28JAN09:
Q1-09 DOW: 8900
Q2-09 DOW: 7250
Q3-09 DOW: 5810
Q4-09 DOW: 3960
CITI NATIONALIZED
OBAMA GETS SICK 27AUG09:
Mini Crash 21SEP09 Predicted correctly:
Bailout=Bonuses
Demise of Bear Stearns
Demise of Lehman Bros.
Demise of AIG
Subprime would cause problems
Date of 2007 crash
CRAs were to blame
G20 riots were a party
Northern Rock run
Northern Rock Nationalization
HBOS and RBS demise
UBS really was Useless
The US faces the challenge of fighting off inflation (rates up), keeping oil prices down (rates up), protecting its very weak currency (rates up) and controlling a massive stock market crash (rates down). Traders think that rates will come down - not what the doctor ordered. Dilemmas like controlling unemployment and inflation with interest rates have challenged economists for years until the problem appeared to disappear. With M3 money supply at record highs, where is Milton Friedman when you need him most?
For those of you investing in Tompion carriage clocks, condos in Manhattan and Commercial Property in West London, the time maybe approaching when you consider more liquid assets.
So you think that the socialist and well meaning Nanny Central Banks will sort the problem out? When has bailing out an errant teenager solved anything? Propping up markets the way Japan tried to in the 1980's does not work and leads to market participants wary of corporates not telling the truth, uncontingent liabilities, bad debt provisions and continual government subsidies thrown into the mix. History tells us that market participants are initially satiated by Nanny's help and then panic. What do the authorities know that I do not?
Whatever happens in the coming weeks and months, the good times are here. Complacency and greed are not nice attributes and a price is always paid.
Welcome to the dark side.
Rumors brought forward Still no word on DE Shaw fixed income losses Tewksbury / TCM in trouble? Permal issues - gone very quiet
Today's quick hits: Debt, Beards and Bear Stearns are what interests us most.
Is this 1907 all over again?
Bulls boast that the fundamentals are all fine: shame that the people don't believe them. Fact and human emotion never mix well.
Partners boast about their managed account platform.
Lessons for today's market in 1907 panic (reuters) The current upheaval in global markets has many on Wall Street drawing comparisons to turmoil seen in 1998, 1987 and even 1929, but a new book suggests investors should look back as far as 1907 for insight into the mechanisms that can trigger a crash.
"The Panic of 1907" (Wiley, $29.95) begins with the Park Avenue suicide of Charles Barney, a prominent New York banker. Barney was one of many casualties -- both individual and institutional -- of an attempt to corner the market in shares of United Copper Co., which brought a string of banks to the brink of collapse.
Authors Robert Bruner and Sean Carr illustrate the domino-effect of the panic, from the plunge in United Copper shares all the way to the bankruptcy threat for the city of New York. "The Panic of 1907" also paints a picture of the many conditions that made the economy vulnerable to such a brutal chain reaction.
Timed to coincide with the 100th anniversary of one of the worst financial meltdowns in U.S. history, the book's arrival on shelves in September is all the more fortuitous, since even mom-and-pop investors are now aware of the volatility that has gripped Wall Street over the past few weeks.
Some of the conditions that laid the ground for 1907 panic may look familiar to anyone who has read the business pages this year: a booming economy and unprecedented rash of corporate mergers and acquisitions and a profusion of "borrowers and creditors (who) overreach in their use of debt."
"Credit anorexia" set in once "bank directors awoke to the inadequacy of their capitalization relative to the credit risks they had taken," causing them to cut off the new loans available to their clients. Soon afterwards, long lines of panicked depositors were forming outside several banks waiting to withdraw their funds.
Bruner and Carr, both professors at the University of Virginia, identify seven elements that can converge to create a financial "perfect storm," no matter what the century. Key among them is some kind of real economic shock. In the case of 1907, one of the shocks was the San Francisco earthquake the year before.
If such a storm were to strike today, we wouldn't be able to identify the shock until after it hit, the authors point out. But one of the potential culprits they cite are the high amounts of leverage used by hedge funds and their tight relationships with major banks, which could make any losses ripple through the financial system.
In 1907, it was J. Pierpont Morgan who led the charge to stop the bleeding on Wall Street. Bruner and Carr credit the financial titan with putting his own firm's capital on the line to save smaller banks from collapse, compelling his counterparts to act as a collective to stave off contagion.
