HEDGE FUND NEWS
@ Fri 08 June 2007 : GMT

FINTAG COMMENT

Unlike escapee Paris Hilton, I am tied to this blog like smog is to L.A. But unlike China I am as transparent as a window in Amsterdam's sex district. [Editor:Enough of the google keywords ranking game]

Having installed a new website user tracker, I am alarmed that after Hedge Funds, the number 2 most frequent readers come from Universities; so maybe I will be the catalyst to a new generation of startups by students who didn't bother to enjoy the grind and tedium of Investment Banking but went straight into running hedge funds with a few mates from facebook.

Interestingly I have just joined facebook to poke at the few hedge fund workers who have time to play virtual reality games instead of making their principals rich. And to my co workers you know who I am talking about.

Onto more serious matters and having carried out a feedback survey on what subjects interest you, I can conclude the following is what you want:

1 who's hot and who is not
2 blow up gossip
3 what hedgies wear
4 where hedgies eat/go clubbing
5 activism and fighting
6 how much do hedgies get paid
7 money laundering and tax evasion

So on this bombshell here is some dull news that touches few of these topics.

Up Periscope News

As the bond and equity markets react to threats of inflation, it is interesting to note that the long forgotten inverted yield curve is making it known that 12 months was long enough:

CO2 News

SPhinX battles over USD263 mln in Refco bankruptcy (reuters)

F&C unveils event driven fund of hedge funds London listing (reuters)

Bull-Dog Sauce pursues poison pill option to block hedge fund bid (ft)

G8 backs off hedge funds' conduct code (independent.ie)



Quote of the day
"That's right: it was some Swedish divorcee health commissioner, sitting in her velour slacks in her taupe-coloured office in the Breydel building, Brussels; and I could just imagine the imperious set of her jaw as she put down her glass of Badoit and prepared to Mont Blanc her initials under the EU edict that alcohol was henceforward to be clearly labelled as a poison; and in my rage I reached for another lunchtime glass of Mazis-Chambertin 2000, to fortify myself for the rigours of composing my column, and I can tell you that it was with all bomb bays fully loaded that I arrived at my desk; and I was on the very point of launching the great Brussels-busting task force when I paused." Boris Johnson, MP, on the EU's decision to put health warning's on wine.

PIRATES DESTROY THE AA

The AA: rescue or wrong turn? (bbc)
Has a private equity takeover been good or bad for the AA?

Since the private equity firm Permira helped take over the AA in 2004, about one third of its workforce of 10,000 have lost their jobs.

Former award-winning AA patrolman Steve Thompson is among several current and former AA staff who tell the Money Programme that private equity has, in their view, damaged the company they love.

"If anybody hears that private equity is taking over their company, beware of the signs," he says.

Some of the AA's staff were represented by the GMB trade union. Its officer Paul Maloney is critical of the management's approach during the job cuts. He describes it as "horrendous" and says it amounted to "corporate bullying".

The AA's chief executive, Tim Parker, installed by its private equity owners, strongly rejects the bullying claim and says the company had genuine performance issues that necessitated the restructure.

"They had not been addressed for many, many years and it was essential that we did that for the members."

Apart from the AA, private equity takeovers have often resulted in radical job losses for the company in question.

Are customers left waiting longer on the left shoulder?

"It could be argued these are unproductive jobs, but that's rather harsh when looked at in a social context," says former chairman of Marks & Spencer, Paul Myners.

But Permira partner Charles Sherwood, one of the private equity owners at the AA, defends the practice, saying, "there are some businesses where you have to take an initial step backward before you can take a business forward".

"If they do not produce good value services for customers then they have no long term future and they will employ no-one," he says.

Mr Parker admits that last year "we could have done with slightly more patrols, and we learnt something from that".

But he maintains the AA's patrol force is now more effective than ever before.

In fact, he thinks the AA in its entirety is stronger than ever.

"We are a good example of a business which had a good business plan which has delivered improvement and sales and is now in a very strong financial position," he says.

Vulnerable company

The AA's current management says the company's earnings are now up by £120m a year.

Motorway traffic
The AA believes its business is flowing better now than before

It sounds like the company is doing brilliantly.

