HEDGE FUND NEWS
@ Fri 29 June 2007 : GMT

FINTAG COMMENT

My hits always tail off on Friday which is a good thing because there is more to life than reading the rantings of an ailing Hedge Fund Manager.

Still, I have severe competition as Bear Stearns' Marin has been blogging about the collapse of his hedge funds (already grease monkeyed into a script for the forthcoming HBO hedgie soap). It may explain why it has been a bit lonely here for the last few weeks.

So what else is going on?

No more smoking - after the big smoking parties this weekend, fags are outlawed in UK public places (no pun intended).

Fed keeps rates on hold and waits to see what the ECB does.

The iPhone is great but the screen gets very dirty after you eat a Big Mac.

Did Amber Partners, a due diligence firm, certify the Bear Stearns' Asset Backed Security Hedge Funds as healthy? Yes they did. UPDATE 2 Jul 07: AP have since told me otherwise. No they did not.

Corporate Bankers jump ship and join Hedge Funds.

Proctor is raped by Pirates.

KKR wins a Hedge Fund award.

Subprime contagion reaches the UK.

Quote of the day
"...this is the most frothy market I have seen in 31 years ... question is how long will it last." Ken Thompson, CEO and Chairman, Wachovia.

OTHER NEWS

Did Bear Stearns Used Amber Partners to Certify its Loss Making Hedge Funds - A Company It Has Equity In? Apparently not ...

Obesity linked to Alzheimer's as epidemic looms (guardian) ...

...could this include the CEO of Bear Stearns Asset Management?


The ABCs of CDOs. Can you spell RISKY? (globeandmail)

Fed keeps rates steady at 5.25% (bbc)

Banker Blasts Colleagues In Farewell E-Mail (bankersball)

Court approves Bull-Dog poison pill (ft)

iPhone goes on Sale (yahoo)

MARIN SPILLS HIS HEART OUT

Bear Stearns boss took refuge in blogging as hedge funds imploded (independent)

The sub-prime mortgage market meltdown threatens to become the first giant financial crisis of the 21st century. And it will be blogged.

At the investment bank Bear Stearns, where two imploding hedge funds threatened to trigger billions of dollars of losses across Wall Street, the asset management division's boss, Rich Marin, was fighting valiantly "to defend Sparta against the Persian hordes", as he characterised it on his personal web page.

For the numbers stuff - the $30bn in failed bets on the mortgage market, the $3.2bn rescue package - you could hit the financial pages of the newspapers. For the blood, sweat and tears, there was Mr Marin's blog.

At least there was, until it was spotted and Whim of Iron: Impulsive Ramblings from a Motorcycling Alpha Dog became the talk of Wall Street. Now it is invite only.

After Bear Stearns' two highly indebted funds plunged 23 per cent in value, its lenders demanded cash back and investors clamoured for their money. The trouble is, dumping lots of the assets on the market would only have revealed how their value had collapsed, which could have forced investors to write off billions of dollars.

Little wonder that Mr Marin was working so hard, as he revealed last Sunday. "I needed something very light-hearted tonight after another long weekend at the office saving the world. The new movie Evan Almighty was just right," he wrote.

Mr Marin - "age: 53; astrological sign: Aquarius; interests: motorcycling, skiing; favourite music: Billy Joel, Meatloaf" - has been the head of asset management at Bear Stearns for four years, charged with turning the business into a high-fee, highly-aggressive manager through the launch of hedge funds.

This past month, the strategy has come back to haunt the bank - and Mr Marin, who has posted a picture from the recent epic movie 300. "This pretty much sums up my last two weeks trying to defend Sparta against the Persian hordes of Wall Street. Nothing like a good dog fight 24x7 for a few weeks to remind you why you chose the life you chose," he wrote. "It's nice to know you can have an impact on the world. Next time I'll try to make it a slightly more positive impact..."

STARS IN THEIR EYES

U.K. hedge fund loses its early magical powers --- Did managers rely on feng shui, stars to make decisions? (wsj-europe)
JANUARY 2005, NyLon Capital LLP of the U.K. launched with much fanfare a $1.2 billion high-profile hedge fund, backed by a blue-chip bank and run by some of the brightest stars of London's financial community.

Within 15 months, the shine was gone. Many of its investors asked for their money back after early losses and signs of management feuding. Claims lodged in the U.K.'s High Court allege that business decisions taken by the fund's top manager were influenced by an astrologist and a feng shui expert and this destroyed the relationships between the partners. The fund acknowledges that a consultant in feng shui, a Chinese geomantic practice, was employed and says the top manager is acquainted with an astrologist but denies these connections affected the fund's performance.

Barclays PLC -- NyLon's largest backer and the former employer of most of its traders -- owns a 12.5% stake in the fund, received after giving it GBP 250 million ($500 million) to manage when the fund was launched 2 1/2 years ago. The investment is one of the largest known allocations by a major bank in a start-up hedge fund.

One of the few investors remaining with the fund says it has barely broken even since it was launched. Yet Barclays is helping to keep the fund afloat by paying an annual management fee on its large investment -- capital that could be earning money for its shareholders elsewhere. Barclays PLC and its investment banking arm, Barclays Capital, declined to answer two sets of emailed questions for this article.

NyLon illustrates the pitfalls that banks like Barclays can fall into when backing traders in new hedge funds. Banks make such investments to get a share in the lucrative fees hedge funds charge to investors and to make a capital gain on the money they invest in the fund. Sometimes banks invest in hedge funds started by their own traders because of their successful track records at the bank.

Morgan Stanley, Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among the banks that have taken minority stakes in hedge funds over the past several years. Other banks have started internal hedge funds, attracting billions of dollars from their clients to collect management and potential performance fees on.

Not all of these investments have paid off. Bear Stearns Cos. is spending about $1.6 billion to bail out an internal hedge fund after losses from securities backed by subprime mortgages. And UBS AG last month shut down Dillon Read, a hedge-fund unit it staffed with about 80 of its proprietary traders, after disappointing returns in its first year.

