HEDGE FUND NEWS
@ Tue 03 July 2007 : GMT

FINTAG COMMENT

Vitriolic.

Everybody hates Bear Stearns, it seems. Just the sort of distraction to allow ultra secretative Och-Ziff to sneak in an IPO (with a valuation that beggars belief) while others take bets on whether Merrills or Lehman will take out Bear Stearns - although it would be a brave and awesome move if a buy-out fund were to remove the cancer from the street completely. 80 odd years of growth extinguished because a fat man got greedy.

Jeffery Lame (sic), another executive with a love for bacon sandwiches, has a tough job - the cancerous growth, BS Asset Management, is a tiny division but an extremely important one and as old executives are forced to leave, attempts are being made to beef up its risk management efforts (questions have to be asked over what MeasuRisk was doing? It also begs the question how useless a Value@Risk calculation is if you don't act upon it).

This may not be enough because however good the people and products are, the words "Bear Stearns" is synonymous with "making the numbers up".

Let's play a game. What comes to your head when you read the words:

Junk Bonds

Liars Poker

Barings

Brian Hunter

The Thai Baht

GLG

The ERM

Paris Hilton

Blackstone

Goldman Sachs

Bear Stearns

I am sure you can think of more interesting ones, but I hope you get the drift.

For some things, the tarnish never rubs off.

Thought of the day
What happens if you use BearXplorer to analyse your portfolio when you assume an ABS Hedge Fund collapses and then is saved by another party which is in fact the owner of the management company? What about plugging in "What-if a major US bank causes financial meltdown" how will my portfolio stack up?

[Editor:July 4th onward we ban the words "Bear Stearns" from the site. The "people" want to move on...]

BLAME HEDGE FUNDS' NEWS

Cioffi's Hero-to-Villain Hedge Funds Masked Bear Peril in CDOs (bloomberg)

Hedge funds face up to high flows, lower returns (reuters)

Hedge Funds Could Be Driving Market Rally (reuters)

Riskdata research shows that 30% of funds trading illiquid securities smooth their returns (bobsguide)

CHEAP AS CHIPS

Bear Stearns Could Become Takeover Target (cnbc)
Bear Stearns Cos. Inc. (BSC.N: Quote, Profile, Research) plans to build up risk controls at its asset management business after two of its hedge funds hit rock bottom by making bad bets on risky mortgages, the Wall Street Journal reported on Monday.

Citing people familiar with the matter, the paper said Bear Stearns Asset Management's risk-management team was likely to report to the parent company's chief risk officer Michael Alix.

The team had previously reported to the asset management division's chairman and chief executive, the report said.

The Journal said the investment bank also planned to add new risk managers to the unit.

Last week, Bear Stearns hired Jeffrey B. Lane, a vice chairman at Lehman Brothers, to help repair the company's image, find out what went wrong and boost the asset management business. Lane is replacing Richard Marin as chairman and chief executive of Bear Stearns' asset management business.

The meltdown of the hedge funds embarrassed Bear Stearns, widely known for its savvy in handling mortgage risk. The funds buckled on wrong-way bets tied to subprime loans, which are made to people with weak credit.

Bear Stearns could not immediately be reached for comment.

BEAR NECESSITIES

Fund bail-out reveals hidden dangers of a Bear hug (ft)
"Congratulations. Now don't screw up." The legendary greeting meted out by Goldman Sachs elders to new recruits encapsulates the mixture of confidence and anxiety at the heart of Wall Street.

For all their greed-is-good paeans to unbridled competition and ever more daring deals, the pinstriped alpha men and women inhabiting New York's skyscrapers live in constant fear of failure. History makes sure of that.

Every time US financial wizards got too confident and piled herd-like into a hot market, a "screw up" brought them down to earth. In recent weeks, it has been the turn of the tough guys and gals at Bear Stearns to reflect on the fragility of their craft.

The near collapse of two hedge funds run by Bear sparked fears of a rout in debt markets and of a sudden end to the buy-out bonanza. The doomsday predictions were cut short by Bear's offer of $3.2bn to bail out the less leveraged of the funds.

Without the intervention, the received wisdom goes, credit markets would have been roiled by a "fire sale" of the collateral - slices of subprime loans - held by the creditors (aka other investment banks). That may well be the end of the story.

But in the calm that followed the averted storm, Wall Street's finest have overlooked a damaging consequence of the affair.

