HEDGE FUND NEWS
@ Wed 11 July 2007 : GMT

FINTAG COMMENT

So the USD is officially designated a third world currency?

We are on the verge of a CDO meltdown and FiNTAG performs poorly in the iShares game.

Debt is the new black and the UK subprime market is booming.

Doubts are cast about the true impact the US subprime market is really having on the markets; despite the rating agencies having fits and downgrading debt way after the event and most Hedge Funds having a cracking good June.

Paulson makes 40% on the subprime debacle.

We reveal that London Mayfair rents are as high as Manhattan.

The #1 bank to work for is Barcap and the worst banks to work for are those comprised of initials (UBS, BNP, HSBC) apparently.

KLAXON NEWS

Bear Stearns says SEC ends probe into muni sales (reuters)

Private equity firms pay banks $10bn (financialnews-us)

Banks warned on equity bridges (financialnews-us)

London hedge fund TCI raises stake in Chinese Estates to 8.37% (bloomberg)

ANYTHING YOU CAN DO, WE CAN DO BETTER

Are Hedge Funds Raising the Rent? (dealbook)
Hedge funds get blamed, fairly or not, for all kinds of market anomalies. This time, they are being held partly responsible for the increase in commercial rents in New York.

Hedge funds are having what a Reuters reporter calls a “breathtaking” effect on the New York City rental market. Perhaps not coincidentally, a study recently found that there were 40 percent more hedge funds launched in the first half of 2007 than in the same period last year.

Hedge funds are private pools of capital, usually restricted to institutions and wealthy investors. Many have reaped big profits for their investors in the last few years, which has inspired others on Wall Street to create their own hedge-fund firms. Though often based in the Connecticut town of Greenwich, a large number of these firms also choose to set up shop in Manhattan.

Reuters' Ilaina Jonas writes:

Many hedge funds are not only able to pay top dollar for their offices, but they need to do so to impress and retain both clients and staff. Like a magnet, hedge fund rents have pulled up other rents across the market.

And down the market, too. The demand of fund managers is cascading — raising rents even on lesser properties. “They've brought everything up because they've raised the top level, and now the B space is priced as A space, and the C space is now priced at B space,” Ben Friedland, CB Richard Ellis Group senior vice president, told Reuters.

But it's the A space that is most affected. In the first quarter, the average rent on top-level Midtown office space rose 27 percent from a year earlier. “Rents surpassing $100 per square foot — shocking just a year ago — were too numerous to count,” Ms. Jonas wrote.

The actual work of hedge funds doesn't take a lot of space (although some of them do have sizable trading floors), but they still typically tend to rent 10,000 to 20,000 square feet because they need views (often of Central Park) and other accoutrements to impress clients (and, in some cases, themselves) such as gyms, kitchens, and private rest rooms.

According to HedgeFund.net, there are about 1,250 hedge funds operating in Manhattan.

Absolute Return magazine reports that 72 new hedge funds were started in the United States in the first half of 2007, including three that raised $1 billion or more. The biggest was the Carlyle Group's Carlyle-Blue Wave, a multi-strategy fund that launched with about $2 billion.

The question now is, what will happen to the rental market if and when the hedge-fund business comes back to earth?

OK!

Is Your Firm 'In Vogue' Or 'In The Dog House' ? (hereisthecity)
In Vogue

Barclays Capital

A lean, mean fixed income machine. But will the proposed deal with ABN AMRO be one deal too far ?

Goldman Sachs

Despite a less than sterling performance from the Goldman Global Alpha hedge fund and somewhat flat second-quarter earnings, the firm remains top of the global M&A league table and top of the heap in the financial markets.

Morgan Stanley

Two years on from CEO John Mack's triumphant comeback, Morgan Stanley is back at the top of its game. Impressive second-quarter earnings have reinforced the view that the firm is the only likely candidate to overhaul Goldman.

On The Rise

Commerzbank

No longer the 'comedy bank', Commerzbank has got its act together and is waiting for the right firm to come along and make an offer the firm's CEO can't refuse.

