has also been an increase in the number of fraud cases that have are being reported. A large number of hedge fund managers have been charged for defrauding investors.

Keeping this in view, the SEC has now introduced a new rule. Under this, most hedge fund managers would need to register with the agency. As a result, the SEC examiners would be able to inspect and overlook the functioning of most hedge funds. Further the managers would also have to abide by an array of regulations including accounting and disclosure requirements.

The rule essentially applies only to those funds that allow investors to redeem their stakes within two years of purchasing them. With this move, this largely unregulated sector would also see some regulatory action.

SEC pushing for registration of Hedge Fund Managers

The Securities and Exchange Commission (SEC) staff has reportedly recommended that hedge-fund advisors register with federal authorities. Such a move would give regulators better insight into the largely unregulated US $600 billion hedge-fund industry. Although the staff report stops short of hinting at registration of hedge funds as an entity, there is bound to be industry rebound in terms of reaction and fund performance. Even if the registration bit doesn’t come out as feared, this is likely to impact the investor confidence and leave a dent in the new investment pouring into the hedge funds sector. So more than the issue at hand the propaganda around it is likely to cause more damage.

According to the estimates of the SEC staff, there are between 6,000 and 7,000 hedge funds in the United States, and only about one-third of hedge-fund advisers now register with the SEC voluntarily. The likely motive behind the drive for the SEC is to gain deeper insights into the strategies deployed by the hedge fund managers.

Phillip Goldstein’s Suit against SEC Rule on Hedge Funds

Phillip Goldstein is leading a closely watched effort to prevent the Securities and Exchange Commission from extensively expanding regulation of the trillion-dollar hedge-fund industry. He is reportedly contesting to overturn a new rule that would force hedge funds managing more than $25 million to be registered with the agency by February 1 2006 and undergo periodic audits. Latimes reports:

The SEC says it must get a handle on the freewheeling investment pools that are mushrooming in popularity among pension funds, endowments and wealthy individuals. The agency points to a spate of recent hedge-fund frauds, as well as the collective force the funds have on financial markets.

Hedge Funds Settle Fraud Case, Pay Hefty Amount

According to federal and state regulators, two Texas hedge funds, their investment adviser and two executives have reportedly given their consent to pay a combined US$37.7 million to settle charges of fraudulent market timing and late trading in mutual funds. Veras Capital Master Fund; VEY Partners Master Fund; their investment adviser, Veras Investment Partners LLC; and its managing members, Kevin Larson and James McBride, have agreed to settle without admitting or denying any of the wrong acts.

This case was filed jointly by the U.S. Securities and Exchange Commission, New York Attorney General Eliot Spitzer and the Commodities Futures Trading Commission. reuters reports:

The SEC said Veras used "deceptive techniques" when conducting inappropriate mutual fund trades from January 2002 through September 2003, including attempts to hide its true identity from mutual funds. "By using deceptive means to late trade and market time mutual funds, Veras profited illegally and at the expense of ordinary investors," Merri Jo Gillette, director of the SEC's Midwest Regional Office, said in a statement. An attorney for the hedge funds and the adviser declined to comment.

SEC Reportedly Gives Time Extension to Hedge funds

The U.S. Securities and Exchange Commission is seemingly giving hedge funds a little more time to prepare for a new rule that will allow the SEC to monitor the $1 trillion hedge fund industry more closely. It is being reported that the agency has allowed hedge funds to send their paperwork by early 2006. Thus, some hedge funds might be still able to meet the deadline for the regulation that will take effect on February 1st 2006. Under the new rule, about 1,900 of the loosely regulated industry's 8,000 funds will have to register with the Securities and Exchange Commission and allow SEC’s inspectors to periodically review their books. Reuters reports:

However, the SEC, in a 78-page letter sent to the American Bar Association, has reportedly outlined that if an adviser files its initial application for registration no later than January 9 2006, "the staff will endeavor to act upon the application by February 1, 2006." This letter has supposedly given a sigh of relief to many a hedge fund houses and investors, as it would allow them to get their documents in by the 9th of January 2006.

Hedge Funds Favored in SEC case

According to a US Appeals Court judge, the US Securities and Exchange Commission's plan to force hedge fund advisers to register with the agency does not hold good. Judge Harry Edwards, one of three judges involved in the lawsuit against the regulations, told SEC solicitor Jacob Stillman the agency had stretched the definition of "clients" to make the registration proposal work. afr.com reports:

While hedge funds have usually viewed themselves as the advisers' clients, the SEC wants the definition to include the funds' investors as well. That would require advisers to register with the agency, giving it more power to fight fraud in the $US1.1trillion ($1.5trillion) industry.

The FSA gives Hedge Funds a wider target audience, but with a hidden catch

The debate on the regulation aspect of the hedge funds industry never seems to cease. Since, the cynicism amongst the supporters of any such regulations on these funds does not seem to be in the near future. The Financial Services Authority (FSA), the UK financial watchdog, has played really very on this sticky wicket. The FSA announced that hedge funds as an investment option will now be open to institutions or rich individuals through their high-street bank and to have hedge fund holdings through their ISAs or Sipps. This would open up the lucrative market to a wider base of potential investors towards the hedge funds industry. However, this would come with a catch; the FSA has created a specialist unit that will monitor the hedge-fund managers trading behavior more closely. This would be quite a surreptitious step for the FSA towards regulation of the hedge funds industry. The Business Online.com Reports:

Currently, hedge funds, which are estimated to manage about $1 trillion (£560bn, E830bn), are regarded as an investment option open to institutions or rich individuals. Such a move could allow individuals to invest in hedge funds through their high-street bank and to have hedge fund holdings through their ISAs or Sipps.

Hedge Funds operations stalled due to Refco’s illness

Refco’s current instability could spell dooms day for the hedge funds in executing trades through the trade futures giant. A substantial portion of revenues of Refco are earned through the trade execution of securities and commodities are executed through Refco Capital. The news of the halt Refco Securities – group’s bread winning business, was leaked out from Refco's clearing bank, Depositary Trust Company, which stated that it is winding down its business. Following on the embattled group has begun winding down Refco Securities, a regulated brokerage which accounts for more than half of the group's gross revenues. In order to safeguard its interests, they have sent its CEO, Mr. Phillip Bennett, on paid vacation to search for audit trails, and frozen customer accounts for 15 days in another US subsidiary, Refco Capital Markets. Refco Securities is being closely monitored by the Securities and Exchange Commission (SEC) and the Financial Services Authority (FSA) for the company’s actions. Former SEC Chairman, Mr. Arthur Levitt will act as an adviser to help stabilise Refco, while, Goldman Sachs will assist on the rescue mission on an advisory basis. Black Enterprise.com Reports:

Refco Securities is regulated by US financial watchdog the Securities and Exchange Commission. It said today that the unit could not withdraw equity capital for 20 days. The aim is to try to protect money held by Refco from leaking out to any company investors or employees.

Loans recklessly disbursed by large banks to hedge funds

There seems to be a bubble build-up in the lending made by banks to hedge funds. As per some conservative estimates, a small group of big banks including JP Morgan Chase, Deutsche Bank, UBS and Credit Suisse have over $500bn at risk in hedge funds where the amount has been recklessly invested. It is believed that this has been borrowed by funds keen to "leverage" their investments, raising concerns over the level of lending, from the US Securities and Exchange Commission (SEC) and the Financial Services Authority (FSA) in London. Such lending’s by banks have garnered interest since, there are hedge funds going bust every month, Bayou to Wood River. Even Refco, a futures trader may soon file for bankruptcy, for funneling of funds by its CEO into his holding banks. The situation seems dreary for the hedge funds and banks, which may have to face tighter norms and regulations in the future. Independent Online Reports:

It has calculated that a small group of big banks have over $500bn at risk in hedge funds. These are believed to include JP Morgan Chase, Deutsche Bank, UBS and Credit Suisse. These companies refute suggestions that the exposure could be a problem. "All of our lending is secured," said a spokeswoman for a leading European bank.