Barclays decided to make its investment in NyLon Capital between March 2004 and April 2004, after Alan Burnell, its European head of government-bond trading and fixed-income derivatives, and three colleagues said they were planning to leave the bank, according to a legal claim against NyLon filed in October 2006 in the U.K.'s High Court. The claim, filed by one of Mr. Burnell's colleagues, Domenico Crapanzano, was seeking back pay and capital invested with NyLon. That dispute was settled out of court last month.

The fund, known as the NyLon Flagship Master Fund, was designed to follow what is known as a "macro" strategy, allowing it to trade in a variety of markets. The fund took its name from the financial centers of New York and London.

There were plenty of reasons for Barclays to back Mr. Burnell and his team. Having joined Barclays in 2002, Mr. Burnell quickly built a lucrative and influential European government-bond trading and market-making business for the bank, according to two former NyLon employees.

"It was very important that they had the Barclays money," said Magnus Backstrom, chief investment officer at Finland-based OP Bank Group Life & Pension Fund, which invested in the NyLon master fund in 2005 and is one of the few investors left in it.

"When a team is spinning out of an investment bank, it's a very strong indicator of support and verifies the track record they had there," he said.

NyLon was one of a handful of European hedge funds that raised more than $1 billion in 2005. Its investors included the investment-management arms of Morgan Stanley and HSBC Holdings PLC, according to regulatory filings.

Mr. Burnell became NyLon's managing partner with a 37.5% stake, while his three Barclays colleagues and another trader each held 12.5% as partners. Barclays also received a 12.5% stake, according to Mr. Crapanzano's claim. Nylon declined to offer its understanding of the ownership figures, saying the information is confidential.

But the partnership began to fracture in the second half of 2004, even before the fund started to trade, according to Mr. Crapanzano's claim. Early on, the partnership was "marked by constant tensions among the executive members with arguments over numerous issues, mostly over the division of power and money . . . but also over trivial matters such as office layout and design," he alleged.

NyLon acknowledges in its defense and counterclaim to Mr. Crapanzano's allegations that there were disagreements between the partners in the first year.

NyLon took until December 2004 -- more than five months after the partnership was set up -- to settle on their fashionable Sloane Square address. At 650 square meters, the office was cavernous for an operation with fewer than 20 employees. A space that size would hold around 65 traders in an average dealing room, according to Dealing Room Construction Ltd., a company in London.

There was little expense spared, with part of the space dedicated to a private gym for employees that was frequently staffed by personal trainers, according to Mr. Crapanzano's legal claim and other former NyLon employees. NyLon confirms there was a personal trainer and a physiotherapist who staff paid for.

Mr. Crapanzano alleged in another document filed in the U.K.'s High Court in February of this year that some of Mr. Burnell's business decisions relating to the other partners were influenced by France Jacoubet, a French astrologist.

He said Ms. Jacoubet drew up horoscopes of all the fund's partners and employees to see whether they would fit into the company. Reached by telephone, Ms. Jacoubet declined to comment.

Mr. Crapanzano also alleged that Mr. Burnell hired a feng shui consultant to conduct "good fortune" assessments of the fund's offices and oversee spiritual cleansing rituals, which involved placing small figurines of trolls, or ogres, in desk drawers and placing piles of sand and pebbles in the corners of the office.

NyLon, responding to questions sent to the fund and Mr. Burnell, said that Ms. Jacoubet is a family friend of Mr. Burnell's and said the company had used a feng shui consultant. But it rejected the idea that any business decisions were influenced by an astrologist. "To suggest that astrology was used by Mr. Burnell as a substitute for experience, judgment and skill as both a trader and a manager of staff is ridiculous," NyLon said.

NyLon's performance was disappointing in the first three quarters of 2005, ranging between a 0.6% monthly gain in January to a 1.1% monthly loss in September, according to NyLon's investor newsletter. Then, on Oct. 7, 2005, Mr. Crapanzano's interest-rate portfolio hit loss limits and was stopped out, or frozen, after he lost $25 million in euro interest-rate derivatives, according to his legal filings.

Mr. Crapanzano's portfolio, which NyLon didn't immediately unwind, eventually grew to register a loss of $44.6 million by January 2007, NyLon said in its counterclaim. NyLon said it doesn't owe Mr. Crapanzano unpaid salary for several reasons. It alleged Mr. Crapanzano breached its partnership agreement in several ways -- including erasing data from the fund's computers -- and owed the fund money. Mr. Crapanzano denied owing the fund money and refuted allegations of improper conduct in his response. Mr. Crapanzano and NyLon settled the case out of court in May.

The partner's loss weighed on the fund's performance in 2005. NyLon had been targeting annualized returns of 15% to 20%, but it ended up losing 2.8% over 2005, according to NyLon's and Mr. Crapanzano's filings. The loss contrasted with an average gain of 6.8% for macro funds in 2005, according to Hedge Fund Research, a Chicago-based data provider.

Some of the original investors said they felt the fund wasn't taking enough risk to make the returns it was targeting.

Mr. Crapanzano said in his legal documents that the fund was taking less risk in 2005 than it had told investors it would aim to. He said the fund had a value-at-risk, or VAR, target of 3% of assets and an upper limit of 5% of assets but that the average VAR in 2005 was 0.6% with around $1.3 billion invested in risk-free assets, such as government bonds.

NyLon said investors would have understood that risk levels might not always hit the fund's target. "There is a clear understanding in the industry that a target is just that and there is no guarantee it will always be met."

Mr. Crapanzano offered to resign in December 2005 but, because he would be the second partner to leave, Mr. Burnell was faced with a problem. Barclays had a right under its agreement with NyLon to pull its GBP 250 million investment if either Mr. Burnell or two other partners left the fund, according to two previous employees.

The solution he came up with was to keep Mr. Crapanzano as a partner until Dec. 31, 2006, when Barclays's agreement with NyLon would expire anyway, unless the bank agreed to waive its redemption right, according to the NyLon legal document.

Mr. Burnell's ties with Barclays were strong and in January 2006 he secured the bank's agreement not to withdraw its funds even if another partner left, according to NyLon's legal documents. But while Barclays was recommitting itself to the fund, other investors were giving notice that they wanted to pull out, two former NyLon employees say.