One hundred years later, Bruner and Carr pose the question, does today's rapid, automated style of trading leave any room for such a cooperative rescue effort, should such a panic occur again?
Fintag says Market mean reversions are nearly always caused by the inappropriate use of cheap capital. Whether it is tulips, snake oil, railways, lastminute.com, commodities or pirate equity funds, people never know when the party is finally over. The neighbours call the police, a few fights take place in the street and some end up in the cells nursing a sore head. In the cold light of day, that same old question is asked.
When Warren Buffet, billionaire investor and chairman of Berkshire Hathaway, first characterized derivatives -- especially the lightly-regulated, over-the-counter variety -- as "financial weapons of mass destruction," it caused a ruckus on Wall Street.
Industry insiders and regulators rushed to the defense of these synthetically-created securities. They touted the efficiencies and other benefits of instruments that enabled all sorts of risks to be sliced, diced, and shuffled around in myriad ways, and they downplayed any potential shortcomings.
One key argument: these paper promises, whose value typically depends on something else (a stock option is one example), were being created, bought, and sold by sophisticated individuals and institutions who knew exactly what they were doing and who had little reason to engage in reckless or otherwise destructive behavior.
Recent events suggest that not only were significant downside risks wrongly dismissed, but that no small number of those who have been wheeling-and-dealing in these often breathtakingly complex instruments had strong incentives (e.g., fat commissions) to shove the most dangerous varieties into the portfolios of anyone and everyone, regardless of whether it was appropriate or not.
Unfortunately, now that the financial system has been polluted with all sorts of toxic financial waste, desperate and cash-thirsty financiers are discovering that the well of liquidity is undrinkable or running dry.
In "Market's Flaws Surface," Wall Street Journal reporters Alistair MacDonald, Ian McDonald, Henny Sender, and Carrick Mollenkamp detail some issues that have recently come to the fore and why "complex hedging tactics can't trump fear."
The past week's turmoil in stock and bond markets brought to light a mounting array of stresses in the global financial system as it struggles to adjust to disruptions once thought isolated to the subprime-mortgage market.
The biggest immediate issue -- a jump in short-term interest rates as banks became unwilling to make cash readily available to borrowers -- was met Friday by the Federal Reserve and the European Central Bank flooding markets with billions of dollars. The moves were joined by central banks in Japan, Australia and elsewhere.
Other stresses are popping up, too, many of them related to trades that involve derivatives -- complex financial instruments whose value can be hard to determine -- and to the activities of hedge funds.
At Citigroup Inc.'s credit-derivatives trading desk in London, volume has been so huge in credit-default swaps -- in which traders make bets on the likelihood of companies defaulting on bonds or loans -- that Citi can't keep up with orders. In the U.S., stock prices have been behaving bizarrely, with the shares of companies with seemingly poor prospects rallying. At the same time, U.S. securities regulators are probing the balance sheets of some U.S. investment banks to check whether they have been accurately recording the values of some derivative holdings.
The central banks' actions were aimed at bringing order to the frazzled markets. They helped calm the U.S., but not Europe, where fears persist that banks are overexposed to U.S. subprime-mortgage debt. The Dow Jones Industrial Average fell 31.14 to 13239.54, while trading in a range of about 225 points during the session. Yields on U.S. Treasury bonds fell, as investors turned to government bonds for safety. The pan-European Dow Jones Stoxx 600 index dropped 3.1% to 362.7.
Much of the recent turmoil is the result of fear. As investors have shunned risk, trading in some markets has dried up. But also behind the assortment of market glitches and unusual trading are massive changes in the global financial system that have taken place in the past decade.
Investment in hedge funds has boomed. Because they invest across a wide range of asset classes and regions, and take on debt to make their investments, these funds can transmit problems broadly. Hard-to-value derivatives also have boomed, but haven't been severely tested as now. Investors are learning that activities often taken for granted in established arenas such as the stock market -- knowing the price of an investment, for example -- can go bonkers in the world of derivatives.
Commercial-paper markets became caught up in some of these trends during the past week. Commercial paper, a staple investment for money-market mutual funds, are short-term loans typically issued by highly rated companies for less than a year. The market -- $2 trillion in the U.S. and nearly $1 trillion in Europe -- is considered one of the most easily traded and safest corners of the financial markets outside of U.S. government bonds.
