HEDGE FUND NEWS
@ Mon 18 June 2007 : GMT

FINTAG COMMENT

Following a sports saturated weekend (Golf, F1, Real Madrid et al) and a 2 days Pimms-fest session at Queens for the men's tennis championship, my "bear syndrome" has kicked in again. We are building up nicely to the 25th June 2007 market correction, as previously prophesied, quite nicely. And here are some reasons why:

Goldman is the new Bear Stearns.

Japan bails out of Hedge Funds as Basel 2 brings managed accounts to the fore again (Nomura is to buy HFR, a managed account platform provider, to solve the problem).

Merrill Lynch bails out Bear Stearns and bonds continue to fall.

Replicators are the saviours of the Hedge Fund industry (not).

Private Equity cave in to being taxed more.

The Financial Times is to buy out the Wall Street Journal (no love lost there me thinks).

Firms are shunning IPO listings and waiting to be raped by Pirates instead.

Mayfair is the land of the tosser.

PIMMS HANGOVER NEWS

Bull vs. Bear - Merrill seizes assets of Bear Stearns subprime fund (dealbreaker)

Wall Street Analysts More Bearish Than Ever; More Accurate, Too (bloomberg)

We Are All Tossers Now (guardian)

Hong Kong's latest Reit scrapes through (financeasia)

Singapore's Chinatown new home for hedge funds (reuters)

Hedge Fund Targets Sunrise Senior Living (dealbook)

US opposes proposals for 'voluntary' hedge fund code (ftalphaville)

BEDTIME READING

Why The Japanese are Redeeming from Hedge Funds and Why Most Institutions Will Be Forced To Do The Same Very Soon - BASEL II (pdf)

Who is this smug looking Bear?

EVERYBODY HATES GOLDMANS

Goldman Sachs alternatives inflows sink to zero (financialnews-us)
Net inflows to Goldman Sachs Asset Management's alternative investment funds, which includes hedge funds, fell to zero in the second quarter for the first time since the bank started reporting a breakdown of inflows in 2004.

Alternative investments have been one of the greatest drivers behind the asset management division's performance. Last year the bank reported net inflows of $32bn (€24bn) into alternatives after stellar investment performance in 2005.

However, with performance slipping last year and this year, net inflows declined to $2bn in the first quarter and were flat in the second.

David Viniar, chief financial officer of Goldman Sachs, told analysts: “There is not really much colour to add; it was flat over the quarter. We are pretty optimistic on the business, we are adding new products and I think over time you will see that grow.”

In response to questions about Global Alpha, a $10bn hedge fund, Viniar said withdrawals had been minor. He said: “There have not been substantial redemptions. People who are investing in the fund understand that it is a high risk, very volatile fund. Over the life of the fund, it has had quite good performance but recent weakness.”

Sources said the fund was down at least 6% to the end of May. Last year it lost 9% but in 2005 returned more than 50%. Goldman Sachs declined to comment.

A decline in fund performance has affected performance fee income, which fell 87% from $843m in the first half last year to $110m in the same period this year. At the same time management fees, which are fixed, have grown by 26%.

This reflects $36bn in net fund flows into fixed income and equities in the first half.

Goldman Sachs Asset Management earned $2.1bn in revenues in the six months to May 25, which was 13% lower than the same period last year. At the end of May the group had $758bn under management, of which $151bn was in alternative investments.

The alternatives division includes hedge funds, private equity funds of funds, hedge funds of funds, multi-manager fiduciary assets and some funds managed on behalf of the private high net worth client group.

CLEAR AS MUD

Basel II spurs hedge funds to open books in Japan (reuters)
Tough new rules that prompted Japan's regional banks to cut billions of dollars from their investments in hedge funds are spurring some of the secretive funds to be more open about where they're placing their bets.

In a bid to woo back capital, these funds and their advisers are providing more data on positions and trades, industry players said. Products promising hedge fund exposure, but with greater disclosure and less risk, have also emerged.