But then there's the small issue of debt. The private equity owners loaded the AA with £1.3bn of borrowed money during the takeover. This has since risen considerably.

Understanding how this works is the key to understanding the private equity buyout system.

Some £1.3bn of the AA's initial buyout of just less than £1.8bn came as loans arranged by Barclays Bank.

Former venture capitalist Peter Folkman argues the prudence behind this level of debt is dependent on the general health of the economy.

"If the company is making more profits, it can service the debt. That's fine," he reasons.

"If we get hard times then, undoubtedly, it'll make the AA much more vulnerable."

High debt levels

As private equity investors become bigger players in the UK economy - the £11bn buyout of Boots is set to be the largest ever in the UK - there is concern at very high levels at the size of the debt being piled on the companies that get taken over.

The Financial Services Authority has raised concerns that one day a private equity company might collapse under the weight of its own debt .

But at Permira, one of the AA's private equity owners, partner Charles Sherwood adamantly denies overloading this or any of their other companies with debt.

"It serves us no good at all to burden the company with more debt than it is capable of servicing in a sensible way," he insists.

WHERE'S MINE?

Oligarchs take helm on the high seas and in salerooms (times)
In some Renaissance Italian city states, it was the custom of rich families to vie with each other to put up the highest buildings. Something very similar is going on among the plutocrats who dominate the luxury yachts market.

Ships are getting bigger. If your rival has a 160m yacht, make yours 162m. Or 165m. “Bigger is always better,” laughs Jonathan Beckett, chief executive of the yacht broker Nigel Burgess. “It's a phenomenon — the market has exploded.'' This scramble is led by a collection of the super-rich drawn from the ranks of Russian oligarchs, Indian billionaires, hedge fund managers, tycoons, Greek shipping owners — anyone who can put down up to €500 million (£340 million) for an ocean-going vessel.

“Fifteen years ago, if you sold a boat of 50m it was a fantastic deal,” Mr Beckett said. But he believes there is a cut-off point, with anything between 30 and 50 people who want and can afford such ships chasing the 12 afloat.

“There aren't 50 boats. There will be. That's not an infinite market. I think then you reach saturation point, when prices will settle.”

David Barrie, director of The Art Fund, which buys works for public galleries, sees no such saturation point at the top end of the art market, after recent record auctions.

“People keep comparing the situation to the late 1980s when there was another huge boom in the art market. That was followed by a huge bust. But there's no sign of prices flagging.”

Surely they must eventually fall? “If you take a historical perspective, the answer has to be no. At the very least the market is going to calm down and prices must level off. I don't think it's a bubble that's going to burst.

“The top end of the art market today is dominated by rich individuals. In the past, it was rich individuals and rich galleries.”

NO SENSE OF HUMOUR

NY analyst sues over Borat film (guardian)
Borat's efforts to glean cultural learnings from the US have upset a New York financial analyst, who is suing 20th Century Fox over a scene in which he was chased down the street by the spoof Kazakh journalist.

Jeffrey Lemerond, a former healthcare analyst at the Carlyle Group , who now works for SAB, a hedge fund in New York, has filed a lawsuit claiming he suffered "public ridicule, degradation and humiliation" in the hit movie, which starred the British comedian Sacha Baron Cohen.

During the film, Baron Cohen's Borat character attempts to hug and kiss an apparently random selection of people on the streets of New York. The lawsuit says: "Plaintiff is seen fleeing in apparent terror, screaming for Mr Cohen to 'go away'."

The federal suit is filed under a pseudonym, John Doe. However, the American media has identified the plaintiff as Mr Lemerond.

Lawyers for Mr Lemerond say he gave no permission for his inclusion in the film - and that it was not newsworthy, therefore breaking New York's privacy laws.

Baron Cohen's film, which has taken more than $260m (£130m) in box office receipts, has prompted frenetic legal action. Two Romanian villagers sued last year, complaining they were shown as "simpletons". In December, a judge threw out a suit from two South Carolina students, who claimed the producers plied them with alcohol and induced them to make sexist remarks.

Fox has consistently maintained that such lawsuits have no merit.