But interest rates on commercial paper have risen as far and as fast as they did after the shock of the Sept. 11, 2001, terror attacks.
Behind the surge: Banks that typically lend to each other in this market were withholding loans to preserve money in case they needed to back up affiliates. Some European banks were facing credit squeezes because their affiliates might be exposed to U.S. subprime mortgages, bankers and traders say.
The commercial-paper problems hit Europe particularly hard. Investors worried that some European banks were exposed to U.S. subprime mortgages, particularly after German bank IKB Deutsche Industriebank AG disclosed on July 30 that its profits would be hurt by subprime exposure.
"It shows that there are so many interconnections today between different parts of the market that otherwise seem so disparate," says Eric Jacobson, director of fixed-income strategies at Chicago research firm Morningstar Inc.
The credit-default swap market also is a source of some concern. Investors increasingly turn to this market to make bets on the fortunes of companies, and to hedge themselves against the risk of a default. In the past few weeks, volume in indexes that track these derivatives has more than tripled, according to data from Deutsche Bank. By contrast, the so-called cash market, where the loans and bonds of individual companies exchange hands, has become almost totally frozen.
After trading a credit-default swap -- which banks exchange with investors, hedge funds and other financial institutions -- banks need to input the trade details into their internal computer systems and confirm the terms between parties. In 2005, regulators demanded that banks clean up huge backlogs in documenting these trades in this booming market, and they have made solid progress toward doing so.
The Federal Reserve Bank of New York demanded that banks clean up these backlogs in part because it worried dealers could lose track of who owes what to whom. Officials also worried that a backlog of unconfirmed trades could be called into question in times of market stress.
But Citi's London credit-derivatives office hasn't been inputting terms fast enough to keep up with high trading volumes in at least one of its markets, according to people familiar with the matter. As a result, a backlog of unprocessed trades has built again, they said.
"Based on industry metrics, our credit derivatives trade-confirmation and settlement activity is very much in line with the rest of the industry. We have heard no complaints from our clients," a Citigroup spokesman said.
As demand for credit derivatives increases, the market has become subject to other strains. In the face of huge price swings and a growing aversion to risk, it has become more difficult to execute trades. That is what traders refer to as liquidity risk; it may mean both dealers and hedge funds that thought they could get out of positions or hedge those same positions may be left with large exposures.
Indexes that track this market have swung widely in recent weeks. The volume of trades some dealers are willing to buy and sell have shrunk drastically, both dealers and their hedge-fund clients say. Both sides add that there is also a huge gap between the prices buyers say they will pay and the prices sellers say they will take. That further discourages orders.
Meanwhile, the Securities and Exchange Commission is worried about how the market is handling another kind of derivative called collateralized-debt obligations.
Securities regulators are checking the books at top Wall Street brokerage firms and banks to make sure they aren't hiding losses in the subprime-mortgage meltdown, said people familiar with the inquiry. The SEC is looking into whether Wall Street brokers are using consistent methods to calculate the value of subprime-mortgage assets in their own inventories, as well as assets held for customers such as hedge funds, these same people said. The concern is that the firms may not be marking down their inventory as aggressively enough.
The broader problem for the market is that trading in many of these instruments is so sparse, it has become increasingly difficult for investors and investment banks to put an accurate value on them.
Writing in the Financial Times, author and law school professor Frank Partnoy describes an even more fundamental problem with synthetic securities in "The Derivatives Vacuum."
The recent collapse of two hedge funds at Bear Stearns Asset Management raises two questions few people can answer. How did they lose so much money so quickly? And where else are similar problems buried? The unsatisfying answers illustrate why markets suddenly have become so volatile.
First, it has been widely reported that the Bear Stearns hedge funds lost money on highly rated derivative securities based on subprime mortgages. Essentially, these securities, known as collateralised debt obligations (CDOs), were complex bets on how many people would repay the money they borrowed to buy homes. Although Bear Stearns has not yet admitted which versions of these derivatives it held, one can glean some characteristics from letters the funds sent to investors months ago.
On May 15, the newer of the two funds reported it was down 6.5 per cent for the year. By contrast, the value of many subprime-linked securities had been sliced in half as early as February. In other words, the fund was not simply tracking the subprime markets: it was doing better, presumably because it was buying highly rated securities. Still, many investors in both funds were nervous about the losses and asked to redeem their investments. The funds said No.
