HEDGE FUND NEWS
@ Thu 28 June 2007 : GMT

FINTAG COMMENT

The last few days have been all go so today it slows down nicely.

We report that working at Google is preferable to Goldman; real estate beats hedge funds; UBS and Simpson Capital get parking tickets and replication is revealed once more to be a farce. Where art thou' ART?

Sovereign Wealth Funds are a threat to world order but nobody cares; Germany allows a hedge fund to be launched and CDO's and debt get an airing.

Oh yes, and I have food poisoning of the beer variety.

BATHROOM NEWS

USD1bn Caliber Hedge Fund Shuts Down Due To Subprime Exposure (lse)

HSBC won't be broken up, says Green (financeasia)

Northern Rock shares hit as profit growth is set to slide (times)

Worries grow about the true value of repackaged debt (ft)

Japanese firms go on the defensive against Hedge Funds (guardian)

Looking Like a Billion Bucks (nytimes)

Bear Stearns Assigns Top Trader (an oxymoron?) To Bail Out Hedge Fund (nysun)

Paulson: Hedge Fund Tax Hike May Have 'Consequences' (nysun)

Hong Kong v Shanghai: Global Rivals (bbc)

Regulators to Examine C.D.O. Investments (dealbook)

Eau de Panic at Bear Stearns (ft)

New York hedge fund Simpson Capital sued (ft)



Even With Seriously Bad News The Markets Don't Care

BRICKS AND MORTAR

Rich investors shunned hedge funds for property in 2006 - study (forbes)
The world's richest individuals halved their allocation to alternative investments in 2006, largely in favour of real estate and equity investments -- but the appetite for hedge funds and private equity is poised to return, according to a report by Merrill Lynch and Capgemini.

The report, which focuses on individuals with at least 1 mln usd to invest and as much as 30 mln usd, revealed that average allocation to alternative classes, including hedge funds and private equity, fell to 10 pct in 2006, from 20 pct in 2005.

Low volatility in the equity markets, new opportunities in real estate investment trusts (REIT) and performance in the commercial real estate market were identified as the cause for the shift.

According to the report, 2006 saw property receive 24 pct of allocations from high net worth investors, up from 16 pct the previous year.

The change, however, does not reflect doubts about alternatives, according to Nick Tucker, head of UK and Ireland Global Private Client group at Merrill Lynch.

'It was not skepticism, it is rather due to expectation of greater returns in the equity and real estate market,' Tucker said.

He added he expected interest in hedge funds and private equity to revive as investors remember that those assets classes were 'key' in the bear market at the turn of the century. He added however that he did not expect a downturn in the equity market.

The report forecast that by 2008 alternative assets will have regained some ground, with average allocations of 13 pct, while real estate allocation is expected to be 20 pct.

Equity, which in 2006 saw asset allocation increase by 1 pct point to 31 pct, is expected to remain stable in the run up to 2008.

The World Wealth Report has also highlighted increasing interest in socially responsible investments, largely thanks to inflows from new high net worth individuals.

SRI and ethical investments however are not seen just as an opportunity to invest responsibly, but also as potential for higher returns, the report said.

Tucker noted that the Domini 400 Social Index, based on the S&P 500 with applicable SRI screening, posted on average 12.7 pct a year since 1009, compared with the S&P 500's 11.4 pct.

Assets invested in SRI in Europe more than trebled to 1.3 trln usd in the two years to 2005, the report said, adding that 9 pct of European investors require SRI components investing 6 pct of the total portfolio.

In North America, SRI allocation is 8 pct while in the Asia Pacific region it is 14 pct.

'SRI cannot be avoided or ignored. SRI is a huge chance and people in the industry are aware (of the demand) and cater for this area,' Tucker observed.

Giving to philanthropic causes is also a trend on the rise among the rich. On a global basis 7 pct of high net worth individuals' portfolio is earmarked to philanthropy, with Asia Pacific emerging as the area with the highest allocation - 12 pct.

In North America and the Middle East, allocation to good causes was 8 pct in 2006, while in Europe it stood at 5 pct in Europe and 3 pct in Latin America.

In terms of geographical diversification for overall HNW investments, Europe has seen an increase of investments making up one forth of global investment volumes in 2006, up from 22 pct in 2005, while investments in the US declined by 1 pct point to 43 pct.

Europe is expected to account to 26 pct of investments in 2008, while the proportion invested in the US is expected to be 40 pct.

NEW ORDER

Mass. regulator charges UBS in hedge fund probe (reuters)
Massachusetts' top financial regulator accused investment bank UBS (UBSN.VX: Quote, Profile, Research)(UBS.N: Quote, Profile, Research) on Wednesday of trading Red Sox baseball tickets, low-rent office space, and other favors for business from hedge funds.

William Galvin, the state's Secretary of the Commonwealth, said UBS' Prime Services unit ran a so-called hedge fund hotel in Boston's financial district, engaging in unethical practices and conflicts of interest that could raise fees for investors.

Less than six months after launching his probe, Galvin filed an administrative complaint to demand the Swiss bank stop such practices, recommending a censure and a fine against UBS.

"If you are giving out points for brazenness, the things these people did rank pretty highly," Galvin said in an interview. "This shows the industry cannot police itself and that there needs to be regulatory oversight."

A UBS spokesman declined to comment on the matter.