By March 1, 2006, 90% of the fund's investors had served notices of redemption, according to Mr. Crapanzano's legal claim. NyLon said in its legal defense that it made a presentation to its investors in February 2006 that was intended to reassure them that the fund remained on track. Even so, NyLon said investors pulled out at least $432 million, or 38% of the fund's value at the time.

The fund admits it experienced more losses, in Japanese inflation-linked bonds, in August 2006, but that the portfolio concerned wasn't frozen and remained "within its performance limits."

NyLon says it now has around $500 million in assets under management but won't say how many institutional investors it currently has apart from Barclays. It also declined to provide any details of how much money it has made or lost since inception. The fund says it has added two new senior members to its investment team in the past six months and expects to take on an energy trader in July.

"The fund is in now in a strong position and we are investing for its future growth," NyLon said. "We are intending to raise additional assets in 2008."

But some of the investors who are still with the fund are far from satisfied with its performance.

"The returns are still disappointing compared to our expectations," said Mr. Backstrom, the chief investment officer at Finland's OP Bank Group Life & Pension.

ECB

Money/credit growth rises in Eurozone signalling further interest rate rises (finfacts)
The annual rate of growth of M3 increased to 10.7% in May 2007, from 10.4% in April 2007. The three month average of the annual growth rates of M3 over the period March 2007 - May 2007 rose to 10.7%, from 10.4% in the period February 2007 - April 2007.

M3 is the broad measure of money/credit in the economy and is an important indicator for the Governing Council of the European Central Bank.

ECB President Jean-Claude Trichet wrote in the Financial Times last November: Do not mistake me for a monetary Luddite - I have immense appreciation for the intellectual elegance and sophistication of modern monetary policy models that leave no room for money. In many respects, I fully agree with their implications regarding the benefits of price stability, the crucial importance of central bank credibility, the advantages of pursuing a clear and predictable policy and the centrality of private inflation expectations. Such considerations have governed my own thoughts on monetary policy since I was appointed governor of the Banque de France 13 years ago. These same considerations have also strongly influenced the design of the ECB's policy framework. Yet, I cannot dispel my doubts that a model of monetary policy that includes no role for money is incomplete in some important respects.

The rise in M3 coupled with the fall in German unemployment adjusted for seasonal swings, to 9.1% from 9.2% last month - the lowest since March 1995 - will fuel speculation of a rise in the ECB interest rate to 4.25% in September, despite the report today of a fall in retail sales.

In today's ECB report on the main components of M3, the annual rate of growth of M1 decreased to 6.1% in May 2007, from 6.3% in April. The annual rate of growth of short-term deposits other than overnight deposits increased to 13.7% in May, from 12.4% in the previous month. The annual rate of growth of marketable instruments decreased to 18.8% in May, from 19.2% in April.Turning to the main counterparts of M3 on the asset side of the consolidated balance sheet of the MFI (Monetary Financial Institutions) sector, the annual growth rate of total credit granted to euro area residents rose to 8.2% in May 2007, from 7.5% in April. The annual rate of change of credit extended to general government was -3.1% in May, after -5.6% in April, while the annual growth of credit extended to the private sector increased to 10.9% in May, from 10.7% in April.

Among the components of the latter, the annual rate of growth of loans to the private sector stood at 10.3% in May, unchanged from the previous month. The annual growth rate of loans to non-financial corporations increased to 12.6% in May, from 12.2% in April.2 The annual growth rate of loans to households decreased to 7.4% in May, from 7.6% in the previous month. The annual rate of growth of lending for house purchase was 8.6% in May, unchanged from the previous month. The annual rate of growth of consumer credit decreased to 5.9% in May, from 6.9% in April, while the annual growth rate of other lending to households declined to 3.6% in May, from 3.8% in the previous month. Finally, the annual rate of growth of loans to non-monetary financial intermediaries (except insurance corporations and pension funds) decreased to 14.5% in May, from 16.3% in the previous month.

WHAT DOES MARIN WEAR?

Looking Like a Billion Bucks (nytimes)
HEDGE funds, hedge funds, hedge funds,” Richard David Story, the editor of Departures, the magazine for American Express premium cardholders, said before the Ferragamo show on Sunday when asked to account for the current mood in men's fashion and what looks like newly set markers for giddy excess.

To judge from all the $700 cotton poplin trousers (Bottega Veneta), $250 flip-flops (Hermès) and $20,000 satchels in matte tobacco crocodile (Tod's) on offer, the fractional-jet-share crowd has coffers so deep that there'll be plenty left over for chronographs or John Currin paintings.

Whether these customers are real or imagined, the idealized notion of them appeared to dominate many designers' offerings for spring 2008, all pitched to a guy with both a high net worth and a 30-inch waist.

“Preppy deluxe” is how one editor characterized Tomas Maier's solid collection of high-end slouch-wear for Bottega Veneta: glazed linen three-piece suits; rumpled jackets with zippered detachable sleeves; and soft bags in crocodile, ostrich and deerskin, which, the designer indicated, “reflect the careless elegance of the clothing.”

As in seasons past, Mr. Maier's clothes were an elaboration of the insouciant formality that characterizes good Neapolitan tailoring. Still, they could also be mistaken for a billionaire's version of the stuff from a J. Peterman catalog.

That some version of that Bottega Veneta man — lithe, young, carefree in his moneyed assurance — seemed to be everywhere said something about the generally buoyant economic mood in Milan.

His spirit was to be seen in Frida Giannini's slick and well-orchestrated show for Gucci, which presented a tautened version of that same fellow and put him in graphic suits with madras cloth checks rendered in black and white, and trousers that sat just above the pubic bone and biker jackets with grommets and shoes with lethally pointed toes.

He appeared again in shiny trench coats, knife-slim suits and a muted palette at the Versace show, designed this season by the Russian-born Alexandre Plokhov, formerly of Cloak. He was spotted at Roberto Cavalli's unexpectedly restrained show held in a cavernous disco near Linate Airport wearing not the leopard spots and junky rocker paraphernalia one expects from this designer, but instead the subdued suits and the slouchy suede driving shoes favored by the Maserati crowd.