On June 7, losses climbed to 19 per cent. Investors asked how the newer fund lost so much money, when the subprime markets were rebounding and many commentators, including Ben Bernanke, the Federal Reserve chairman, suggested a crisis had been avoided. Indeed, as the markets bubbled with optimism at the time, Everquest Financial, a new firm that had purchased most of its $700m of assets from the two Bear Stearns funds, filed for an initial public offering. This timing was baffling: why did the two funds fall while the markets rose?
Then came the whopper: on July 18, Bear Stearns admitted it could not figure out how much money it had lost. It said: “A team at BSAM [Bear Stearns Asset Management] has been working diligently to calculate the 2007 month-end performance for both May and June for the funds.” The funds refused to answer investors' questions. Less than two weeks later, they filed for bankruptcy protection.
This is not the first time smart people have bought complex derivatives and later said they could not calculate their losses. Bankers Trust, the most sophisticated derivatives firm of the 1990s, made similar mistakes. In 2001, the chief executive of American Express shocked investors when he admitted the company “did not comprehend the risk” when it lost $826m on CDOs. Freddie Mac and Fannie Mae have taken years to value derivatives losses, as did Enron.
As in those cases, the Bear Stearns funds did not lose money in the manner most people think. If the funds lost most of their money in May and June, they must have held positions other than highly rated CDOs. Some experts say the funds also made lower-rated subprime bets that were designed to hedge risk by moving in the opposite direction. Unfortunately, they did not. The Bear Stearns funds held opposing positions that unexpectedly moved in the same direction. As many traders say, the only perfect hedge is in a Japanese garden.
Anyone looking for clues to buried subprime losses elsewhere also should understand that many institutions do not “mark to market” complex derivatives to reflect changes in value over time. Many pension funds and insurance companies hold subprime-linked derivatives, but have not yet recorded losses. Others have recorded some, but not all, losses. Indeed, it is possible the Bear Stearns funds lost money during February, but did not record those losses until months later.
Some institutions argue that accounting rules permit them to hold derivatives at cost. Others say they need not reflect a loss until there is compelling evidence of a decline in value, such as a downgrade of the investments' credit rating. As a result, it is virtually impossible for investors to understand how much exposure an institution really has to the subprime markets.
The common denominator of derivatives fiascos such as that of the Bear Stearns funds is that the answer to the above questions is: “No one knows.” Subprime exposure can remain buried and unexplained for months.
Now that investors seem to understand this, the markets are swinging wildly. Volatility is highest when people realise they cannot figure out what investments are worth.
Former Federal Reserve Chairman Alan Greenspan once said that "the clearest evidence of the perceived benefits that derivatives have provided is their continued spectacular growth." Based on the carnage that a huge build-up of unsaleable derivatives has helped to create in global financial markets, it seems that's one more thing "the maestro" has gotten wrong.
Fintag says I am not naturally a bear at all. What I love is uncertainty because that is how hedge funds work best. FiNTAG started out as a way for me to rant about how much I dislike SW Funds, the uselessness of regulators like the SEC, my passionate hatred for dividend grabbing rapists like Pirate Equity houses and the debt-denial world we have all been living in for the past 3 years because rates went too low. The status quo is not my cup of tea.
But I love the FinancialArmegeddon blog. It gets to you everyday and eventually you realise that we are at the cusp of something big. And its coming although please note that stars tell us we must wait for October for the next huge wave. The 17th to precise, 20 years after the great 1987 crash.
Citigroup faces the $700m music (ft) Citigroup has lost more than $700m in credit business in recent weeks, making it one of the biggest casualties of the crisis, according to a person briefed on the situation.
The scale of the losses is not a serious problem for a company that earned more than $20bn last year and bankers believe some Wall Street rivals have lost more.
But it will be acutely embarrassing for Chuck Prince, chairman and chief executive, who has been widely criticised for saying last month that Citi was “still dancing” in the credit markets.
The losses will undermine his efforts to restore investor confidence in the?world's?largest financial services company and revive its flagging share price.
They will also be a blow for Tom Maheras, head of Citigroup's capital markets business, who recently told the Financial Times that its growth had caught up with rivals after three years of under-performance.
