HEDGE FUND NEWS
@ Thu 01 March 2007 : GMT

FINTAG COMMENT

I am pretty grumpy today and also very rude about certain people.

We look at the parallels of the markets vis-a-vis cocaine (the come down will happen), the SEC dithering, another Hedge Fund of Fund's doing an IPO, a Pirate Equity guru confesses all, another Pirate Equity guru spouts methane and a mega fund is launched in Asia.

Ketchup and wet dreams are also covered.

Interesting news that I do not cover, as its outside my remit, include Iraq being compared to Vietnam and San Francisco suffering a landslide.

Words I will try not to use today include:

Wobble
Slide
Panic
Global Sell Off
Nervousness
Sweaty Palms
Correction
Shivers
Running for Cover
Phones not answered
Computer glitch
Squeeze
Liquidity Crunch
Tremors
Breather

Lucky Dip News

What the Market Is Telling Us ... (businessweek)

F&C FoHF to IPO ... (ft)

Hedge fund assets swell, mainly due to performance ... (reuters)

DJ Common Hedge Fund Strategy Didn't Attract Money Last Year ... (via dowjones)

Ajay Kapur Quits Citigroup; Plans Hedge Fund In Smoggy Hong Kong... (bloomberg)

Hennessee Research On Inflows to Hedge Funds 2006 (pdf)

South Africa Hedge Fund Index up ... (sundaytimes)

Traders Turn to Options to Hedge Risk of Yen Rally ... (bloomberg)

Help for the big Guy ...(ft)

EU Clears BAWAG Sale to Cerberus Group ... (yahoo)

Investor PGGM shares TCI concern on ABN's strategy ... (reuters)

Taming China's Dragon Market ... (time)

Currency Hedge Funds' Roundtable 2007 Outlook ... (dailyii)

DON'T PANIC

Pessimists' time will come (guardian)
A trend is only a trend if its direction is obvious when standing six feet away from the graph. One of the City's top chart analysts used to swear by this principle, and you can understand why. The story of the FTSE 100 over the past 15 years can be simplified like this: in the 1990s, with a couple of wobbles called 1994 and 1998, the market went up; from 2000 to March 2003, it went down; since then, it's gone up.

It follows that there have only been two moments in the past 15 years when it has been correct to pronounce a major change in the market's direction - 2000 and 2003. It's a useful fact to remember when, as now, confidence appears to evaporate. Statistically, even falls like Wall Street's 400-plus point drop on Tuesday usually turn out to look less dramatic once a little time has passed.

Call it the rhythm of the markets; many fund managers lined up yesterday to make the "don't panic" argument. It is perfectly sensible advice, and New Star's Stephen Whittaker was only expressing the consensus view when he said the FTSE 100 is likely to end this year near the 7000 mark, its all-time high.

It is interesting, though, that hedge fund managers, as opposed to long-only investors, appear far less sanguine. Investment bank Morgan Stanley published research this week based on interviews with 90 clients in 12 cities in the US and Europe. The focus was on emerging markets, and the bank reported that long-only investors "mainly had a benign view of the global economy" whereas the global macro crew - the people who take a lofty view of the world and try to anticipate major shifts - were "much more sceptical".

Many of the global macro managers said they were actively going short of commodities and commodity-related shares, assets likely to be among the first to suffer in any global slowdown.

One can hear an echo here of the debate that dominated the last few years of the dotcom bubble. At the end of the 1990s, it was the global macro players who were saying dotcom valuations were absurd, while everybody else swallowed the guff about a new paradigm. Famously, Julian Robertson's Tiger hedge fund lost billions by betting too early on a bust. He gave up the fight in March 2000, the precise top of technology valuations, and liquidated his shrunken fund.

The moral of the Tiger tale was that being right about the markets is only half the battle; your timing must also be good. The current crop of hedge fund managers know that too, but they still think the time is right to bet more aggressively on a slowdown. One day they'll be right.

KETCHUP

Credit for Heinz growth spread around (pittsburghlive)
Nine months of solid economic growth at the H.J. Heinz Co., with net income increasing nearly 13 percent, and total sales climbing almost 10 percent, begs the question:

Is it Heinz, or is it Nelson Peltz? Analysts and industry watchers say the positive results at Heinz are a combination of the two.