POOR DUE DILIGENCE

Amaranth files motion to dismiss San Diego lawsuit (reuters)
Amaranth Advisors LLC, the hedge fund that collapsed last year amid $6 billion in losses, filed a motion on Thursday to dismiss a lawsuit filed by the San Diego County Employees Retirement Association, according to a court filing.

The San Diego pension fund "knew exactly what they were getting into" when they put pension money into Amaranth, the motion filed in the U.S. District Court in Manhattan stated.

The pension fund accused Amaranth of failing to adequately disclose the risks of investing in the hedge fund.

EU IN A TISWAS

Annual Irish Consumer Price Inflation was 5.0% in May; Excluding mortgage interest, the rate was 2.6% - Service inflation was 9.1% (finfacts)
The CSO reported today that Irish Consumer Prices in May, as measured by the CPI, increased by 0.4% in the month. This is the same monthly increase as recorded in May of last year. The annual rate of inflation fell slightly to 5.0%, down from 5.1% in April.

The EU Harmonised Index of Consumer Prices (HICP) increased by 0.3% in the month, compared to an increase of 0.5% in May 2006. The annual rate of inflation, as measured by the HICP, decreased from 2.9% in April to 2.7% in May.

The most notable changes in the year were increases in Housing, Water, Electricity, Gas & Other Fuels (+22.6%), Alcoholic Beverages&Tobacco (+5.4%), Restaurants & Hotels (+4.9%), Education (+4.8%) and Health (+2.8%). There were decreases in Clothing & Footwear (-3.1%) and Furnishings, Household Equipment & Routine Household Maintenance (-2.0%).

The annual rate of inflation for Services was 9.1% in May, while Goods increased by 0.3% in the year.

The most significant monthly price changes were increases in Housing, Water, Electricity, Gas & Other Fuels (+0.7%), Restaurants & Hotels (+0.6%), Food & Non-Alcoholic Beverages (+0.6%) and Clothing & Footwear (+0.6%).

The main factors contributing to the monthly change were as follows:

Housing, Water, Electricity, Gas & Other Fuels costs increased with higher average mortgage interest repayments and rents.

Restaurants&Hotels rose with higher prices for eating & drinking out and accommodation services.

Food & Non-Alcoholic Beverages rose with increases across a range of products including lamb, potatoes, other bakery products and beef.

Clothing & Footwear prices increased with higher prices for both clothing and footwear.

The CPI excluding tobacco index for May was up 0.4% in the month and up 4.7% in the year. The CPI excluding energy products index was up 0.2% since April and increased by 5.1% in the year. The CPI excluding mortgage interest increased by 0.4% in the month and rose by 2.6% in the year.

REALLY?

Excess liquidity can lead to sloppy banking (financeasia)
The head of BNP Paribas' energy and commodities group in Sydney says when markets become heated, proper risk assessment is needed to avoid disaster.

Prema Balakrishnan runs BNP Paribas' energy and commodities export project (ECEP) in Sydney - a division of the bank that provides project and trade finance solutions along the export value chain.

While BNP Paribas has ECEP divisions dotted around the world, including Singapore in Asia, the Australian office has become the Asia-Pacific regional hub for the bank's mining and resources activities. These include providing finance to small-to-medium mining companies but also providing commodity price risk management and making evaluations for companies with a cross-border acquisition strategy.

Here, Balakrishnan discusses the idea behind the ECEP group and how she plans to expand the mining franchise in Australia and the region. She also discusses what can happen when credit becomes too readily available to project sponsors.

How does your ECEP division differ from supply chain offerings being set up by trade finance banks around the world?

Balakrishnan: We came to the realisation four years ago that it made sense for us to bring the parts of the bank involved with project finance and structured trade finance solutions together. So I suppose we were a first mover in this trend. The supply chain offerings of other banks often don't extend to the production phase. They tend to focus on the financing of transactions once a product has been produced, whereas we get involved in the development stage - the stage where a company is still mining for or harvesting a particular commodity. Our involvement might come in the form of development finance, risk management or hybrid funding. We also have a global fund that invests directly in energy and commodities companies, so we are ready to take a stake in these businesses.

Has that fund made any investments in Australian companies?