Credit Suisse

New CEO, new energy. Credit Suisse is coming off the back of a couple of good years. All eyes now on the firm's second quarter profit numbers.

Deutsche Bank

CEO Josef Ackermann has delivered on his promises, contained costs and seen his bank's share price rise. Expect further progress up the global investment banking league tables.

Jefferies & Co

The best things, they say, come in the smallest packages. Good earnings numbers, an impressive executive team and the strong desire to put clients first, continue to allow Jefferies to punch well above its weight.

JP Morgan

Despite CEO Jamie Dimon's best efforts to p.ss off those big earners over at the investment bank, the company is slowly getting its act together. Expect another big deal some time soon.

Merrill Lynch

Impressive recent earnings and an efficient and determined executive team. Now longer 'Mother' Merrill, more like 'Mutha' Merrill. The firm's now got balls.

Stalled

Bank of America

The firm's top executives still think Paris is in Texas. Until they appreciate that there is life outside Charlotte, Bank of America will only be Big in America.

BNP Paribas

Doing well in France and in equity derivatives, and running the investment bank tightly from Paris, the firm has yet to show that it can play on a wider stage.

Dresdner Kleinwort

Stuck between a rock and hard place - neither a big global player, nor a niche firm. Waiting for German owner Allianz to make up its mind whether to get rid of it or believe in it enough to invest so that it can act like a proper player.

Lazard

All quite on the Lazard front. Although still punching above its weight in M&A, concerns are growing about how long the firm can stand-alone given that it isn't a fully integrated investment bank. The company's share price has also fallen back from highs.

Lehman Brothers

The rise and rise of one of Wall Street's coolest firms has stalled somewhat of late. Despite impressive second-quarter figures, the firm has started to leak bankers and many are grumbling that tight controls on costs may be starting to impinge on the ability to do business.

Nomura

A firm with huge potential - if only it would delegate more authority to international executives.

Royal Bank of Scotland

Need to land a big deal, don't you Fred ?

Societe Generale

As for BNP Paribas (see above)

In The Dog House

Bear Stearns

The firm's much-publicized hedge fund-related problems may not result in any significant impact on earnings, but Bear's reputation on the risk front has been damaged.

Citi

In the midst of a major restructure / cost-cutting exercise in an attempt to appease shareholders, CEO Chuck Prince continues to have an uneasy hold on the top job. He must do more than simply fire staff, off-shore and outsource if he is to continue in the hot seat.

HSBC

The bank's share price isn't doing much. The firm's latest attempt to make it into the investment banking big time has failed. Recent lending problems over Householders International in the US highlighted risk / control concerns. Calls for a break-up of the empire are increasingly being heard.

UBS

Oh, how the mighty have fallen! Three disappointing earnings quarters, the closure of a high-profile hedge fund business and a less-than-impressive share price (UBS's 12% rise this year compares to a 31% increase over at Credit Suisse in the same period) caused CEO Peter Wuffli to lose his job. It'll be all change over at UBS now, as new CEO Marcel Rohner starts to stamp his authority on the bank. Expect some more senior executives to leave, and costs to be screwed down over at the investment bank.

West LB

Recent prop trading losses have caused many to question where this firm is going. Should it box clever and pull back the wagons around Dusseldorf ?

Dead & Buried

ABN AMRO

Enough said.

Calyon

Who ?

COLLATERAL DAMAGE

Chief executives warn of CDO meltdown (financialnews-us)
The problems being experienced in structured credit markets have highlighted the risks of selling complex investment products, according to fund management chief executives.

With collateralized debt obligations backed by US sub-prime mortgages running into trouble, fund managers at the Fund Forum said the situation resembled the UK's split capital investment trust scandal of 2002.

Martin Gilbert, chief executive of Aberdeen Asset Management, said: “There's an uncanny resemblance between split capital and CDOs. But CDOs have been sold to professional investors. The mistake we made was selling yield (through split capital trusts) to private investors.”