The losses were made largely in the structured credit business run by Michael Raynes, hired from Deutsche Bank in London last summer.
They are in addition to those Citi faces from lending commitments to leveraged buy-outs.
Mr Prince told the FT on July 10 that the lending party would end but there was so much liquidity at the time that it would not be disrupted by the turmoil in the US subprime mortgage market.
“When the music stop,?in?terms?of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.”
Citigroup on Friday declined to comment.
Copyright The Financial Times Limited 2007
Fintag says Maybe a small loss but this equates to quite a few jobs. Cost cutting in banks will be the next "big thing".
Aug. 12 (Bloomberg) -- The following list comprises the most-read Bloomberg News reports from the past week.
1. ECB Offers Unlimited Cash as Bank Lending Costs Soar (8/9) 2. BNP Paribas Freezes Funds as Loan Losses Roil Markets (8/9) 3. Bernanke Was Wrong: Subprime Contagion Is Spreading (8/10) 4. Bear Stearns Caymans Filing May Hurt Funds' Creditors (8/7) 5. Fed Keeps Rate at 5.25%; Inflation Is Main Concern (8/7) 6. LBO `Freeze' Shuts Wall Street Pipeline (8/6) 7. Bear Stearns Removes Spector After Debt Market Losses (8/6) 8. U.S., European Stocks Tumble on Credit Concerns (8/9) 9. American Home Files for Bankruptcy After Shutdown (8/6) 10. Treasuries Rise as Money Market Rates Soar (8/9)
Fintag says Credit, Interest Rates, Subprime, the useless Fed and the useless Bear Stearns.
It is always interesting to see what market participants are concerned about and guess what - pretty much the same things I have been ranting on about for weeks [Editor: Enough ego please]
PIRATE PRISON
Has boom become doom for the buyout barons? (guardian) Hundreds of billions of dollars of private equity-related debt are putting a strain on the finances of some of the investment world's biggest institutions as the debt-hungry buyout industry has all but ground to a halt, paralysed by turmoil in the market for credit. It was not the fate many had predicted for the masters of the universe.
Little over a month ago Britain's captains of private equity were circling the wagons, forced to defend themselves in the face of an unprecedented barrage of invective from politicians, media commentators and unions. Such was the concern about the buyout barons' increasing influence over the economy. Scattergun attacks ranged from accusations of asset stripping to probing the personal tax status of industry executives.
A series of stunts captured the attention of politicians and the media, flushing out the faceless financial engineers who had recently acquired the Automobile Association, piling debt on to the business and sacking thousands of workers.
In truth, the AA deal was just one of the latest transactions in a wider corporate land grab. For years the stock market has been riding a wave of speculation as investors bet on where next private equity would strike, buying out companies at a handsome premium to stock market values. Big British employers to have fallen into the hands of these groups included Gala Coral, New Look, Saga, Travelodge and many, many more.
Two months ago the US private equity firm KKR signalled the industry's seemingly insatiable appetite for taking over listed companies with its £11bn acquisition of Alliance Boots. The chemist group became the first FTSE 100 group to fall in what was the largest private-equity deal in Europe.
Many, including the Financial Services Authority, predicted this blaze of acquisitions would leave a trail of businesses struggling under potentially onerous debt burdens. The City regulator said the collapse of a big firm was "inevitable". What almost no one predicted, however, was that the ever stronger flow of deals would dry up. Abruptly. Almost overnight.
Dead calm
Recent weeks have seen a string of transactions collapse as financiers conceded there was no hope of raising the debt required for a private-equity deal. The spin doctors describe the deals as "delayed" but in reality many were dead in the water.
Debt investors, who just weeks ago had been clamouring to get a piece of every private-equity deal, were now staying at home.
Barings Asset Management claimed two weeks ago that 48 deals, with a combined value of $60bn (£30bn), had been abandoned in little over a month. That number will have jumped again since and compares with no deals being pulled last year.
The situation is frustrating for those whose deals have been disrupted, but it remains a more enduringly uncomfortable problem for the many investment banks that have provided acquisition debt financing - loans they had expected to be able to package up and sell on rapidly.
Toby Nangle, a fixed-income investment manager at Barings, believes private equity-related debt sitting on banks' balance sheets stood at about $400bn at the start of the month. "Given their inability to pass this credit risk on to the market, their short-term acquisition finance is increasingly looking like a series of long-term loans."
