HEDGE FUND NEWS
@ Thu 24 May 2007 : GMT

FINTAG COMMENT

I had lunch at a very good Italian restaurant on Greenwich Avenue after satisfying my wife's needs at Tiffany's, a short walk up the hill, and counted 3 hybrid cars amongst all the SUV's parked outside. Honda says hybrids are dead and Hydrogen cars are the way forward but that the UK will not be building them because it hasn't joined the Euro. The other good news is that tax has no impact on Hedge Funds (?) and a South African in Australia becomes a billionaire just as he comes to retirement age.

UBS is sued for front running, the term "Hedge Fund" is to be removed from the dictionary and a loan index is launched (yawn). DB catch the marketing bug and launch a replicator and I drive off to JFK later this afternoon for a flight back to Blighty.

SUV News

Hawkish MPC minutes put 6% interest rate on cards (times)

Newcastle sells out - to a real person (ft)

Even doctors can't compete with hedge funds managers when it comes to pay (bloggingbuyouts)

Deutsche Bank launches new index to replicate hedge fund returns (hedgeweek)

Hedge Funds Emerge From the Woodwork (onwallstreet)

WHATCHA TALKING ABOUT?

Higher Taxes Wouldn't Have Big Impact on Hedge Funds (cnbc)
The top 100 hedge funds control $1 trillion in assets and their managers make "staggering" salaries. Should they be taxed?

Michael Peltz, executive editor of Alpha Magazine, and Gary Weiss, author of "Wall Street Versus America," took up the question on "Street Signs." Their answers -- and the reasons behind them -- may surprise you.

Peltz, whose magazine calculated the top funds' gains, said he was "stunned" by the numbers: The rate of hedge fund asset growth is actually increasing from the 30% average of the past several years, to 40% from 2006 to date.

The editor said that taxation not only wouldn't stifle investment, it likely would have no effect on the funds whatsoever. "Money is just their way of keeping score," Peltz declared. He said that most players in the private-equity realm own "more assets than they can ever spend" -- and if the money doesn't go to the government, it will probably just go to charity.

Weiss said that a tax hike might lead to "a little less enthusiasm about going into the hedge fund business" -- but he agrees with Peltz that it wouldn't lead to "a major change."

Would such a tax amount to punishment for success? Weiss concedes that "a class-warfare argument is valid," as the funds are "blamed for more [problems] than lunar eclipses." But he feels there is nothing wrong with increasing taxes on the very wealthy: "If they make a couple of million less, big deal."

TOO MUCH

Hedge fund plays on theme of violins (ft)
A hedge fund investing in old violins has been pledged $11m (£5.5m) in the latest sign of investor willingness to put money into offbeat assets that were previously the exclusive domain of collectors and enthusiasts.

Florian Leonhard, a London-based violin dealer and restorer, is aiming to start investing the Fine Violins Fund once it has raised $50m, with a target of returning 8 per cent to 12 per cent a year.

The fund is perhaps the strangest in a series of new asset classes being created by investors trying to avoid stocks and bonds.

Hedge funds have been set up specialising in wine, art, shipping and even football players, demonstrating the appeal of assets that historically have not been correlated with financial markets.

“Financially it is a dead secure long-term investment,” Mr Leonhard said. “It helps to be versatile in your portfolio as an investor.”

The fund will also have a philanthropic aim as the violins it buys will be lent to up-and-coming musicians, contributing to their value.

“It is much better than wine,” he said. “Wine can go off. And unlike art, violins are not subject to fashion.”

Violins have long been bought alongside art by big banks and wealthy collectors as both hobby and investment. The Stradivari and Guarneri collection of David Fulton, who sold his FoxPro software to Microsoft in 1992, is among the world's best.

More recently, investors have clubbed together to buy individual instruments - the rarest of which can cost several million dollars - to lend to talented musicians, in the hope that the big price rises seen over the past half-century will continue.

But some investors worry about the dangers of putting money into assets that are hard to sell and where there is difficulty in establishing what drives prices. Such reservations helped scupper plans last year by Stanley Gibbons, the London stamp dealer, to launch a hedge fund investing in stamps.

However, once obscure assets are becoming mainstream, with reinsurance, direct loans, carbon credits and film financing being given attention.

Several traditional hedge funds are also beginning to look at more exotic assets. Peter Lunzer, director of the Wine Investment Fund, said one hedge fund had already invested £1m via his fund.

A LAUGH A MINUTE

Honda tells UK: join euro- zone or else (telegraph)
Honda's president Takeo Fukui has threatened to cut off future investment in Britain unless the country joins the euro, admitting that the Japanese car producer had made an "error" building its car plant in Swindon.

Honda's president Takeo Fukui has threatened to cut off future investment in Britain unless the country joins the euro
Takeo Fukui: 'we thought the UK was in Europe'

"The exchange rate of the pound against the euro is very difficult to forecast. Unless the UK joins the eurozone, we can't add to plant in Swindon. We're not planning to withdraw from the UK because it is a major market, and Swindon supplies it," he said, speaking at his luxurious penthouse office overlooking Tokyo.