Another avatar of the hedge-fund hottie turned out at Valentino's brand-consistent presentation, notable as usual for natty Roman tailoring styled in a way that is often more than a little bit campy. Wasn't that double-breasted white jacket nipped at the waist once a uniform of sorts among the high-end gigolos populating the piazzetta in Capri?

Mr. Bigbucks was here again at the Salvatore Ferragamo show, conjured this time wearing sharp-edged suits of white cotton (with accompanying gloves), handsome tweedlike cotton blazers or faintly feminine evening clothes (a kind of shiny hoodie) that suggested a time in the future when it will be the man who needs help with his zipper before leaving the house.

“It's more cool now to be refined,” said Massimiliano Giornetti, the young Ferragamo designer. “It's cool to wear a jacket again on the weekend and in the evening and in your spare time.”

It is particularly cool if you happen to be in Milan when, in a not-altogether-accountable spirit of optimism, the city cracks open the oaken doors to its fabled palaces and cloisters and turns them into party rooms.

On Saturday night a dinner was held for Nicolas Ghesquiere of Balenciaga beneath Tiepolo's hallucinatory and superpopulated ceiling at the Palazzo Clerici. This was followed the next evening by a vast alfresco feast whose host was Franca Sozzani, the editor of Italian Vogue, honoring the painter Julian Schnabel, who is enjoying a retrospective here. The dinner drew from the worlds of fashion and politics and also from what is left of the local aristocracy, and was served at a series of long tables set inside the arcade of what at one time was a hospital for sufferers of the plague.
For his first men's wear show in Milan, the Belgian designer Dries van Noten took over the Caryatid Room at the Palazzo Reale, illuminated it with 1,500 candles and served guests plates of pasta before offering them a moody selection of clothes shown on models who paraded like sleepwalkers through a low-lying bank of manufactured fog.

There were diaphanous raincoats of parachute silk and side-belted blouson shirts that vaguely recalled Russian Tea Room waiters. There were also boxing shorts and judo trousers, remade in matte satin and jewel colors that, however romantic they looked in the setting, would not be much help if our man found himself looking to get lucky or, for that matter, trying to flag down a taxi at 3 a.m.

If, on the other hand, he had it in mind to slip on an apricot-colored parachute-silk skimmer, hop into a time machine and set the dial for New Haven circa 1984, he might glide to a graceful landing at a Yale seminar where earnest brainy sorts were ardently discussing something quaint like the butch-femme dyad or the future of men.

Gender studies, of course, have gone the way of the dodo. Yet like that bygone creature they have an insistent way of insinuating themselves into our consciousness and our collective dreams. “The concept of duality so dear to psychoanalysis and art in general,” read a press handout at Versace. “This is the challenge facing the Versace man in the coming spring/summer 2008 season.”

You don't say. Even before the Versace man got there, many of us were puzzling over what to make of the tension between masculine and feminine dualities in sartorial self-expression and also wondering why it is that, for a lot of designers, Peter Pan seems to be the ideal man. How, for example, do you rationalize the success of Thom Browne, who won a men's wear award from the Council of Fashion Designers of America in 2006 and who was recently hired by Brooks Brothers to help revamp the brand?

You can't argue with the influence Mr. Browne's clothes have had on the industry, although he was surely not the first to make suits that suggested a Pee-wee Herman romp along Savile Row. At a garden party staged for a pictorial in the July/August issue of Departures, Euan Rellie, the husband of the fashion gadfly Lucy Sykes, is seen wearing a Thom Browne suit that has all of that designer's trademark details: cropped jacket piped at the collar, lapel, hem and pocket; shirttails left hanging; bow tie.

A caption identifies Mr. Rellie as an investment banker, and one would certainly have to be making a bundle to afford a get-up that cost $6,170, not including underwear, socks and shoes. Yet far from embodying a model of fiscal authority or contemporary chic, Mr. Rellie comes across in the picture as the man hired by the caterers to make balloon animals.

With the notable exceptions of Dsquared and Armani, labels whose designers are unabashed in their appetite for manly types, a lot of shows this week cast models that looked as goofy as Mr. Rellie did and also far too young. This is probably as good a place as any to remark that, by returning to the clean tailoring, body-hugging lines and gimmick-free forms of his early career, Giorgio Armani produced his best show in a long time, one that had nothing to do with our general cultural infantilism, or what sometimes seems like a plot by the fashion cabal to get the Centrum Silver set to relinquish all hopes of growing old stylishly and to accept the inevitable orthotic inserts and elastic waists.

EASILY the most aesthetically charged shows of the week were at Prada and Jil Sander, both labels by designers of intellectual agility, technical know-how and aesthetic quirkiness. Raf Simons at Sander recently narrowed his already-slim silhouette to the point where his models look like calligraphic brush strokes.

His palette this season was cool and maritime: the pale greens of dunes covered in beach grass, the flat blank blue of a Low Country sky. Somehow, though, while declining to flout the visual vocabulary created by the label's founding designer — often mischaracterized as minimalism — Mr. Simons has managed to articulate a visual idiom of his own. It is terse, direct and, as probably befits the son of a professional soldier, disciplined.

No sentimentalist, Miuccia Prada nevertheless remains a romantic, her work driven by her highly singular notion of social engagement in all kinds of media (art, architecture, music, clothes). It may seem like a far-fetched assertion to make about a designer who turns out a collection built around boiler suits, mad scientist lab coats, pajama sets in muted floral patterns, and skinny shirts over skinnier trousers in patterns that collide nearsighted geeks, but Ms. Prada has once again come up with her own alternative to the scrawny, unconvincing bad boys that have dominated men's fashion since Hedi Slimane first saw Pete Doherty play. It is not exactly that she makes emo fashion. But that's the general idea.

PIRATES CAPTURE INNOCENTS

Private equity firm buys stake in hedge fund (financialnews-us)
Proctor Investment Management has made its seventh contribution to a hedge fund as alternative investment firms continue the rush to sell stakes in themselves while high valuations are the rule.

Canada's Proctor Investment Management took a 17.5% stake in Conquest Capital Management, but did not disclose the amount. Proctor is an 18-month-old private equity group that invests in hedge funds and alternative asset managers. It contributed to seven firms before Conquest, and four of those have been equity investments, said Jim Coley, Proctor's chief executive officer.