While some hedge fund managers worry this could allow their strategy to be copied and profits crimped, a growing number, especially smaller and newer managers, have succumbed to the pressure.

"Hedge funds are beginning to be more transparent to investors," said Mitsuhiro Kawamoto, a deputy director at Japan's Financial Services Authority (FSA).

Regional banks have cut their hedge fund investments by $5 billion, according to some industry estimates. Many appear to be holding that money in cash or ploughing it back into the resurgent corporate loan market.

The decision by Japan's regional banks to invest with the sometimes controversial hedge fund industry has its roots in the bursting of the country's asset bubble in the early nineties.

The collapse dragged on economic growth for more than a decade and cut demand for corporate lending.

Regional banks had to look elsewhere for returns, and raised their investments in hedge funds and other risky assets to about $27 billion, according to data from the Bank of Japan.

But this exposure to the notoriously secretive and sometimes volatile asset class made regulators nervous. Both FSA and the central Bank of Japan have expressed concern that the banks did not have the resources to monitor these investments.

Blow-ups such as Amaranth in the United States and Eifuku in Japan heightened their fears.

MORE DATA, NEW PRODUCTS

The advent of Basel II, which requires banks to set aside more capital aside if they invest in hedge funds, has helped regulators achieve their aim of deflating the situation by default.

"Regional banks which are not so capable of understanding what hedge funds do are retreating from investing in hedge funds," said Kawamoto.

Poor performance may also be a factor. Last year Japan-focused hedge funds were hit hard by a sell-off in small cap stocks in the first half of the year.

Research firm Eurekahedge's index of Japanese hedge funds lost 3.46 percent in 2006, making them the worst performers globally. This marked a sharp reversal from gains of 23.69 percent in 2005.

To stem redemptions, some hedge funds and their advisers have started providing more data on investments, as well as working with regional banks to help them improve risk controls.

"We lost about 80 percent of the regional bank money invested in our hedge funds this year. We offer more transparency now because if we don't we'll lose more," said the head of hedge fund investments at a U.S. bank in Tokyo who markets about 20 funds to Japanese investors.

OUT OF SHADOWS

Japan was the first country in the world to implement Basel II and developments are being closely watched by the United States, which is struggling to hit its 2009 deadline, and Europe, where banks are due to adopt Basel II by the end of this year.

The new rules, which Japan implemented in March, stipulate banks have to set aside a maxiumum of 12.5 times the sum they invest in funds as insurance in case the fund loses more than the capital invested, as opposed to reserving zero for holding cash.

This has made it costly for the regional banks to invest in hedge funds. But banks can lower the amount of capital they have to put aside if they can demonstrate they understand the product.

Some consultants are trying to cash in on Basel II by selling products, like managed accounts, designed to help the banks calculate the risk of their investments. With managed accounts, the bank pays extra to have more information on the funds' positions, trading and prices.

"Managed accounts may help exposures to be assessed, modelled and the most appropriate risk weighting applied for," Simon Hookway, chief executive of MSS Capital, which specialises in products for hedge fund investors.

Another is principal protected notes. Investment banks will guarantee the return of most of the capital the regional banks invest -- for a fee.

But given the growing popularity of hedge fund investments in Asia, many larger and more established funds have spurned this new openness. Preferring to remain in shadows and keep their positions secret, they are courting investors who are not subject to the new regulations.

"Some funds are saying no thank you and raising money from high net worth individuals and life insurance companies," said Stan Howard, executive director of Teneo Partners, which advises asset managers on hedge fund products.

EDHEC

Move to mimic hedge fund glory (ft)
Why pay a 20 per cent performance fee for a hedge fund when you can replicate one for almost nothing? A slew of products using computer models to clone or replicate hedge fund returns are being launched in a bid to capture some of the billions of dollars flowing into the industry.

The products have the potential to revolutionise the industry, in much the same way as indexed funds affected mutual funds.

