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February 08, 2007

Presidential Ties to Hedge Funds

-- Pushpa Sathish, Staff Writer

If you remember him as I do, it would be for the stellar role he played in handling the disastrous consequences of that fateful day in September, 2001 when a terrorist outfit wreaked havoc on the United States. Now, Rudy W. Guiliani is making news for an altogether different reason.

The former mayor of New York City is in the limelight as he contemplates running for president next year – especially because of the large contributions that are pouring from hedge funds to his campaign fund. T. Boone Pickens and Paul Tudor Jones II stand out in the list of contributors – they run the hedge funds BP Capital Management and Tudor Investment Corporation respectively and were named by Alpha Magazine as the second and fifth highest earners among hedge fund managers.

Besides these inflows, there have been others from the employees of BP Capital Management and Elliot Associates – the latter, a hedge fund managed by Paul E. Singer, a staunch supporter of Giuliani.

Hedge Funds’ Cup of Woes Overflows

-- Pushpa Sathish, Staff Writer

January has not been a good month for a few hedge funds. Red Kite lost more than 20 percent on bad bets on copper – the fund is now trying to deal with the investors who are knocking down its doors in an attempt to redeem their investments. The two-year old fund which had a strong showing last year is pinning its hopes on the 45-day notice that investors are supposed to provide before they pull their money out. The lock-out period was increased from 15 to 45 – perhaps in lieu of what was in store at the fund?

Meanwhile, across the ocean in the United Kingdom, things are not too good at the offices of SemperMacro. The hedge fund, beset by a cascade of troubles including a 16 percent loss last year and a subsequent withdrawal of funds by investors, is in the process of cutting back on its staff. SemperMacro, which was set up by a former Goldman Sachs employee and a former BBC chairman, plunged to $500 million from $1.5 billion after an investor redemption in December 2006.

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.

Longer Lives for Hedge Funds

-- Pushpa Sathish, Staff Writer

We’ve read and heard a lot about the relatively short lifespan of hedge funds – they average three years in existence before closing up shop. But that trend is slowly fading away, says hedge fund consultant and index provider Hennessee Group. The attrition rate for hedge funds, that is, the rate at which they are liquidated, is an average of 5.2 percent since 1999. The last two years have seen a significant decrease in the number of hedge funds that wound up due to poor performance or an exodus of staff and managers – 6.2 percent in 2004, 5.4 in 2005, and 5.1 in 2006.

Hedge funds are opening their doors to institutional money, a move that will generate larger funds with more expensive infrastructure. The very existence of these influential funds will make it difficult for startup and smaller funds to survive, which means that fewer people will be rushing to launch their own funds without the necessary clout to endure the stiff competition, according to Hennessee.

Conclusion – The attrition statistics do not mean that the failure rate in the hedge fund world is much higher than that in other industries – Hennessee’s managing principal Charles Gradante sums up the situation.

Make Sure you Share Share-Purchase Information

-- Pushpa Sathish, Staff Writer

Buying the majority of shares in a company, hiding the fact from the SEC, not informing your investors about the beneficial interest due to them, being involved in a securities fraud – these are misdemeanors that will get you into heaps of trouble, a fact that John H. Whittier will attest to.

The former head of the now defunct hedge fund Wood River Capital Management LLC was indicted on the charges of cheating investors to the tune of $88 million in Oct 2005. He’s being accused of securities fraud and failure to disclose beneficial interest in a publicly traded security - of 5 percent in one and 10 percent in two others.

Whittier, who purchased 80 percent of wireless communications company EndWave Corp., failed to disclose ownership of the same – which is why he is being charged with attempting to con investors in the hedge funds Wood River Partners LP and Wood Rivers Partners Offshore Ltd.

His arraignment is scheduled for Feb 8.

February 02, 2007

SLI CEO Slams Hedge Fund Strategies

-- Pushpa Sathish, Staff Writer

Fund managers have come in for criticism from Keith Skeoch, CEO at Standard Life Investment (SLI), one of the biggest fund managers in the United Kingdom, for their increased usage of shorting and other hedge fund strategies. Skeoch warned of the dangers lurking around the corner when fund managers bet on the company’s stock falling even as the board was constructively talking of succession. Shorting can bring down the price of a company’s stock, an occurrence that is not good for long-term investors.