Nearly one year ago, Heinz was notified by the billionaire and activist investor that he and some investor friends were buying into Heinz, and that they were looking for more earnings from the iconic Pittsburgh company.

Thus followed six months of what industry watchers described as a nasty proxy fight, with management and dissidents each presenting eerily similar growth plans for Heinz, both sides calling the other names, and both promising shareholders a vote for them meant growth and prosperity. Peltz and fellow dissident Michael Weinstein in August were elected to the Heinz board.

Heinz is doing everything management promised in its Superior Value & Growth Plan, analysts said. On Tuesday, for example, the company reported net income jumped 88 percent in the three-month period ended Jan. 31. The food giant's net income totaled more than $219 million, or 66 cents a share, up from $116.6 million, or 35 cents a share, in the year-earlier quarter. Net income from one year ago was impacted by a $16.6 million loss from discontinued operations.

Worldwide sales at Heinz rose 5 percent to $2.3 billion from sales in the comparable period a year ago of $2.2 billion.

Heinz shares closed at $45.86, down $1.15 a share.

"We originally discussed our growth plan with analysts in September 2005, we repackaged it for June 2006 release," said Heinz spokesman Michael Mullen yesterday. "We continue to execute our plan."

"The company really had been stepping up with a clear, coherent plan to increase sales and earnings before Peltz entered the picture," said analyst Alexia Howard, who follows Heinz for Sanford Bernstein, New York. "However, Peltz brought a sense of urgency to the situation -- he put the onus on company management to stretch themselves."

"Peltz lit a fire under management to execute its plan," said Craig Hutson, a senior investment grade analyst who follows Heinz for independent bond research firm Gimme Credit LLC, New York. "His presence keeps the pressure on to meet goals."

"We are pleased with our momentum," said Art Winkleblack, Heinz's chief financial officer, during a conference call yesterday with analysts.

Winkleblack said the outlook for Heinz's full-year results looks very positive, with sales to reach $9 billion, operating income to increase by more than 7 percent, and earnings per share to range between $2.35 and $2.39.

ABAX

Asian start-up set to launch record $1bn hedge fund (ft)
The first start-up independent Asian hedge fund to begin with more than $1bn is expected to launch in the coming weeks, according to people familiar with the situation, signalling a watershed for the asset class in the region.

The launch underscores the growing confidence and ability of indigenous talent to raise significant amounts of money to compete against global firms, which have piled into the region in recent years.

The new fund - registered as Abax - will be based in Hong Kong and fronted by Taiwan-born Chris Hsu, a former star fund manager at Citadel Investment, one of the world's largest hedge fund groups. The fund's primary focus will be on private and structured transactions in greater China. Other senior staff will include Donald Yang, until recently the long-standing head of Asian debt capital markets at Merrill Lynch; and Frank Qian, who worked alongside Mr Hsu at Citadel as a senior risk manager.

People familiar with the matter said that they expected Abax to attract initial funds of $1bn-$2bn. One person familiar with Asian hedge funds said: "All the signs are that Abax will be overrun by investor appetite, but they might only accept $1bn, so that management is not overwhelmed."

The start-up firm is hoping to tap strong international demand for Asia-focused hedge funds, which have on average outperformed their more mature rivals in the US and Europe in recent years. So-called Greater China funds, focusing on Hong Kong, Taiwan and mainland China, were by far the best-performing Asian hedge funds last year, with the top fund - Apex Greater China Directional - generating a return of 165 per cent.

Asia-focused hedge funds hold more than $100bn of assets under management - about 10 per cent of global hedge fund assets.

But some industry experts questioned the ability of Abax to raise the record-breaking figure.

Peter Douglas, head of GFIA, a Singapore-based consultancy, said foreign investors would question Mr Hsu's relatively short track record as a hedge fund manager of about four years. "The main guy is seen as the source of the risk-return that investors will experience. In a post-Amaranth environment, investors who can write cheques for $100m are unlikely to invest in someone who has less than six to seven years' experience."