Aberdeen, the largest managers of split capital trusts sold its retail funds business to New Star Asset Management after the collapse of the sector. “In hindsight it was the best thing for us because it allowed us to concentrate on the institutional business,” he added.

Anthony Bolton, investment director at Fidelity International, echoed Gilbert's concerns about CDOs, in particular in how they are valued. “These CDOs are based on a model, and the model is based on a set of assumptions. If something changes in the world and the assumptions prove wrong, the models and the structures will be wrong. It reminds me a lot of split-level investment trusts,” he said.

However, Richard Wohanka, chief executive of Fortis Investments, one of the largest CDO managers in Europe, said risks had been overstated. “The press has gone berserk on the CDO sub-prime debacle. A CDO is a highly illiquid bond and the premium on pricing is the compensation for the illiquidity. If people buy the CDO to hold it to maturity, it will pay out. However, if you have to sell you will probably suffer,” he said.

Jeroen Bakker, head of asset and mortgage backed investments at Faxtor Securities, said: “A CDO that is well structured shouldn't get the blame for what is happening at Bear Stearns.”

CDOs typically have a life of five to eight years. Several hedge funds, including two managed by Bear Stearns and two in London, have reported losses on US sub-prime securities when delinquency rates rose and house prices fell.

USELESS

iShares - the final leg (ftalphaville)
We are in the final furlong of the iShares trading game, where players have been busy shuffling £10m of virtual money between various exchange traded funds.

And extraordinarily successful they have been! With just three trading days to go before the final reckoning, the Top 100 competitors, sponsored by Barclays Global Investors, have racked up gains of more than 9.5 per cent.

That includes SayNoToStampDuty in 100th place. But the league is headed by AL, with £11,867,432 — just a smidgen ahead of recent pace-maker cjgreenway, with 11,844,471. A tight field behind these leaders has nickos700, with a return of 16.78 per cent to date, while sometime high-flyers like dubaibull (up 14.11 per cent) and tricky99 (up 14.08 percent) are going to have to take some risks if they want to be in the final running...

So what's looking good?

On Tuesday it was a guess-ers' market — the iShares DJ Euro STOXX MidCap was showing the best performance, up 2.08 at £36.28. Otherwise bonds and property etfs were looking sensible places to park cash.

Turkey and Taiwan were the markets to avoid, where the relevant MSCI funds were down 2.6 at £20.51 and 1.82 at £20.05, respectively.

So if you are in the game, get playing. Final tallies will be drawn up after this Sunday's formal close.

EASY COME, EASY GO

Huge increase in those forced to default on mortgages payments (independent)
Buyers are being forced to borrow record amounts of money to finance their property purchases
Number of people defaulting on their payments this year has doubled to 77,000 each month
Fears are growing of a dramatic increase in the number of houses that are repossessed

Britain faces a mortgage crisis with payment arrears rising sharply as 18 million homeowners struggle to meet the fifth rise in interest rates in less than a year.

It is being predicted that high earners who have stretched themselves to buy a home will join less prosperous social groups in experiencing problems as they juggle finances to adjust to rises in monthly payments.

Research suggests that twice as many borrowers as last year have missed mortgage payments in the past six months. A website, MoneyExpert.com said that, while 36,000 borrowers a month fell into arrears last year, this year that figure will be 77,000.

Fears that homeowners are vulnerable to rate rises intensified when the Council of Mortgage Lenders (CML) said yesterday that first-time buyers were borrowing a record 3.37 times their income and other buyers just over three times.

A spokesman for the CML said it was revising upwards its forecast of 18,000 repossessions this year. The two million people whose fixed-rate deals will come to an end in the coming 18 months are expected to endure the most pain. "There's a big squeeze coming up. Not because interest rates are particularly high but because of the pace of the rises in the past six months, which will catch people on the hop," the CML said.

Although treble what they were three years ago, repossessions are a quarter of the rate they were at their peak of 75,000 in 1991 when millions of people found themselves in negative equity - with properties worth less than their mortgages. But a time lag means that it may be several months before the true scale of problems emerges in 2007 and 2008.