Hedge fund started targeting the Middle East

The world economy going haywire due to rising prices across countries due to its linkages with the rising oil prices, however, one region in the world is not complaining, i.e. the Middle East and North Africa. And since many of these regions are oil producers they have benefited tremendously with the price rise of over 300 per cent in the last few quarters, where the price of oil on the NYMEX exchange has soared around $70 of per barrel. The nature of the business which was secretive and undisclosed in nature in now following international norms and practices prescribed in the developed countries. And in order to ride on the trend and attract westerners a new fund has commenced operations in the region. Mr. Khaled Abdel Majeed, founder of Mena Capital, which is based in London and Istanbul, has set up a hedge fund - Mena Admiral Fund, to trade stocks in the Middle Eastand North African regions. The Fund’s decision making process will surround across prevailing economic trends of the region, however it will buy or short sell stocks on its individual merit. The minimum investment required will be of $100,000, and will charge annual management fees of 2 per cent and performance fees of 20 per cent. Reuters Reports:

Many of the countries in the Middle East and North Africa are major producers of oil, the price of which has jumped nearly 300 percent since the September 9, 2001 attacks on U.S. cities. On Thursday it was trading around $61 a barrel. "There has been pressure from the United States on some of the region's countries to reform since 9/11," Abdel Majeed said.

Another hedge fund convicted by the SEC for improper investments

A hedge fund scandal has rocked the hedge fund industry, the new hedge fund to be convicted by the Securities and Exchange Commission (SEC) for false promises and its defrauding investors. The SEC announced the civil lawsuit against Mr. John Whittier, a former media and telecommunications analyst for investment firm Donaldson, Lufkin & Jenrette, and now the current hedge fund manager of Wood River Partners LP and Wood River Partners Offshore Ltd., based in San Francisco and Ketchum, Idaho. The court has appointed a receiver for the two funds seeking unspecified civil fines and restitution from Mr. Whittier and the funds. This episode has been a latest in the series of enforcement actions by the SEC in recent months against largely regulated hedge funds. The SEC has accused the company on its non-appointment of a genuine auditor to track the investments, and no such audit trails have been found. The most shocking aspect in this scandal was that the fund had invested about 65 per cent of its portfolio in a company by the name Endwave Corp., to acquire 45 per cent stake in it. The fund had invested in Endwave from 2002 through 2004 where the company’s stock had spiraled down from high of $55 in July, this to the recent low of $12.69 Oct 13, this year. The Mercury News Reports:

The Wood River funds were founded by Whittier, a former media and telecommunications analyst for investment firm Donaldson, Lufkin & Jenrette. The SEC said in its suit that from February 2003 to the present, investors put tens of millions of dollars in the funds based on promises of a broad diversity of investments and strict oversight by an auditor. But Whittier had no audits done and invested heavily in the stock of one small company, Endwave Corp., the agency alleged.

FSA pulls up Hedge Funds for their role in insider information through a loan syndicate

The Financial Services Authority (FSA) the UK equivalent of SEC stated that it is reviewing to develop a link between hedge funds' ability to manage price-sensitive information and to keep this behind so-called Chinese walls. The onus of responsibility has been handled to Mr. Tom Huertas head of wholesale bank regulation. The exercise was launched by the FSA in June to focus on the dangers of insider trading and market manipulation. The FSA determined one area - the price-sensitive information obtained by hedge funds from the buying of non-public bank loans, and use of any such information illegally to trade public securities such as bonds and shares. The FSA wanted to check the link between non-public information in connection with a loan syndicate for personal gains. However, the FSA discovered that hedge funds had obtained price-sensitive information from MyTravel and Jarvis, when both companies had flirted with bankruptcy without signing confidentiality agreements, which eventually prompted lenders to sell their loans to traders and hedge funds. Reuters Reports:

But to get that information and continue to trade in public share and bond markets they must have "Chinese walls" separating their public and loan traders. The suspicion among some market participants is that some hedge funds are physically too small to achieve this, sometimes operating out of a single room.

Hedge Funds accused for their role in shady PIPE transactions

Hedge funds are known to make their investments through various strategies to derive phenomenal returns which beat traditional market returns, and at times land up into trouble. This time the Hedge funds are ensnared by the Securities and Exchange Commission (SEC) for manipulative trading in the market for private stock placements by small companies. There are two Hedge Funds who have been issued a so-called Wells Notice by the SEC for their alleged role in the $14 billion-a-year market for private investments in public equity (PIPE). The SEC generated interested some 2 years back in PIPE dealings, however, the action gathered momentum when the SEC, in conjunction with the NASD, began a broad inquiry into the PIPEs market some 18 months back. The two regulators issued subpoenas and requests for documents to 20 brokerages houses as well as 10 hedge funds which are big PIPE investors in the past couple of years. However it may not be the first time that any hedge funds would have been convicted in any PIPE wrongdoings to date. The previous accused hedge funds are - HBK Investments role in PFSweb (Nasdaq: PFSW); former hedge fund manager Ms. Hilary Shane’s and Friedman Billings Ramsey’s (NYSE:  FBR) role in Compudyne (Nasdaq: CDCY); Knight Capital’s Deephaven asset management group over series of PIPE transactions from June 1999 through March 2004. TheStreet.com Reports:

This summer, Knight Capital (NITE:Nasdaq) disclosed that its Deephaven asset management group could face potential regulatory action over its trading in a series of PIPE deals from June 1999 through March 2004. Refco (RFX:NYSE) , meanwhile, has set aside $5 million to cover the cost of settling allegations that some of its brokers acted improperly in arranging trades for an investor in a PIPE transaction.

Philadelphia-based hedge funds wreck global havoc

Hedge funds are famously shrouded in secrecy and offshore tax havens to shelter their investments from public scrutiny. However, whenever any of the funds go bust the theory of regulating the funds creates a major furor. A recent blow-up of the troubled Philadelphia Alternative Asset Management Co., LLC has created international legal tangles. The U.S. District Judge Mr. John Padova appointed Mr. C. Clark Hodgson Jr., a partner in the law firm Stradley Ronon Stevens & Young, LLP this summer to manage the company's assets while the U.S. Commodity Futures Trading Commission investigated $179 million in estimated losses from the funds. A court-appointed receiver in Philadelphia is battling British investors; Cayman Island lawyers; and banks from France, Switzerland and the Netherlands over the left over corpus of $275 million which is invested since 2004 in three hedge funds run by the company from its former offices in King of Prussia and Toronto. And these paramount issues were not enough, the bankers and lenders in Europe gave the legal battle a new turn, by deviating the legal process to the Cayman Islandjurisdiction and appointing a new court appointed legal counsel. It is yet to be seen the outcome of this battle, but sure seems one to be watched out for. Philly.com Reports:

The European custodians were supported in their Cayman petition by two hedge-fund managers that had invested in Philadelphia Alternative Asset Management Co., MB Absolute Return Fund Ltd., which has an office in New York, and Britain-based Fortune Funds Ltd. MB has since dropped out of the proceeding. But in an affidavit supporting the Cayman petition, Fortune managing director Simon Hopkins detailed his concerns about the Philadelphia receiver.