WET DREAM

TheMarkets.com Opens New Offices in New York and London (prnewswire)
TheMarkets.com, a leading provider of global research and estimates to institutional investors worldwide, today announced that it has relocated its New York office, in a move that triples the footprint of its global headquarters there. At the same time, the Company has opened a fully-staffed London office to support increasing demand in the region.

Entering its seventh year of operation, TheMarkets.com boasts a global client base including over 1500 institutions in 43 countries on six continents. This client base includes 42 of the 50 largest U.S. asset managers, over half of the top 100 European asset managers, three-quarters of the world's biggest 100 hedge funds, and 15 of the top 25 global private equity firms.

"Our recent move in New York and opening in London represent exciting strides for TheMarkets.com. Both of these locations are leading global financial centers-home to our founding brokers, many of our clients, and some of the world's most talented employees," said David Eisner, CEO and President. "Last year, our global employee headcount grew by two thirds. Our new offices are poised to support our continued growth in response to increasing market demand globally."

TheMarkets.com was designed by and for institutional investors. "We owe all the success we have achieved to our loyal client base," Eisner said. "Our commitment to attaining their continued satisfaction through product innovation and unparalleled client service has enabled us to get where we are today. We're excited to build further on that success with our recent expansion."

About TheMarkets.com

TheMarkets.com delivers unprecedented access to the premier real-time research, earnings models, estimates, and full website content and quantitative tools of its eleven contributing Member Firms, plus U.S. equity deal coverage and research from hundreds of global contributors. TheMarkets.com is owned by: Banc of America Securities, LLC (NYSE: BAC) , Citigroup (NYSE: C) , Credit Suisse (NYSE: CS) , Deutsche Bank (NYSE: DB) , Dresdner Kleinwort, part of Dresdner Bank AG and a member of the Allianz Group (NYSE: AZ) , The Goldman Sachs Group (NYSE: GS) , JPMorgan Chase (NYSE: JPM) , Lehman Brothers (NYSE: LEH) , Merrill Lynch (NYSE: MER) , Morgan Stanley (NYSE: MS) , UBS Investment Bank (NYSE: UBS) , and Reuters (NASDAQ: RTRSY) , the global information company, which provides technological infrastructure, web-hosting services, and certain proprietary content.

WOBBLING SEC

Treasury Official Defends New Hedge Fund Guidelines (nytimes)
Days after a presidential commission recommended a hands-off approach to regulating hedge funds, the Treasury Department is defending its new guidelines against critics who say the new rules don't go far enough, according to The Financial Times. Answering naysayers — who include several state attorneys general — Robert K. Steel, a deputy to Treasury Secretary Henry M. Paulson Jr., said that the President's Working Group on Financial Markets would stand firm on its report's recommendations.

“The President's Working Group did not view this issue through an anti-regulatory lens,” the F.T. reported Mr. Steel as saying. “In fact, if the group believed that our regulators needed more authority to address these issues, Secretary Paulson would have led the charge in asking for it.”

The report represents the newest stance on hedge fund regulation since the 1998 meltdown of Long Term Capital Management. In it, the Bush administration and top domestic regulatory agencies said that the $1 trillion industry needed no extra policing from the government or other agencies. Hedge funds, their lenders and their investors were best equipped to keep the lightly regulated investment pools in line, the report said.

Mr. Steel acknowledged criticism that “a vocal few” had decried the new rules as ambiguous. But he said that regulations could prove only a one-time fix — and that the guidelines should not be understood as “an endorsement of the status quo.” The principles outlined in the report, he said, were specific and should be helpful markers for people to follow.

He kept some of the onus on investors: “If one does not see appropriate disclosure, one should not invest.”

It isn't clear yet whether Mr. Steel's clarifications would pacify critics like Richard Blumenthal, Connecticut's attorney general, who said that the rules need “a lot more teeth and a lot more specificity.” His state's legislature is considering two bills that would bolster transparency in the famously secretive industry. Such a move would have extra impact because many hedge funds reside in the city of Greenwich.

GET RICH QUICK

Why is this man a master of the Universe? (times)
How can a small group of people get so rich so quickly without doing anything remarkably clever or even taking huge risks? This is the real question behind the storm that has blown up over the amazingly lucrative “private equity” business which now employs, by some accounts, almost a quarter of the British workforce.

