HEDGE FUND NEWS
@ Thu 05 July 2007 : GMT

FINTAG COMMENT

Despite it being July 4th yesterday, FiNTAG had its highest ever hits. Given 60% of my readers are from the US I can only conclude it is not a very popular holiday.

Today we look at:

ECB and Bank of England to announce rates decisions. UPDATE Flat/25 bip rise.

Global Cockup postpones London listing after Archeus sues it for USD500m.

Oil at 10 month high - USD73.

Carlyle lists an ABS fund - just.

Discovery of shockingly good French restaurant in W1, "Petite Maison"

US Lawyers turn investors away.

The FSA get all excited about a UK style subprime mess.

OTHER NEWS

Top 20 Rising Hedge Fund Stars (Where's Finbar?) (ftalphaville)

LBO Debt Alarms Fidelity, Lehman, TIAA-CREF Managers (bloomberg)

“Bundled” Portable Alpha: A Bridge Across The Portable Alpha Chasm? (allaboutalpha)

Chinese quality inspectors found almost a fifth of goods inspected in H1 2007 were below standard (finfacts)

Bank expected to raise UK rates (bbc)

US petrol demand lifts oil prices (bbc)

Merkel walks a tightrope in shielding German companies (gulftimes)

Hedge funds find Bermuda a favourable climate for now (ft)

Renaissance to launch new fund (ft)

New Star to close three single strategy hedge funds (hedgeweek)

Up, up and away

AUTOMATIC BRAKING SYSTEM

One More Hedge Fund Suspends Redemptions - Just Another Crack in the Ice? (stockpatrol)
Imagine you were standing at the center of a beautiful, tranquil, ice-covered pond. Life is blissful and, for the moment, prosperous. Suddenly cracks begin to appear on the surface, in every direction. The sun is shining brightly and soon the ice will melt. Anxiety begins to build. You know that disaster is only moments away. You want to get off safely, but you know that with each step the tiny cracks will become fissures, the ice will begin to break, and order will be replaced by chaos. You contemplate the prospect of plunging into the freezing water and wonder, is there any hope of escape.

Now, consider an equally disturbing scenario. You have invested in a highly-leveraged hedge fund. The fund has grown significantly in recent years, riding a seemingly endless wave of investor confidence and unprecedented (some would say, unjustified) optimism. Fund managers are riding high - just like their brokerage firm counterparts did a decade earlier, enjoying unfathomable incomes and lavishing themselves with planes, ships and other accoutrements of their new-found wealth.

But there is cause for concern. The fund's assets are tied up in illiquid assets, like, for instance, sub prime mortgages. The fund managers have leveraged your investment by borrowing from investment banks and other financial institutions. Those lenders have been getting nervous - quite understandable as sub-prime mortgages fail with increasing frequency and confidence in the mortgage market continues to decline. Small cracks, to be sure. But are they signs of fissures to come?

The latest news from the Horizon ABS Fund may offer new cause for concern. Horizon ABS Fund, which focuses on bonds backed by home loans, has suspended redemption requests by investors. The Fund supposedly was up about 40% last year, which might leave investors feeling quite flush - if they could get their hands on their money. Ordinarily, the Horizon ABS Fund allows investors to redeem their stakes in the fund once a quarter on 90 days notice.

Just not now.

In other words, if you are an investor in the Horizon ABS Fund and you want to reap the rewards of that fund's growth by withdrawing your money - you can't. Now, no doubt, the fund's offering documents allow the fund managers some leeway to suspend withdrawals. That, however, may be little comfort to nervous investors who are left to wonder when they will be allowed to remove their funds.

This drastic action by the managers of the Horizon ABS-Fund reportedly come on the heels of a request for withdrawal by one investor, who accounted for approximately one quarter of the Fund's purported $650 million assets. Horizon ABS Fund investors may be asking why the Fund would allow itself to be so significantly dominated by a single investor who could jeopardize the stability of the Fund if he elected to collect his money and leave the table.

The Horizon ABS Fund is just one of the investment products under the Horizon umbrella, managed by John Devaney, who runs United Capital Markets Holdings, Inc of Key Biscayne, Florida. Devaney has gained a measure of celebrity by throwing lavish parties at industry conferences, featuring entertainers like comedian David Spade and Tonight Show host Jay Leno, and rock stars such as Counting Crows, ZZ Top and Blues Traveler.