New terror flag raised bar in London

There is a different terror situation which organizations in London which they are getting scared of. Though, this time its not the human bombs or the terrorists which rock the city, they are the infamous, hedge funds. They have been wrecking havoc in the financial world and have become the new terror raiders in the corporate world. This new industry has been racking up trade volumes on the London Stock exchange and now 40% of the share trades on the exchange. They are the new corporate raiders now. The hedge funds are now trying to make hostile bids for Marks & Spencer by backing Mr. Philip Green. Mr. Paul Myners, the Marks & Spencer chairman is now trying to put up a strong defense against the outsiders, when the company’s own board of directors changed tactics and sold of its financial services arm to HSBC to return £2.3 billion of cash to shareholders. The cash rich hedge funds rule the roost now; they are the new pirates of the millennium after the private equity buyout firms ruled in the 1980’s -90’s. Sunday Herald Online Reports:

Public markets such as the London Stock Exchange (LSE) should be as transparent a place as possible in which to do business. To ensure this, listed companies report their various ventures and dealings, and institutional funds do the same with their major holdings and transactions. The idea is that this gives investors enough information to make fairly educated decisions.

Alan Greenspan believes U.S. has become more matured

Federal Reserve Chairman Mr. Alan Greenspan said via satellite to the National Association of Business Economics annual meeting in Chicago, that advanced pricing options and other complex financial products have lowered the cost of hedging risks. The new risk dispersal instruments have enabled banks to bypass credit risk to insurance companies, re-insurers, pension funds, and hedge funds who are willing, at a price, to supply credit protection. The said that the economy has become more flexible, efficient, and a resilient financial system which that can mitigate most significant shocks like higher prices in oil and natural gas, and a near bubble burst which could happen in the near future like the housing industry. He also states that automatic market adjustments correct imbalances faster than administrative or policy actions so drastic regulators curbs need not be so effective. Lipper HedgeWorld Reports:

If we have attained a degree of flexibility that can mitigate most significant shocks—a proposition as yet not fully tested—the performance of the economy will be improved and the job of macroeconomic policymakers will be made much simpler," Mr. Greenspan said.

Read More: Greenspan: Economy More Flexible Partly Because of Hedge Funds

UK-based Man Group accused of having a hand in the collapse of Philadelphia Management

There are stains marked on Man Group’s, subsidiary Man Financial, London’s top Hedge Fund. Man which is managed by the CEO, Mr. Stanley Fink, a well-known personality has agreed to co-operate in any investigation. Man Financial has been accused by the Pennsylvania court for wrong dealing and a party to the collapse of Philadelphia Alternative Asset Management Company in June this year. The fund was managed by Mr. Paul Eustace, a well known icon in the hedge funds industry and had raised about $300m from international investors last year. Man Financial is accused by the receiver to the collapsed fund, Mr. Clark Hodgson of helping Mr. Eustace bloat his true investment performance through a secret account through UBS in Cayman Islands to hide losses. Mr. Thomas Gilmartin, a senior vice-president at Man Financial in New York, however named in the documents as Mr. Eustace's chief point of contact. It is to be seen the alleged role of Man Financial in the transaction, if they are charged it could give a strong blow to the reputation of Man Group. Guardian Unlimited Reports:

Documents filed in a Pennsylvania court this week accuse Man, the company that sponsors the Booker literary prize, of allowing losses of $175m (£100m) to be hidden from investors in a third-party hedge fund. The mechanism is claimed to be a secret and unauthorised account in the Cayman Islands known as the "50 account".

Read More: City firm faces £100m rogue trader action

The absconding Bayou Group founder may serve prison for 20 years

The incidents of the Stamford, Connecticut-based hedge fund, the Bayou Group had all the ingredients of a Hollywood Drama. The plot thickened with every aspect of the human-side – greed, lies, deceit, and finally confession. The conspiracy of the absconding Mr. Samuel Israel III, founder of the Bayou Group from the investors with their money was unraveled when he was convicted by Magistrate Judge Mr. George Yanthis of the U.S. District Court in White Plains. Along with him was Mr. Daniel Marino, the company's CFO who fake suicide note was discovered by the police from his apartment some time back. The two men are charged under three counts of felony for duping investors under: investor adviser fraud, mail fraud and conspiracy to commit fraud. The mail fraud the most serious of them carries a possible 20-year prison sentence, fines and restitution, for stating profits for years when the fund was never in black for the entire duration. The convicts had inflated their earnings and booked profits of $43 million when the incurred losses to the tune of $49 million in 2003, and took $29 million in commissions that year. And to top its all they also set-up a phony New York City accounting firm in 1999 called Richmond-Fairfield Associates for cooking up audit reports. This drama is turning sour for the founder and the CFO, after taking their investors for a ride. The Journal News.com Reports:

Ross Albert, a former federal prosecutor and now a securities lawyer in Atlanta, said it's near certain that Israel and Marino, will spend time in prison. "Generally the way people implicated in these types of frauds avoid prison, if at all, is by providing information on higher-ups," he said. "But as we've seen with Enron and WorldCom, that usually just gets you a discount (a shorter sentence), not a get out of jail free card."

Read More: Bayou officers plead guilty, face prison

European Pensions Funds stray away from Hedge Funds

The world over, pension funds are shifting their investments into hedge funds for a higher return on their investments. However, as per the report by Greenwich Associates the European pensions funds have chosen to shun the hedge funds. Their allocations to hedge funds and private equity have remained flat at about 1% of assets for each of the past three years. And the ever increasing danger of declining returns from the hedge funds have been point for the European pensions funds to restrain themselves from burning their fingers. The estimates noted that the promising dreams of delivering returns from Continental Europe have been fast eroding due to new accounting rules that seem to penalize risk-taking. Another reason can be attributed to mark-to-market accounting rules which ask European funds to “put on hold plans to shift their assets from government bonds to equities and other potentially higher-yielding investments”. The average European pension fund reported a solvency ratio of 95 cent compared to 105 per cent in 2003. While investments in Government bond were up to 29 per cent at the end of 2004, from 27 percent two years earlier, and investments in cash and equity were flat. IPE.com Reports:

The comments come in Greenwich’s 2005 report on the European investment management industry. It found that solvency ratios at Continental pension funds continued to deteriorate in 2005. This exacerbated the need for improved returns. Greenwich said that the average European pension fund reported a solvency ratio of 95%, compared to 105% in 2003.

Read More: European schemes shun hedge funds – Greenwich

SEC’s new mantra to reign in the hedge fund industry

The new chairman of the Securities and Exchange Commission Mr. Christopher Cox wants to tighten the noose of control around the trillion-dollar hedge fund industry by implementing a new law. However, in a recent interview, his first after becoming the apex body’s chairman, Cox agreed bring about radical changes in the rules governing hedge funds. In walking a tightrope between creating a suitable regulative framework to prevent fraudulent happenings and playing to the hedge fund gallery he promised to create an atmosphere which would be conducive to the overall development of the industry. He concern was well founded since the hedge fund industry in the US is witnessing an explosive growth and the industry watchdog has a lot of responsibility weighing on its shoulders, to keep a close watch in the transition period. Mr. Cox also spoke about other important topics such as SEC responsibility in executive compensation, the election of a mutual fund’s management by directors who are independent of the fund’s management and the SEC’s stance of adopting punitive measures against corporate wrongdoers. CNN Money.com Reports:

Cox, a 52-year-old former California congressman and onetime securities lawyer, succeeded William Donaldson, who resigned as SEC chairman two years before his term expired after running into opposition when he proposed the rule requiring hedge-fund advisers to register with the SEC.