New York-based Stonebrook Capital is the latest to launch what it calls an “alternative beta” strategy, using models to replicate hedge fund strategies. It charges a 1.5 per cent management fee instead of the 2 per cent management fee and 20 per cent performance fee typical of actual hedge funds. The firm is also one of few African-American owned hedge fund groups, an advantage given pension fund pressure to allocate business to minority-owned firms.

Jerome Abernathy, the founder of Stonebrook, said research shows 70 per cent of gross hedge fund returns could be attributed to market returns rather than the skill of individual managers. Also, more than 30 per cent of gross returns went to the hedge fund manager in the form of fees.

Goldman Sachs, Lynch and Bank have launched hedge fund replica strategies, available to institutional investors. JPMorgan will launch one in the next few weeks, in a tie-up with three academics who produced the definitive research showing that hedge fund returns could be duplicated by computer models. IndexIQ, a New York-based quantitative strategist, has launched a series of synthetic indices which it is offering to distributors.

Rydex Investments, which services retail investors, was the first to launch such products. It has attracted $500m in the past 18 months to its three funds, which replicate hedge fund strategies but are structured in the form of mutual funds. It launched a replica managed futures fund two months ago, which has already pulled in $140m in retail money.

Patrick DiNuzzo, an investment adviser, said: “We have been dying for this type of solution for years... they are at the leading edge of enormous demand in the marketplace.”

Rydex plans several more replicas, based on merger arbitrage and currency strategies. The returns of its main fund so far have slightly underperformed most indices.

The products offer average hedge fund returns, not the outstanding returns that some individual managers do. However, the risk of a diversified portfolio is less. And they charge less than either a single fund or a fund of funds, the previous method of getting diverse hedge fund exposure.

Investable hedge fund indices, launched a few years ago, have not caught on because they do not include funds closed to new investors, cannot properly replicate the hedge fund industry, and tend to underperform. The synthetic indices and funds have no such hurdles because they do not include actual funds, but analyse typical strategies then recreate them.

PIRATE SOUP

Why humans snap at the heels of private equity (observer)
The fate of Jaguar and Land Rover will be a key indicator of the state of 21st-century UK plc. That the most likely buyer is private equity already tells us much - not least because in our City-dominated economy there are no large manufacturing candidates left.

If they are snapped up by private equity, will two of the best-known names in UK manufacturing go the 'propertification' way of Rover, their assets seen to be worth more as shopping malls and offices than factories employing people to make things? Or will they be turned round, their pipelines stocked with new models and returned to the stock market in rude, restored health?

That is the official private equity scenario, of which the motor companies will be an acid test. But the test track will not be ownership as such. Some of the best-performing motor and ancillary companies are already privately controlled, with a strong family influence - think of Toyota, BMW, Porsche and Michelin.

Yet these companies work to time frames and visions that are in many ways the antithesis of private equity. All are the result of patient organisation-building that stretches far beyond building a product and selling it. Toyota makes its own microchips (thus saving itself the electronic glitches that damaged Mercedes's quality reputation); while in Michelin's idiosyncratic structure the tyre brand is underpinned and spread by its maps and restaurant guides. How long would those last if the private equity funds got their hands on the French tyre-maker?

The testing ground is management. The corporate world is increasingly dividing into two rival visions of how to manage performance. Private-equity-driven management is a kind of turbocharged version of the existing command-and-control orthodoxy, but vastly bidding up both its inducements for success and the penalties for failure, and bidding down the human angle. Generic, numbers-driven, financially-motivated, it claims to be able to manage anything.

In a kind of Gresham's Law, private equity-style management is driving out longer-term, more people-oriented alternatives. Pressure from the capital markets is one factor, leading companies to try to head off the attentions of private equity or to respond to activist shareholders (such as those on the case of Cadbury and Vodafone) by pre-emptively adopting their own behaviour.