The censure comes following other large fund management houses like Barclays Global Investors, Henderson Global Investors, Gartmore, Morley Fund Management, Legal & General Investment Management, and Threadneedle Investments increasing their use of long-short strategies that are typical of hedge funds. Business Times Online reports:

Mr Skeoch said that increased use of shorting could cause conflicts within a business, particularly a large one that conducted hundreds of trades each day. “If you have one fund manager making a decision to short and one deciding to go long, which trade takes precedence?”

Funds of Hedge Funds Head to London

-- Pushpa Sathish, Staff Writer

It’s a reversal of sorts – while the rich and famous are steering clear of hedge funds following Amaranth’s collapse, pension funds are flocking to invest their millions in funds of hedge funds, an option associated with a lower risk than hedge funds. The new brand of investors has pushed London to the top of the fund of hedge funds destination list – the British capital has overtaken Zurich as the favorite listing ground for these investment vehicles.

According to data from ABN AMRO, London went past Zurich in January, and as of December 2006, had £3 billion in listed funds of hedge funds, a figure that is more than twice that of Zurich. Mark James, director of alternative investments at ABN, attributes London’s surging lead to two factors - the decline in the support offered by local Swiss banks to funds listed in Zurich, and the innovative systems in London that manage the discount at which the shares trade to the value of the fund’s assets. FT reports:

Funds of hedge funds are closed-end companies similar to investment trusts, which issue shares then invest the proceeds in a portfolio of hedge funds. They appeal to investors looking to diversify the risk of owning a single hedge fund and offer regulatory and tax advantages to some investors, such as private individuals and life assurers.

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.

Teachers and Hedge Funds – The Pension Connection

-- Pushpa Sathish, Staff Writer

Oh how quickly we forget! The ashes of Amaranth are not yet cold, and the San Diego County public employees’ pension has not yet healed fingers burnt in the collapse. But that has not deterred another state-run pension from throwing its lot with the hedge fund industry. Rising benefits and miserly funding from the state have pushed the $39 billion Teachers’ Retirement System in Illinois to seek high returns from the high risk world of hedge funds.

Teachers’ is not learning from the misfortunes of the $7.5 billion pension for the public employees of San Diego County – the fund invested $175 million in Amaranth and lost more than $85 million in under a month. It has recouped half the amount since then, but the fact remains that hedge funds are probably the riskiest investment vehicles in the financial world, especially for a bunch of school teachers.

Teachers’ may have been forced to jump on the hedge fund bandwagon tempted by the promised high returns, because it holds just 62 percent of the money needed to meet its obligations. But does it know that its choices are limited? Hedge funds are extremely secretive about their operations, and taking on public pensions as clients will force them to reveal information as per the Freedom of Information Act. They are also bound by state laws that restrict the scope of their investments – for example, an Illinois statute bans investments in Sudan.

The pension is not worried though – It understands and is well-equipped to monitor the risks involved, and is going in with “eyes wide open,” according to spokeswoman Eva Goltermann.

No Freedom From Fraud For Hedge Funds

-- Pushpa Sathish, Staff Writer

Hedge fund executives fund plane trips and expensive cars using investors’ money – this is the sort of headline that gives the entire hedge fund industry a negative tinge; this is why the U.S Securities and Exchange Commission (SEC) is stepping up its efforts to infuse some transparency in the operations of these secretive agencies; and this is why hedge funds are not the average investor’s cup of tea.

Bret Grebow and Robert Massimi, former trader and manager of the now defunct fund HMC International, played around with investors’ money as if it was their own, literally. While one used funds from new investors to meet redemptions and pay out non-existent profits to other investors, the other went a step further – he impressed his friends by flying them out to Houston on a Learjet for a Super Bowl game and also treated himself to a brand new Lamborghini, all with money fished out from investors’ pockets.

Grebow learned too late that’s there no free ride, especially not in a Learjet or a Lamborghini; he has to cough up not only a $120,000 civil penalty, but also $3 million that he stole. Massimi also faces the same civil penalty, but he gets off lighter than his partner-in-crime; he owes investors only $1.3 million. Considering the amount raised to fund this fraud - $12.9 million from 80 investors – this punishment seems a bit tame.

The former traders, who have been banned from working for investment advisors, settled the charges without admitting that they stole the money or used it fraudulently.