"Swindon is close to full operation, but we made one slight mistake: we thought the UK was in Europe. Now we find that it is reluctant to join and that has become a big problem," he said.

"We're not doing any lobbying on this but every time we meet officials they say there is no interest in joining for the meantime. We have to take this at face value and reconsider our strategy."

His comments echo the growing frustration among Japan's industrialists over the strong pound, now trading at multi-year highs against the dollar, the Swiss franc and other currencies, although it has moved in tandem with the euro over the past three years.

Mr Fukui, a small, wiry man bursting with energy and revered in Japan for straight talking, said he believed the hydrogen fuel cell engine would one day sweep the world's car markets.

"Hybrid cars alone cannot deal with global warming. The ultimate solution is the fuel cell but our engineers are struggling with this technical challenge and a breakthrough is not going to be easy," he said.

"At the moment it uses a massive amount of precious metal [platinum] and I don't think it's realistic for the next 10 years."

Mr Fukui said the technology would not be viable until consumers could re-supply the fuel cells at home from solar batteries that are carbon neutral.

INSIDE TRACK

Hedge fund investors sue UBS for $200m (independent)
Investors in a collapsed hedge fund are demanding $200m (£100m) in compensation from UBS, the fund's broker, claiming that the Swiss financial giant was betting against its client using inside knowledge.

Idaho-based Wood River collapsed in 2005 after piling more than 80 per cent of its funds into one share - a technology company called Endwave - whose price quickly began to sink. In a case that goes to the heart of the conflicts of interest that riddle Wall Street's largest financial institutions, UBS is alleged to have made more than $100m (£50m) from short-selling of Endwave shares. Short-selling is the selling of borrowed shares, expecting to be able to buy them at a cheaper price at a later date.

Wood River's out-of-pocket investors say the bank knew that the hedge fund had amassed a dominant stake that it would have to sell. It knew this - the lawsuit says - because Wood River had told its investors that it would never put more than 10 per cent of its funds in a single stock. UBS said that it would "vigorously defend" the lawsuit.

John Whittier, Wood River's founder, was charged in February with fraud and failing to make proper disclosures to the stock market. At one point, the fund controlled more than 80 per cent of Endwave without the stock market being informed, which it should have been when the stake went over 10 per cent.

Wood River's investors who tried to retrieve their money only forced the fund to sell Endwave shares, triggering a fall in the value of the shares and the ultimate collapse of the fund.

As well as being prime broker to Endwave's dominant shareholder, UBS was also a market maker in Endwave stock. It knew about and should have insisted upon the disclosure of Wood River's stake, the lawsuit alleges.

Prime brokers manage trades, lend stock and proffer loans to hedge funds.

FORTRESS PART 2

Platinum surges 76% on debut (ft)
Kerr Neilson, the founder of Platinum Asset Management, was confirmed on Wednesday as Australia's most successful hedge fund manager when shares in his company surged 76 per cent on the first day of trading.

Mr Neilson sold 25 per cent of Platinum in an initial public offering limited to retail investors, raising A$561m from the share sale. The shares on Wednesday rose from A$3.80 to A$8.80. The successful floatation puts the value of Mr Neilson's holding in the company at about A$2.8bn ($2.3bn).

Mr Neilson - a former manager of offshore funds at Bankers Trust who set up his boutique firm at the helm of a small team comprising other ex-Bankers Trust colleagues - has gained market recognition in Australia by focusing his investment strategy on overseas markets such as Japan and attracting renowned international investors such as George Soros to his Platinum funds.

The strategy has set Mr Neilson apart in an Australian fund management industry that has grown strongly in recent years but continues to remain very domestic, in large part because of the country's geographic isolation.

A person familiar with Mr Neilson's activities said: “He is one of the few, if not the only, Australian manager who has been investing internationally out of Australia. In that sense, he was a forerunner but on top of that, his performance has been exceptional, and this over a period of more than 10 years.”

Still, the South African-born Mr Neilson has tried to distance himself from other hedge fund managers by targeting specifically retail investors and tapping into Australia's A$1,000bn so-called superannuation fund industry, which has soared on the back of the country's compulsory retirement savings scheme and an Australian stock market that is at a record high.

On the company's website, Platinum says that it is not a hedge manager because ”we only partially hedge our share holdings with short sales and will generally have net long positions of 50 per cent or more”.

However, another market observer said: “Where he (Mr Neilson) has been very smart is in marketing himself as something different. If he had called himself a hedge fund manager, he would have scared a lot of retail investors away.”

Platinum has outpaced its domestic competitors such as Hunter Hall and PM Capital to develop an internationally-sized business that manages about A$22bn invested in Asian and other worldwide equities.

While acknowledging the stunning market debut, some market pundits suggested yesterday the offering had benefited from the fact that Mr Neilson had opted for a fairly small share sale, as well as a relatively low initial valuation compared to some of its competitors. The share sale valued Platinum at 17.6 times its forecasted earnings for 2007.