Put simply: by helping its hedge fund, Bear could have changed the future rules of the game. Consider this. Bear, and other banks, treat their hedge funds as arm's length entities, independent of the parent company. The classification enables financial institutions to keep hedge funds, and their liabilities, off balance sheet, thus avoiding the need for provisioning and other costly regulatory requirements.

In Bear's case, the bank received fees for running the two fallen funds but it only invested a small amount of money in them. Such arrangements, in turn, increase the borrowing costs of this type of hedge funds.

Banks require higher interest rates to lend to entities like the Bear funds because the arm's length relationship makes them riskier than if they were formally part of a huge financial group. The flip side of that argument is that Bear, or any other bank, has no obligation to rescue these funds in times of trouble. And that is why last week's bail-out creates both a dangerous precedent and a pricing problem.

On the first point, banks will find it hard to persuade regulators that their hedge funds are off balance sheet entities if there is an implicit expectation they are prepared to pump cash into them when the going gets tough.

If I were a Securities and Exchange Commission official, my exhibit A would be the press reports of how an executive from a creditor bank asked his Bear counterparts to "stand behind" the fund.

But even if regulators fail to notice the double standards, capital markets ought to spot a glaring pricing mismatch. Why should lenders require the same compensation regardless of whether they provide debt to a stand-alone hedge fund or one managed by a bank ?

Take the example of Amaranth, the hedge fund which hit the rocks in September after a bet on US gas prices went wrong. It is clearly riskier to lend to a lone wolf like Amaranth than to a hedge fund with a Bear-like sugar daddy lurking in the background. Yet the diverging risk profiles are not reflected in the interest rates earned by lending banks.

Instead, banks are reaping high-risk rewards for not so risky work with funds implicitly backed by other houses - a situation that could encourage excessive lending.

Now I understand why Bear had to save its fund. In this line of business, reputation is everything and failing to act would have destroyed its standing with rivals and clients alike.

And I do sympathise with creditors asking for a parent company's help in sorting out a financial mess. But neither party can have it both ways: if the funds are independent they should be left to fail. If they are not, Bear and the creditors should shoulder higher regulatory and financial burdens.

To paraphrase Goldman's adage: "Congratulations on avoiding a crisis. Now don't screw up the system."

CATCH ME IF YOU CAN

The Smell of Contagion in the Air (financialarmegeddon)

An ill wind swept through Wall Street last week, seeping into trading rooms, cubicles, and offices on every floor. All of a sudden, people began to feel anxious and afraid. After years of dreaming about how much they would make, people started worrying about how much they might lose. In a matter of days, the notion of risk had been transformed from a hypothetical concept to a potentially lethal reality.

Signs of a sea change were everywhere. Investors rejected buyout-related debt from companies like U.S. Foodservice and investment banks were left holding the bag. Several firms, including Catalyst Paper Corp and Magnum, dropped plans to issue junk bonds, citing “adverse” conditions. South Korea's Kia Motors, Netherlands' Arcelor Mittal, and others pulled offerings amid an abrupt shift in favor of less risky alternatives.

As investors balked at terms that would have been warmly welcomed only weeks before, the pace of mergers and acquisitions slowed. That, in turn, spurred anxious bankers to turn up the heat. They warned portfolio managers that those “'who [refused] to take their “fair share” of ... troubled deals [would] face reduced allocations on good deals in the future,' ... recalling tactics employed by Drexel Burnham Lambert in the latter days of its reign over the junk bond market in 1989,” noted Barron's, citing analyst Martin Fridson.

Meanwhile, the once burgeoning market for collateralized debt obligations, or CDOs, slowed to a near standstill. Activity was stymied by the meltdown in the subprime finance sector and the collateral damage at two Bear Stearns hedge funds. Sizeable losses at Caliber Global Investments, a $900 million hedge fund, forced it to shut its doors. According to Barron's, dealers also cut back “on making markets in high-yield paper because of the capital they [had] tied up in bridge loans and problematic mortgage paper.”

Risk spreads ratcheted higher across the board. A late-week burst of buying in Treasury bonds suggested that money managers were seeking safer shores in the run-up to a new quarter. Although major stock averages were hardly changed, trouble lurked below the surface. Banks, brokerages, and other financial shares continued to fare poorly. The volatility index, or VIX, remained elevated, despite relatively flat markets and the onset of a holiday-shortened week. Breadth and momentum flagged, in contrast to the usual cheerleading that all was well.