Read More: SEC's Cox to enforce hedge fund rule

Pilkington seem to be a takeover target, run by hedge funds

Numerous events have been seen shaping in the industry which is bustling with activities. There are rumors floating around Pilkington, Britain's biggest glassmaker where it lost about 6% of its value with more than 34 million shares changing hand in a single day. It is believed that it was the handiwork of Harry Hedge Funds. It is also believed that the stupendous rise in the share price of Pilkington from 108p to 152 ½p from its low this year may have come to full stop. But the story behind it still shows a different picture, this volatility in the stock price is due to the rumor of being a take over target for an asking price of £2 billion. This has been double the bid price which was about two years back. Pilkington has been a target since the company is facing increased competition and rising costs. Although it seams uncertain when the stock price would be streamlined, but surely there is a lot of action one can expect at this counter for a couple of months. Black Enterprise.com Reports:

Pilkington has been buoyed by talk of a Pounds 2 billion bid. The group is probably one of the stock market's longest-running bid targets, having been tipped by City speculators every year for the past decade. The company's value has doubled in the past two years.

Read More: Hedge Funds in Frame As Pilks is Hit By Big Sell-Off

A step towards regulation of Hedge Funds in the UK

The UK’s Financial Services Authority (FSA) has appointed Mr. Andrew Shrimpton, Head of Asset Management to take charge of the six-strong hedge fund unit have a high impact on financial markets. Such proposal was made in June when the FSA in one of the two discussion papers stated that it would bring 15 and 25 high-impact hedge funds under closer scrutiny. This step has been taken by the FSA to make sure that the economy does not end up in financial disarray since these hedge funds trade on international financial markets which are large-scale borrowers and have close relationships with investment banks, which could be perfect recipe for a financial disaster. FSA stated that it is not considering any radical change in its supervision policy of the lightly-regulated investment vehicles. This is a implication of the strong statement in which FSA believed, which alleged that certain unnamed hedge funds in the UK were "testing the boundaries of acceptable practice with respect to insider trading and market manipulation". But , the Mr. John Tiner, Chief Executive Officer, FSA, demanded the regulator to deliver its promises of deregulation. FT.com Reports:

The FSA said yesterday that Andrew Shrimpton, its head of asset management, would lead the six-strong hedge fund unit. Regulators have focused on hedge funds because of the amount they trade on international financial markets, because they are large-scale borrowers and because they have close relationships with investment banks.

Read More: FSA names head of hedge funds unit

Bayou puts the reputation of the industry at stake

Another cautious outlook issued on one off incident of the scandal involving Mr. Samuel Israel III of Bayou Management LLC, Connecticut-based hedge fund, which guzzled investors money. Although the fund mentioned that it had $440 million on paper. But with Mr. Israel now absconding, the Connecticut State Attorney General seized at least $101 million which was linked to Bayou from its bank accounts in Wachovia Bank. However, experts state that this is a stray incident and should take precautions before making any investment in them. But the fact cannot be denied from that these funds shake up the management of the organizations the grease their operations to make them work at peak performance. But it cannot be ignored that these funds at times acquire unnecessary risks of using leverage i.e. adopting higher debt to equity ratios. Although one bad apple cannot be typecasted as the entire basket, hedge funds on the basis their ills of their adoption of techniques cannot be outcasted. However caution and alertness should be a prime principle of investing. AZCentral.com Reports:

Hedge funds also represent a financial equivalent of cutting-edge technology. They've attracted some of the top talent in the field, competing to bring out the next-generation creative product, in this case making the financial markets more efficient. While some hedge funds undoubtedly wreck companies by short-selling and other tactics, at least a few funds allow for a longer time horizon and the patience to build companies.

Read More: Beware: Dangers lurk in hedge funds

Electronic settlement systems suggested for Hedge Funds

It is an unsaid fact that Hedge Funds have been clumsy with the kind of paper work required by them to be done. There are mounting backlogs of unconfirmed trades and therefore Investment banks have threatened to close down credit derivatives with hedge funds who fail to clean up their back-office processes. This has been based on the meeting hosted this week between the leading industry bankers and the regulators at a meeting hosted by the New York Federal Reserve. The regulators have asked the banks to probe into a closer regulatory scrutiny. However, the bankers say shifting to improved settlement procedures and switching to electronic systems from the traditional settlements like fax would be costly for hedge funds to enter into the credit derivatives market. Since hedge funds often deal in a stock one day, then “assign,” or sell, their interest to a third party the next, thereby puzzling the back-office staff of the original counterparty tracking a paper trail. Although it is still to be calculated any such impact on the hedge funds, but whatever it may be it may be a step towards regulating these light regulated funds in the future. FT.com Reports:

Regulators encouraged the banks to take action in order to head off the threat of closer regulatory scrutiny. At the meeting, bankers suggested that improving settlement procedures and switching to electronic systems could become hedge funds’ cost of entry to the credit derivatives market. Many credit derivative transactions are bespoke, which has made it difficult to automate the settlement process as has been done in more standardised assets such as stocks and bonds. As a result, trades are still frequently settled by fax.

Read More: Hedge funds threatened over trading backlogs

White paper outlining compliance rules for hedge fund managers

SEI Investments, a provider of global asset management services has come up with a white paper outlining the top issues to be resolved by hedge fund managers so as to ensure compliance with the SEC hedge fund law which will be rolled out in February 2006. According to insiders the new SEC law will be more than a compliance requirement and would involve stricter rules being clamped across hedge fund operations. The new white paper involves a study of the cardinal rules for compliance and identification of areas requiring special attention. Issues addressed in the paper include those revolving around conflict of interest, development of fair and equitable trade allocation practices, timely resolution of trade errors etc. The governing body has also prescribed a new code of ethics which encompasses issues such as short selling, trading of restricted stock etc. The white paper was written to help hedge fund managers make a smooth transition from pre to post SEC ruling. The whiter paper gave a sneak peek into the new SEC ruling which the white paper claims would be much more than a paperwork requirement. Hedgeco.net Reports:

According to the White Paper, Hedge Funds must also develop trade allocation practices, which must be "fair and equitable" to each client over time. Consistency is important and exceptions, in the rare instances that they occur, should be documented and disclosed. They must also implement good policies for handling trade errors, and must avoid using soft dollars to compensate brokers for absorbing losses.

Read More: SEI Investments outlines top issues for Hedge Funds prior to registration

Hedge Funds provide haven for the rich and the fraudulent?

Greed is what keeps a man alive. The more he has the more he wants. And he also understands the principal, Higher the Risk, Higher the Return. So in order to materialize such returns the logical step, one can take is to invest ones earnings in Hedge Funds. Hedge funds deliver phenomenal returns by applying unconventional techniques, such as short-selling, or betting on falling markets to investing across sectors and geographies. Therefore Hedge Funds seam to be rational investment avenue for the wealthy to multiply their returns. And it has been studied that it has also become a shop floor for the rich and the fraudulent. As per the study undertaken by Securities and Exchange Commission (SEC), atleast 51 cases have been reported charging hedge fund advisers who have defrauded investors to the tune of more than $1 billion.  However it cannot be denied the role Hedge Funds have played in generating value for the investor, and there are few spoilt eggs in the basket who wants to spoil the entire basket. Courier Post Online Reports:

A growing number of frauds involve hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors, according to The Associated Press. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns.