Loans index to launch in US (financialnews-us)
An index on which derivatives of leveraged loans can be traded is to be launched in the US on Tuesday.

Markit Group, a credit derivative pricing company, said last week the LCDX index of loan credit default swaps would begin on May 22.

The launch of this US version of the European LevX loan default swap index, which was introduced last October, is expected to be a catalyst to a market recording growth in line with the boom in private equity-led leveraged lending.

The value of global leveraged loans made to junk or sub-investment grade rated companies rose to $450bn (€332bn) at the end of March compared with $248bn at the end of 2005, according to rating agency Standard & Poor's.

The global volume of default swaps on leveraged loans is about $52bn compared with $6.3bn at the end of 2005, said the Loan Syndications and Trading Association.

Loan credit default swaps offer buyers insurance against non-payment of high-yield secured loans. The derivative contract allows investors to trade exposure to loans by selling protection through the index.

However, although the market has been developing, it is dwarfed by the $34 trillion credit default swap market.

Growth has been hindered because of a dispute between top-tier banks over the structure of European and US contracts. US loan credit default swap investors, who use the products mainly for speculation, prefer a contract that continues after a loan is repaid by transferring to a new loan issued by the borrower.

HARVARD

Oxford appoints first chief investment officer (guardian)
Oxford University has appointed its first chief investment officer, as part of a push to make better use of its financial assets.

Sandra Robertson, previously co-head of portfolio management at the Wellcome Trust, will set up and run an investment office to oversee the university's £900m endowment fund.

A spokeswoman for Oxford University explained that it was keen to increase the income it receives from its investments. It strengthened its investment committee earlier this year, increasing the number of members with experience of fund management.

Cambridge University stole a march on Oxford by appointing its own chief investment officer last November, Nick Cavalla, from Man Group.

The move towards more professional fund management expertise illustrates how UK universities are increasingly copying techniques that their American counterparts have long relied on.

In her time at Wellcome Trust, the world's second richest medical charity, Ms Robertson managed a team overseeing its private equity and hedge fund portfolios.

It has provided many millions of pounds to Oxford University over the years, including funding the Wellcome Trust Centre for Human Genetics.

"UK universities have lagged far behind their US counterparts in the size and quality of management of their endowments," said Mark Walport, director of the Wellcome Trust. "It is important that UK universities enhance their endowments as an additional funding source to keep them in the forefront of education, scholarship and research."

The university spokeswoman explained that it is in the process of formulating its strategy on socially responsible investment.

Due to its collegiate format Oxford's colleges handle their own investment funds, which total around £2.7bn, seperately from the central pool.

APPRAISAL TIME

Boards Feel the Heat as Investor Activists Speak Up (dealbook)
In Europe, the occasional activist has stirred up a revolt at an annual general meeting, led a no-confidence vote against management and even taken executives to court. Those have been the extreme cases.

But on the Continent, as well as in Britain, shareholder activism now seems to be moving toward Main Street and into the hands of ordinary investors, The New York Times writes.

These no-frills activists are changing the dynamics at the top, their measured but pointed agitation pitting previously passive shareholders, who are used to expressing displeasure by simply selling their shares, against senior management.

In many cases, the shareholders are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, The Children's Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands.

Then Peter Paul de Vries, the feisty head of the Dutch shareholder association VEB, took ABN Amro's management to court, accusing it of bypassing shareholders when selling one of the bank's most attractive assets.

Prudential, one of Britain's largest insurers, faced calls Thursday from Hermes, a London-based hedge fund, and other shareholders to break itself up. Deutsche Börse, the operator of the Frankfurt Stock Exchange, this month removed from the agenda of its annual shareholder meeting a motion that would have made it easier to issue new shares without asking shareholders — mainly to appease rebellious Atticus Capital, a New York-based hedge fund.

“What we have seen so far may only be the beginning,” Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, told The Times. “There are many more opportunities as there are many more underperforming companies.”

WE ARE SAFE: FOR THE TIME BEING

Hedge funds 'pose no risk' to financial stability (lse)
Experts are stating that hedge funds do not pose any significant risk to the stability of wider financial markets, despite the fact that they use large amounts of money as derivatives.

According to Simon Gray of Hedgeweek fears that hedge funds could undermine other financial markets are by and large unfounded, stating that there is a level of misunderstanding surrounding hedge funds and their derivatives.

Mr Gray also highlights past occurrences of hedge funds collapsing at no detriment to other markets, even if they were worth billions.

"There've been some big hedge fund collapses over the last few years... However the world financial system carried on merrily," he explained.

"The thought is that somehow if a significant number of trades go wrong and people trading them collapse, that somehow the whole system will break down ... I think the risk of derivatives is perhaps exaggerated by people who don't really understand what derivatives are used for."

Proposals under consideration by the Financial Services Authority could give private investors access to hedge funds in the UK.