Banks have long worked with loosely regulated hedge funds, clearing trades, providing finance and even introducing managers to potential investors. Hedge funds have generated up to a third of banks' equities-trading commissions, in a fiercely competitive business.

To woo new hedge funds, some banks provide more service than others, leading to regulators' concern about potential conflicts of interest. Galvin said his office was still looking to see if other banks made similar deals with hedge funds.

UBS offered Boston-based hedge funds office space with amenities such as IT service, pantries full of snacks, catered lunches, and receptionists, for less than half the market rate. The buildings are in the city's financial district, near the harbor, Federal Reserve Bank of Boston and main train station.

This year, hedge fund Par Capital Management was paying $35 a square foot for office space while Delta Partners LLC was paying $40 a square foot in rent. The going rate is $72 a square foot, Galvin's complaint states.

UBS lost $441,940 in 2006 subsidizing office space, and if hedge funds failed to deliver enough business to the bank, they were asked to move out, Galvin found.

Also according to the complaint, bank executives were very generous with hedge fund managers who needed cash when personal fortunes were tied up in their funds.

When Par Capital's Paul Reeder asked for a $7 million line of credit for personal liabilities, a top prime brokerage executive urged colleagues to make the money available. "We need to accommodate them or risk losing them to competitors like Citi," Richard Del Bello wrote, according to Galvin.

Shortly before the Boston Red Sox won the World Series in 2004, a UBS executive paid $300 for a highly coveted ticket and gave it to Par Capital. Two years later, UBS spent $12,000 for Red Sox suite tickets. The bank also spent hundreds of dollars on baby gifts and thousands of dollars to wine and dine hedge fund executives.

Because of their fee structure, hedge fund managers can earn massive salaries, with a few of the more talented ones taking home more than $1 billion each last year. (Additional reporting by Dan Wilchins in New York)

LOCUSTS TO SETTLE DOWN

Germany's First CDO Equity Hedge Fund Set To Launch (dailyii)
Omicron Investment Management is working on the first German-domiciled hedge fund of collateralized debt obligation equity. Omicron Private Debt Fund may open up investing in CDO equity to a whole new group of investors that up until now were prevented from investing in the area, said Marcus Klug, managing director.

Omicron plans to launch the fund with a target size of $100 million by the third quarter. About 70% of the fund will comprise equity from collateralized loan obligations from the U.S. and Europe, with the balance invested in the equity of CDOs backed by asset-backed securities, Klug said.

The fund is geared toward German investors and is designed to answer investors' criticisms of offshore funds, namely that they do not provide tax reporting, have very little regulatory oversight and provide no transparency. "It can be a deal breaker if you can't tick the boxes on tax and regulatory issues," Klug said. The private debt fund will provide tax reporting, especially important for German investors as their country?s tax laws require a detailed level of tax reporting.

The fund also opens up outright investing in CDO equity for German insurance companies, which up until now have been restricted to buying combination notes, a mix of equity and debt tranches.

The fund, however, will be regulated by the Federal Financial Supervisory Authority, Germany's equivalent of the U.S. Securities and Exchange Commission. The hedge fund regulation trumps the CDO equity regulation, Klug said.

The fund's other noteworthy features include payment of a dividend of up to 10% and allowing investors to redeem their money on a quarterly basis. Hedge funds typically plough their returns back into their investments and lock up investor money for several years.

NORMAL

This is not a Classic Monetary Squeeze (rosemanblog)
Stocks now appear poised to begin a long-awaited correction. Since the beginning of June, the S&P 500 Index has lost more than 3% and continues to struggle as the advance-decline line deteriorate, new highs decline as new lows increase while mutual fund-flows have ebbed. But like I've said before, stocks won't succumb to a bear market - at least not yet.

“A classic monetary squeeze is not occurring, which typically precedes a bear market for equities. Corporate earnings are adjusting to a slower growth environment, but will continue to expand at a healthy clip this year. Foreign economies remain strong and will outpace the United States in 2007. Should the mortgage market continue to unravel, I expect the Bernanke Fed to start cutting interest rates, which will help to put a floor on the market. Also, as the Fed is well aware, cheaper credit will also encourage hedge funds and private equity funds, today's surrogate bankers, to buy busted mortgages, a boon for financing, acting as a stabilizer for distressed housing.”

That's what I wrote several weeks ago and I stand by the same observations today.

Another major plus for this bull market is low interest rates.

The big spike in bond yields earlier this month was a short-term aberration in the five-year trading range we've seen for the benchmark ten-year Treasury. The market got spooked about a rapidly recovering American economy this quarter and rising inflation. Facts are, however, the economy is still sluggish with a host of data over the last week pointing to slow growth, particularly in housing, durable goods orders and consumer sentiment. This is not the kind of economic data that precedes a monetary squeeze or a fresh bond bear market.

One thing for sure, however, is that foreign markets are indeed growing much more quickly than the U.S. economy. And those central banks are doing the right thing, raising interest rates, but grudgingly. The Fed does not set monetary policy for China or Europe; the primary indicators for the Federal Reserve are employment trends, inflation and housing. So far, there's major trouble in housing.

Bottom line: Stay invested in stocks because they'll outpace bonds again over the next 12 months, barring a geopolitical crisis. Stocks are still consolidating and might even plunge this summer. But by the time we hit earnings season in October, I'm expecting another major rally as the Fed relents by cutting interest rates, the dollar declines and the economy starts to recover.