Read More: INDUSTRY TRENDS: Hedge funds draw the rich, fraudulent

Hedge funds caught in the battle of regulation

The story has taken another twist in itself. After the forceful impact put forth against the Hedge Funds by the German and the Dutch authorities, it seams to be all in vain. Mr. Arthur Docters van Leeuwen, Chairman of the Committee of European Securities Regulators (CESR) quoted at the European Parliament's economic affairs committee. CESR is a European body of all national financial market regulators from the 25 European Union member states advising the EU on stabilizing EU financial rules. He believes that Hedge Funds are too minuscule to draw ones attention. They are quite diminutive do not have the potential to create havoc in the financial markets. But, it is yet to be seen if the regulation would ever be forced on the Hedge Funds and if so, would it be because of the diplomatic pressure or to save the individual investor from burning his fingers. Reuters Reports:

"There is still not a strong case for regulating hedge funds per se," Arthur Docters van Leeuwen, Chairman of the Committee of European Securities Regulators told the European Parliament's economic affairs committee. CESR is a pan-European body that comprises all national financial market regulators from the 25 European Union member states, and advises the European Commission on fleshing out EU financial rules.

Read More: No need to regulate hedge funds - senior regulator

Netherlands follows suit to Germany seeks regulating the Hedge Funds industry

The Netherlands with Germany is the latest member in the bandwagon to pass regulations for Hedge Funds operations. German Chancellor Mr. Gerhard Schroeder had tried in vain to win the support of the world leaders during the G8 summit in Scotland to regulate the global hedge fund industry. The Netherlands watchdog AFM wishes to regulate the Hedge Funds on four parameters:

§         Hedge funds give little or no historic or future information about its investment policies,

§         They fail to disclose the way of measuring or attributing performance,

§         Each Hedge Fund follows its own valuation principles for its portfolio, and

§         They have an opaque cost structure, which may mislead the customer.

These things are in the pipeline since the time Mr. William Donaldson was the SEC Chairman. But the ball is set to roll with the breakout of the Connecticut-based Bayou Hedge Fund Group last fortnight. The Netherlands currently has about 5 hedge funds, and additional 45 funds of hedge funds operating in the country. HedgeCo.Net Reports:

Last year the United States Securities and Exchange Commission under former Chairman William Donaldson passed new hedge fund laws for hedge funds operating in the United States. But the law stimulated significant opposition and controversy, to the point that it is the subject of a law suit by one New York based hedge fund manager. While time for the implementation of the US hedge fund laws is fastly approaching, it still remains unclear if the laws will become fully operational by early next year’s deadline.

Read More: Dutch Regulators worried about lack of Transparency of Hedge Funds

Schroeder blames Hedge Funds for oil price hike

Chancellor Gerhard Schroeder is yet again in the news for spearheading investigation on the phenomenal rise in oil futures. Schroeder believes that at least $18 per barrel is due to speculators playing in the market. A strong hand of hedge funds cannot be ruled out. Though the government is investigating the trend, it admits that such a task should be undertaken on an international level to make it truly worth wile. Chancellor Gerhard Schroeder has been for long associated with the movement for regulating the loosely regulated hedge fund market.

His attempts to get an international consensus on the issue failed when both UK and US refused to implement regulation at the G8 summit in Scotland earlier this year. Germany goes for elections this month and the prospects of Gerhard Schroeder's win are very bleak. Opinion polls indicate that Angela Merkel might be the new Chancellor. His views or stand on the regulation of hedge fund industry are not known. Hedgeco.net reports:

“Schroeder’s administration has tried in the past to introduce hedge fund regulations internationally, but was unsuccessful when it brought the issue before the G8 nations meeting in Scotland.”

Read More: German Government to investigate role of Hedge Funds in skyrocketing oil futures 

German Chancellor strikes again at the Hedge Funds, now on the oil prices issue

The German Chancellor, Mr. Gerhard Schroeder is back in the news on his fight against the Hedge Funds. This time it is against the hedge funds and speculators who have been bloating oil futures to record levels. According to the German Economy and Labor Minister Mr. Wolfgang Clement these players have artificially jacked up the oil prices at least $18 per barrel. And as per Mr. Schroeder this calls for urgent need for stringent regulation at an international level. However, this is not the first time the German Chancellor has raised his voice against the hedge funds. It all started when Germany’s Stock Exchange, Deutsche Bourse’s Chief, Mr. Werner Seifert was asked to tender his resignation, when it was discovered that hedge fund has foiled a bid for an international exchange takeover. He had later tried to create a buzz during the G8 meeting in Scotland, but did not draw convincing attention for an international regulation drafted for the regulation of the hedge funds. There are rumors that the Mr. Schroeder has made a constant effort to be in news to be re-elected in the September 18, German elections. However, the German sentiment is strong against him and believed the opposition candidate, Ms. Angela Merkel might win the election. Ms. Merkel had not taken a strict stand against the hedge funds regulation issue. HedgeCo.Net Reports:

The German Economy and Labor Minister Wolfgang Clement said, ``Like other experts, we think that at least $18 per barrel of the oil price is due to speculation and hedge funds play a role in it.'' Clement further said, ``We will look into the matter although it only makes sense if that happens on an international level.''

Read More: German Government to investigate role of Hedge Funds in skyrocketing oil futures

Can an investment go wrong when everything else about them is absolutely right?

The investors of the four Bayou funds are a disturbed lot these days. Money that was promised to be wired to their accounts in mid August is no where to be seen. Nor is the company talking or offering any clarification to its investors. The investors are surprised with this because the fund always looked and was professional all this time. There was absolutely nothing that could indicate that such a situation could arise. Now the Federal Bureau of Investigation has joined Connecticut banking officials and federal prosecutors who are all trying to sort out the matter. The fund manager Samuel Israel is a Wall Street veteran who always believed in keeping his investors informed.

He sent descriptive emails to the investors every week and conducted a conference call with his investors once a year. The funds performance was also impressive with the returns exceeding benchmarks. To top it all, the fund did not have a lock in period and also did not charge its investors the management fee and only charged them 20% on profits. The investors are still wondering what happened!! Nytimes.com reports:

“Investors who spoke about their involvement in the funds said they were surprised by recent events and that Bayou had none of the earmarks of a Ponzi scheme.”

Read More: A Hedge Fund Falls Off the Face of the Earth

United Airlines seeks the support of Hedge Funds and Private Equity Funds to stay afloat

United Airlines U.S. No. 2 airline has been through Chapter 11 protection for more than three years. The top four lenders have been quite reluctant on extending their financing to the cash strapped airline on account of rising fuel costs and the conflict between the labor and the management. United had even hinted that it would receive $2 billion in financing when it emerges from bankruptcy. The current loan term expires on September 1, which is 10th such grace period granted by the creditors. United had finalized its business plan in July this year and would file its reorganization plan in early September. However creditors can respond to its acceptance until early January next year. So to save its skin United Airlines is exploring wider avenues to seek financing from relatively new and unconventional players like in this market like the hedge funds or private equity firms as an effort to emerge out of bankruptcy. These players have bail out distressed airlines out of bankruptcy, like Cerberus Capital Management LP took a stake in Air Canada to help the company emerge from bankruptcy., whereas, Texas Pacific Group had bought a stake in America West in 1994 when that carrier was in Chapter 11 and helped it emerge from bankruptcy. Chicago Business Reports:

Private-equity firms and hedge funds are increasingly attractive options for United as rising fuel costs and labor turbulence heighten traditional lenders’ wariness of extending large loans to airlines, the source says. Obtaining equity financing would likely be cheaper for United, and tapping such funds wouldn’t add to the airline’s already heavy debt burden. However, the firms would demand an ownership stake, giving them a say in the carrier’s operations.

