HEDGE FUND NEWS
@ Thu 07 June 2007 : GMT

FINTAG COMMENT

Today, 3 london buses arrived at once and my scrapbook of news is overflowing. It is called the "David Beckham" effect.

Debt, inflation and interest rates preoccupy us all but nobody seems to care. Feeling very bearish today, my spirits have been lifted by the news that we are all living on the planet zurg. The markets are correcting themselves but I still feel the big one will be in October - they always are - and I am stocking up on old gold watches.

Happy Times Are Here News

Bear Stearns falters serving hedge funds (leadingthecharge)

Oct 2007: are the activists about to get sharper teeth? (ftalphaville)

KGR Capital launches fund of China hedge funds (hedgeweek)

Hedge funds play the Maxis takeover story (financeasia)

Banks are in coal, hedge funds lie in wait (reuters)

Three investors 'complicit' in excess corporate pay (financialnews-us)

French probe buy-out collusion (ft)

LET THE BLAME GAME BEGIN: KICKING OUT THE POOR FROM THEIR HOMES

Hedge Fund Bear-ish on Subprime relief (nypost)
A big hedge fund on one whopper of a winning streak is picking a bitter fight with Bear Stearns over whether renegotiating loans for homeowners struggling with subprime mortgages is fair play.

Paulson & Co., an $11 billion hedge fund, has written regulators over concerns that Bear and other investment banks may be engaged "in market manipulation" when the banks' mortgage-issuance units modify loans so that homeowners can avoid foreclosure.

The Madison Avenue-based Paulson is ready to do major battle.

It penned letters to the Federal Reserve and Commodity Futures Trading Commission and hired former SEC Chairman Harvey Pitt to provide legal advice, according to The Financial Times.

The letters make no bones about the threat to the value of Paulson's trades from what it called "uneconomic transactions." Also signing at least one letter were representatives from hedge funds Hayman Capital Partners and Elliott Associates.

At issue is the motivation behind efforts by Bear's EMC Mortgage unit to renegotiate subprime home loans, and whether it's solely to prevent homeowners from losing their houses, or, as Paulson's general partner John Paulson told The Post, simply "to artificially inflate the value of derivative securities."

Paulson said that he strongly supported loan modification when valid, but that some of these "second chances" appear to be just "market manipulation" from Bear.

Tom Marano, Bear Stearns' mortgage chief, declined to comment.

Long one of the largest mortgage players on Wall Street, Bear has been vocal about efforts by its so-called "Mod Squad" to adjust the interest rate or duration of home loans for troubled borrowers.

For Paulson, this is no mere academic debate. His funds have a multibillion-dollar bet on the decline of the subprime mortgage market, using trading strategies.

The first involves short-selling the ABX index, a key subprime mortgage market benchmark that tanked in February and March as mortgage defaults skyrocketed, earning Paulson and other funds billions of dollars in profits.

Another Paulson strategy involved using credit default swaps, complex securities that act as an insurance policy against a drop in the value of subprime securities.

Paulson bought about $1 billion worth of this "insurance" as bonds, backed by subprime mortgages, declined in value, and he locked in a home run, collecting an amount roughly equal to those declines.

But the alleged $1 billion in paper profits that Paulson's fund has made is being jeopardized as the ABX index has begun to march upward, rallying to 83 from a low of 73 in February.

More ominously, dozens of other hedge funds have shorted billions of dollars worth of ABX index derivatives and bought credit default swaps. Should there be an unexpected upward move in the ABX index, dozens of hedge funds would seek to cover their shorts, likely forcing prices sharply higher.

UK SUBPRIME DELINQUENCY

House prices at 10 times salary (thisismoney)
The next generation of homebuyers could face average house prices that are 10 times their salary, an independent housing body warned today.

Unless the number of homes being built increases, home ownership could become an impossible dream for millions of young people.

Research from the new National Housing and Planning Advice Unit (NHPAU) found more than a third of non-homeowners think they will never be able to buy and a further fifth believe it will take them at least five years before they are in a position to take their first steps on the property ladder.

The NHPAU has been established by the Government to provide independent advice on improving housing market affordability. Its pessimism demonstrates that rising property values are not the bonanza they are often made out to be.