Keep holding some cash...

I'm flying back to Montreal today from Zurich. I'll have some European observations for you in tomorrow's post.

SLEEPING BAGS

Goldman Meets Match in Googleplex When Recruiting Graduates (bloomberg)
Everyone wanted to hire Qiushuang Zhang.

Before earning her master's degree in computer science at Georgia Institute of Technology in May, Zhang had two job offers from Goldman Sachs Group Inc., two from Microsoft Corp. and one from Google Inc. Then a headhunter phoned to pitch a job at Renaissance Technologies Corp., the $20 billion hedge fund firm led by math guru James Simons.

``Goldman says I can make lots of money,'' says Zhang, 24, a native of Harbin, China, who wears bright purple glasses and spent last summer writing video game software for Electronic Arts Inc.

Zhang asked for advice from a Chinese friend who once worked at Goldman and is now at a San Francisco-based hedge fund. The woman agreed that writing software for Goldman's option traders in New York would be thrilling, Zhang says. Then she confided she can't sleep at night because of work stress. ``Life is different if you focus too much on money,'' Zhang says. Besides, after growing up in China's frozen northern provinces, she says she loves the California sun. She starts at Google in July.

Wall Street and Silicon Valley are courting Zhang and graduates like her -- kids with top grades, finance and math skills and a couple of languages -- more heavily than any students since the days of the '90s dot-com explosion.

With the surge in mergers and acquisitions, leveraged buyouts and hedge fund investing, U.S. securities firms are struggling to fill all of the empty spots at their investment banks, in trading rooms and on quantitative finance desks. Employment in financial services grew 37 percent to 830,000 people in the decade ended in 2006, according to the New York- based Securities Industry & Financial Markets Association, an industry lobbying group.

`Ferocious'

``It's ferocious,'' says Connie Thanasoulis, Merrill Lynch & Co.'s director of campus recruiting. ``You have to get the technology part right because that's become the guts of the organization.''

The students they're fighting for are members of the generation born from 1982 to 2002 called Generation Y, or the Millennials. They need to be approached differently from previous graduating classes, says William Strauss, a marketing consultant and co-author with Neil Howe of ``Millennials Rising: The Next Great Generation'' (Knopf, 432 pages, $15.95). Their parents have often scripted their lives from kindergarten to college, they've faced intense competition in school and many have been so busy burnishing their resumes that they've never held a paying job, Strauss says.

Flip-Flops

``They aren't as experienced with the notion of getting to work on time or other elements of workplace etiquette,'' he says. ``You can hear them coming in their flip-flops.''

The Millennials' arrival in the workforce heralds a demographic crunch. The baby boomers' child-bearing years peaked in 1990. Those born that year are the cohort graduating from high school in 2008. The birthrate fell 9 percent in the following nine years, according to the National Center for Health Statistics. ``With the amount of business out there right now, everybody wishes they had more talent,'' says Stefan Selig, global head of M&A at Banc of America Securities LLC.

``Our hiring issues are a high-class problem,'' says Janet Raiffa, head of U.S. campus recruiting for Goldman Sachs. ``The students we want are the same ones that everyone else wants.''

Nowhere are the recruiting wars being more fiercely fought than for those who can write the algorithms used in computer- based trading or search engines. The securities industry earned 19.5 percent of its net revenue from computerized trading in 2006, up from 12.6 percent in 2005, a Sifma report says.

Dwindling Candidates

Meanwhile, the number of U.S. students choosing computer science as a major plummeted 39 percent in the five academic years ended in 2006, according to the Washington-based Computing Research Association. Those with technical expertise are the same ones that Yahoo! Inc., Google and a growing number of hedge funds and private equity firms also want. ``Technology is the hardest to hire for,'' Raiffa says. ``We really have to compete.''

To fill math-intensive jobs, banks are bringing in more non-U.S. employees -- people like Zhang who came to the U.S. to study. They typically started out in countries such as China or India, which have been more focused on math and science education. One dividend is the knowledge of cultures where firms such as Goldman aim to expand.

``We know that we are hot property,'' says Rishi Dhingra, a master's degree candidate in quantitative and computational finance at Georgia Tech.

Engineers

Banks are adding engineering schools to the roster of business campuses where they recruit. During the past two years, Citigroup Inc. has started visiting Carnegie Mellon University in Pittsburgh; Massachusetts Institute of Technology in Cambridge, Massachusetts; and Georgia Tech in Atlanta.

``We tell them, `You could be the person to create software that's used on a trading floor tomorrow,''' says Caitlin McLaughlin, Citigroup's global head of graduate recruitment. At a tech company, she says, developing a new product can take months or years.

The banks are also trying to woo younger students -- often preferring undergraduates to those with a master of business administration -- and even some high school students. Goldman Sachs runs a program for minority teenagers and GS Camp for incoming college students to introduce them to investment banking. Morgan Stanley has 15- and 16-year-olds from schools such as New York's math-strong Stuyvesant High School work on its trading floor as part of a mentoring program during the summer.

Work-Life

With their ease with technology -- the Internet is as basic a tool as pen and paper to them -- the Millennials are smarter than their bosses were at the same age, Strauss says. Most don't see themselves working at their current job for more than a year or two. And having seen their boomer parents struggling to juggle careers and family, they aren't willing to sign on for a life of 80-hour workweeks.