Uncertainty about what shoe might drop next contributed to the unfamiliar shift in sentiment. So did a fear of losses — and of lost bonuses, lost jobs, and lost reputations. Although most Wall Streeters knew it was only a matter of time before the jig was up, hubris and denial had lulled them, time and again, into thinking that nothing would happen until “next year.” But with one major operator experiencing problems and rumblings about others, the day of reckoning suddenly seemed a whole lot closer.

Until recently, Wall Street's movers-and-shakers thought they had all the answers. Now, everyone — including risk managers, regulators, and reporters — was asking a lot of questions. How many others had similar problems? Who else held securities that were at risk? What would happen if other firms revealed that they, too, had bet wrong and would be taking large hits? People started turning all sorts of rocks over, looking for potentially nasty surprises.

Yet despite the clamour for more information, many were clamming up. Some were trying to maintain the pretence that all was well, or they were stalling in the hope that recent troubles would somehow go away. Others feared what might happen if the truth about what was being discussed behind closed doors came to light. Rumors started to fly about hedge fund liquidations and margin calls. In the absence of hard data, some began to fear the worst.

In no time at all, it seems, things are looking much different than they were. Suddenly, there is the smell of contagion in the air.

BRAVEHEART

Och-Ziff files for latest hedge fund IPO (financialnews-us)
Hedge fund Och-Ziff Capital Management is the latest alternative investment firm to file for an initial public offering, even as The Blackstone Group's stock continues to tumble amid worries about US treatment of tax policy for partnerships.

Och-Ziff Capital Management filed with the Securities and Exchange Commission today for a $2bn initial public offering led by Goldman Sachs and Lehman Brothers. Daniel Och, one of the firm's founders, spent 11 years at Goldman before founding Och-Ziff in 1994.

The filing provides an insight into the business of one of the largest and most opaque hedge fund managers in the world. Och-Ziff has $28.6bn (€20.9bn) of assets under management, nearly five times the $5.8bn the firm had only five years ago and a 40% jump from the $17bn under management only last June. Over 50% of Och-Ziff's assets under management are invested outside of the United States, and the firm has six partners in London and its Asian offices, including Hong Kong, Tokyo and Bangalore, India. The firm said in its filing that it also expects to open an office in Beijing this year.

Unlike Blackstone -- whose CEO and founder, Stephen Schwarzman and Pete Peterson, stand to earn, respectively, $667m and $1.8bn -- Och-Ziff will not give the proceeds of its IPO to its 18 partners. They own 100% of the firm and are paid almost entirely from Och-Ziff's profits.

All the partners will put their proceeds from the deal into a new fund family, the OZ Global Special Investments funds, which will be used to grow the firm's investments in Latin America, Central Europe, South Africa, as well as Indian real estate, energy, alternative energy and other areas and products. The partners can redeem their investments in the special investment funds only after five years.

Och-Ziff is facing challenges in the regulatory environment for alternative asset managers and hedge funds as well as the current state of the capital markets in the US. The initial public offerings of Fortress Investment Group and Blackstone are key precedents for Och-Ziff. Both have seen their stock prices fall steeply recently: Fortress has dropped from around $33 on April 18 to $23 in midmorning trading today. Blackstone's stock has plummeted on those worries, dipping from $45 on its first day to $29.40 today.

The US business of Man Group also recently filed for an initial public offering.

Och-Ziff wrote in its filing: “Various factors, including recent financial scandals, have caused investors and governmental authorities to express concerns over the integrity of the US financial markets and the adequacy of the current regulation of financial institutions, including alternative asset managers. Accordingly, the regulatory environment relevant to our business and to investors in our funds is subject to change in a manner that may be adverse to us and fund investors.”

Besides the threat of increased regulation of hedge funds, Och-Ziff is also walking into the remainder of a firestorm of controversy about how private equity firms should be taxed. Just before Blackstone went public two weeks ago, the Senate and House proposed legislation that would more than double the tax rate to 35% for partnerships that are publicly traded. Last week, a Bush spokesman said the president would veto any bill that sought to increase taxes on private partnerships, but worries persist.

In addition, the US capital markets as a whole have suffered slightly from wariness over credit concerns, troubles in the sub-prime mortgage market, and the traditional summer slowdown. According to investment banking research provider Dealogic, six deals slated to raise $445m were withdrawn last week, the highest number of withdrawn deals since October 2004, when six deals were also withdrawn.