Read More: United eyeing hedge funds, private equity

Hedge Funds tend to loose its sheen but touch the $1 trillion mark

The term Hedge Fund resounds of a type on investment supposedly for the rich and the wealthy and giving them phenomenal return on their investments. But scenario has changed, now the minimum amount required to invest in a hedge fund has been reduced to just $25,000, or less investments in shares that invests in multiple hedge funds. As per Hedge Fund Research Inc., there existed about 600 hedge funds with and estimated $38 billion in assets in 1990 and has seen a phenomenal to around 8,000 hedge funds, with more than $1 trillion in assets. But the investment in hedge funds has dropped sharply from $24.6 billion in net new assets in to $11.6 billion in the second quarter this year. The returns are also a lackluster and are way of the mark. But his has not dejected investors and newer financial institutions like pension and endowment funds have been the part of the current hedge fund investment spree. Virginia Retirement System has invested approximately $1.6 billion accounting for nearly 4 per cent of its assets; Baltimore City Fire & Police Employees Retirement System has put an estimated $80 million into hedge funds last year, while the City of Baltimore Employee Retirement System has invested around $55 million representing nearly 5 percent of its assets. But there are new players like Maryland State Retirement and Pension System who do not prefer to take the risk considering the uncertainty involved by investing in them, since the 1998 horror stories of Long Term Capital Management’s collapse do not die soon.SFGate.com

Spencer acknowledged that the Baltimore pension is getting into hedge funds at a time when returns are flat. The average hedge fund is up about 4.1 percent so far this year, according to Hedge Fund Research, far below the 15- year average of around 15 percent. "We are hoping that it can't get worse," Spencer said of recent hedge fund performance.

Read More: Hedge funds' returns falling Main St. investors moving in may be disappointed

Cayman Islands Monetary Authority laughing its way to the bank on ever increasing surge on hedge funds registrations

There has been a major hype created about hedge funds around the world. Creating a cut throat competition to dole out better performance to its investors. Although there are reports indicating that hedge fund assets are shrinking and rates of growth curve seen flatting out. Money managers and investors, have rest their hopes on emerging markets such as Asia which has seen such a stupendous growth in the recent past. But despite the global slowdown in hedge fund returns during the first half of 2005, there was a 13 per cent increase in their number compared with in the first half of 2004. And the global hot favorite location with 80 per cent of all registered hedge funds is Cayman Islands Monetary Authority. The number of such registered hedge fund rose from 5,932 to 6,527 in the first half of 2005. With more than 795 new hedge funds registered in the Cayman Islands till end of June this year. HedgeCo.Net Reports:

While some hedge fund industry trackers continue to publish reports indicating that hedge fund assets are shrinking, the growth data from the Cayman Islands suggest that these reports may have been exaggerated. Mark Lewis, a partner at Walkers and joint head of the firm's investment team, told Bussinesswire, "It is clear that fund managers are under pressure to deliver results for their investors, but hedge funds are still an increasingly common part of most investment strategies."

Read More: Record number of new Hedge Funds launched in Cayman Islands

NASD for tighter control over funds of hedge funds

Hedge Fund industry has grown at a phenomenal rate but nothing much has been done to regulate its activities. Although SEC has imposed some basic regulations, but in the view of increasing spread of hedge funds, they seem to be highly inadequate. Recently brokerage watchdog NASD commented that the hedge funds which were previously only for the ultra rich and institutional investors, are now within the reach of not so rich individuals. These investors are primarily investing in funds of hedge funds where the initial sum to be invested is not too high. But these are investors who do not have a propensity for taking high risk and as such are quite vulnerable. As such they are quite a vulnerable lot and are easily swayed by false or misguiding claims. Last year Citigroup Global Markets was fined $250,000 for distributing inappropriate sales literature by NASD. This has been upheld as the largest enforcement action involving hedge funds. But in the view of the growth of the market, it is necessary to have more of these measures in order to ensure minimum cases of losses and fraud for the common man. Today.reuters.com reports:

“The SEC adopted the rule amid concern that hedge funds -- loosely regulated capital pools typically marketed to the wealthy and financial institutions -- were beginning to promote themselves to more moderate-income investors.”

Read More: US brokerages regulator eyes hedge fund sales

German Chancellor wants to tame the ferocious funds to save his seat.

The world over there has been a debate for stringent and stricter control systems against the Hedge Funds by the financial authorities across the Atlantic. Leading the pack is German Chancellor, Mr. Gerhard Schroeder who has been in the forefront to call for austere measures against the tactics used by the hedge funds and private equity firms. He argued that the tactics used by hedge funds and private equity firms such as “stripping of assets” which could be a potent killer for an economy. Under this tactic the hedge fund managers and private equity firms buy a company re-capitalize its financial structure to gain artificial returns, and then sell off the company. The new owner will repeat the process and strips the company even further in order to sell it to make a profit. Mr. Schroeder made a proposal for strict international regulations to win the support of the U.S. and the U.K. at the recent G8 meeting in Scotland. However in vain, in the backdrop of the predictions that Mr. Schroeder is racking up this diplomatic debate due to the fact of the weak support he has gathered for the coming presidential elections in Germany. HedgeCo.Net Reports:

Schroeder said some hedge fund managers and private equity firms were employing such tactics. He said, "When they buy, make tough cuts, then sell the company on to a second person, who then strips the company even further in order to sell just a little bit more, then I think it is justified to look more closely at what is going on." A few months ago, Schroeder made a proposal to subject the hedge fund industry to some strict international regulations. His proposals however failed to win the support of both the United States and the United Kingdom at the G8 meeting held in Scotland.

Read More: German Chancellor defends plans of tighter controls for Hedge Funds

Do hedge funds still pose a threat of blowing up?

Opinions seem to be divided in the question of impact of hedge funds on the financial market. While there are some who feel that the market has the potential for going all wrong, there are others who opine that the possibility is rare.  SEC chief Roel Campos mentioned to a gathering that people are placing high bets which if they go wrong can snowball into a catastrophe such as that experienced in 1998 with LTCM. The sheer size of bets is such that if anything goes wrong say in Russia, it could impact for example student loans back in the US. The speed with witch the industry has grown makes it quite vulnerable to a fall. Such fears have been growing in the minds of people. Now it is felt, that just because we have not witnessed a fall since 1998 does not imply immunity from a downfall in the future. Phillippe Bonnefoy, investment adviser to Cedar Partners mentioned recently that the chances of a looming disaster exist but the probability of the same happening in a current lower leverage environment is ‘slim’. Hedgeco.net reports:

“According to him, hedge funds no longer use much leverage in trading compared to the LTCM days. In addition to the tighter and stricter controls, which have been put in place by managers to help them control risks.”

Read More: Hedge Fund blowup speculations are exaggerated

Are Hedge Funds safe? – The debate continues

The sheer size of hedge funds today (over $1 trillion) has raised concerns over how safe they really are. The debate over the impact of hedge funds and their strategies on the lives of commoners and millionaires continues. While some advocate that the fuss over hedge fund’s likely collapse like that of Long Term Capital Management in 1998 is quite unnecessary. For one, they say, the funds are using much less leverage now than they were using 10 years back. Even the risk propensity of large and medium sized investors has reduced, who now do not expect returns like 40% of 1990s. Yes, the General Motor and Fords episode earlier this year did shake the industry a little and some large funds did loose money but the point to be noted here is – The market did not collapse. However some feel, that the exposures are not over yet. There might be others waiting in the pipeline which are not visible yet. Money.cnn.com reports:

“But it never came...a sign say some that the risks in hedge funds is overblown; it's only those investing in the hedge funds themselves (usually high net worth investors) that need to worry.”

Read More: Hedge funds: No fear?