That point was brought home to Linda Riefler, Morgan Stanley's chief talent officer, at a breakfast meeting with a recent hire from Harvard Business School. ``His opening comment was, `Tell me about how you balance work and family,''' Riefler says. ``That would never have happened five years ago.''

Riefler, a member of Morgan Stanley's management committee, says the company is looking at ways of offering extended unpaid leave. ``All the firms are now competing to re-engineer jobs and to show that success doesn't have to mean 24/7,'' she says.

`Sexy Image'

Morgan and Goldman have a long way to go before they can compete with Google. ``Google has a very sexy image,'' Goldman's Raiffa says. ``There is a coolness on Wall Street, but it's a much more corporate environment.''

Zhang agrees. ``Goldman's current package is not enough to compete with West Coast IT companies,'' she says, especially when you count the benefits.

Flexible hours are standard issue at Google. So are a host of other perks that make the atmosphere at the Googleplex -- as the search engine company calls its Mountain View, California, headquarters -- not that far removed from that of a college dorm.

Workers can play pool or ride scooters from one area to another. They get three free meals a day, laundry and gym facilities and free massages on their birthday. Zhang, who says her first name is Chinese for `autumn cool,' says Google will give her $5,000 toward the purchase of a car if she buys a hybrid vehicle. (She's leaning toward a Toyota Prius.)

Google

Google is the No. 1 place where both U.S. undergraduates and MBA students want to work, according to a poll by Universum Communications in Philadelphia. Universum asks more than 44,000 undergraduate and 5,450 MBA students a year where they'd most like a job. Goldman was the third choice for MBAs, behind McKinsey & Co.

Even among students who majored in investment banking, Google is climbing the ranks. It was No. 9, up from 17 last year, says Claudia Tattanelli, Universum's U.S. chief executive officer. Goldman was No. 1 in that group.

It's still harder to get into Goldman than into Princeton University. The bank offers jobs to about 5 percent of applicants -- about half of the 9.5 percent acceptance rate for the New Jersey school's class of 2011. Some 900 undergraduates at the University of Pennsylvania's Wharton School -- out of a student body of 2,400 -- applied for summer internships at the bank, Raiffa says. Just 70 of them were accepted.

Parents' Day

Investment bank recruiters say they're trying to gear their pitches to Millennials' close ties with their parents. Merrill Lynch last year added a Parents' Day for families of minority interns, flying 11 families to New York from as far away as Nigeria to see where their children would work.

``We are dealing with a generation of parents who realize the importance of every decision their investment is making,'' says Elton Ndoma-Ogar, 34, head of diversity recruiting for Merrill's investment bank. ``We call the children their 'investments.'''

Every firm now sends its most-senior executives to campus. JPMorgan Chase & Co. CEO Jamie Dimon met students at eight schools in the past year, including Duke University in Durham, North Carolina, and Stanford University in Stanford, California. At Harvard Business School, his alma mater, Dimon taught a one- day class on JPMorgan's $56 billion purchase of Bank One Corp., the Chicago-based company he ran from 2000 to '04.

Styled by Prada

``Recruiting is absolutely critical right now,'' Dimon says. ``I send senior people to campuses now, and they have to show up.''

They're also trying soft-sell approaches. Merrill sponsored a dress-for-success night for women at the Wharton School in Philadelphia, with stylists from Prada. (Tips: Avoid bright red nail polish. And wear closed-toe shoes -- no flip-flops.) Merrill also hands out video games, including ``Cyber IPO,'' in which players score when they correctly order the steps for a fictitious company's initial public offering.

Goldman Sachs sponsors workshops at more than 50 schools giving advice on resume writing and how to behave in the workplace. (Sample: Always have a short pitch prepared about your current project, so that you can deliver it if you ride the elevator with the CEO.) JPMorgan, which hosts cocktail parties and coffee chats, does remind students in its recruiting booklet: ``The fact is, this is all about business, and if you find that boring, investment banking is not for you.''

Perk: Money

Bank recruiters can still offer the same perk that has always brought people to Wall Street: money. Undergraduates in investment banking or information technology typically get a $60,000 salary, plus a year-end bonus that starts at about $10,000 and, for some first-year bankers, could reach $80,000 or more.

That compares with average starting salaries of $45,837 for business majors in general, $52,177 for computer science majors and $31,333 for liberal arts majors, according to the National Association of Colleges and Employers. And Wall Street earnings can soar above $1 million with time. The average pay for a Goldman Sachs employee was $622,000 last year.

For a sizable slice of the Millennials, money is critical.

They're graduating with more debt than any generation before them, Strauss says. Tuition, room and board at private U.S. colleges is climbing toward the $50,000-a-year mark.

``They look with despair on things like buying a home,'' Strauss says.

Comedy Central

A year ago, Puneet Singh, Wharton's junior class president, thought he might move to Hollywood when he graduated. He's got a resume that includes an acting credit on an episode of the ``Law & Order'' television series.

He was also an intern at Comedy Central's ``Colbert Report,'' where he became known on the air as Stephen Colbert's ``Sikh friend.'' His stand-up comedy act, performed on campus and at Galapagos, a club in Brooklyn, New York's Williamsburg neighborhood, includes jokes about his conservative upbringing as the child of Indian immigrants in Canfield, Ohio. (A clip of his routine on YouTube.com shows Singh, 20, wearing a turban and joking about being mistaken for a terrorist in the Akron airport in Ohio.)