STRUCTURE

The Caymans: Hamptons for Hedge Funds (dealbook)
In as little as two weeks, and for about $35,000 in fees, hedge funds can set up shop in the Cayman Islands — just a fraction of the time and one-tenth the price of incorporating a fund in drearier climes like Delaware. Just ask William E. Grayson, a hedge fund manager who has never set foot in the Caymans but has set up one of his funds there.

While speed and bargain prices are big attractions, the real draw, say analysts and Congressional investigators, are perfectly legal Caymans-based corporations and partnerships that allow major investors to avoid taxes of up to 35 percent that the Internal Revenue Service levies on unearned business income. Cayman tax laws also help American fund managers legally defer domestic taxes on their personal profits by channeling them offshore through their funds.

The biggest of the three islands that make up the Caymans, Grand Cayman, is only 22 miles long and, at its widest, 8 miles across. But the territory's tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business.

“So many of the best money managers have set up in the Cayman Islands,” says Kurt N. Schacht, managing director of the CFA Center for Financial Market Integrity, a nonprofit research organization in Charlottesville, Va. “It has become the place to go.”

As recently as a decade ago, regulators and law enforcement officials regarded the Caymans, an outpost 480 miles south of Miami that once served as a shelter for pirates like Blackbeard, as a hotbed for money laundering and other dubious financial schemes. Today, it is the corporate home for what the Cayman Islands Monetary Authority estimates to be three out of every four of the world's hedge funds — more than anywhere else — thanks to its friendly tax and regulatory regimes, as well as an army of foreign bankers, tax lawyers, accountants and fund administrators who make it all work.

“With some of the other jurisdictions, there's an island mentality,” says Michelle Kline, a principal at Genesee Investments, a hedge fund based in Bellevue, Wash. “The thing that's different about Cayman is that the regulators realize that hedge funds are a business, rather than just something to regulate.”

For their part, Cayman officials, regulators and private-sector lawyers, bankers and accountants say that there is nothing illegitimate about how the territory supports offshore finance, and that it is a system that is unfairly tarred and much misunderstood by its critics.

SELLING WATER

Lender makes credit card bid (shanghaidaily)
STANDARD Chartered Bank (China) Ltd has applied to regulators to launch branded credit cards on the Chinese mainland, according to Virginia Tang, general manager of the bank's credit cards and personal loans in China.

Standard Chartered is among the first batch of overseas banks to seek to issue yuan-backed cards on the mainland. The others are HSBC, Citibank and the Bank of East Asia.

Standard Chartered yesterday launched its first unsecured personal loan product in Shanghai. The selling point is that no collateral or guarantor is required. The loan, targeting the mass market, ranges from 8,000 yuan (US$1,050) to 200,000 yuan. It has maturities ranging from six months to four years with interest rates from 7.9 percent to 9.9 percent.

HOT TOTTY

Pound hits 26-year high against dollar (times)
The pound today hit a new 26-year high against the dollar, lifted by expectations that the Bank of England will hike interest rates on Thursday, to 5.75 per cent.

Sterling hit $2.0160 in afternoon deals. The dollar was also weaker against the euro, falling to within half a cent of a record low against the shared currency.

The greenback has been weighed down by predictions that US rates will remain stable in the wake of a US housing slowdown after a crisis in the market for sub-prime loans.

“We suspect that sterling will stay above $2 for an extended period, although we are doubtful that it will go that much higher,” Howard Archer, the Global Insight economist said.

He added that growing expectations that rates will reach 6 per cent later this year would also support sterling.

The euro was up 0.6 per cent at $1.3625 in New York trade, just shy of a record high of $1.3680 set in April.

The expectation of a further rise today came despite fresh evidence that four increases in borrowing costs since last August are starting to sap consumer demand.

Output across retailing and wholesaling tumbled by 1.6 per cent in April, in the sharpest plunge suffered by the distribution sector in almost three-and-a-half years, official figures showed this morning.

The abrupt decline, about 40 per cent of which was blamed on lower car sales, saw the output of the services sector as a whole, the engine room of the economy, succumb to a 0.1 per cent decline in April — the first such monthly fall since January.

Output in the hotels and restaurants sector was also estimated to have dropped by 1.7 per cent in April after a strong showing in March.

The gloomy figures were the latest in a slew of data suggesting at least tentatively that higher base rates are starting to bite in both the high street and the housing market.

But while the disappointing numbers will provide some ammunition for doves on the Bank of England's Monetary Policy Committee as they prepare for its two-day meeting on Wednesday and Thursday, economists said they were unlikely to forestall the new rise in interest rates that most of the City expects this week.