A second, less acknowledged, reason is the lure of quantification: managers find numbers easier to manage (and manipulate) than humans. A striking testimony to this clash of values is the conflicting attitudes of executives around HR. In a worldwide survey by the Economist Intelligence Unit and Deloitte, while 85 per cent of senior executives said people were 'vital' to business performance, 63 per cent admitted they never consulted HR leaders on mergers and acquisitions, and in three-quarters of firms HR barely contributes to strategy formation.

By piling on the pressures to dispense with underperforming assets and wring the utmost from existing resources, private equity favours present efficiency. Whether the same reductive appeal to financial motivation and quantification is as effective when applied to the less certain process of innovation is moot - let alone the investment in people, products and the organisation that leads to enduring outperformance in a sophisticated industry such as car manufacture.

While it is greatly to the taste of the capital markets, the private equity management style runs up hard against what people say they want from work. According to studies such as Roffey Park's annual 'management agenda', most people are still more motivated by making a difference, by recognition and by doing a good job and feeling good about it than anything else. Put bluntly, beyond a certain point most people want meaning from work rather than money.

Such concerns might seem to cut little ice in the face of the high returns being claimed by the most successful private equity and hedge funds, quite apart from the extraordinary amounts being pocketed by those in charge of them. Despite what people privately think, money talks louder than anything else, doesn't it?

Yet even in this ultra-hardnosed world, the human factor has a habit of biting back. Last week the Financial Times noted that staff at top investment banks in London, struggling to cope with record deal volumes, were so overstretched that they were in danger of making costly mistakes. One consultant noted: 'The temptation is to drive your people harder. But there is a limit. There could be a danger of people slipping up.'

It's a delicious irony: the boiler room of today's voom-voom capitalism at risk of blowing up under the pressures it is imposing on others in the name of the virtuous disciplines of private equity. Down on the shop floor, whether in the City or a Land Rover plant in Solihull, you take the 'man' out of management at your peril.

ISN'T THAT NORMAL?

Activist investors flex their biceps (times)
THREE weeks ago, Marcus Agius, chairman of Barclays, received a call from Nat Rothschild of the New York hedge fund Atticus requesting a meeting.

The timing seemed odd, given Agius was trying to execute the world's biggest banking deal - the proposed £93 billion merger with ABN Amro. Because Rothschild is his wife's cousin, however, Agius agreed.

But a few days later, on Monday, June 4, Agius was swamped with work and called Rothschild to cancel, promising to hook up for a chat when the bid was complete.

Rothschild refused to be fobbed off and, rather than argue, Agius jumped in his car and headed to Atticus' office in London's St James's. Even as Rothschild greeted him, Agius had no idea that their meeting would threaten to torpedo Barclays' deal with ABN completely.

Rothschild gravely handed Agius a letter signed by Timothy Barakett and David Slager, chairman and vice-chairman of Atticus. Agius read with astonishment a detailed demand for Barclays to drop its bid for ABN.

“It is clear that you are not the best owner for ABN Amro's sprawling collection of assets ... we share the market's concern that Barclays' thirst for an acquisition will lead you to increase your already full takeover offer. If you proceed we will vote against the deal and encourage others to do likewise,” the letter read.

Agius was furious - but careful not to underestimate Atticus's determination. By Wednesday, June 6, Bob Diamond, head of Barclays Capital, was dispatched to meet Slager in Atticus's headquarters in Manhat-tan's Park Avenue while Barclays' chief executive, John Varley, met Rothschild in London. The next day, a video conference call was set up between Atticus and Naguib Kheraj, Barclays' former finance director running the bid. Meanwhile, bankers from Citi-group were sent in on Friday afternoon, including the bank's head of financial services, Hamid Biglari, with Gary Sheldon from the New York office and Chris Williams who flew over from London.

But Atticus refused to back down and published the letter, claiming to have the support of a group of other shareholders. At a stroke, Barclays' deal was deemed to be in jeopardy - hamstrung by one investor.

Barclays was not alone. In the past three weeks, some of Britain's biggest companies have been caught out by aggressive activists.