Singh, who has a 3.8 grade point average, also may graduate with more than $100,000 in college-related debt.

``Last summer, I would have said, `You are out of your mind' that I would do banking,'' says Singh, whose parents wanted him to be a doctor and only relented when he got into Wharton.

Different Fun

He was won over by a presentation made on campus by Goldman, where he's interning this summer, and a Wall Street salary that will go a long way toward paying down his student loans, he says.

``Money is important to me in the long run,'' Singh says. ``In my 20s, I want to train myself and build a network so that when I'm 30, I can be doing what I want and support a family.''

As an intern, Singh is earning about $1,100 a week. ``It's going to be a different kind of fun than Comedy Central,'' he says.

Courtney Patterson had little time for fun when she was an intern on Wall Street. Patterson, 22, who graduated from the University of Virginia in May with a bachelor's degree from the McIntire School of Commerce, spent last summer in the media investment banking group at UBS AG in New York.

She says she enjoyed working on deals, including Comcast Corp.'s $483 million purchase of Patriot Media & Communications CNJ LLC, a New Jersey cable company. Most of her time was spent preparing Power-Point presentations, pitch books and Excel spreadsheets, she says. Patterson had dinner at the office most nights, including some weekends.

Takeout Food

``You get to know which takeout places were 24-hour,'' she says. Though Patterson got job offers from Bear Stearns Cos. and Lehman Brothers Holdings Inc., she decided to return to UBS full time as an analyst in the media banking group, earning $60,000 plus bonus.

``It was hard to say no to UBS,'' says Patterson, who grew up in Kenilworth, Illinois, a wealthy suburb of Chicago. ``I really don't know what I want to do long term, but they play up the aspect of how many opportunities there are,'' Patterson says. She could go abroad or work in a different industry besides media, for example, she says.

Like many of her generation, Patterson isn't ready to make a career-long commitment. For now, she'll be living in an apartment two subway stops from the Swiss bank's midtown Manhattan office so she won't spend too much time commuting. She'll be one of more than 400 full-time analysts and associates starting at UBS's U.S. investment bank this summer -- a 41 percent increase from 2006.

Goldman's Confidence

Patterson's classmate, Tyler Walk, a 22-year-old math and finance major, also toiled long hours last summer -- as an intern at Goldman Sachs. Housed in a New York University dorm, Walk says he spent at least 80 hours a week in the office as an investment banking intern for a group working on industrial companies.

``I couldn't do that pace forever,'' Walk says. The high point, he says, was being sent as Goldman's sole representative on a trip with a client to four Eastern U.S. cities to visit factories.

``Goldman showed confidence in me after only a few weeks,'' Walk says. Now that he's finished his bachelor's degree, he's returning to Goldman full time in the same department.

The challenge for Goldman, and the rest of Wall Street, will be hanging on to the elite graduates of the Millennial generation.

Hired by Phone

Georgia Tech's Dhingra, 27, grew up in Bareilly, India, and earned a bachelor's degree in electrical engineering at Indian Institutes of Technology in Kanpur, a science and engineering school with seven campuses that accepts only the country's top students. Then he worked at Oracle Corp. in Hyderabad, India, for almost two years as an applications engineer doing data modeling.

When Dhingra, who graduates in December, went searching for a summer internship this past January, he phoned an Indian friend who works at Lehman Brothers. Dhingra had three interviews over the phone on a Friday and got a call the following Monday from a senior vice president, who offered him a job doing math for Lehman's equity analytics group.

``They were pretty eager to have me,'' he says with a grin. Dhingra says he'd like to go back to Lehman for a few years after he graduates to gain expertise in the financial markets. ``Most of us want to start at an investment bank and then go on to a hedge fund,'' he says.

Intel Patent

Jay Anderson also has the skills that Wall Street can't afford to lose. Anderson, who expects to get his bachelor's degree in computer science from Georgia Tech in December, spent the fall of 2005 as an intern at Santa Clara, California-based Intel Corp.

The 21-year-old was given a problem to solve related to the company's BIOS, or ``basic input/output system,'' program which makes sure that all chips, hard drives and ports work together to start a computer when it is turned on. Anderson's solution so impressed his managers that they put it up for patent consideration.

He became fascinated by the legal details of seeking the patent, he says, and, a couple of months later, applied to law school.

In the meantime, Anderson went to a Goldman Sachs presentation for minority students in computer science that piqued his interest. Goldman flew him to New York for nine back- to-back interviews and offered him three summer internships the same day.

The first was writing algorithms for Goldman's high-speed global trading business; the second was writing risk management software that uses information from legal contracts, a position that acknowledged his interest in law; and the third was in equities technology.

Harvard Calling

``I went for No. 2,'' Anderson says. ``I wanted something different from the usual tech fare.''

Anderson is excited about working in New York, but he may not stay there long. This spring, he was accepted into Harvard Law School. He's deferred entry until September 2008 and says he's considering doing a joint law degree and MBA.

Even Zhang, Google's new hire, isn't making any promises about the future. Ever since she was in high school in Harbin, she says, she has dreamed of living in the U.S. and working on the most-advanced technology.

``It's like you're running at the front end of this age,'' she says. When she starts at Google, Zhang says, she wants to learn more about the company's so-called underground teams -- those working on secret projects that can't be discussed with her until she officially starts her job.