Analysts pointed to other data this morning which indicate continuing robust conditions across much of the economy, as well as in Europe and Japan, along with persistent price pressures, that will do little to ease the anxieties of the MPC hawks over inflation.

Today's figures indicated that services sector output in the three months to the end of April accelerated to register buoyant growth of 1 per cent, up from 0.9 per cent in the three months to March, despite the deterioration shown for April alone.

Manufacturing's recovery also remained robust during last month, helping to keep cost and price pressures simmering, according to the latest CIPS/RBS purchasing managers' survey.

A dip in new orders from domestic sources saw the CIPS headline index of industry's overall activity slipped a notch, to 54.3 for June, from May's reading of 54.7. Any figure above 50 indicates expansion.

The survey's gauge of input costs for manufacturers' raw materials, components and fuel climbed to its highest since September last year, while the reported price of goods leaving factories edged down a fraction but remained close to a record high reached in May.

Signs that businesses are attempting to push prices higher have been a key concern for the MPC, and continuing steep cost increases will do little to diminish companies' appetite for attempts to bolster their margins.

The MPC's hawks may also seize on other figures today showing that growth in unit wage costs across the economy jumped to 2.4 per cent in the first quarter (Q1), up sharply from 1.6 per cent in the final quarter of last year to the fastest pace of increase since last spring.

More reassuringly, however, productivity growth improved sharply in the first quarter despite the burden of increased labour costs. Measured by output per worker, productivity grew by 2.7 per cent in the three months to March, up from 2.1 per cent in the final quarter of last year to record the best performance since early 2004.

On the alternative gauge of output per hour worked, productivity grew by 2.8 per cent in the first quarter, up from 2.7 per cent in the previous three months, although a little below the 2.9 per cent pace in the third quarter of last year.

The MPC's hawkish faction pressing for a rate rise this week will meanwhile also find its case bolstered by evidence that the global economy remains in potent form.

Activity in eurozone manufacturing accelerated by more than expected last month to a four-month high, according to the RBS/NTC purchasing managers' survey of conditions there. Its headline reading rose to 55.6 in June, from a May index of 55.0.

In Japan, the closely-watched Tankan survey of business sentiment meanwhile showed that big Japanese companies remain upbeat over prospects. Confidence among large firms outside the manufacturing sector was at a 16-year high, while in industry sentiment emerged stronger than analysts had expected.

DULL

The lure of wealth by the lakeside draws expats and fund managers (ft)
Selecting Geneva as US-based Highland Capital's first European outpost and nerve centre for most of its future deals across the region will come as a massive shot in the arm for the Swiss financial centre, writes Haig Simonian.

Geneva is the capital of Switzerland's - and arguably the world's - private banking sector, and home to countless domestic and foreign banks which are focused on catering to the very wealthy.

Although UBS and Credit Suisse, Switzerland's two leading banks, are based in Zurich, Geneva - with its cosmopolitan air and particularly strong links to the Arab world - has created a niche as a leading private banking centre.

For foreign banks in particular, which are keen to establish a wealth management bridgehead in Switzerland, it is the growing location of their choice.

Although very strong in trade finance as well, especially for raw materials, Geneva has over the years lost ground to Zurich and foreign centres for broader banking and related activities.

While many fund managers - including fund of hedge fund managers - are Geneva-based, most of the hedge funds themselves, for example, are in the US or London.

It is Geneva's access to large amounts of private money and its relatively sophisticated investors that make the city an alluring base, along with its attractive lifestyle by the lake.

Although small, Switzerland is a leading destination for venture capitalists and private equity specialists after funds, particularly in specialist sectors such as pharmaceuticals, medical technology and life sciences.

Add to that its central location, good infrastructure and highly international population, and the appeal is clear.

The Alps are within easy reach for skiing and recreational visits, and Lake Geneva itself offers both sailing and assorted watersports.

In addition - and quite conveniently - Swiss cantons are willing to cut one-off tax deals with rich foreigners, explaining why Lake Geneva and its surroundings are destinations of choice for many expatriate sports stars, entertainers and billionaires.

STOP IN THE NAME OF RATIONALITY

United Capital's Devaney Halts Refunds on Subprime Hedge Funds (bloomberg)
John Devaney, a trader who claims a gift in finding bargains during market turmoil, halted redemptions on some of his hedge funds that invested in subprime-mortgage bonds.