Not as yet, though we engage with the managers of the fund regularly and talk about opportunities in Australia. The fund is based in New York and has a global mandate with most of the investments so far happening in the US and Latin America. At the moment it has an investment program of $250 million and there are plans to launch another fund.

What about your activities as a commodities trader?

I think our ability to take a position on a commodity is key to building strong relationships with clients. We are members of the LME, NYMEX and IPE which enables us to act as a principal in transactions. As long as there is a terminal market or an exchange tradable market in the commodity, we can trade it. In Australia we have extended structured trade solutions for skim milk powder, coal and steel, and we are looking at iron ore, copper and nickel. Because we are prepared to take a position, we can buy a commodity from an intermediary, like steel for example, and then sell it on to our client on a just-in-time basis or via a repurchase facility.

You say that the mining sector is a key focus of the ECEP group in Australia, what are you doing in this space?

The mining initiative taking place here is part of a global initiative and the Sydney based team is at the centre of expertise for the Asia-Pacific region. This means trying to co-ordinate deals with our teams in Latin American, Africa and Asia. We are doing everything from providing development finance, facilitating trade flows, investing directly in mining projects and trading in the commodities that are produced in the mines. Our team includes two mining engineers and one geologist which gives us the power to independently assess the viability of our clients' businesses. Not only do we have this technical expertise but we have a strong understanding of emerging markets too which means we are aware of local issues and know how the local regime operates. This appreciation really helps us in the mining business.

What about corporate advisory in the mining sector?

Having clients dotted around the world means that we can bring them together and foster cross-border M&A activity. We get a lot of enquiries from clients offshore who want to invest in Australian resources businesses, so we spend considerable time conducting business reviews and feasibility studies. This requires dedicated team of staff that has the ability to assess a business properly and we are looking to expand this team.

When it comes to providing project or structured finance, do you like to club together with other banks?

Last year we were a lead arranger in financing Hancock Prospecting's investment in the Hope Downs iron ore project, and National Australia Bank and Royal Bank of Scotland were also on this deal. Our preference is not to do club deals. Sometimes we are brought together with other banks because a client wants it that way, but we would prefer to act as the sole arranger financier and then either syndicate the risk out or hold it ourselves. Club transactions can be tricky when one of the banks in the group doesn't know enough about the mining or resources sector to evaluate the risk properly.

Has this become a problem in the structured finance arena - the evaluation of risk?

Yes. I think that the high level of liquidity in the market place at the moment is affecting the process of risk assessment and due diligence. A herd mentality means that discipline has gone out the door. There are very high valuations being placed on assets at the moment, and we have to remember, that it wasn't very long ago when some of these assets were in the slumps. You have to ask whether a business or a project can survive a downward cycle, because when a cycle turns, it can turn very fast.

So what is your strategy for surviving dips in the cycle?

First you have to have the right technical people on your team who can evaluate a project or a business, and second, you need to be prepared to walk away from a deal. And we are prepared to do this. When the project financing for the Cross-City Tunnel in Sydney was being put together a few years ago, we couldn't make the traffic numbers stack up so we declined to be part of a consortium that funded the deal. We were criticised for the decision at the time because 16 other banks went in, but now our decision has been vindicated. (The tunnel went into receivership last year with A$560 million in debt.)

What new services are on the horizon?

We are looking around the globe to see what is being done by other ECEP divisions and what might be applied here. In the US, the bank is looking at transport to and from oil fields as a new business - acquiring or chartering the planes that service the oil rigs. This might have application here in Australia in the mining sector where a lot of the mines are in remote outback locations. We are also looking at the possibility of trading some obscure commodities. The bank's various divisions are already doing this. Like in Geneva they trade orange juice and olive oil, while the Dublin office has traded in glass bottles. We like to drive innovation and put products in front of our clients that they haven't seen before. The tricky thing is that each deal is unique and structured differently which means it is multi-faceted, so it can take some time to get these deals done.

Copyright FinanceAsia.com Ltd., a subsidiary of Haymarket Media Ltd

WHICH LEADS NICELY ONTO ...