The aggregate assets under management of Proctor's portfolio of firms grew from $4.7bn ($3.49bn) to over $8bn in 2007, Proctor said.

The stake in Conquest, which has about $380m under management, marks Proctor's first investment in an firm that specializes in a single strategy. Conquest launched the first managed futures index replication-based fund in 2004 and specializes in beta replication, or imitating the absolute returns of certain funds, as opposed to returns measured against indexes like the S&P 500.

Proctor looks to invest in two to four firms a year, Coley told Financial News. He noted that Proctor has avoided the high prices paid by other stakeholders in hedge funds because it buys interests in small firms, not the giants that draw more attention and dollars. Coley said: “The prices of Fortress and other IPOs are not affecting the valuations of smaller firms.”

Bankers expect between 10 and 20 alternative asset managers to float within the next 18 months. That includes potential flotations from Citadel, Avenue Investment Management, Perry Capital and DE Shaw.

Hedge funds have been able to sell stakes in themselves because they can command high valuations right now. More than 25 alternative asset managers, including The Blackstone Group, have raised at least $15bn in the past 12 months by selling either minority or controlling interests in themselves, according to research by Financial News and US corporate finance adviser Freeman & Co.

Of the top 10 independent hedge fund managers, four -- including Bridgewater Associates, Citadel, Atticus and Campbell -- are considered to be “eligible” for investments or sale, according to an Institutional Investor survey of fund managers.

Investment banks have been particularly avid investors in hedge funds. Morgan Stanley has bought five alternative asset managers, including FrontPoint Partners, and Lehman Brothers has taken minority stakes in the same number. Earlier this year, Citi paid $600m to buy Old Lane Capital and promoted the firm's founder, Vikram Pandit, to head of alternatives for the firm.

MISSED OUT AGAIN

Hedge Fund Industry Awards: Black-Tie Reconnaissance Mission (allaboutalpha)
The hedge fund industry honored its most admired managers and investors last night (Wednesday night) in New York at Alternative Investment News' Hedge Fund Industry Awards. The event was a great success - even though Alpha Male lost out on the charity-auction bidding for a $8,500 Friday afternoon helicopter trip from Midtown to the Hamptons. To add fuel to the bidding on that one, MC David Moore (the ”world's funniest CEO”) promised that the pilot would fly low over the heavily congested I-495 so “you can give the drivers the finger”. While that did sound enticing, I promised my wife I would bail out if the bidding surpassed 85 bucks.

In any event, this was a tough assignment, but someone had to do it. Here is what I have to show for it...

Industry (finally) recognizes Phillip Goldstein for “breaking” the SEC

Controversial hedge fund manager, Phillip Goldstein of Bulldog Investors, was honored last night by the hedge fund community as “Hedge Fund Leader of the Year”. You may recognize his name as the man who challenged and beat the SEC in its attempt to regulate the hedge fund industry.

While this recognition seems to make perfect sense on the surface, it actually represents somewhat of a change of heart for an industry that was initially slow to line up behind Goldstein's court challenge. As Alpha Magazine reported in its July/August 2006 edition:

“Goldstein's legal costs have amounted to $300,000. He has paid most of this himself, although a few small hedge funds and funds of funds have stepped forward to offer financial assistance. Goldstein admits to being a little disappointed that none of the large, well-known fund firms have offered aid or support, even though many, he suspects, supported his case.

“'People agreed with us, but no one wanted to sign on as plaintiff,” he says. “No guts, no glory”.

Whether or not you agree with regulating the hedge fund industry, Goldstein certainly showed a lot of guts to take on City Hall last year. And last night he received the glory that, in some people's minds, was a long time coming.

Canadians make up for losing Stanley Cup to the Anaheim Ducks

Canadians won both categories in which were nominated last night. The $100 billion Ontario Teachers' Pension Plan picked up honors for the best public sector pension plan and the Vancouver-based managers of the Weyerhaeuser pension plan won for best corporate pension plan. While this may seem to make up for Ottawa's loss to Anaheim in the recent Stanley Cup final (see posting), Canadian managers might beg to differ. In a further knock against Canada's small, but talented, hedge fund manager community, both of these awards were given to investors, not managers. At least these Canuck managers can take heart that their continued lack of recognition means they can also continue to exploit pricing anomalies in Canada's well regulated, yet less informationally efficient capital markets.

Venue apparently built by Scots

Last night's awards ceremony was held in the historic and cavernous “Gotham Hall” at Broadway and 36th in New York. Long ago, the massive main hall once housed the Greenwich Savings Bank. In fact, not far above the main podium were the following clearly visible inscriptions - obviously designed to encourage investing in hedge funds (okay, maybe not hedge funds per se):

“There is no gain so sure as that which results from economizing what you have.”
“It is what we save, rather than what we earn that assures our competence for the future.”

If only the Greenwich Savings Bank offered a good fund of funds, it would surely have produced a lot of alpha during the depression...

London Replication Seminar vs. New York Hedge Fund Awards

Yet another “New York vs. London” story...After we posted a piece on the state of the so-called “hedge fund replication” industry on Wednesday, we were struck by the irony of now covering an event that celebrated all that is not replicatable. Beside Bulldog and Crazy Canucks, last night's other “un-replicatables” included:

* Emerging Manager of the Year: ARCIM Advisors

ARCIM, an energy trading firm, raised $600m last year before soft-closing. All indications are that its founder, Harry Arora, is a great manager. Still, bad luck seems to follow this guy around. As the program from last night's event pointed out:

“...the energy trading firm made its debut last July shortly before Amaranth Advisors, Arora's previous employer, imploded. Amaranth's problems, much like those of another former employer, Enron, had nothing to do with Arora.”

Sounds like a great fund - as long as you're not superstitious.

* Institutional Manager of the Year: Lyxor Asset Management

If gala attendee John Casey (Casey, Quirk) is right about the coming flood of institutional assets into the hedge fund industry, “manager of the year” and “institutional manager of the year” will soon be the same award. But for now, this Soc Gen subsidiary (not to be confused with the Vegas casino “Luxor” - a whole other type of risk) won these dedicated “institutional” honors.