"We are a long way from the dark days of the late 1980s and early 1990s when more than a million people lost their homes, but many are feeling the strain," said Sean Gardner, chief executive of MoneyExpert.com, which surveyed 2,000 people about their mortgage problems.

"Anyone who has missed a mortgage payment should, for a start, be talking to their lender and letting them know what is going on. They should also look to cut spending and reduce debt across the board. That ought to mean sorting out their finances and getting all loans and credit cards under control," he said.

The Bank of England raised rates a quarter of one per cent to a six-year high of 5.75 per cent on Thursday, leaving someone with a £200,000 repayment mortgage having to find £165 more a month than last summer.

In Gordon Brown's new Cabinet, ministers discussed plans to move more people on to the property ladder as the Prime Minister signalled that tackling the mismatch between housing supply and demand was a priority for his new administration.

House prices have trebled to an average of £184,070 since Labour entered Downing Street in 1997, giving millions of existing homeowners surges in their personal wealth. As prices have risen, buyers have pushed themselves to the brink to get on the property ladder. A monthly survey by Spicerheart Financial Services found that the proportion of borrowers taking out mortgages of 95 per cent or more of the value of the property doubled from 9 per cent to 19 per cent between January and June.

A report today from the market analyst Datamonitor predicts that "sub-prime" mortgages will increase by 5 per cent a year until 2011, offered to people with previous defaults. Maya Imberg, the author of the report, warned that the banking system should be wary. "Despite the argument that they have sophisticated underwriting models in place, UK sub-prime lenders should take the US sub-prime mortgage crisis as a warning and ensure they are not over-exposing themselves to highly risky loans," she said.

Each time the Bank of England increases rates by a quarter point - which it did in August and November last year and in January, May and July this year - £33 a month is added to a £200,000 repayment mortgage. Yesterday, Oliver Gilmartin, of the Royal Institute of Chartered Surveyors, said first-time buyers should not assume rates were at the top of the cycle and they could "move higher for longer than currently expected". More than half of the economists in a poll by Reuters expect rates to hit 6 per cent in 2007.

The Consumer Credit Counselling Service said high earners were spending far more of their income on housing costs, up from 33 per cent in 2003 to 44 per cent in the first four months of 2007.

To improve affordability, the Government is planning to announce a scheme to offer special, fixed-term mortgages to first-time buyers. The scheme is likely to be tailored to offer shared-equity schemes where buyers purchase a stake in their property while renting it from social landlords. Local authorities will also offer more land for affordable housing. "This is an incredibly market- sensitive area," said the Prime Minister's official spokesman.

'It's a lot of money to come up with'

Ruth Davey, 37, single mother and part-time worker

Ms Davey, a freelance project manager in arts and environmental ventures, may have to find a lodger after her mortgage payments rose by 25 per cent in 10 months.

She took out a £70,000 mortgage five years ago to buy a house in Bristol. "At the time I was earning a lot more than I do now so I was able to cope with the payments," she says. "Then, two years ago I was made redundant, by which stage I was already a single mum."

She moved last September to Stroud in search of a quieter environment in which to bring up her four year-old son. She sought financial advice and took out a £404-a-month interest-only mortgage with Standard Life to buy a £143,000 two-bedroom house. But her payments have soared to £525 a month. "It's a lot of money for a single mum to come up with, especially as I only work part time," she says. "I've worked very hard since I left university but when my son was born I took the decision to spend time with him before he started school. As a result my earnings are very low.

"I know I took a risk with my mortgage," she says. "When you take out a variable rate plan you expect things to fluctuate but now I'm wondering when it's going to stop."

RICH AND POOR

CBI's Lambert offers private equity a defence strategy (guardian)
The CBI director-general, Richard Lambert, weighed into the debate over executive pay yesterday, saying the flow of benefits created by globalisation meant top salaries were increasing while those on lower pay suffered.