According to a Bloomberg report on July 3, 2007, Horizon funds "last month sold off a 'large amount' of securities and also closed out derivative bets on subprime-mortgage bonds at a loss." That, as Bloomberg explained, is in keeping with Devaney's stated strategy, which "is to buy subprime-mortgage bonds and other asset-backed securities when they've fallen out of favor."

Sub prime mortgages certainly have "fallen from favor" in recent weeks, as evidenced by the near-collapse of two Bear Stearns hedge funds late last month. One of the Bear Stearns funds reportedly suspended redemptions in May.

There would appear to be a potentially fatal flaw in Mr. Devaney's strategy. Lenders are unlikely to share his aggressive approach to shaky markets. As fund assets become increasingly concentrated in dicey illiquid securities, lenders call for more collateral. Uneasy lenders may demand additional collateral - or simply sell fund assets to pay-off loans. Merrill Lynch & Co. seized about $800 million in mortgage securities from the Bear Stearns funds

United Capital says that Merrill Lynch is the prime broker for the Horizon ABS Fund.

The benefits of the Fund's extraordinary growth could soon be lost. United Capital says that the Fund declined in value in April and May; further losses are expected for June and the entire year. Meanwhile, investors can only watch their assets decline.

In a statement, United Capital said that it expects "to resume processing these redemptions as soon as is prudent, which we hope will be in the very near term."

Will that be enough to keep angered investors at bay? Or will they soon start dialing their attorneys? At some point investors will grow weary of the cracking ice and take steps to protect themselves from the icy plunge.

PASS THE PARCEL

Bolton says CDO market similar to split-caps (reuters)
Fidelity fund manager Anthony Bolton has likened the market in collateralised debt obligations to the controversial split-capital trust sector, and warned on the methods used by some activist hedge funds.

Speaking on Tuesday at the Fund Forum 2007 in Monaco, Bolton, one of the UK's most respected managers, said while the development of packages of debt such as CDOs has helped spread risk, they nevertheless pose a large investment risk.

"I still think there are major risks with these -- CDOs, CLOs (collaterised loan obligations)," he said.

"They are basically based on a model, which is based on a set of assumptions. It's very difficult to say 'it's always like this'. If something goes wrong with the assumptions, it changes the model."

Collateralised debt obligations (CDOs) are created by bundling together portions of different types of debt to spread risk among investors around the world and has become a $1 trillion (500 billion pound) market.

However, credit markets have come under pressure in recent weeks as rising delinquencies in the U.S. subprime mortgage market led to a sell-off in bonds backed by the mortgages.

According to JPMorgan, the spreads on BBB-rated tranches of high grade structured finance CDOs rose 275 basis points in June to 800 basis points.

Bolton said CDOs and CLOs have similarities with split-capital investment trusts, some of which collapsed earlier this decade due to a mix of falling stocks, cross-shareholdings and heavy borrowing, prompting an investigation by the financial regulator.

"It reminds me a lot of split-level investment trusts. They were based on models and assumptions, and it turned out the models were wrong and that led to the collapses.

"I think what will happen is that the prime brokers won't allow valuations based on models. They will require valuations based on the market and that will be a mechanism leading to more reality."

However, speaking at a separate session, Richard Wohanka, chief executive of Fortis Investments, said the media had got into a "frenzy" about CDOs.

"I think the press has gone berserk on CDOs and the subprime debacle. CDOs are nothing other than a bond, but highly illiquid ... If you buy a CDO, you need to understand it has a good yield but be clear to hold it to maturity."

ACTIVISTS

Bolton also said he had concerns about the methods employed by some activist investors who press for corporate change.

"I think they're a force for good, with some reservations. To be a responsible shareholder you need to take an interest and vote ... Where I've had a problem is when companies react to activists -- who are known as activists who are taking small stakes -- when they react very quickly to their demands

"I worry at the extremes that companies are taking short-term decisions at the expense of long-term benefits ... I do think that at times they're trying to get a bandwagon effect to try and manipulate the market."