Bond turmoil raises fear of end to easy credit (ft)
The benign credit conditions that have helped fuel the global buyout boom came under threat on Thursday as the yield on 10-year US government bonds registered its biggest daily jump in years.

Some analysts suggested the dramatic rise in yields could herald a sustained period of higher interest rates, increasing the cost of borrowing for companies, deflating borrower-friendly credit markets and eventually crimping the outlook for equity markets.

The S&P 500 index fell 1.8 per cent in New York while the German Dax dropped 1.4 per cent.

“Stocks need to reflect what bond yields are saying,” said Michael Kastner, portfolio manager at SterlingStamos. “Rate cuts have been taken away and if yields start to reflect that rate hikes are likely this year, then it will get pretty ugly for stocks.”

The yield on the 10-year US government note hit 5.14 per cent in New York trading, marking the biggest one-day advance in several years, before settling back to 5.10 per cent. That brought 10-year yields above those on shorter-term Treasuries, restoring a more normal - that is, “steeper” - yield curve.

For much of the past year and a half, longer-dated notes have offered lower yields than shorter-duration bills, creating a “conundrum”, as Alan Greenspan, then chairman of the Federal Reserve, put it in 2005.

But yields on US, European and Japanese government bonds have been climbing for a month, fuelled by strong economic data and, in places, fear of inflation.

Government bond yields soared on Thursday in the eurozone and the UK, pushing the 10-year Bund yield to a four and half year high and the 10-year gilt yield to its highest for nine years.

The moves come a day after the European Central Bank raised its main interest rate to 4 per cent, its highest level since September 2001. Many investors fear the ECB will continue raising rates this year to counter inflationary pressures. The Bank of England on Thursday kept its main interest rate on hold at 5.5 per cent, amid investor worries that rates could rise next month or in August. Predictions of a Fed rate cut have largely been abandoned.

The sharp rise in the US 10-year bond yield was particularly disturbing to technical analysts who monitor the pattern of Treasury interest rates, which have been broadly on the decline since the late 1980s. Over this period, each peak in rates has been progressively lower. Thursday's advance created a higher peak, breaking the trend and potentially signalling a longer-term advance in rates.

“A lot of people are scared of that 20-year trend line and rightfully so,” said Gerald Lucas, senior investment adviser at Deutsche Bank. “A close above that level at the end of this week would likely target a further rise to 5.25 per cent.”

The 10-year Treasury is widely used to hedge risk associated with fixed income securities such as mortgages.

Copyright The Financial Times Limited 2007

DIPPING

Deutsche Bank, Four Hedge Funds In Insider Probe (finalternatives)
Deutsche Bank finds itself in the sights of regulators once again, as France's financial authority investigates accusations that it passed insider information to four hedge funds.

It is the fourth time in little over a year that regulators in Europe have taken aim at Deutsche Bank for such alleged malfeasance. In the current case, the Autorie des Marches Financiers is probing telephone calls between Deutsche Bank and hedge funds GLG Partners, UBS O'Connor, Ferox Capital Management and Meditor Capital Management. According to an unreleased 80-page report on the matter, Deutsche Bank allegedly helped those hedge funds trade shares in Vivendi Universal in advance of a convertible-bond sale in November 2002, Bloomberg News reports. Shares of Vivendi took a 14% nosedive in the days before the offering.

According to the report, Deutsche Bank also failed to keep proper records of the conversations, as required by French law, and destroyed the relevant tapes. Bloomberg reports that Deutsche Bank may be slapped with €3 million in fines for its alleged role, with each of the hedge funds possibly earning €1.5 million fines, which would make it the biggest combined fine even in France related to improper trading.

This is the second time this year that Deutsche Bank has run afoul of France's AMF: It and GLG were fined in January, with Deutsche accused of improperly leaking information regarding an Alcatel convertible-bond sale. The firm was also hit last year by British accusations of misleading investors about a stock offering, and by Spanish regulators in March for leaking information again.

CORRELATION = 1

As Money Pours in, Hedge Funds Come to Look More Like the Markets (nytimes)
“We are somewhere between the third and fifth inning in the growth of assets invested in alternative strategies,” said Todd Builione, a managing partner at Highbridge Capital Management, a $15.7 billion hedge fund that is majority owned by JPMorgan Chase.