In a couple of years, Zhang may move back to China and go into business for herself, she says. Her widowed mother, a former school principal, lives there, and Zhang is her only child.

That's one plan, at any rate. Like other sought-after Millennials, Zhang can always change her mind.

THE WORLD'S WHORE

Foreign investors 'pick Britain' (bbc)
Britain remains the favourite European destination for foreign investment, according to a report.

It won 686 projects in 2006, a 23% rise on the year before and accounting for 19% of all foreign investment deals in Europe, according to Ernst & Young.

More than half of these - 361 - were in London and the South East.

Scotland also fared well in terms of attracting overseas investment, almost doubling the number of deals from 33 in 2005 to 63 in 2006.

The European Investment Monitor found most British investment came from the US, but noted that levels were growing from Brazil, Russia, India and China.

India invests

The overall number of investment projects in Europe grew by more than 15% - from 3,066 in 2005 to 3,531 in 2006 - with western European countries the main beneficiaries.

About 211,000 jobs were created as a result, the report said.


FOREIGN INVESTMENT DEALS
1. UK - 686
2. France - 565
3. Germany - 286
4. Spain - 212
5. Belgium - 185
Figures are for 2006
Source: Ernst & Young

Having previously threatened to overtake the UK as the most popular destination, investment to France grew modestly in 2006, and its percentage share fell.

The importance of India as a foreign investor was one of the key trends to emerge, with the country now the second most important source for inward investment into the UK - growing by 53%, and by 66% into Europe as a whole.

"Indian companies are winning clients from domestic Western European competitors by investing in sales and customer support offices and also software development centres close to their European customers as a means to drive growth," said Ernst & Young's regional development director Nigel Wilcock.


WHO INVESTS?
1. USA - 990 projects
2. Germany - 449 projects
3. UK - 239 projects
4. Japan - 189 projects
5. France - 169 projects
Figures are for 2006
Source: Ernst & Young

"This is actually good news for the UK because not only from an Indian perspective is there a cultural affinity with London and the South East, but the City is at the heart of the European service sector economy."

US firms

The main losers in the report were Poland, Hungary, Russia and the Czech Republic, whose project numbers all fell.

The report's authors put this down to the relative decline in the number of manufacturing projects - saying that companies seeking a low cost base were turning to China and India rather than central and eastern Europe.

However, Romania and Bulgaria both saw major investment ahead of their admission to the European Union.

IBM and Microsoft were the two companies investing most into Europe, the report said, followed by DHL and GlaxoSmithKline.

CLONE CLONE

New Edhec HF Replication Research in Limited Release Today (allaboutalpha)
Owing in part to its tremendously prolific promotional department, few in the hedge fund industry are unaware that EDHEC Risk and Asset Management Research Centre - an off-shoot of the renowned Edhec Business School in France - is releasing its latest research on hedge fund replication today (Thursday) at a seminar in London. The paper's title summarizes Edhec's take on the state of the replication world today: “The Myths and Limits of Passive Hedge Fund Replication: An Attractive Concept...Still a Work in Progress”.

While the full paper isn't yet available to the public, our friends at Edhec have provided AllAboutAlpha.com with an copy so we can give you some of the main points.

Overall, we find it to be a very good survey of the state of the replication field. In the words of the authors, Noel Amenc, Walter Gehin, Lionel Martellini (Hall of Fame, related posting), and Jean-Christophe Meyfredi:

“The purpose of this position paper is to provide an in-depth analysis of the subject, with an emphasis on the findings based on the last ten years of academic research on hedge fund performance analysis and replication, and a discussion of the implementation challenges related to a commercial offering based on these concepts.”

The paper reaches two broad conclusions:

1. that factor-based replication has “mostly failed in thorough empirical tests to produce satisfactory results on an out-of-sample basis“, and,
2. that pay-off distribution approach (a la Harry Kat) generates “relatively satisfying results on an out-of-sample basis”, but “cannot be a method suitable for performing hedge fund replication, at least not in a sense likely to meet investors' expectations“.

The report goes on to say that the fundamental flaw with factor replication is the current lack of appropriate non-linear or dynamic factor models. Meanwhile, the problem with the pay-off distribution approach is that it is “much more about fund design than about hedge fund replication” (a fact which they point out is also acknowledged by its proponents). In addition, the paper echoes a point raised by Northwater Capital in their recent critique of hedge fund replication techniques - that the returns of a distributional replication are contingent on the choice of inputs (see related posting).

The first half of the report is a comprehensive and concise review of the last ten years of academic research on the topic of hedge fund alpha and (later) hedge fund replication. For example, the report's contention that factor models are less than ”satifying” is backed up by a table showing r-squares in the 30% to 70% range (in-sample), with out-of-sample data being much worse. The authors then re-run the approach used by Andrew Lo (see related posting) and find similarly “unsatisfying” results.

Wonder the authors:

“Since academic attempts to design factor models for hedge fund return replication have so far been unable to generate fully satisfactory results, the recent launch of a number of industry initiatives is perhaps surprising.”