"People at the top of the ladder are increasingly being benchmarked against international yardsticks, which pulls up their overall compensation" while "the comparisons work in the opposite direction at the other end of the pay scale", Mr Lambert said. "In the developed world, the impact of growth has been unevenly distributed. The benefits have flown more to the owners and managers of capital than they have to labour."

But Mr Lambert lauded the more positive effects of globalisation in developing countries, where wage levels had increased, and highlighted its benefits to developed countries, where companies have access to larger markets and cheaper imported goods.

Mr Lambert also addressed the hot topic of private equity and hedge funds, describing them as the "new capitalism". He said that the sector was often characterised by a "winner takes all" attitude but he argued that it promoted the movement of assets to those companies best equipped to handle them.

He added that the appropriate level of tax for the sector would not be found by "knee-jerk changes in the tax system aimed at clobbering the winners in order to cheer up everyone else". Instead, the director-general suggested, new capitalism should defend itself and its workings by giving employees and creditors more information on deals and more clearly relaying to the public how business success affected job creation.

"Until recently, too few of those involved have been willing to stick their heads above the parapet."

In order to quell fears about the changing workplace, companies should bear the responsibility for equipping their staff with financial knowledge and the government should introduce more financial education and training as large parts of the country were still "financially ignorant".

"There have been structural changes in the world of work," he said, "and if they are not properly understood it could lead to the reversal of good fortune."

EMERGING MARKETS

Dollar tumbles to record low vs euro on subprime fear (reuters)
The dollar tumbled to a record low against the euro and stayed near a 26-year trough against sterling on Wednesday as investors feared that growing problems in the U.S. subprime mortgage market could spread to the wider economy.

The dollar's broad decline accelerated early in the Asian session and was steepest against the low-yielding yen, as investors cut back on their exposure to higher-yielding but riskier assets.

The yen quickly erased most of its gains against the dollar as Japanese retail speculators bought back the U.S. currency, but a fall in Tokyo shares after a drop in U.S. stocks the previous session kept other investors cautious of further reductions of yen short positions.

The Nikkei share average (.N225: Quote, Profile, Research) fell 1 percent, retreating further from its seven-year closing high hit on Monday.

The dollar's sell-off was sparked by a report from credit rating agency Standard & Poor's that it might downgrade $12.1 billion in subprime-related debt. Subprime loans are extended to borrowers with poor credit.

"Short positions in the yen may continue to be reduced and push dollar/yen further down toward 120 yen if a slide in global stocks extends," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Bank.

"A possible next theme which could hurt the stock market would be a disappointment in upcoming U.S. corporate earnings," Yamashita said.

The euro steadied at $1.3744, after rising as high as a record $1.3787 against the dollar in early trade in Asia on electronic trading platform EBS.

Sterling stabilized at $2.0270 but stayed near a 26-year high of $2.0282 hit the previous session, according to Reuters data.

Against the yen, the dollar fell to a one-month low of 120.99 on EBS before pulling back to 121.60, down 0.10 percent from late New York trade.

"The latest sharp drop of the dollar against the yen looks as if it was caused by Japanese margin traders cutting their yen short positions," a senior dealer at a Japanese securities company said.

"The dollar remains vulnerable, but it may not fall one-way against the yen in Tokyo if those traders come back to pick it up on dips," the dealer said.

The subprime news pushed U.S. stocks and Treasury yields sharply lower on Tuesday.

1 + 1 = 2

Paulson Hedge Fund Gained 40% in June as Bear, Braddock Sank (bloomberg)
Paulson & Co.'s largest credit hedge fund returned 40 percent last month by wagering on the decline of the subprime-mortgage market.

The Credit Opportunities Fund has soared 129 percent this year through June 30, according to a July 5 letter to the New York-based firm's investors. Hedge funds globally gained 1.1 percent on average in June and 8 percent in 2007, Hedge Fund Research Inc. of Chicago said yesterday.