The answer is actually quite clear, but it has never been heard from either the detractors or defenders of the private equity business. The real origin of what trade unionists regard as this industry's excess profits is not the lack of regulation of private equity. It is the overregulation of pension funds, public companies and other investment institutions.

Trade unionists and old Labour politicians will never make — nor even understand — this argument. For them, demanding extra regulation to control the likes of Damon Buffini, the head of Permira, is the automatic response .

But the financial institutions that are making money by the truckload from private equity transactions have different incentives. If they want to defend this franchise, they will have to become simultaneously more straightforward and more sophisticated in explaining the sudden wealth it has produced.

It is not good enough merely to quote statistics about the broadly positive effects of private equity deals on profits, productivity and even jobs — impressive though these are. The most extensive study of what happens when private equity companies take over businesses has been conducted by the Centre for Private Equity Research at Nottingham University. The research shows not only that investors in these deals over ten years on average made profits 22 per cent above the market index, even after paying the seemingly exorbitant fees of the merchant bankers and lawyers. More surprisingly it shows that employment, after dipping by an average of 5 per cent in the first year after a buyout, rose by 21 per cent after four years; also that productivity almost doubled in this period, that product innovation increased and that companies showed evidence of more entrepreneurship. Most surprisingly of all, the Nottingham study — financed in part by City institutions — “found higher levels of employment, employee empowerment, and wages” after these deals.

But why could these gains be secured only by taking companies private, instead of just buying their shares in the stock market in the usual way? And why did the financiers and managers who arrange these buyouts make profits far in excess of the modest extra returns earned by the shareholders who put up the money? Both these questions have essentially the same answer.

Private equity financiers generate huge profits mainly because they buy companies on the cheap and then find ways of financing them even more cheaply. But how do the private equity entrepreneurs manage to swipe undervalued companies from under the noses of large corporate investors, such as pensions funds and other public shareholders? After all, private equity buyers normally pay substantially more for a company than it would command in open trading on the stock exchange.

This issue is really the nub of the private equity conundrum, and the explanation is surprisingly simple. The companies bought by private equity funds tend to be undervalued because investment institutions, especially British pension funds, have been told by regulators that they have too much money invested in the stock market and have been strongly encouraged or even forced to sell their shares in public companies. Instead, they have been urged to put their money into a combination of supposedly ultra-safe bond investments, spiced up with a sprinkling of “alternative assets”, of which private equity and hedge funds are the most prominent types.

The reasons for these regulations — supposedly to make our pensions safer — need not detain us, but their net result has been clear: In the past five years, as more and more pension funds have succumbed to this fad of deserting the stock market, many good companies have been sold for well below their true values.

Meanwhile, the pressure on pension funds to put their money into supposedly safe fixed-interest investments has pushed down interest rates and made the financing of private equity deals very cheap.

Moreover, this bias against stock market investment has not been confined to Britain. US regulators have pushed their pension funds in the same direction and, more recently, the bias against public equities has been given a further push by another powerful group of players — the Asian and Middle Eastern central banks.

China, Japan and other Asian countries now have more than $3 trillion of foreign exchange reserves, with oil-producing countries, including Russia, adding another $1 trillion. This enormous reserve accumulation has shifted control of a large slice of global saving from American and British private savers, who tend to invest in stock markets, to Asian and Middle Eastern bureaucrats, who are usually forced by law to invest in nothing but bonds and other “guaranteed” assets.

A natural consequence of this nationalisation of global savings has been to push down interest rates on corporate debt to very low levels. At the same time, ministers, embarrassed by the meagre profits on their huge reserves, have been demanding higher returns from their central bankers.

But how could this be achieved without exposing their national patrimonies to the “casino” of stock market investment? The obvious answer has been to follow American and British pension funds: ginger up their portfolios with spicier assets that look like safe bonds. Creative people in the financial markets have been happy to devise new types of investments to give their customers what they want, coming up with ever more complex financial instruments with esoteric names such as private equity mezzanine debt, credit default swaps and resettable payment-in-kind bonds. This has given private equity firms a huge pot of money to draw on.