A series of “poison pen” letters have landed on the board tables of Vodafone and Cadbury Schweppes from relatively small funds demanding the companies' immediate break-up; and last month Martin Reid was suddenly removed as chief executive of Log-ica CMG in the wake of investor demands.

These moves came only a few months after the activist investor TCI sent a letter to ABN demanding the bank's break-up and sparked what has become a global bidding war.

Just as corporates thought investor relations couldn't get any worse, last week it was announced that Third Point, the New York hedge fund famed for its bullyboy treatment of corporate America and use of scathing public letters, was planning to start its first European fund.

Shareholder rights under UK company law have hardly changed since the late 1980s. The big difference is the change in the shareholder register to include a growing number of activists motivated by the rich rewards that turning companies round can bring. Atticus, which has $17 billion (£8.6 billion) under management, last year generated 35% returns.

Although more prolific in America, investor rows are hardly new in Britain - few could forget Fidelity's ruthless removal in 2003 of Michael Green, chairman-designate of ITV, while Atticus itself was instrumental in toppling Werner Seifert at Deutsche Börse. But corporates and their advisers have been shocked by both the proliferation of cases and the boldness of the demands.

One senior banker said: “In recent years, activism has evolved from a few quiet suggestions in a chairman's ear to louder complaints about specific deal-related issues, such as price. What seems different now is that activists are demanding to set a company's strategy and agenda themselves.”

Even Fidelity's Anthony Bolton - who has a reputation for being the City's “Quiet Assassin” - has been spurred into public comment, complaining that Cadbury Schweppes had bowed too easily to calls for it to break up.

In March, Trian, an American hedge fund co-founded by the activist investor Nelson Peltz, bought a stake of almost 3% in the British company. Three days later Cadbury announced it would separate its American drinks operations from its confectionery business.

Bolton said he feared this “could represent a come-on to every corporate raider or activist investor”. He added: “I don't think that the relationship between UK companies and their shareholders will ever be quite the same again.”

Atticus's Slager said: “Directors need to understand that they don't own the companies - we do. They shouldn't be persuaded by individuals, but if the collective body is in agreement, they must act.”

Many argue that companies and managers have only themselves to blame because the hedge funds are filling a vacuum left by inefficient, foot-dragging directors and institutions.

But others are also uncomfortable with the new activism. One objection is that activists demand a far higher level of attention than their shareholdings deserve.

The most obvious example is that of Vodafone where John Mayo, the former director of Marconi, has exploited a little-known loophole of company law to use a tiny stake - 0.0004% of the shares - to demand a complete break-up of the company. Commentators have branded the attempt of Mayo - who has gathered some heavyweight former investment bankers to help drive his investment vehicle ECM - as wrong and absurd. The demands, which look set to be put on the agenda at Vodafone's annual meeting, include forcing it to spin off its 45% interest in Verizon Wireless, its US joint venture, and taking on additional debt of £34 billion.

While the loophole might be an extreme example, institutional shareholders complain that financial derivatives - especially contracts for difference (CFDs) where only 10% of a stake is actually paid for in cash - allow hedge funds to wield power disproportionate to the actual risk they are taking. The Association of British Insurers (ABI) has called for City regulators to insist that hedge funds disclose their large positions at all times, not only when they are bidding for a business.

Last week Atticus converted its stake in Barclays from swaps to cash in answer to criticism that it should put its money where its mouth is.

Atticus was also wrong-footed by accusations that the fund was trying to block Barclays in order to protect the bid from the rival consortium headed by Royal Bank of Scotland.

Atticus remained silent as rumours flew that one of its managers had contacted the broker Cazenove to buy RBS stock just days before its letter to Barclays was published.

Slager told The Sunday Times: “We did have a small position in RBS, but we sold it at the beginning of the week to avoid confusion.”

Activists are also charged with accusations of collusion since in the most high-profile cases the same names - most frequently, TCI, Atticus and Tosca Fund - are all present.