Government figures show that in 2000 the average cost of a home was four times annual earnings. Steep house price hikes meant that by 2006 typical homebuyers were looking at a home seven times their salary.

Professor Stephen Nickell, chairman of the NHPAU and former Bank of England Monetary Policy Committee member, said: 'First-time buyers have seen a big rise in the deposit needed to buy a home and the amount of their income spent on mortgages. Demand for housing is growing and unless action is taken, pressure on the market will only get worse.'

A survey of 2,700 UK adults by the NHPAU found three quarters of people think house prices in their local area are a problem, with more than eight out of 10 adults stating that the Government should take action to make housing more affordable.

Nickell added: 'There is a clear need for more ambitious and urgent delivery if we are to make homes more affordable for our children.'

KING KNUTE

A Change in Attitude? (financialarmegeddon)

One thing that has puzzled those of us who worry about the gargantuan debt load that has built up in the U.S. financial system is the sense that borrowers don't seem too worried about paying it back. Well, while that might have once been true, it looks like that is no longer the case. In "Debt Burden," Credit Slips reports on the release of some interesting data about today's attitudes towards credit.

LendingTree has just released a new debt survey showing that 48% of Americans are worried about their debt loads, and that 20% expect to be stuck with credit card and other non-mortgage debt for the rest of their lives. Lending Tree tries to put a happy face on some of the data (most people "perceive themselves as some day being debt free"), but I didn't feel any better when I read it.

But overall the descriptions are quite reasonable, and LendingTree deserves kudos for their detailed reporting. They give numerical responses on all their questions, broken out by age. It is a treasure trove for all the data jocks who frequent this site.

One last note: LendingTree refers to the reports as the "inaugual" LendingTree survey, suggeting more to come. The company is obviously in the financial services business, but I take the presence of a serious survey like this, put out by a for-profit business, to suggest that debt issues are moving into the mainstream. Once it was Kinsey and sex that fascinated us. Now, LendingTree and debt?

HOTELS: DON'T MAKE ME LAUGH

Vector pulls £2bn float after investor boycott (times)
A last-ditch price cut failed to convince investors concerned about the role of management and the property market

Vector Hospitality, the company aiming to be the first hotel-based real estate investment trust, today pulled its flotation blaming market conditions, a day after cutting the price to below the bottom end of its orginal range.

The decision to postpone the £2 billion float indefinitely comes after high-profile institutions boycotted it saying they were concerned about the role of non executive director Richard Balfour-Lynn, who runs the firm Cameron Investment Managers, which has been appointed manager of Vector's 71 UK hotels.

Mr Balfour-Lynn also runs Marylebone Warwick Balfour, which is selling property assets to Vector and founded another firm which is selling assets to Vector.

The company had yesterday cut its indicative IPO price range to 875-900p a share from an earlier 995p to 1,115p range and delayed the pricing for 24 hours.
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Now it seems even that measure has failed to draw enough investors.

Vector was to be the UK's largest property flotation this year raising up to £2.26 billion to buy flagship assets ranging from the Waldorf Hilton and Cumberland hotel in London to the Malmaison and Hotel du Vin chains.

Sources close to the deal told the Times: "It is to do with market conditions. The market has softened today and it is fair to say that the property market has been softening for the whole period of the marketing and all that added up to a price the principals were not happy with."

But on Monday Standard Life Investments, Morley Fund Management and Henderson Global Investors ruled themselves out of the float blaming potential conflicts of interest around the management role of Mr Balfour-Lynn. Cohen & Steers of the US, one of the world's largest specialist real estate investors also opted out of buying Vector shares.

The FTSE 100 index of leading blue chip shares fell 110.1 today to 6522.7, the largest one day fall since March.

Concerns meanwhile have been mounting about valuations of property stocks on stock exchanges around the world.

Shares in Spanish real estate companies crashed this Spring while in London the shares in both Land Securities and British Land, the UK's two largest quoted property companies, are now trading at a 15 per cent discount to their net asset values after trading at premiums for much of last year, over fears that prices for UK commercial property have peaked.