A very similar process in the late 1980s launched the first generation of American private equity buyouts, when Wall Street created the “junk bond” market to satisfy the appetite of US insurance companies and building societies for equity-type profits when regulators only allowed them to invest in bonds, or at least assets that looked like bonds.

That first wave of buyouts was controversial and created some corporate scandals, but it had an electrifying effect on US business and arguably launched the productivity revolution of the next decade — as well as making unprecedented fortunes on Wall Street. With luck, something similar may now follow in Britain. There's certainly no doubt about the fortunes.

PIRATE TAKES HIS CLOTHES OFF

It's time we grew up, Hands warns industry (telegraph)

Guy Hands believes the time for being private is over

Once the enfant terrible of the private equity world, Guy Hands feels it is about time the industry grew up. If it does not, warns the chief executive of Terra Firma Capital Partners, the party could be over for good.

Guy Hands: 'The ultimate danger is if private equity becomes the public market with leverage'

Hands, no stranger to speaking the truth, is deeply concerned about the state of the industry - and not just because of the negative headlines it has been receiving over the past month.

At the root of his concerns is that although the industry has grown in size, it has not grown in stature.

"With $50bn (£26bn) due to be raised in 2007, and the top 10 private equity firms controlling, with leverage, over $1 trillion of investments, have we moved from being seen as entrepreneurs to the unacceptable, unaccountable face of capital?"

Hands hopes not, but he fears that might happen if the industry is not quick to adapt.

Key to this, he argues, is the need to become public, not private, equity. Not in any listed or quoted sense, but in a sense that the public at large can see and touch exactly what the industry is doing.

"The public is much more dangerous than the regulator," he warns.

By way of example, he cites Terra Firma's unsuccessful bid for troubled utilities firm Thames Water.

"The reason why we didn't buy Thames was because to get the service right for customers would have cost another €1bn, so we underbid by that amount."

Private equity must not only stand up and be counted, he argues, it also needs to present a public image that consumers can relate to. An economic investment case is not enough, there needs to be a social investment case also.

"Look at [Sir] Philip Green," he smiles, arguing that the owner of Bhs and Top Shop has done everything that private equity investors do, but has done so successfully, winning the backing of the public.

"Why? Because the public knows who Philip Green is. In reality he did nothing different but he personalised it. He did everything that private equity does but he's a national hero. The problem with Rubenstein [Carlyle chief David] buying a $50bn company is would he really be keen to go up before 16m consumers? If you own a really big company, people eventually decide they own you."

Sitting firmly behind Hands' argument is of course the rise of the mega fund, which has given the industry an ability to buy large, well-known brands that affect consumers' day-to-day lives.

"Once you get so large you change the model, then you need to find a new place to fit into society."

If the industry does not, he argues, then regulation will soon follow - something which he places a 35pc-chance on being imposed by a Western government in the coming years.

But regulation - which he warns strongly against the industry sleepwalking into - is not the only threat. Harking back to the mega funds, Hands feels the entire industry is at risk of losing the differentiation which created it in the first place.

"There is a risk where the advantages start to disappear due to size. The danger is that we become effected by the cycle and by leverage, and so that we're no longer investing in an alternative. There's a real risk that private equity simply becomes the cycle. If that is the case, then our fees become rather difficult to satisfy. The ultimate danger to this industry is if private equity becomes the public market with leverage - the markets will catch up in time."

Equally as concerning to Hands is the increased potential for replication. Investment bankers, he argues, are already working on statistical programmes that begin to replicate the returns delivered by private equity, as they have begun to do with hedge funds: "It's not inconceivable that private equity could go the same way." He calls instead for the industry to go back to its roots, and do what it is good at. Finding niche industries that are crying out for investment, rather than merely investing in everything across the market which can only lead to replication of the wider economic cycle.

Such change must of course go hand-in-hand with a greater accountability, and a greater desire by industry heads to be seen as public figures, something which he admits the majority in the industry joined to get away from.

"If we don't," he smiles, with reference to the threat of the investment bankers, "we could all end up in a computer room as outsourced geeks."

MINE IS BIGGER THAN YOURS

To the point: Savers should be the private equity whistle-blowers (telegraph)
"Hedge funds are much bigger than the private equity industry and the managers within such funds vary from the very bright to the very thick, with a complete range of views. And that's all you need to stop a deal."