* Fund of Funds Leader of the Year: Eden Rock Capital Management

This London-based firm more than doubled assets to $2 billion over 2006 (that's “two billion dollars”), thanks in part to its focus on the increasing popular asset based lending (ABL) strategy.

* Hedge Fund Launch of the Year: Kohlberg Kravis Roberts

A little start-up calling themselves “KKR” for short won as the “launch of the year”. Apparently, their distressed fund, the KKR Strategic Capital Fund, scored $1 billion before it even opened last year (prompting Henry Kravis to repeatedly place his pinky to his mouth and say - in a diabolical voice - ”one billion dollars!”). Sure, this accomplishment may sound impressive, but a quick poll of those sitting at Alpha Male's table confirmed this KKR outfit was likely just a one hit wonder...

* Nonprofit Investor of the Year: Bowdoin College

Finally, the “Non-profit Investor of the Year” apparently figured out how to make, well, tons of profits last year by investing in hedge funds. Located in Brunswick, Maine, a coastal town of 21,000, Bowdoin College's $673 million endowment returned 18.1% in 2006, more than double the average US university endowment. With all this publicity, it's apparent that what happens in Brunswick no longer stays in Brunswick.

IT'S ALL OK

Bear Stearns assured investors on leverage (ft)
Bear Stearns told potential investors in a now-stricken hedge fund that it could cope with even higher leverage because it put money into “high quality” assets - many of them hard-to-value structured products based on subprime mortgage bonds.

However, Bear also warned investors that taking on higher leverage could increase its volatility and brings with it “an additional risk element”.



That warning, in marketing material inviting investors to switch into a more highly-geared version of its High-Grade Structured Credit Strategies fund last year, proved prescient.

Bear last week agreed a $3.2bn bail-out of the older fund, and is negotiating with lenders who provided $7bn to the highly-geared High-Grade Structured Credit Strategies Enhanced Leveraged fund.

The prospect of forced sales of the rarely-traded collateralised debt obligations in which the Bear funds invested has unnerved the market and contributed to a re-evaluation of how bonds issued by CDOs, which invest in portfolios of other bonds, should be valued.

Ralph Cioffi, manager of the two Bear funds, invited investors last year to switch to the new Enhanced Leverage fund, saying in a letter: “Additional leverage brings with it additional risk, however we feel the form of leverage we are utilising will complement our current strategy.”

The new fund was created after Barclays Bank in London agreed to provide a financing facility of up to three times investor capital through an over-the-counter derivative, according to people familiar with the structure.

Bear trumpeted the borrowing facility when it was agreed last year, telling investors that it gave the fund more flexibility and was “better quality leverage” than previous funding.

Enhanced Leverage had attracted $638m from investors by the end of March, which it geared up more than 10 times using a mixture of repo financing and the Barclays facility, documents sent to investors show.

Barclays said its exposure was “not material”, and it is understood Bear did not draw down all the financing facility provided by the bank because it was cheaper to borrow through repos. According to documents Bear sent out in late May, Enhanced Leverage had $11.5bn invested in bonds and bank debt and short positions of $4.5bn via credit default swaps, primarily on the ABX index linked to bonds backed by subprime mortgages.

All of the long positions were in bonds and bank loans with AAA or AA credit ratings, which have first call on assets and are supposedly safe. But increased scrutiny by markets of the assets underlying CDOs led to a fall in the value of top-rated CDO bonds this year, hurting both the Bear funds in February.

The credit default swaps, a form of hedge, should have partially protected both funds against a fall in credit quality and so in the value of the bonds they had bought. However, in a note to investors Bear revealed the funds had been caught out in March when both the bonds and hedges worsened.

“The widening in [credit] spreads we experienced in February and March was the result of fear of an unprecedented increase in the cumulative losses these portfolios will suffer over time, not of an actual deterioration in credit on the underlying bonds in our portfolio,” Bear wrote in May.

At the same time, its hedges - bought in late 2006 using the ABX index of credit derivatives linked to subprime mortgage bonds - failed to perform as the ABX rallied after a sharp drop in February.

As a result, the 10-month old Enhanced Leverage fund then fell sharply. Its older sibling, which was less geared with 5.8 times leverage at the end of March, saw its first down month.

The older fund was the larger, with $925m from investors, but it also had a larger exposure to lower-rated bonds. It had $9.6bn invested in bonds at the end of March, with credit default swap hedges of $4bn.

The falls in March were reported in late May, when Bear also closed the funds to redemptions. Further falls in April and a mark down of previous valuations led to margin calls by banks owed money, which last week seized and began to sell assets before Bear agreed to the bail-out.

Bear has now said it will not rescue Enhanced Leverage. It did not reply to requests for comment on its warnings to investors.

Copyright The Financial Times Limited 2007

SHAKE RATTLE AND ROLL

Billions Lost In Nervy Markets (acnnewswire)
It won't exactly be the finish to the financial year that everyone was hoping for a week or so ago when it seemed as though we had shaken off those early June blues about rising interest rates and falling Chinese stockmarkets.

Even if the market finishes with a bang today in a burst of last minute window dressing for the end of the financial year, the easy money party is now over.

Risk is back in fashion and there's now a bit of a hangover to endure.

All those glamour gigs of hedge funds, private equity, buyouts, deals, the Macquarie Bank (at its lowest point since April but up 81c yesterday to $85.93) to doing business, are still going to be around. They won't go away.

But some of those leveraged deals and their financing will come home to roost before the shake-out is finished.

It's now the old fashioned ideas of risk and reward that will be to the forefront of consideration, rather than distribution, or buy, sell, flick and take your cut through fees, points and other annuity streams.

What we are seeing isn't the end of the world like 1929; it's more like the end of the tech and net boom in 2000 which was marked by the huge Time Warner takeover of AOL, which was so big and outrageously excessive.

Likewise, the float of the Blackstone private equity group in the US last Friday and the run up from the issue price of $US31 a share, to $US38, and then back down again this week, will be seen to have marked the highpoint and the start of the adjustment from the years of declining risk aversion and easy money.

Easy money allows the incompetent to paper over mistakes and hide the errors: now we are seeing the return to investors pricing in risk. The canny have retreated to the sidelines in US Government bonds until they see what happens.