Ray Dalio of Bridgewater Associates compared hedge fund and market index returns.

Indeed. According to Douglas C. Wurth, global head of alternative investments at JPMorgan Private Bank, $1 billion a month is flowing into hedge funds on JPMorgan's platform, where wealth managers are now recommending that very rich individuals ($25 million or more) and institutions put 35 percent of their portfolios in alternatives, and 20 percent of that into hedge funds.

Mr. Wurth and Mr. Builione were both speaking on a panel with other senior executives from the private bank at a briefing in New York. It was clear that alternatives continue to be the rage for a number of reasons, including the low correlations that hedge funds have historically had with major equity and bond markets. In other words, when those markets tank, hedge funds, in general, do not.

Then there's Ray Dalio.

Mr. Dalio, the founder of Bridgewater Associates, a hedge fund with about $30 billion under assets, has some different thoughts on his industry, including some tough questions on why hedge fund returns look so much like stock market returns when they are not supposed to be correlated.

In a private research letter sent out this month, he and a colleague examined the correlation of hedge fund returns to the returns of certain market indexes.

In general, hedge funds returns should not replicate stock market returns. If they did, investors would be smarter to buy index funds and not pay the steep fees of hedge funds. Because hedge funds can hedge their bets, borrow to increase their bets, tread where others fear to tread and seek out nontraditional assets, they should generate excess returns (alpha), not just reflect market returns (beta).

According to Mr. Dalio's analysis, over the last 24 months, hedge funds were 60 percent correlated to the Standard & Poor's 500-stock index, 67 percent correlated to the Morgan Stanley Capital International EAFE (for Europe, Australia and the Far East) index of foreign shares, and 87 percent correlated to emerging market equities (unhedged). They were 41 percent correlated to the Goldman Sachs Commodity Index, 52 percent correlated to high-yield, or junk, bonds, and 42 percent correlated to mortgage-backed securities.

The letter also parsed the correlations by strategy, which is a more precise way to think about hedge funds, since different types of funds take different kinds of risks. Short-biased hedge funds have a negative 70 percent correlation to the S.& P. index, while equity long-short, the description applied to what most people think of as a hedge fund strategy (betting that some stocks might go up and others might fall, usually with leverage) had a huge correlation of 84 percent.

Then Mr. Dalio looked at data back to 1994, which showed that historical correlations were in the range of 49 to 54 percent; high, but not as high. So as equity markets have done well, hedge funds have done well — not necessarily because of their genius but because they have the wind of the stock markets at their back and because a lot of them use leverage to magnify their bets.

(Mr. Dalio did not return calls for comment.)

In a period when volatility is low and credit spreads are tight, it should be difficult for hedge funds to make a lot of money. But many funds appear to be taking the easy way out.

Still, no one cares about correlations, or anything else really, until the markets head down. But a lot of investors like Bridgewater as a part of a diversified group of hedge funds because Mr. Dalio has a contrarian view, and if and when the markets tank, he should — and he had better — trounce his more correlated peers.

And Mr. Dalio clearly has more than his powers of prognostication on the line: Bridgewater returned a meager 3.4 percent last year.

Many people in asset management think the whole correlation thing is overblown: of course hedge funds will take advantage of strong markets to make money. The key is that when the markets turn, these managers can do something about it. The question is whether they are smart enough to know to do it.

Maybe they are. But investors would be smart to try to understand how exposed they might be to the markets when they think they are well protected against them. (Private equity firms, another popular place to dump money these days, are buying highly leveraged large-cap companies.)

Of course, understanding returns may be hard. Mr. Wurth of JPMorgan expressed concern about aspects of hedge fund investing, notably the lack of transparency, which makes it harder to try to monitor trading by fund managers and the lack of influence a single client might have on a big fund. Which is why JPMorgan suggests clients limit themselves to only 35 percent in alternative investments, even though many want their portfolios to look more like those of foundations and endowments, which can have as much as 60 percent of their assets in alternatives.

"You do things that foundations don't do," Mr. Wurth joked. "You die and you pay taxes. So don't get ahead of yourself."