The nail in the coffin for valuations of global real estate valuations may have come yesterday from the planned flotation of Realia, the Spanish real estate company, which cut its final price for a flotation to €6.5 per share, below its original range of €7.9 to €9.7

CAUGHT OUT

Fitch warns of negative 'hedge fund effect' on credit (ft)
Hedge funds are helping to fuel a global credit boom, but their growing influence on credit markets is likely to have negative consequences, a new report by Fitch Ratings has found.

Such funds now account for almost 60 per cent of trading volumes in credit default swaps - derivatives that provide a kind of insurance against non-payment on corporate debt. The CDS market has more than doubled in the past four years, according to Markit, the data group.

"Hedge funds' willingness to trade frequently, employ leverage, and invest in the more leveraged, risky areas of the credit markets magnifies their importance as a source of liquidity," the Fitch report said.

Credit-oriented strategies were one of the fastest areas of growth for hedge funds. They now have between $15,000bn and $18,000bn of assets deployed in the credit markets.

These numbers reflect high leverage multiples: hedge funds regularly borrow up to five and six times the value of their assets under management.

But the rising power of hedge funds in the credit markets has come at a cost, Fitch warned.

Innovations in the credit market, which has become a veritable alphabet soup of complex and illiquid structured products, have been largely driven by hedge funds' demand for products that generate higher returns. Funds have also been pressuring their prime brokers to continually relax credit terms, andprovide secured financing for their less liquid positions.

Consequently, investors face increased liquidity risk, since the next downturn could involve sudden and correlated declines in asset prices as funds and prime brokers try to unwind their positions.

"The potential for a more synchronous, forced unwind of credit assets cannot be discounted," Fitch said.

"During a period of market stress, any such forced selling of assets would be magnified by the effects of leverage."

Moreover, hedge funds have introduced a new and untested behavioural element into the markets. "Even if hedge funds retain the financial wherewithal to hold credit assets in a downturn, it is not clear whether they will have the willingness," Fitch said.

In short, hedge funds have made it even more difficult predict how credit markets would behave if prevailing benign conditions end.

This uncertainty is significant because, according to Fitch, even a temporary dislocation in the credit markets could lead to a rash of defaults, particularly among more marginal names with upcoming debt maturities.

Investors should therefore proceed with caution.

"Of concern would be an ill-timed event that led to a sudden reversal of this liquidity across multiple segments of the credit markets," Fitch said.

THIS IS IT

'SELL, SELL, SELL' from Morgan Stanley (ftalphaville)
It's a full house at Morgan Stanley, with the bank's three key indicators all flagging up sell signals as of Tuesday. 'Fundamentals', on the back of higher bond yields and higher ISM new orders, has come into line with the existing sell signals from the 'Valuation' and 'Risk' indicators.

That across the board has occurred only five times since 1980. Equities have always been down in the following six months, by on average 15 per cent (see below). Previous occasions include September 1987 and April 2002.

“We prefer to be on the right side of those odds,” the bank notes in a report. Morgan Stanley admits that its calls have thus far proved too cautious, with markets up 7 per cent since the bank went neutral for equities.

One explanation for that is that “arguably the wall of worry is still being climbed.”

What may distinguish this bull-run from previous gung-ho, invincible rallies is that the market remains worried. Normally when the bank's valuation indicator says , sentiment is optimistic. This time, the futures market indicates caution.
“Our indicators are suggesting an equity market correction and we are expecting one,” the bank adds. “The correction may only happen when sentiment turns outright bullish.”

Previous full house sell signals, next 6 months performance

Apr 1981 -10.8%
Sep 1987 -25.2%
Feb 1990 -6.8%
May 1992 -7.0%
Apr 2002 -26.2%

Average -15.2%

PIRATES BOOKING UNREALISED SALE PROFITS? NEVER

An element of judgment (breakingviews)
Blackstone has pushed the envelope in a number of ways with its planned public offering. But one of leveraged buyout house's raciest ideas - wisely now abandoned - was to book profits as soon as it made investments. That said the accounting treatment Blackstone has eventually settled on isn't the most conservative one could imagine.

It will still book profits on investments before it has exited from them. Blackstone along with other private equity groups takes a cut of the profits made on the funds it invests. The issue is how and when to calculate this cut of the profits known as carried interest.eIn Blackstone's initial prospectus in March it said it planned to adopt a new accounting standard known as FAS 159 for calculating its carried interest.