The report then goes on to explain the so-called “Pay-off Distribution Approach” pioneered by Harry Kat. I find Kat's approach is so hard to understand without an options background that I barely have a grasp of its basic mechanics on a good day (and I've written, like 5 or 10 postings on it). But this report contains what is probably the best chance any of us have to understand how the approach actually works. Here's an excerpt:

“The principle of payoff replication is very simple and inspired from derivative pricing theory. It is based on the following two-step process. The first step consists of estimating the payoff function “g” that maps an index return onto a hedge fund return, while the second step consists of pricing the pay-off and deriving the replication strategy...”

The report goes on to say that the approach works “relatively well” at matching the properties of hedge fund distributions (means aside), but that:

“...the average return obtained for the clone is always (significantly) lower than that of the index on our out-of-sample period, which can be explained by the bear market (March 2000-March 2003) which spans a sizable fraction of the out-of-sample period. This result suggests that extreme caution should be used in choosing the reserve asset, and that the performance results of the replicating strategy are not robust with respect to the choice of the risky asset involved and the sample period considered.”

Later, the report reiterates this caution by stating that, for an investor with “more limited patience“, distributional replication can lead to “severe disappointment“. Furthermore, it suggests that higher transaction costs for the strategy “are bound to further impact the performance” achieved using this approach.

In the end, Edhec says neither hedge fund replication approach is ready for prime time. However, all may not be lost. In an idea reminiscent of Tony Blair's “third way”, the researchers suggest a hybrid solution:

“Overall, it seems that it is only by combining the best of the two competing approaches that one can possibly hope to achieve truly satisfying results: the factor approach could facilitate time-series replication while the pay-off distribution approach could help generate the replicating portfolio for non-linear factors...”

The report is packed with data and results from previous studies and from Edhec's own reconstruction of each methodology. If you didn't attend Edhec's seminar today in London, you can still order a copy (for 750 Euros) by contacting Edhec at AMeducation@edhec.edu or by phone at +33 493 187 819.

And while you wait for your copy to arrive, you may also want to check out AllAboutAlpha's Hedge Fund Replication dossier (free and easy registration required). This area of our website now contains abstracts and links to around 20 papers from most of the key researchers in this field (e.g. Andrew Lo, Bill Fung, David Hsieh, Walter Gehin, Lars Jaeger, Harry Kat, Thomas Schneeweis and friends). And while you're there, we'd also suggest you stop by the Portable Alpha and 130/30 dossiers and another one dedicated to research into the question of investment fees (everyone's favorite topic).

BIG

Hedge Funds Cash Out of Big Lots After Price Doubles (bloomberg)
Big Lots Inc., the largest U.S. seller of overstocked and discontinued items, has an online Wild and Wacky Find museum where customers can submit items they stumble upon while shopping at the company's stores.

There's Chick A Poo Organic plant food made from chicken droppings, Shower Buzz vibrating body soap and Woofy Pop chicken-flavored popcorn for dogs. While the goods make Big Lots fun for shoppers, the enjoyment is waning for investors, particularly hedge funds.

New management and a planned restructuring lured about 56 hedge funds to buy Big Lots beginning in June 2005, and the stock jumped 91 percent last year for the fifth-best gain in the Standard & Poor's 500 Index. A third of those funds sold shares in the first quarter, and the stock has dropped 17 percent since the end of May.

``The easy, or low-hanging fruit has been picked,'' said Dan Thelen, co-manager of the Loomis Small Cap Value Fund in Bloomfield Hills, Michigan. ``Now the shares are fairly priced.''

Loomis Sayles & Co. sold all of its 145,000 Big Lots shares this year based on the stock price relative to earnings, Thelen said.

Profit from continuing operations rose sevenfold in the year ended Feb. 3 to $112.6 million. It will increase 24 percent this year and 13 percent next, according to analysts surveyed by Bloomberg.

Big Lots' biggest seller has been Philadelphia-based Cooke & Bieler Inc., which sold 6.45 million shares this year.

Fortress, Fir Tree

Hedge funds that pared Big Lots holdings include Fortress Investment, based in New York, which sold all of its 131,700 shares; Fir Tree Partners, also of New York, which traded 43,063 shares leaving it with 58,530; and London's GSA Capital Partners, which sold 52,300, giving it 46,116 shares, according to Bloomberg-compiled data.

``Hedge funds can be opportunistic and want to pocket the short-term gains,'' said Vivienne Hsu, a San Francisco-based money manager with Schwab Investment Management's Hedged Equity Fund. ``The shares had a good move, so they run.''

Not so for the Schwab hedge fund. It bought 1 million Big Lots shares last year, and owned 1.13 million as of January. Hsu cited the anticipated per-share annual profit growth of 20 percent through 2009 as one reason for sticking with the stock.

``The company still has a lot of potential,'' Hsu said.

Shares of Big Lots, based in Columbus, Ohio, rose 80 cents to $29.70 at 4:16 p.m. in New York Stock Exchange composite trading.

Big Lots was the S&P 500's most-shorted stock this month with 29 percent of its float sold to profit from falling prices.

Treasure Hunt

Big Lots buys closeout and overstocked items from retailers and manufacturers, selling them at a discount. Outdoor furniture cushions may be on the shelf one day, sell out, and be replaced with garden hoses the next. Salt and pepper shakers in the shape of hula dancers might be grouped with six-foot (1.8-meter) inflatable palm trees to create a Hawaiian party-themed section.

``The fun with Big Lots is the treasure hunt,'' Thelen said. ``You don't exactly know what you are going to get.''