The unwise are still trying to play, get the last deal up, make the bonus and score a killing.

The widening spread between junk bonds and other forms of speculative finance and US Government bond rates, is telling us the days of easy money are gone.

Deals will still be done but they will have to reflect risk and return, and the possibility that things can go down, and not just up, up and up.

The bull market in bonds, stocks and financial derivatives, anything financial, is fraying at the edges.

Since last Friday, the yen has risen by around one per cent, hurting carry trade investors (it's why the Aussie and Kiwi dollars got a dose of the wobbles midweek).

The Blackstone Group's shares have tanked by 15 per cent; and Wall Street has refused to bail out two Bear Stearns hedge funds hit by the subprime crisis.

(Bear Stearns had to do the bailout on its own after other big banks refused to help. Many remembered the Long Term Capital Management bailout in 1998, how Bear Stearns refused to be a part of the rescuing consortium. Who says money doesn't have memory, or its owners don't enjoy revenge?).

Carlyle Group has postponed a planned $US415 million initial public offering of a fund that invests in bonds backed by mortgages after a slump in the U.S. subprime market. Carlyle said in a statement overnight to issue was being put off anda revised timetable for the sale is being prepared.Carlyleplanned to use most of the money from the IPO to buy AAA-rated residential mortgage-backed securities. The fund also targeted loans, high-yield bonds, and collateralized debt obligations, all of which are a bit risky to buy in the present market climate.In London, Caliber Global Investment Ltd., a $US908 ($A1.1 billion) million fund managed by Cambridge Place Investment Management, will close after losses on subprime mortgage debt.

Caliber said in a statement yesterday that it would sell assets and shut the fund within a year. The fund, listed on the London Stock Exchange, reported a second quarter loss of $US8.8 million last month.

The Caliber fund invests in mortgage and asset-backed debt and about 60 per cent of its investments are in the US.

The decision comes after Queen's Walk Investment Ltd., a fund managed by London- based hedge fund manager Cheyne Capital Management Ltd., said last Friday that June loss $US91 million ($A10.6 million) in the year to March 31 in part because of the subprime mortgage slump.

Shanghai's overvalued stock market is losing its zip, as are markets elsewhere.

And the cause of all these woes (besides the easy money), istheUS housing sector which resembles abattleground, with casualties still being found and forecasts of worse to come before it improves.Now, just as markets overshoot and undershoot, so to the events of the past five trading days could very well be an overreaction. But if it is, then the pillars supporting the current market confidence are mightily weak. Strong markets are not shaken by hedge funds going bad, or shares dropping.

Just as the Long Term Capital bail out back in 1998 cost billions and rattled markets, shares, bonds and other investments didn't head south for another 18 months.

The amount of money now invested across all classes of assets is many times more than in 1988, the stakes are higher, the time horizons shorter; communications are better: so are the trading parties and mechanisms in place.

But the underlying worry is that no one knows how these new fangled securities called CDOs (and their imitators) are going to behave in a set of circumstances no one has experienced for years.

Bill Gross, chief investment officer at Pimco, the world's largest bond fund, wrote said in an investor letter this week that the subprime mortgage crisis "is not an isolated event and it won't be contained by a few days of headlines".

And Amitabh Arora, the New York-based head of interest rate strategies at Lehman Brothers, said: "The bigger risk now is that it calls into question CDOs as a financing vehicle in the corporate credit market.

"The next six to 12 months will see a significant reassessment of CDOs as a financial vehicle, not just in the subprime world, but in the corporate world, too."

And that's the fear: if CDOs from subprime refinancings are 'toxic', to use one colourful description, then what about their counterparts and similar derivatives used in corporate finance to help finance the trillion dollars or so of private equity buyouts in the past couple of years?

Now not all the deals are bad, nor will many of the more recent ones fail because business conditions are still reasonably strong, but there could very well be a few who fall over simply because the string snapped on the financing structure.

We are seeing that in the US now with several big junk bond issues pulled, delayed,or where the issuers have had to agree to raise less money at higher rates.(eg Foodservice, MSCI, Myers Industries: all junk bond financings reduced or pulled, or both).

If that sharp run up in US bond rates in early June to a peak of 5.32 per cent for the 10 year security (and the problems in the Chinese share markets at the same time) prove to be the catalyst, then these new securities and their holders are insecure and a disaster waiting to happen.,

And, in all the uncertainty of the past month, gold, silver and other commodities haven't done well; probably because hedge funds and other financial speculators are withdrawing slowly.

In fact there was one quote during the week in one US report that investors would have done better buying certificates of deposit than in investing in gold or silver this year!

And while bond yields jumped sharply on June 5, they have been rising slowly since the start of May, up 0.47 per cent.

Some optimists claim this is bullish because it reflects higher growth expectations.

The more likely reason is that the higher growth has been priced in and lenders are demanding they receive a better real rate of return than the 2.7 per cent or so they have been receiving recently.

US and European analysts say that real 10-year bond yields of 2.7 per cent are still at least 100 basis points below where they were during the last three years of the last great boom, from 1997 to 2000.

If that's the case, there's a whole lotta shakin' a' comin...

Australasian Investment Review (AIR) is a free daily news service with a weekly online magazine covering global financial markets with a focus on Australia, New Zealand and Asia.

Each morning (Sydney time) AIR's team of experienced journalists present you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. AIR is available free of charge.

CATCH ME

Hedge funds chase ECM bankers (financialnews-us)
Alternative asset managers don't just want to hire a bank, they want its bankers

Ask any equity capital markets banker who their best clients are and many will say buyout firms and hedge funds. It is well known that alternative asset managers have close links to investment banks - and equity capital markets departments have been among the main beneficiaries of the millions of dollars in fees paid by these groups.

The hire last week of Merrill Lynch's head of equity syndicate by London-based hedge fund Polygon Investment Managers shows how serious alternative asset managers are about securing better access to the capital markets.

Mark Gwynne, a highly experienced equities banker, has a combination of market and corporate finance knowledge highly attractive to hedge funds.

One London headhunter said: “I suspect hiring equity capital markets bankers is something on the minds of funds. This is something we will be paying a lot more attention to.”