Wyevale chairman under fire from hedge fund

The future of chairman of Wyevale Garden Centres, David Williams, seems to be in a soup after Wyevale’s largest shareholder Laxey Partners asked for his removal from the post. David Williams had been appointed as the chairman of Wyevale Garden Centres in February this year. Laxey Partners who own 18.7% of the company’s shares has been demanding his removal from the very beginning, claiming that Williams does not have a clue about anything in the company. Laxey has asked for a meeting with all the shareholders and has reportedly a backing of at least 34%. Noteworthy amongst those backing his move is serial investor Jack Petchey who currently holds 5% of the shares. ‘Wyevale Way’ is a strategic review which has been launched by the company recently in order to amongst other things, sell 28 of the 113 stores and return the cash to shareholders. The company claims to have already spent £2m on the review and on defending itself from the charges made by Laxey. Analysts too are not happy about the step taken by Laxey and say that all this will derail the progress of the changes underway.Telegraph.co.uk reports:

“Analysts were dismayed that Laxey was trying to derail these changes. Richard Ratner at Seymour Pierce said: "It is ridiculous. I don't understand where Laxey think they can get value out of the property." He said removing Mr Williams would be a "travesty."

Read More: Hedge fund clips away at Wyevale chairman

Christopher Cox to be new chief of Securities Exchange Commission

President Bush appointed Californian Congressman and fellow republican Christopher Cox to lead the Securities and Exchange Commission (SEC) recently. Cox has a reputation of striking a balance between driving businesses as well as being tough on Corporate Crime. There are speculations that he is most likely to focus on enforcing current regulations rather than introducing newer rules. As such he is very unlikely to undo any work of predecessor William Donaldson. His line of work is expected to be quite conservative and truly in line with the overall republican approach. Players who support the proposed fund regulation by SEC, are happy with his appointment. At the same time over-regulation does seem to be a possibility as Steve Holzman, who manages the $1.2 billion equity hedge fund Vantis Capital in Los Angeles, puts it. On the contrary, people like Phil Goldstein, a shareholder activist who runs Bulldog Investors, opposes hedge funds regulation so much so that he actually sued the SEC, alleging it exceeded its regulatory power. Money.cnn.com reports:

“On the pro-business front, Cox authored legislation in 1992 to end double taxes on dividends, which helped lead to President Bush's reduction of the dividend tax in 2003. He also supported legislation that would make it tougher for investors to sue for securities fraud, and voted for big tax cuts for corporations and wealthy individuals.”

Read More: Hedge funds cheering for Cox.

SEC observes quantum rise in leverage hedge funds

The Securities and Exchange Commission (SEC) has been observing that there has been a quantum rise in leverage hedge funds, but has also made its intent clear by stating that it did not wish to regulate the industry. The industry lately has been thriving on a lot of borrowed money. Leverage technique, as it is commonly called, is used to enhance bets in the markets. Some funds borrow up to two or three times its capital, in order to maximize their return. This can sometimes go horribly wrong and lead to disaster like that witnessed by collapse of Long Term Capital Management in 1998 after Russia’s debt default. Roel C. Campos, SEC commissioner, told a Managed Funds Association symposium organized recently, that although the industry was under scrutiny, they were not contemplating regulating it. Commenting on the situation of increased borrowed funds, managers at Reuters Hedge Fund Summit held in London last month said that they saw nothing to confirm that funds were borrowing heavily to boost returns. None the less, some basic rules are in place – for example in October last year SEC notified the hedge funds that any fund manager with 15 or more U.S. investors and managing assets of $30 million or above has to register with the agency from 1st Feb. 2006. Money.cnn.com reports:

“In October last year the SEC ruled that any fund manager with 15 or more U.S. investors and more than $30 million in assets must register with the agency starting on Feb. 1, 2006, to broaden its supervision of the sector. “

Read More: SEC warns of hedge fund risks, but doesn't want to regulate .

No regulations for Hedge Funds in the near future for EU

Hedge funds due to their ability to generate quick and high returns have caught the attention of investors the world over. The quantum of assets under management of hedge funds has grown exponentially in the last few years. As such, worries about a financial market catastrophe in the future are inevitable. Several politicians have been lobbying for regulating the industry in order to bring in transparency and a general code of conduct. German Chancellor Gerhard Schröder particularly is seeking international consensus on regulating the booming hedge fund industry. However Charlie McCreevy, EU internal market commissioner, said that he had no plans of imposing regulations on the industry. However he said that he does plan to improve the overall European investment fund market, which has over 5 trillion euros under investment. Even Washington has opposed the move for setting ‘minimum international standards’ for the industry. Dw-world.de reports:

“EU internal market commissioner Charlie McCreevy said Thursday he had no plans for regulating the booming hedge fund industry amid pressure from Germany for tighter rules. "I do not intend regulating in the hedge fund area in the immediate future, if at all,"

Read More: EU Plans No New Hedge Fund Regulations |.

Hedge Funds - McCreevy unveils green paper on EU Asset Industry

EU Commissioner McCreevy recently unveiled a policy discussion document (green paper) on EU Asset Industry. He said that there is no need for a legislative overhaul at this stage for the Hedge Funds. He added that if at all hedge funds are imposing a threat to the financial system, it is the duty of Central Banks and National Regulators to deal with them. He stressed upon the point that the current legislations should emphasize on making the laws work better for the countries and not waste it on formulating newer ones which are just not necessary. He also showed his disagreement to German Chancellor Gerhard Schroeder and others who are busy promoting the cause of regulating hedge fund industry. This row over regulation started primarily after takeover bid by the Deutsche Boerse for the London Stock Exchange was foiled by fund managers. McCreevy suggested that the EU fund legislation should be known as UCITS (Undertakings for Collective Investments in Transferable Securities) directive. UCITS are basically investments funds which are registered and are authorized to operate across borders. Reuters.co.uk reports:

“If hedge funds are a risk to the financial system, then central banks and national regulators should deal with them, he said. “

Read More: EU funds face quick fixes rather than big overhaul.

Asian Hedge Funds quicker to register than their US counterparts

According to The Wall Street Journal, investment experts feel that Hedge Fund industry in Asia is stable and upbeat about the future. The total number of Asia Pacific hedge funds stands at 533 and expected to touch 600 mark by the end of the year. The region currently manages over $60 billion of assets. This figure is also likely to increase by 42% to close at $85 billion by the end of 2005. According to the report, Asian investors have been early adopters of hedge fund strategies. And in anticipation of growth and its fallouts incase of unregulation and lack of transparency, the region has already made it mandatory for hedge funds to register themselves with the regulators. Point to note here is that this development precedes the US initiative of mandatory registration of hedge funds managing assets for over 15 US investors and/or handling assets over $25 million from February of next year. Despite the forecasted growth in the region and the major debate over regulation, investment experts do not foresee the need for regulating hedge funds in Asia. Investorsoffshore.com reports:

“In particular, the report suggested, Asian financial regulators caught on to the need for hedge funds to register more quickly than their US counterparts - hedge funds in the United States with more than 15 US clients or with at least $25 million in assets will only be obliged to register with the SEC from February of next year.”

Read more: Asian Hedge Fund Regulation Unlikely To Become Tougher, Experts Suggest .

Rising redemptions lead to fall of share prices for Man group

Shares of Man group fell on the news that there was massive redemption underway for the world’s largest fund manager. Between April and June, the group has seen sales of $1.6 million. In the same period, redemptions were made which were worth $1.2 billion. This figure includes redemptions made by private investors to the tune of $700 million. This level of redemption is definitely higher than has been seen lately in the market, commented Geoff Miller, an analyst at Bridgewell Securities. MGS Diversified opportunities which is the most recent launch of Man, was able to raise $200 million. However these figures were not included in the figures of the first quarter. Man’s stock lost 3.2 percent and is regarded as the biggest loser on the FTSE100. The Man group however remains positive even in this situation and gave a statement that the overall performance of the group remains on the positive side and that its core AHL managed futures fund was up by 5 percent. Hedgefundsworld.com reports:

“Man Group, the world's largest hedge fund manager are facing rising redemptions and disappointment over the funds raised by its latest product launch, Reuters reports. Shares in Man Group fell this morning on the back of this information.”