Jon Moulton; you gotta love his style. The founder of Alchemy Partners gave The Daily Telegraph the benefit of his wisdom on the state of the private equity market earlier this week, and in the process managed to land his trademark straight-talking jabs on parvenu hedge funds entering the buyout industry, trade unions and investment bankers alike.

Debate about the effects of private equity on British industry and the economy is threatening to become feverish. And, in the process, dangerously dumbed down. Moulton's bread may be buttered heavily on one side, but he is not so foolish as to see his industry in black and white terms, or indeed the many other participants in the debate.

Doubtless, if there are very thick as well as very bright hedge fund managers, so there are private equity investors who do not come up to the intellectual mark. More importantly, there is a range of investment styles and views across the venture capital world. This is not an industry that can or should speak with one voice.

Also, if it has villains, it has heroes too (Jon Moulton may be both or neither depending on your point of view, and indeed on which of his very many deals most heavily influences your judgment).

What is in danger of being lost beneath the headlines about low levels of tax paid by businesses taken private, or the scale of redundancies they make, is the recognition that they are an integral part of our capitalist system, not some discreet enclave. In many ways, it is the system that makes them, not the other way around.

Take tax, as a current high-profile example. Private equity investors chase high levels of return on their investments by slimming down the equity capital committed and loading high levels of debt on to balance sheets. As a consequence, their interest bills are much higher than for businesses with debt-equity ratios more typical of publicly quoted companies.

Higher interest bills, ceteris paribus, spell lower taxable profits. And thus lower tax for the Exchequer. However, someone is profiting from debt-heavy financing structures: the banks and other providers of the debt. One must assume that they pay their taxes like good corporate citizens.

The Chancellor could attempt to restructure the tax regime so as to discourage high levels of corporate leverage. But he might find himself in a tangle of unintended consequences. These could include (and I am aware that this is a classic "cry wolf" threat) driving both lenders and borrowers offshore and out of his tax net.

Private equity financiers do not load up with debt to avoid tax, but to make their equity capital sweat. This capital is, in some regards, a nebulous concept - a spreadsheet cell in a balance sheet. In reality, though, it is all manner of physical assets, including human capital.

Sweat a firm's equity and you sweat its workforce. Adopt a financially high-risk approach to operating a business and you effectively force yourself into a lean and mean cost base. This does not mean that you don't invest for growth (another incorrect generalisation about private equity), but you do refuse to carry unnecessary baggage.

This may make private equity owners in general appear poor employers, but this can only be true in the long term if highly leveraged businesses prove less successful than their more conventionally structured counterparts. In this regard, the jury is still out.

Benign economic conditions have kept the number of major corporate failures to a minimum. There have been a handful of problem cases in the private equity arena, but far too few to undermine investors' confidence in such funds. An economic downturn might be a different story.

Even then, inherently strong businesses are likely to survive financial difficulties bought about by a combination of economic weakness and high levels of debt. Such companies rarely go out of business; they merely re-emerge with a new and different set of owners and bankers.

This presupposes, of course, that funding is available for such refinancing. At present, such is the abundance of capital available to private equity that it is almost inconceivable that it would all be suddenly withdrawn by backers in a downturn. Some funders may be spooked by conditions, but many would also recognise cheaper prices as a welcome long-term investment opportunity.

These backers include the nation's pension funds and insurance companies. Ironically, the conventional asset managers prepared to accept bids from private equity players for public companies are investing on behalf of the same funds that are also backing the buyouts. Not necessarily deal by deal, but in general.

Ultimately, everything traces back to the nation's savers, who themselves are looking for personally optimal combinations of fast bucks and security. Individual fund managers may be enriched in the pursuit, but only if they deliver for the end saver.

If any whistle is to be blown on private equity, then it should be by either savers themselves, or any appropriate guardians of their interests. The Financial Services Authority is conducting a review of private equity. It should at least prove a better guardian than the taxman.

Most telling of all, though, will be the returns delivered by private equity in any economic downturn - for these will tell us the exact mix of "very bright" and "very thick" controlling buyout funds. Be sure, the market will then deliver its own effective justice.