Last month Bolton said Cadbury Schweppes' decision to split its businesses after investors led by U.S. billionaire Nelson Peltz, who had taken a 2.98 percent stake, had changed the investment landscape and could encourage other activists.

Bolton also said private equity funds, which have used cheap borrowing to take on increasingly bigger leveraged buyouts but which have attracted attention from lawmakers over their huge profits, could face tougher times ahead.

"Like with everything, there is a cycle to private equity ... They've now got into mega deals and are coming into the public eye, and I think that contains the factors that will end the cycle in private equity."

CONTINGENT LIABILITY

GlobeOp Financial postpones UK listing (hemscott)
GlobeOp Financial Services SA said it has notified the UKLA and the London Stock Exchange of its decision to postpone its application for listing.

Earlier today GlobeOp said it rejects the lawsuit claim by Archeus Capital Management and various Animi funds (Archeus) for 465 mln usd, as it believes the lawsuit is calculated to gain maximum leverage against GlobeOp during its initial public offering.

Archeus filed a complaint in a New York State Court on July 2, three days before the closing of GlobeOp's IPO, the company said.

It added that the overwhelming portion of Archeus' claim for 465 mln usd is for consequential damages and GlobeOp's contract with the fund excludes claims for consequential damages, particularly for damages related to loss of business or lost profits.

GlobeOp said it looks forward to returning to the market once the current uncertainty has been clarified. In the meantime, GlobeOp's business strategy and growth plans remain unchanged by the postponement.

SNEAKY

Carlyle fund floated after delay and cut (ft)
Carlyle, the US buy-out house, yesterday became the latest private equity company to list a fund on the NYSE Euronext bourse in Amsterdam after having earlier delayed the initial public offering because of investor wariness.

The flotation of Carlyle Capital Corporation, a Guernsey-based fund investing in US mortgage-backed bonds, had been put back from Thursday last week as choppy market conditions forced Carlyle to cut the price and size of the offer.

While the company said the fund had no exposure to the subprime sector, it was a victim of investor worries about rising interest rates and US subprime mortgages that had forced other companies to cancel bond and loan deals.

Its bond portfolio comprises mainly triple-A-rated US agency mortgages from Fannie Mae and Freddie Mac, the government-sponsored mortgage finance institutions, Carlyle said. CCC has already raised $600m from a private placement of shares in the last year, allowing it to make $17bn of highly leveraged investments in residential mortgage-backed securities.

It had planned to price at between $20 and $22 a share, but cut that to $19. It also cut the size of the issue from $415m to $300m. The shares initially traded up to $20, before slipping back to $19.10 in what a person close to the matter described as "a flat market".

The offering comprised 15.9m class B shares, including 4.5m sold directly via a private placement. Reducing the size of the issue from 18.87m shares and cutting the price below the initial range had meant Carlyle was forced last week to file a supplementary offering memorandum that needed the Dutch regulator's approval, delaying to the IPO.

Joost van der Does Willebois, chairman of the Amsterdam market, declared Amsterdam "the most attractive gateway to the Euro-market" for private equity companies and hedge funds. Since January 2006 private equity and hedge fund listings have raised €10.8bn on Euronext Amsterdam.

HOT TODDY

Horlick puts on brave face as fund raises just £131m (independent)
Bramdean Asset Management, the investment company run by Nicola Horlick, has raised just £131m for a new fund launched to invest in alternative assets, around half the amount it had hoped to pick up.

Bramdean said it was pleased with the amount raised, despite the total figure being towards the bottom end of its original £75m to £250m estimate of demand from private and institutional investors.

However, Mark Dampier, head of investments at Hargreaves Lansdown, the independent financial adviser, said investors had been underwhelmed by Bramdean Alternatives Limited. "They must be massively disappointed by the amount they've raised," he said. "By comparison, New Star's most recent property fund took in more than £200m and Ms Horlick has hardly been short of publicity during the time in which Bramdean has been raising money."

The fund manager, launched in January 2005 by Ms Horlick, one of the UK's best-known investment figures, announced the launch of Bramdean Alternatives earlier this year.

The fund will invest in a variety of private equity funds, hedge funds and other vehicles offering exposure to alternative assets. It has already committed investments to a number of funds, including Terra Firma Capital Partners, Coller International Partners and the SVG Capital Strategic Recovery Fund.