Read More: Shares in Man Group fall amid reports of redemptions

Hedge Funds industry due for shakeout

The $1 trillion Hedge Fund industry is moving towards a shakeout. KPMG and research firm Create said that because of inflows of big funds in the industry, charges are more likely to be pushed down and the industry is due to be consolidated in the next three years. Recent times have seen a boom in the industry due to the inherent ability to show returns in a bear market. But the current clear market trends devoid of volatility have led to some wearing off of the shine from the these funds. Investors have gotten used to seeing double digit returns but the same seems unlikely for long. Due to inconsistent performance, in the last few months, some firms like Bailey Coates have been forced to close down a number of Hedge funds including its US operations. This Hedge Fund sector, according to one estimate, has around 8000 firms operating in it. The quantum of money pouring into these funds is likely commoditise the sector thereby making them less lucrative investment options.  Reuter.co.uk reports:

“These free-wheeling portfolios have boomed in recent years due to their ability to make returns in bear markets, but the pace of expansion is likely to ease off as performance slows down, the report said."

Read More: Hedge funds to consolidate over next three years

Oil market comes to the rescue of loss making Hedge Funds

Much hedge fund activity has been seen in the oil market in the last one month. Perception is that hedge funds are being pulled towards the oil market in order to cover up the losses incurred in the stock market. Fluctuations of the U.S. dollar and drop in credit ratings of General Motors and Ford are seen as major culprits in the hedge funds making losses lately. Slight recovery was observed after the funds entered the oil market. Therefore the international oil market has seen a phenomenal rise in speculative funds. Just to give an idea, in June, the net long positions increased by over 15 times. Analysts feel that the oil will continue to attract speculative funds. Wall Street Journal went on to state that these days Oil is being traded more or less like stocks. English.donga.com reports:

“Experts are predicting that hedge funds will remain in the oil market for a while as it could be difficult for them to find an investment target with a higher profitability than oil futures this year"

Read More: Hedge Funds Aggravate Oil Price Hikes

Banks increase exposure to Hedge Funds

There has been a dramatic increase in the assets managed by hedge funds. The banking industry has also increased its exposure to the funds. This observation was made by Standard and Poors’s recently. Bank for International Settlements in Basel Switzerland also displayed concern on the trend last week. BIS mentioned that due to the rapid growth of assets under management and escalating competition it is prudent to play safe and not to invest aggressively in the funds. All this coupled with the fact that the Hedge Fund industry is not very transparent right now, makes is prone to risk. The recent downfall of the Connecticut, based hedge fund manager, Long Term Capital Management bears witness to this. But several industry analysts feel that a lot has changed since LTCM disaster and numerous checks have been placed to avert such an incident in the future.  Hedgeco.com reports:

“According to BIS, while altogether banks had strengthened controls around hedge funds, however their exposure levels to Hedge investment portfolios were on the rise.”

Read More: Rapid Growth of Hedge Funds increases financial market risks-S&P

Global need for regulating Hedge Funds

The recent debate on need for regulations for the $1 trillion Hedge Fund industry touched new heights. Much has been said about the need for transparency and disclosure in the recent past. Last week European Central Bank President Jean- Claude Trichet urged Europe to cooperate with US in order to find ways and means to regulate hedge funds. He emphasized on the requirement for a ‘transatlantic’ consensus on the same between the two giants. Of late the mammoth growth of the hedge fund industry has spurred comments highlighting this need from both politicians as well as from central bankers across continents. German Chancellor Gerhard Schroeder had also voiced his concern over the same and asked that the industry should operate on regulations that would provide some immunity to the investors. Though the requirement for regulation has been seen by various parties, it has also been made clear that the formulation of regulations by regulators should be tackled ‘with a sense of proportion’. Amidst all this there are some parties like Swiss central bank that feel that the funds should not be regulated as they do not pose a threat to the financial stability of the system. Bloomberg.com reports:

“Given the global nature of the hedge fund industry, a regulatory response can only be given on the basis of a solid international consensus and in particular a transatlantic consensus,'' said Trichet in a speech today at a financial conference in Paris.

Read More: Trichet urges Europe, US on hedge funds (update1).

EU Contemplates New Rules For Hedge Funds

Of late there has been a heightened debate on the need for new regulations for managing hedge funds in Europe.  It has been observed that more and more banks are exposing themselves to hedge funds without really knowing what the funds are doing.  This critical observation has been made by Bank of International Settlements, the world's top central bank.  German Chancellor Cerhard Schroeder would like that the G8 summit that is scheduled in Scotland in early July consider creating new rules for hedge funds.  However, industry observers feel that though ultimately changes need to be made in the current legislature, there is really no need to take hurried steps.  As it is, Hedge funds do not form part of the present EU regulatory framework.  Therefore on July 14, the commission is only likely to propose a study group to assess the regulations of Hedge Funds and their likely impact of financial stability.  Thereafter the commission will make the paper public in October.  Reuter.co.uk reports:

"The Commission's green paper or consultation document will not make a case for major legislation for the funds sector generally, but to work within current laws."

Read More: Hedge funds seen escaping new EU rules for now

Sale of Hedge Funds Allowed in Spain

Due to increased pressure from the investor community, Spain has finally decided to authorize domestic sales of Hedge funds.  Heightened concern in this regard comes from their experience of Madrid-based brokerage collapse in 2001 where the investors had to incur losses of more than $100 million.  Keeping the past experience in mind, even while authorizing sale of hedge funds, some cautions have been put into place.  The funds have to publish trading prices at least once in six months.  Also, an initial investment of $50,000 to $60,000 by the funds will also be made mandatory under the current plan.  Apart from this, it is also stated that the fund managers must be based in one of the 30 mations in the Organization for Economic Cooperation and Development.  This is a list of market oriented countries.  These rules apply to hedge funds and funds of hedge funds thereby allowing investments using borrowed money equal to five times their worth. International Herald Tribune reports:

"Spain is preparing to let domestic concerns enter the $1 trillion business 19 months after Parliament approved a law permitting hedge funds."

Read More: Spain to permit domestic sales of hedge funds

Germans want more Hedge Fund transparency-G8

The German Chancellor Schroeder is determined to bring up the question of harmonizing the rules for more transparency and tighter controls on hedge funds, at the G8 summit this week.  The G 8 summit is being held at Gleneagles Scotland between July 6th to 8th. Worried by lackluster opinion polls at home Schroeder whose SDP party will be facing elections in autumn will make a plea for more transparency in hedge fund transaction rules. Trying to emphasize its commitment to a 'social market economy' by taking a stand against all excessive forms of capitalism the SDP is keen to reduce voter dissatisfaction and stay in power. Frustrating and painful welfare cuts have seen erosion in popular support and the SDP wants to be seen to be doing something about it.   That Berline was not totally against the market is evident as it was a social democrat government that first introduced hedge funds in Germany.  Even so Schroeder and his cabinet would like the G8 to debate on the issue of tighter controls, without making it a priority issue. There will, apparently, also be no statement made. Reuters reports:

"The position of the Chancellor will go in the direction that we also want more transparency here," also that "We don't think that hedge funds are something evil," Pfaffenbach said, but added hedge funds would not be a priority issue at the summit due to be held at Gleneagles, Scotland between July 6-8.

Read More:  G8 to skip statement on hedge funds