Essentially this views carried interest like a stock option. If an investment performs well Blackstone collects its carry but if things don't go well it doesn't lose out. It's a one-way bet. This means that as soon as Blackstone makes an investment it has generated value. Adopting FAS 159 would have allowed Blackstone to book that as an immediate profit - calculated by using options odelling.

Intellectually there's some validity in the approach. But the notion of booking carry as soon as one invests rather than waiting until one sees what profits one has actually realised is hardly conservative. After prospective investors in the IPO quibbled Blackstone backtracked. But the firm still hasn't adopted a system of booking profits only when it realises its investments.

That's broadly speaking the system used by Fortress a similar firm that went public last year. Instead Blackstone has stuck with its old practice of valuing its investments at the end of each year - whether it has sold them or not - and accruing its carried interest as if it had sold them all. Last year the group booked USD1.2bn in carried interest.

If it had adopted the racy options style accounting it would have chalked up an additional USD595m of revenue. But even now that it has stuck to its old accounting system USD333m of the carry comes from accruing profits on unrealised investments. Investors in its public offering would do well to remember that.

PIRATES ARE NICE PEOPLE

In defence of private equity (guardian)
There has been considerable debate over the last week about private equity - and I have found myself in the headlines. Do not, however, misread my remarks: I remain very much an advocate of private equity funds, the nature and impact of which are routinely misrepresented.

Private equity funds invest in the shares of companies in two ways - in new or developing firms (venture capital), or in mature companies (buyouts). The investment is usually long term, an average of 4.5 years, and unlike hedge funds, with which it is often wrongly confused, normally involves taking control of the company concerned. A sensible enough occupation, one might think, and on reflection one that has been going on for hundreds of years. But in recent months it has come under increased public scrutiny.

Shortly after this began, my three adult children came to supper at home. None of them works in private equity. "Dad, are you sure your work for the last 23 years in private equity has been really worthwhile?" they asked. I replied that this was a serious question, and I would reflect. The next day I gave them my answer. I said I believe it has not only been really worthwhile but I am also proud to have been involved.

I gave three reasons. First, because we achieve our purpose. Every business has a purpose. For Toyota, it is making excellent cars. For the Guardian, it is producing timely and accurate news and comment. For private equity it is making returns above those in the stock market for our investors. We have achieved that in spades. And, yes, I think that is really worthwhile.

Secondly, because of who we have done it for. In the most recent private equity fund in which we invested, apart from our own thousands of investors, the owners are: first, eight government agencies; second, more than 20 life insurance companies with all their beneficiaries; third, 40 charities and endowments; fourth - and importantly - the beneficiaries of the pension funds invested in that single fund, no fewer than 33 million people. So there are millions of beneficiaries for each and every investment that fund makes. And, yes, I think that is worthwhile.

Finally, we have changed and improved companies. In a capitalist system - I have seen the other systems and they don't work - you need strong and competitive companies, steadily improving their productivity. That is what we have created over and over again through better operations, through investment and innovation. And that, too, has been worthwhile.

So why the attacks? Opponents point to the impact on employees. In the last few months I have read, I believe, every report on the employment results of private equity, I hope dispassionately. I am convinced that in total, private equity has made a major contribution to the faster growth of jobs and a higher relative contribution than the quoted sector. New Look is just the latest example.

On transparency, the detractors have a point. As investors in private equity we have all the information we need. The decision to set up a commission under prominent City banker Sir David Walker to review this area is therefore a valuable approach to ensuring that others feel they have the information they need, too.

Are the most recent buyouts dangerously over-leveraged? Some may be, but I see much too little evidence offered. Debt levels are lower than in the 80s and 90s. The key statistic is debt service ratios, the amount by which income exceeds interest payments. Today these are at or slightly above historic levels.

What about industrial relations? In recent weeks I have asked journalists which private equity investments unions have raised with them since 2000 concerning problems over industrial relations. The tally usually comes to four - we remember Gate Gourmet from television news coverage and our empty aeroplane plates. Let's assume the actual tally is 10 times that. In Europe, since 2000, there have been more than 4,900 private equity acquisitions. So on this front, too, the case against private equity has plainly been bloated far out of proportion.