Running on empty
Increasingly desperate to disperse their exposure to risk, investment bank demands for the kind of favourable terms that have become commonplace in private-equity deals are being refused. Debt covenant waivers - so-called cov-lite loans - are removed. The role of payment-in-kind (PIK) bonds - debt that postpones interest repayment until the end of the loan term - is being scaled back. Many senior banking figures believe balance sheet indigestion will pass. Bob Diamond, head of Barclays Capital, recently said: "We would expect at some point over the next two to three months to see that [leveraged finance] market at more normal volume levels." The wider economy, after all, is in rude health.
Morgan Stanley also appeared to signal its confidence in a buyout market recovery last week, announcing that one of its best-known bankers, Brian Magnus, is to jointly head the European side of a new private-equity division. The move marked a complete reversal of a decision by the former chief executive Philip Purcell three years ago to pull out of the sector.
The golden age
"Of course the horse has not bolted," Mr Magnus insisted last week. "The private-equity industry is still in its infancy - it has a long way to go. The fact that we missed out for five years is no excuse for sitting on the sidelines."
Others are less optimistic. One credit valuation expert said: "I think it is going to be difficult for the private-equity groups to return to the days when very large components of the deal were PIK and cov-lite. I think investors don't really want to see that."
He pointed to Blackstone's $22bn buyout fund that closed last Wednesday - the largest ever. Much of the cash was raised last year and is already committed to a number of big deals.
"It is hard to see them being able to raise that sort of capital over the next period. I think this was like a golden era for private equity. Obviously, they are still in the game.
"There will still be leveraged buyouts but there has been a general repricing of risk in the leveraged loan market. I don't thing there is any sort of investor interest in those sorts of deals."
The repricing of risk was triggered by a separate debt crisis linked to so-called sub-prime mortgages in the US - loans that, in truth, have little in common with the leveraged corporate financing on which private equity relies.
What the two classes of debt do share, however, is that they are high in yield - and in risk of defaulting - and are widely syndicated. As investors evaluate the extent of the fallout from US mortgages and watch to see which banks and hedge funds have been left exposed, they have also been monitoring the leverage finance market.
City regulators have made it clear for some time that they regard a repricing of risk as long overdue. In November the FSA described typical buyout debt levels as "excessive" and, in some cases, "not entirely prudent". Regulators are carrying out "fact-finding work" to understand better where economic risk from private-equity deals ends up. Such is the complexity and opaqueness of the debt markets that no one has been able to provide the answer.
Few doubt that private equity will re-emerge to stalk stock markets. The FSA has ruled out the likelihood of systemic risk attached to private equity. But the days of dirt-cheap, covenant-lite borrowings driving up asset prices to levels that seem far removed from underlying performance may have gone.
Against the tide
American Leisure Group begins trading its shares on Aim today to raise £75m for its expansion plans near the Disney theme parks in Orlando. Malcolm Wright, the resort company's chief executive officer, said joining Aim would "significantly enhance our credibility in the marketplace and raise the profile of American Leisure Group". The float aims to raise £75m at 120p a share, giving it a market capitalisation of £204m. ALG is developing a resort on 49ha (121 acres) of land and a further 160ha will be developed in three main locations within 20 minutes' drive of the Disney theme parks. The units will be targeted at the high end of the market. There will be a total of 7,000 resort units catering to some 300,000 families a year, and the first units will be ready in spring 2008. Frederick Pauzar, head of corporate development, denied suggestions that the turbulence in the credit market may put off investors, though he conceded it had put a squeeze the amounts some had to invest.
Welcome Break (eight service stations owned by Robert Tchenguiz) £375m auction scrapped
RBS £1.1bn hotels sale to Robson Asset Management delayed
Peacocks £800m sale or refinancing ditched
Manchester United refinancing or securitisation of ticket sales abandoned
Proposed deals potentially vulnerable
Sainsbury's Delta Two
ABN Amro Barclays/RBS consortium
Greene King leveraged property joint venture
Recent completed deals finding it tough to sell on debt packages
Alliance Boots KKR (announced June 21)
Saga/AA Permira and CVC (June 25)
EMI £2.4bn Terra Firma (August 1)
Bupa Hospitals £1.4bn Cinven (June 19)
Brakes Brothers Bain Capital (July 2)
National Car Parks Macquarie (March 14)
Jupiter Asset Management TA Associates (March 20)
Fintag says I though BO stood for Body Odor?