Recruiters say hedge funds want to recruit ECM bankers because they want to tap the primary equity market.

Gwynne's new employer, Polygon, illustrates the point. Last year, rumours, denied by the firm, circulated that it was considering a flotation. But this year the company listed a credit fund, Tetragon Financial Group, that raised $300m (€224m) in Amsterdam.

According to a hedge fund source, other managers have plans to list funds of more than $1bn soon because demand for issues remains strong.

The source said: “The desire to raise permanent capital is high and having an internal ECM competency makes a lot of sense to hedge fund managers, who are probably going to continue tapping the equity market for funds.”

Boussard & Gavaudan, which last year raised €440m ($587m) when it listed its flagship fund in Amsterdam, has announced plans to issue more shares in the vehicle.

Last month it was accelerating plans for the secondary offering because of investor demand, after a 17% increase in the fund's share price. Other funds are expected to follow the Anglo-French hedge fund manager's lead, though managers may find this difficult as some listed vehicles have posted less impressive returns since floating.

The hire of equity capital markets bankers follows a well established trend whereby alternative asset managers recruit debt and loan market specialists to boost their investment banking expertise.

In February, Credit Suisse's co-head of distressed debt, Kevin Lydon, left to join Strategic Value, a US-based hedge fund that specialises in the trading of reduced-value corporate securities.

The skills and experience of leveraged finance bankers have been in demand from hedge funds, particularly those with structuring expertise.

Commercial Industrial Finance Corporation, a US-based structured credit investor with more than $2.5bn in assets under management, last month hired two debt bankers from JP Morgan to run its international business in London.

Cheryl Boucher, an experienced loan syndications banker, and Ruth Traugott, former managing director and head of the technology, media and telecoms debt origination, joined the firm as partners.

Other debt market bankers to join hedge funds include Richard Munn, former head of loan syndications at Deutsche Bank, who in 2004 joined New York-based specialist debt hedge fund Oak Hill Capital Partners.

Losing good staff, whether to a rival or a client, always concerns investment banks. But the move of experienced capital markets bankers to hedge funds could be the start of a new trend.

Collateralised loan obligation fund managers, such as CIFC and credit hedge funds, have been taking market share from traditional bank lenders in the booming leveraged loans market.

Any move by equity capital markets bankers to hedge funds could be the start of “disintermediation” of investment banks by alternative asset managers, according to a capital markets banker.

He said: “Hedge funds cannot - and do not want to - place shares themselves but they do want to play more of a role in structuring their deals.”

Alternatives asset managers drive a hard bargain on underwriting fees. The Blackstone Group is paying its bookrunners a fee well below the average for US stock market listings for its flotation. Managers are bringing more expertise in-house, thus increasing their power to reduce the cost of accessing capital markets further.

One headhunter said: “It's all about buyside funds knowing more about how to leverage capital markets.”

One driver has been concern among buyout funds that investment banks were not achieving the best results in the primary equity market.

This led to innovations, such as heavily criticised competitive flotations, whereby potential bookrunners are monitored throughout the marketing phase of a float and are awarded final mandates for a listing only just before it launches.

With private equity firms and hedge funds expected to be one of the mainstays of equity capital markets for a long time, it is thought Gwynne's hire by Polygon could be the just first move of a top ECM banker to an alternative asset management firm.

UK CATCHES COLD

American sub-prime mortgage ills infect UK markets (times)
Cambridge Place, the London fund manager, was forced to close its $908 million (£450 million) listed fund yesterday as contagion from the embattled US sub-prime mortgage market continued to spread to the UK.

There were signs that jitters about the high-risk mortgage-backed securities had also moved to the blue-chip market, when Carlyle Group, the American private equity firm, said that it would scale down the float of a fund invested in AAA-rated home loans because of investor nervousness about the credit markets.

Cambridge Place, which was established in 2002 by the former Goldman Sachs bankers Martin Finegold and Robert Kramer, said that it would sell the assets of Caliber Global Investment, a London-listed fund, after suffering a net loss of $8.8 million in the first quarter of this year.

Caliber has about 60 per cent of its investments in the US, mostly in mortgage debts rated BBB or below. These are securitised tranches of mortgages given to people with impaired or nonexistent credit histories.
Related Links

* Sub-prime mess tip of iceberg?

* Housebuilder hit as US sub-prime woes deepen

* London hedge fund feels sub-prime pain

Defaults on sub-prime mortgages have surged in America after lenders extended mortgages to people with increasingly weak credit ratings at the end of 2006 and the beginning of 2007 on the basis that climbing house prices would allow them, if necessary, to remortgage their property to meet repayments.

Instead, house prices plunged, forcing the borrowers to miss mortgage payments. The losses are passed through the capital markets to the funds that bought the securities.

Caliber's investors will meet in August to vote on the asset sale, which is expected to take about a year. Cambridge Place has four hedge funds that buy similar securities, but their performances are not thought to have been hit as hard because they have a smaller proportion of their assets in the market and bought mortgages from 2004 and 2005 tranches rather than 2006.

Carlyle said yesterday that it would cut its fund offering on the Amsterdam exchange from $415 million to $300 million and reduce the price of the shares to $19 from the indicated range of $20 to $22. This would cause the fund float to be delayed for a week.

Meanwhile, several companies have announced plans over the past two days to scrap or postpone bond issues because of a lack of interest among investors in risky lending. Myers Industries, the plastic, rubber and metal products group, was the latest American company to withdraw a bond offering. The $350 million junk-bond issue would have helped to finance Goldman Sachs's agreed leveraged buyout of Myers.

Catalyst Paper, the Canadian newsprint and speciality paper company, has scrapped a $200 million offering of junk bonds, citing “adverse” market conditions, and Arcelor Finance, the borrowing vehicle of the steel company being acquired by Mittal Steel, put off its plans to issue more than €1 billion (£670 million), again citing difficulties in the debt markets. In Malaysia, MISC, the shipping company, put its $750 million bond issue on hold.

Mervyn King, the Governor of the Bank of England, renewed his recent warnings that big lending institutions should be careful about their use of collateralised debt obligations, which parcel out bundles of corporate debt across markets.