Nicholas Ferguson is chairman of SVG Capital plc, a private equity investor and fund management business, and coordinates a group of Britain's five largest institutional investors in private equity

investorrelations@svgcapital.com

MAN TO THE RESCUE

Man Group to expand in distressed investments (reuters)
Man Group, the world's largest listed hedge-fund company, plans to expand its investments in distressed companies, Chief Executive Peter Clarke said on Wednesday.

"We are looking for people in distressed," Clarke told Reuters. "We view distressed as an area where we're planning to grow." He declined to provide specific expansion targets.

Bankers, analysts, accountants and rating agencies have predicted that economic slowdown and rising debt levels and interest rates will increase the number of distressed companies and corporate credit defaults in the medium term.

Goldman Sachs Group, Morgan Stanley and Rothschild are among investment banks that have recently hired restructuring professionals.

Man Group's move comes as the company aims to be present across the whole investment spectrum, Clarke said, adding that he does not expect a sudden credit-cycle change in the short term, because of ample liquidity in the market.

London-based Man Group, with more than $60 billion (30 billion pounds) under management, has been part of the hedge fund industry's boom period over the last few years. Hedge funds manage now as much as $2 trillion globally.

Clarke was speaking to Reuters on the sidelines of an event to launch the Oxford-Man Institute of Quantitative Finance, an academic centre at Oxford University aimed at leading world research on derivatives, hedge funds, carbon trading and other financial topics.

Man Group will invest 13.75 million pounds in the project, which Clarke said showed the industry was "well established."

GLASSES

Fund managers eye private alternative to public floats (financialnews-us)
Nasdaq's launch of a market for institutional stakes in companies has been hailed by chief executive Robert Greifeld as the most important thing to happen to US capital markets since the introduction of the innovative stock exchange 36 years ago. But, if correct, Goldman Sachs could argue it is more deserving of the accolade.

The investment bank beat Nasdaq to the post when it launched the Goldman Sachs Tradable Unregistered Equity market, or GSTrUE, in May with the $880m (€651m) sale of a 14% stake in Oaktree Capital Management. Other hedge funds and private equity firms are expected to follow with their own share sales.

The opportunity to trade stakes has long been possible under a Securities and Exchange Commission rule that allows stock to be sold privately in the US with less detailed registration and disclosure requirements than for fully marketed public offerings, as long as the parties involved can be classified as qualified institutional buyers.

In 1990, the rule was relaxed further to allow qualified institutional buyers to trade securities between each other, rather than holding them for two years. However, until now there has not been a centralised trading platform to provide transparent prices to buyers and sellers. All that has changed since the Nasdaq and Goldman initiatives.

GSTrUE uses the bank's equity trading platform and allows its institutional clients to trade private securities. The system lists offers that have been led by the bank and where the issuer has agreed to allow their shares to be traded on the new market, including some securities from international companies.

The bank charges a commission when it matches a buyer and seller and uses its own capital to act as a market maker, if necessary. The system allows it to control the number of investors in any security, which the regulations insist must stay below a threshold of 499, or the issuer must register as a public company.

Goldman declined to comment on the volumes of trading in Oaktree. However, Orla Nallen, managing director at The Bank of New York, said at a recent Securities Industry and Financial Markets Association conference on hedge funds: “A lot of managers are teed up to do private sales such as Oaktree, as not as many are ready to go public as you think.”

James Sullivan, a partner in the corporate transactions and securities group at law firm Alston & Bird, said he had talked to private equity managers that had considered an initial public offering but hesitated because of regulatory requirements, such as Sarbanes-Oxley.

He said as a result, and now that investors can trade among themselves more easily, private placements have become a more attractive option. In a memo accompanying the sale of the stake, Oaktree Capital Management said it did not want to be subject to all the regulations applicable to publicly-traded companies in the US.

Other private equity firms, including Apollo Management and TPG Capital, are considering selling their stakes privately. Rival Blackstone Group has chosen the alternative public route, filing for a $4.7bn flotation after having raised $3bn from China's State Investment Company. A successful float by Blackstone could encourage rivals to follow.

Bankers said interest in raising equity capital had soared since February's impressive market debut by private equity and hedge fund manager Fortress Investment Group. Its shares were listed at $18.50 and spiralled to $37. They have since fallen to below $30 but the company trades on an earnings multiple of 26.