Ms Horlick said she was not disappointed at all with the amount of money raised. "This is a new fund and to be absolutely frank, we had no idea exactly how much demand there would be, which was why we put such a wide range on the estimates," she said. "To pull in more than £100m for a new fund that is unique in the marketplace is very good."

However, Bramdean admitted demand for the fund had been hit by stock market volatility and the series of controversies faced by the private equity industry during the fund-raising period of the past month.

Ms Horlick said the background against which Bramdean had launched the fund had been so difficult that she had thought about pulling the flotation.

"I did think about that, but it is better to get the fund up and running because we can always come back and raise more money later on," she added.

"In fact, the statistics speak for themselves - this year, only two out of 12 new funds launched have raised £100m, and two launches have actually been completely withdrawn."

Mr Dampier said that scepticism about the sustainability of private equity and hedge fund returns had been one factor in the limited demand for the fund.

He also criticised Bramdean's marketing to private investors, who were asked to invest in the fund using an offshore bond wrapper provided by Axa, the insurance company.

Dealings in Bramdean Alternatives, a closed-end vehicle, are expected to begin on the London Stock Exchange on Monday.

UK SUBPRIME

Lack of checks and easy money threaten home loan crisis in UK (guardian)
Thousands of homebuyers with credit problems were allowed to take out huge loans by mortgage lenders and brokers without any checks on their income, according to an investigation by the chief financial watchdog.

The Financial Services Authority said lenders offering specialist mortgages failed to check whether customers had the income they needed to pay monthly payments, putting them at risk of defaulting on loans and losing their home.

The watchdog also said mortgage brokers and advisers in the fast-growing sub-prime sector were unable to show whether a mortgage was a suitable product for many customers with irregular or low incomes. As a result the FSA said it would take action against five firms of intermediaries that failed basic checks on record keeping and advice.

The investigation follows widespread defaults in the US on mortgages sold to low-income families or those with poor credit histories. Critics argue banks went on a lending frenzy without checking the credit-worthiness of customers who were then unable to keep up payments.

Banks in the US, including subsidiaries of British banks, lost hundreds of millions of dollars after they were forced to write off the value of their lending businesses. Concerns that lenders in Britain were heading for a similar crash were fuelled by Northern Rock, which issued a profits warning last week. The bank, which advertises a 125% mortgage, said it had been badly affected by rises in interest rates.

An expected rise in rates by the Bank of England today has heightened concern that more borrowers will default.

The FSA said its investigation of the sub-prime mortgage market, estimated to be worth £30bn a year, found that a third of intermediaries were unable to show whether consumers could afford a mortgage, while more than half allowed customers to "self-certify" their income when applying for a mortgage.

Lenders were also at fault, said the watchdog, for their failure to check implausible applications from customers.

Sub-prime mortgages are offered to people who are unable to take out a conventional mortgage, often because they have a poor credit history or are self-employed. Many of the mortgages allow homebuyers to bypass the usual checks on their income. Clive Briault, FSA managing director, retail markets, said: "We are very concerned about these findings. Consumers in the sub-prime market are vulnerable people who may have high debts or a bad credit history. It is therefore important that they are properly assessed and advised. We will not hesitate to take action where we find bad practice.

The Liberal Democrat shadow chancellor, Vince Cable, said the FSA investigation failed to address fundamental problems in the mortgage market. "Talking about a few rogue brokers is just skimming the surface of the problem. While rogue brokers are a problem, the more pressing issue is high street lenders aggressively trying to build market share.

"Lending income multiples for mortgages are now at an all-time high and, with interest rates set to rise further, the outlook for many homeowners looks grim.

Citizens Advice said many of the 1.4 million people who came to its offices with debt problems quickly fell into arrears after taking out a home loan. "The impact on our clients results in unbearable stress and the loss of their homes."

US fears

Billions of pounds of loans to US homebuyers could be worth only a fraction of their face value, prompting fears that buoyant credit markets in the US and Europe face a sudden downturn and losses totalling £250bn.