Mary Beth Fanning of Medina Township, Ohio, agrees. She shops at Big Lots for discounted picture frames, flower pots and seasonal items.

``I never go in for something I have to have because there is no guarantee it will be there,'' said Fanning, 42. ``I go in to look and always end up buying a bunch of junk I don't need.''

Restructuring

Big Lots became the darling of hedge funds beginning in July 2005, when Chief Executive Office Steve Fishman, 56, took the job and began a restructuring. He closed 130 money-losing stores through December 2006, leaving 1,375 locations in 47 states and 38,000 employees. He reduced inventory with a better system for tracking sales.

``Big Lots had bloated, inefficient assets,'' said Richard Hastings, a retail analyst with Smyth-Bernard Sands LLC. ``Management locked their egos in a trunk and optimized everything.''

Fishman, who declined to comment for this story, also introduced items with higher prices, such as discontinued or overstocked flat-panel and liquid-crystal display televisions.

Profit from continuing operations for the first quarter ended May 5 doubled to $29 million, or 26 cents a share. Sales rose 3.4 percent to $1.13 billion, Big Lots said May 31. Investors were disappointed when the company projected second- quarter profit from continuing operations at 7 cents to 10 cents a share, pushing the stock down 12 percent that day, the most in almost two years.

Cash Flow Doubles

Free cash flow, the money left over after paying for expenses and investments, more than doubled to $345.6 million in the 12 months ended January from $144.5 million a year earlier.

``The turnaround is still happening,'' said Joan Storms, a Los Angeles-based analyst with Wedbush Morgan Securities, which rates the company ``hold.''

Fishman joined Big Lots after stints as CEO of Rhodes Furniture and ShopKo Stores Inc. and was also a buyer for Macy's Inc., formerly Federated Department Stores Inc., and May Department Stores Co.

``The key to Big Lots is that Steve Fishman is a merchant,'' Thelen said. ``He knows what people like.''

Still, those changes weren't enough to keep Loomis as a shareholder.

``From here forward it's going to get more difficult,'' Thelen said.

SWF

China poised to set up $200 bln investment fund (reuters)
China took a big step on Wednesday towards establishing a fund that will invest $200 billion of the country's $1.2 trillion in foreign exchange reserves in assets around the globe.

The embryonic agency has already spent $3 billion on a 10 percent stake in Blackstone, a U.S. private equity group, as part of a drive by Beijing to earn higher returns by making riskier investments.

Lawmakers started to review a proposal that would authorize the Ministry of Finance to issue 1.55 trillion yuan ($203.5 billion) in special treasury bonds to buy foreign exchange to fund the start-up of the agency, Xinhua news agency reported.

The bond plan, submitted by the State Council, China's cabinet, is almost certain to be approved.

The finance committee of parliament endorsed the proposal and commended it to the full standing committee, which is in session until Friday, Xinhua reported.

It said the tenor of the book-entry bonds would be at least 10 years; the interest rate would depend on market conditions.

Xinhua did not say whether the bonds would be issued directly to the People's Bank of China, which controls China's reserves, or sold in the domestic market with the proceeds used to buy foreign exchange from the central bank.

The latter method would drain cash from the banking system and call for careful management by the central bank to avoid a destabilizing spike in interest rates, economists said.

GROWING UNEASE

China currently invests the bulk of its reserves in safe but relatively low-yielding U.S. bonds.

Officials have cited Singapore's state investment funds as a model for its as-yet unnamed agency, suggesting it will in future be buying stakes worldwide in publicly quoted companies and real estate as well as making private equity investments.

The Middle East is one area of interest.

Dubai and Chinese officials have already begun talks on cooperation between their respective state investment agencies, a senior Dubai executive said on Wednesday.

"The Chinese will be looking at investments that we already have in the Middle East and in Western regions of the world," Yu Lai Boon, chief investment officer at state-holding company Dubai World Group, told Reuters in Singapore.

Investment funds managed by governments control an estimated $2.5 trillion in global wealth, outstripping hedge funds.

The Chinese agency will become one of the biggest such funds, which are coming under growing scrutiny in developed countries whose assets are likely to be on their shopping list.

Clay Lowery, the U.S. Treasury's acting undersecretary for international affairs, called last week on the International Monetary Fund and the World Bank to draft a best-practices guide to monitor the investment policies of sovereign wealth funds.

"It is hard to dismiss entirely the possibility of unseen, imprudent risk management with broader consequences," he said.

Kuwait and the United Arab Emirates set up rainy-day funds years ago in the form of state-owned investment vehicles to manage periods of low oil export earnings. Russia has a fund for future generations, as does Norway.

Germany is especially concerned by the rapid growth of sovereign funds, which Morgan Stanley says could have assets of $12 trillion by 2015, roughly the size of the U.S. economy.

"We are watching closely how state-controlled investment firms from Russia, China and the Middle East buy or sell stakes in companies," Germany's Deputy Finance Minister Thomas Mirow told Handelsblatt newspaper this week.

China has said its investment in Blackstone was crafted in such a way as to allay political suspicions. Its stake was small enough not to need U.S. approval, it surrendered its voting rights and it agreed to keep its investment for four years.

IMF chief economist Simon Johnson said on Tuesday that policy makers must cast a careful eye over state-run funds.

"What is the investment strategy of these funds and what is their leverage? I don't know," he said.

"People are beginning to feel uncomfortable about this."