Devaney's United Capital Markets Holdings Inc. stopped honoring refunds to investors in some of the firm's Horizon Strategy group hedge funds, including the money-losing Horizon ABS Fund LP, spokesman Michael Gregory said in a telephone interview yesterday. The funds hold most of the Key Biscayne, Florida-based firm's assets under management, which stood at about $619 million as of March.

``He prides himself as a risk-taker, someone who sticks himself out there,'' said David Castillo, who trades asset- backed, commercial-mortgage and packaged debt securities in San Francisco at Further Lane Securities. After a slump in the market for loans made to subprime, or risky borrowers, Devaney had ``doubled down on his bet, just like a Vegas gambler.''

The decision by Devaney, 37, follows the collapse of two hedge funds run by Bear Stearns Cos., which also lost money amid a plunge in bonds backed by subprime mortgages. As the Bear Stearns funds faltered, prices of the securities tumbled on concern the bonds would be dumped on the market at fire sale prices. Owners of similar securities may face $90 billion in losses, Deutsche Bank AG analysts predicted June 29.

Devaney, who founded United Capital in 1999 and expanded into hedge funds two years ago, is senior portfolio manager of the funds that were closed to investor refunds, according to regulatory filings.

`Defensive Move'

``We did that as a defensive move because we had an unusually high number of redemption requests, and we didn't want to be a forced seller in this market,'' Gregory said. One of the redemption requests was from an investor who had put up about 25 percent of the funds' money, he said. He declined to discuss losses.

The Horizon ABS Fund's offshore version, which gained almost 40 percent last year, lost 5 percent from March 31 through the end of May, according to data compiled by Bloomberg.

The fund had trailed the average gain of fixed-income hedge funds this year through May 31, advancing 0.27 percent, compared with a 3.7 percent rise by fixed-income managers, according to Chicago-based Hedge Fund Research Inc.

Delinquencies Rise

About 12 percent of subprime mortgages packaged into bonds were delinquent in April by at least 90 days, in foreclosure or already turned into seized property, according to a report today by Friedman Billings Ramsey Co. in Arlington, Virginia. That's up from 5.37 percent in May 2005, and the highest since August 1997. Subprime home loans are given to borrowers with poor or limited credit histories or high debt burdens.

As well as the Bear Stearns funds, the declines this year have claimed UBS AG's New York-based Dillon Read Capital Management LLC hedge fund and Caliber Global Investment Ltd., a $908 million London-listed fund managed by Cambridge Place Investment Management LLP. Both have been shut down.

``People are very nervous about how deep the revaluations of these securities will have to go,'' said Virginia Parker, who helps advise about $1.8 billion in client money at Parker Global Strategies LLC in Stamford, Connecticut.

United Capital started as a broker-dealer specializing in low-rated and distressed asset-backed securities, collateralized debt obligations and collateralized mortgage obligations. It expanded that strategy into real estate investments and money management.

Bargain Hunter

Devaney prides himself on finding a bargain.

After the 9/11 terrorist attacks, United Capital "stood there waiting to make a bid'' on bonds created by bundling together aircraft leases, as insurers and other investors dumped them, Devaney said in an interview in November 2006. Those investors had to sell because of ratings downgrades, he said.

In times of market stress, "we figure out a bond is worth 80, and we go in and buy it for, say, 60,'' he said at the time.

A graduate of Colorado State University in Fort Collins, Devaney hosted parties at industry conferences with musicians and celebrities. United Capital sponsored the 2006 American Securitization Forum Industry Dinner, headlined by actor- comedian David Spade. "Tonight Show'' host Jay Leno was the featured star the year before, also sponsored by the firm.

Assets managed by hedge funds globally more than doubled over the past five years to almost $1.6 trillion as of the first quarter, according to Chicago-based Hedge Fund Research Inc. Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

Forced Hands

While prices of mortgage-backed securities were declining earlier this year, many funds probably weren't recording those drops until the Bear Stearns funds collapsed, Parker said.

"These positions didn't get marked down until June,'' Parker said. "Nobody's hand was forced in the market until then.''

Bear Stearns agreed to a $1.6 billion bailout of one of its money-losing hedge funds and is liquidating a second fund after they made bad bets on securities including collateralized debt obligations, many of which were backed by subprime bonds.

After the funds reported losses, investors demanded their money back, forcing the funds to halt redemptions. Bear Stearns stepped in when lenders began seizing assets.