It emerged yesterday that investment bank Goldman Sachs had cut the value of its debt securities by almost 30%, wiping almost $1.5bn (£750m) off the value of its assets. Many of the loans are believed to be to US lenders caught up in the collapse of the sub-prime mortgage market. In the past few months several banks have warned that mass defaults on loans in the US have cut their profits. Last week two hedge funds that invested in the sub-prime mortgage market run by investment bank Bear Sterns collapsed.

The news from Goldman Sachs comes after it warned there could be a rapid loss of confidence in the debt markets. "The biggest risk we face would be a very big crisis in the credit markets," said the bank's chief, Lloyd Blankfein.

Fidelity fund manager Anthony Bolton said the debt markets faced major risks if the downturn caused a ripple effect.

LAWYERS

Foreign firms fear litigious Americans (financialnews-us)
A US man last week lost a $54m (£27m) lawsuit against a dry cleaner that mislaid a pair of his trousers.

The threat of this kind of frivolous legal action has been cited as a reason why foreign companies have been unwilling to list in the US, on top of the regulatory burden of the Sarbanes-Oxley Act.

At the same time ICI, the blue chip UK chemicals manufacturer, moved its American depositary receipts from the New York Stock Exchange to the International OTCQX. The latter launched in March to allow foreign companies listed on qualified international exchanges to trade in the US without full registration with the US Securities and Exchange Commission.

The market is run by Pink Sheets, which operates an electronic interdealer quotation and trading system for over-the-counter securities not traded on a US exchange.

Cromwell Caulson, chairman and chief executive of Pink Sheets, said the market was not competing with established US exchanges as companies would not raise capital but would gain access to US shareholders, which was unavailable from their home listing.

Caulson said: “Will we become the primary market for a large FTSE issuer? No. Will we reach US investors who have not considered them before? Yes.”

ICI said moving to the International OTCQX would result in annual savings of at least £4m (€5.9m) as it would reduce how much it paid suppliers and auditors for Sarbanes-Oxley compliance.

Alan Brown, chief financial officer of ICI, said: “This decision is consistent with our strategy of improving our long-term cost effectiveness, as it reduces complexity without detracting from the integrity of our governance and control processes.”

An ADR represents a specified number of shares in a foreign issuer that are dealt on US markets, like other stocks. International companies quoted on Pink Sheets include Swiss food company Nestlé, Russian energy group Lukoil and German carmaker Volkswagen.

Caulson said: “The US equity markets remain the broadest and deepest in the world, and OTCQX leverages Pink Sheets' scalable quotation and trading platform that is used for all over-the-counter stocks with nearly 200 participating broker dealers.”

International OTCQX asks companies to make their home country disclosures available in English to US investors. Every ADR issuer who trades on the market must also appoint a principal American liaison, who ensures the issuer meets OTCQX requirements and assists with compliance on state securities laws.

Akbar Poonawala, head of global equity services at Deutsche Bank, an ADR principal American liaison for the market, said: “We hope the International OTCQX will become the premier brand to differentiate profitable, large scale, blue-chip issuers from other companies on Pink Sheets.”

Poonawala said one of the factors behind Deutsche becoming a principal American liaison was its belief that the new venue would increase institutional trading in Level 1 ADRs.

He said: “We see our role as taking on the upper crust of unlisted programs. The International OTCQX lends itself to blue-chip companies that will attract more active trading by institutions and individuals due to increased visibility, more marketmakers and the resultant increase in liquidity.”

The Bank of New York was the first to become an ADR principal American liaison. Anthony Moro, head of Americas business development at Bank of New York, said: “Any addition visibility for our ADR clients is a good thing and up to 80% of Level 1 ADRs could move to the new venue.”

The International OTCQX has attracted 10 companies in its first 10 weeks and Moro predicted there could be 50 by the end of the year. Caulson said he would like 100 companies to be trading by this time next year, as it would take time to build a record of trading volume data and develop the brand.

When the market launched, the first three companies to trade on it were Day Software of Switzerland, Canada's Globex Mining Enterprises and Wal-Mart de Mexico. Coulson said the trading volume of Wal-Mart de Mexico's ADRs have increased by nearly a third since it moved to the segment, while US trading in Day Software has jumped to a fifth of its global volumes. He added: “International OTCQX is at hatching stage and we need to teach chicken to fly.”