Peter Montagnon of the ABI said the power of activists should not be overestimated. “Hedge funds only have a big impact if they touch a nerve. And often they raise issues that have been the point of discussion among institutional investors behind closed doors. In these cases, their ideas quickly gain the acceptance of other shareholders - if not, their demands go nowhere.”

Equally, the size of the targets is not only down to increased aggression but because some of the larger companies have underperformed other sectors and are cheap.

Montagnon added: “The world has changed with hedge-fund activists, but this doesn't mean institutions sit around doing nothing. Instead, it is often a close relationship with institutions that allows company directors to understand investor issues and deal with them quickly - for instance, with Cadbury Schweppes or ABN.”

Niall Paul, head of equities at Morley Fund Management, said: “People don't see the robust discussions held behind closed doors between us and company directors, which often result in subtle strategic changes.

“Hedge funds need publicity and noise to back up their small positions - we don't.”

LISTING IS FOR WIMPS

IPO pipeline runs dry (financialnews-us)
urge in European buyouts prompts slump in companies seeking stock market listings

The pipeline for company flotations in Europe has fallen to its lowest level since the last economic downturn, as businesses shun initial public offerings in favour of sales to private equity firms or strategic buyers.

Bankers expect a total of $6.7bn (€5bn) worth of IPOs from 50 floats to be completed this month and in July, compared with $25.2bn from 95 floats for the same period last year, according to Thomson Financial.

The figures are the worst since 2003 when global stock markets were at their lows following the fallout from the dotcom boom.

Total initial public offering volume for this year is set to be $58bn, the worst since 2004, against last year's $97bn, according to Thomson. The figures are in contrast with capital spent on private equity and strategic sales, a record $167bn so far this year.

Bankers deny this is the normal pattern of IPOs tapering off before the summer and say it could mark the start of a trend in which more flotations are rejected in favour of a sale to a strategic buyer or a private equity firm.

Last week the Berlin government plumped for a controversial sale of its 81% holding in Landesbank Berlin over an IPO.

The Government had pursued a dual track listing since January to identify which route was better and a month before schedule announced a €4.6bn sale to savings banks association DSVG after investor pre-marketing suggested a low IPO valuation.

Craig Coben, managing director of Europe, Middle East and Africa capital markets at Merrill Lynch, believes more companies are turning to private sales rather than floating on the public markets to raise capital.

He said: “Benign credit markets are enabling private equity, and strategic buyers in many cases, to outbid institutional investors for companies. As a result, many good companies that would have IPO'd are not making it to the market; they are being bought by financial sponsors or industrial parties.

"Vendors will sell to the highest bidder and, given the current tolerance of the credit markets for leverage within a company's capital structure, financial sponsors will in some cases be able to pay more than the equity market.”

One head of equity syndicate at a US bank said: “The IPO pipeline is much lighter compared to previous years and private equity activity is up to record levels. There are also more dual track listings around. Bankers could see a series of mandates disappear in coming months as companies turn to private equity. The companies just want to raise as much money as possible.”

The trend towards dual track listings, which involves deciding towards the end of the process whether to sell or list, has implications for banks' staffing levels and the fees they earn. Bankers may work for months on a dual track offering and, if the deal goes to a private seller, they come away with nothing.

Last year, buyout fund Permira dropped plans for a €2bn ($2.7bn) flotation of Italian yacht maker Ferretti, opting instead to sell some of its 60% stake to UK-listed buyout firm Candover Investments.

Buyout group Apax Partners' sale of medical company Mölnlycke Health Care this year was another example of the attraction towards the substantial returns brought by private equity over public markets. The disposal brought a return of over 10 times the amount Apax invested two years after buying the business, less than a float would have fetched, according to sources.

And Deutsche Bank and Goldman Sachs, working on the dual track listing of Siemens-backed auto parts manufacturer VDO, could be going home empty-handed.

Last month, chances for a flotation of the firm were looking slim after German tyre maker Continental put forward an €11bn bid for the business, trumping private equity group Blackstone's €8bn offer. Morgan Stanley is advising on the deal with Deutsche Bank and Goldman Sachs.