Paulson, whose assets more than tripled to $15 billion in the past year, predicted that securities based on home loans to U.S. borrowers with poor credit histories would drop in value as defaults increased. Its year-old fund has profited while firms including Bear Stearns Cos. that bet the subprime market would improve have been forced to close funds.

``He has been timely,'' said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island. ``If you're nimble, the market right now has volatility that hedge funds love.''

Paulson's newer Credit Opportunities II rose 22.5 percent last month and has surged 60 percent for the year.

``We expect credit performance of subprime mortgages to continue to deteriorate, house prices to continue to fall and subprime financing to continue to decline, leading to the eventual collapse of the subprime mortgage market,'' Paulson managers told investors in April.

John Paulson, the firm's president and portfolio manager who previously was a managing director at Bear Stearns, declined to comment through a spokesman.

Bear Stearns

Subprime mortgages heading into foreclosure reached a five- year high of 2.43 percent in the first quarter, according to the Washington-based Mortgage Bankers Association. The popularity of loans to homebuyers with low credit ratings pushed the market for repackaged securities based on those loans, called collateralized debt obligations, to $503 billion in 2006. That was a fivefold increase in three years.

Deteriorating values of those CDOs have increased the costs of insuring against defaults, benefiting hedge funds such as Paulson's.

Investor losses on bonds backed by U.S. subprime mortgages may total $52 billion, Credit Suisse Group said in a July 6 report. That figure falls at the low end of estimates of the fallout from rising delinquency rates and foreclosures.

Two hedge funds managed by New York-based Bear Stearns will close because of losses from declining mortgage-bond prices, made worse by $10 billion in borrowings. The bank said it could spend $1.6 billion to bail out its High Grade Structured Credit Strategies Fund as it unwinds investments linked to home mortgages.

Beating S&P 500

Braddock Financial Corp. of Denver said last week it plans to liquidate its Galena Street hedge fund after halting redemptions from the $300 million pool.

Hedge funds are private, largely unregulated pools of capital whose managers participate substantially in profits from money invested. Assets managed by the funds globally more than doubled in the past five years to almost $1.6 trillion as of the first quarter, according to Hedge Fund Research.

Hedge funds globally have posted gains every month this year, compared with monthly declines in May, June and July 2006. The average gain of hedge-fund managers this year through June beat the 6.9 percent advance, including dividends reinvested, of the Standard & Poor's 500 Index, a benchmark for large U.S. stocks.

Paulson started his hedge-fund firm in 1994. He previously was general partner at New York-based investment firm Gruss Partners. He was a managing director at Bear Stearns from 1984 to 1988 after earning a master's degree in business from Harvard Business School in Boston.

BILLY BOB

Separating a Fool From His Money With Hedge Funds (dailyreckoning)
More bad news for the hedge funds. It is as if the press were finally waking up to what hedge funds really are - a way to separate a rich fool from his money.

Hedge funds, like all public spectacles, begin with deception. How could anyone paying 2% in fees and 20% in profits ever hope to make much money after taxes? Yet, some of the savviest investors believed they could.

After deception, the stage was set for farce, as Forbes reported recently:

“Hedge funds are a hotbed of questionable behavior, whether at blue-chip Wall Street firms or at fly-by-nights. Two youngsters and a 53-year-old assistant literature professor at a small college in New York formed a hedge fund, JB Stanley, and lost most of the $400,000 they raised from 15 investors. They siphoned off the rest for car payments, ATM cash withdrawals and other personal uses, according to SEC claims that led to a summary judgement against the three managers.”

But things could soon stop being funny.

“The hedge funds have been flooding the market with subprime mortgage bonds in order to raise cash needed to return to investors,” says a recent report by Roddy Boyd. “That has driven down prices across the board, depressing fund performance and making the bonds less attractive as collateral for loans.

“Investors are expected to learn over the next two weeks just how much damage hedge funds have sustained as a result of the subprime mortgage mess, and if the news is as bad as some market players expect, there is a fear that investors could pull out in droves.”

That will be when the final stage of the Crack-Up Boom comes along and farce turns into disaster.