MORE HEADS TO ROLL
UBS faces Dillon Read losses (financialnews-us) Legacy positions at Dillon Read Capital Management will be thrust into the spotlight when UBS reports second quarter results tomorrow amid concerns the Swiss bank's fixed income business will be hit by losses related to the fund's closure, say analysts.
UBS fixed-income revenue in the three months to June 30 could be down nearly a quarter year-on-year with the bank sitting on illiquid Dillon Read positions worth more than Sfr20bn (€12.2bn) when the hedge fund unit was closed in May, said a Dresdner Kleinwort report.
Dresdner estimates at least Sfr4bn of UBS's capital is tied into Dillon Read, which was closed after the business run by UBS former investment banking chief John Costas racked up a Sfr150m first-quarter trading loss, forcing the bank to take “decisive action”.
UBS has found it difficult to liquidate many of the fund's positions, a problem exacerbated by the leak of bid sheets listing its holdings, according to one trader.
The Dresdner analysts wrote: “Assuming leverage of at least five times (conservative in light of previous returns, we believe), UBS held at least Sfr20bn of related assets. This may have been partly hedged or sold since but we believe the majority of the positions exist, owing to unfavourable market liquidity.”
UBS also faces millions in Dillon Read-related restructuring costs, which Dresdner estimates will be about Sfr300m. An analyst at another big European bank said: “It is impossible to predict how hard the Dillon Read Capital Management debacle will hit UBS's results or how far they have been able to sell down positions. The fixed income business will be under scrutiny come Tuesday.”
Fintag says What a mess this was. But then again that is typical of the Swiss. They tried to run Dillon as an autonomous entity but couldn't keep their grubby controlling hands off it and bust it went.
OH B*NDAGE UP YOURS
Hedge funds braced for more pain (ft) The much-heralded financial rocket scientists responsible for the explosion in complex mathematical trading strategies are bracing themselves for fresh pain after what one team of analysts called “the perfect storm” last week.
Quantitative strategists, or “quants” as they are known, attempt to profit from pricing inefficiencies identified through mathematical models. These send buy and sell signals on small variations in price between different securities.
One hedge funds manager said the average quantitative fund manager was down about 15 per cent in the first few days of August.
“Nothing seems to be working. Previously uncorrelated factors have recently been falling with the same pace, leaving investors with very few places to hide,” said Citigroup analysts in a report to clients last week.
Hedge fund managers who have suffered in the first few days of August and late July include James Simons, long acknowledged as the “king of quants”, at Renaissance Technologies and Clifford Asness of AQR Capital Management. Quantitative managers at Goldman Sachs and Highbridge Capital Management have also experienced difficulties.
Statistical arbitrage funds have run into particular problems. Their mathematical models rely on past trading patterns to predict how particular securities will perform in the future if other securities, say, fall in price. But their models are unlikely to take into account current trading conditions where investors, desperate to raise cash, are selling everything they can.
They are also unwinding short positions, which means buying back stock they sold earlier. Thus, companies with poor prospects have seen shares rise and vice versa, undermining the logic of “stat arb” models. Compounding the problem is that many stat arb managers have borrowed heavily to buy shares.
One hedge fund manager estimated that statistical arbitrage funds with more than $100bn (€73bn, £49bn) in assets had on average borrowed four times their actual assets. These borrowings magnify significantly any moves they may make in the market.
It is these more heavily indebted statistical arbitrage funds that have proved most attractive for pension funds seeking supposedly lower risk hedge fund strategies.
It is also these funds that ran into problems at the end of July when volatility began to rock the market.
As volatility rose, they began to cut back their risk. They did this by selling out of their positions to reduce leverage.
But the wave of selling only exacerbated the problem by pushing down prices. As asset values fell, the ratio of debt to assets rose. This forced them to sell yet more assets.
One hedge fund manager said: “Nobody is happy with their credit position and everyone wants to de-risk and de-leverage. And it is global. The market has gone freaky”.
Analysts at Lehman Brothers said the problem was that investors' models, its own included, were behaving in the opposite way to tried and tested predictions.
Fintag says Tis true that many of the Prime Brokers are calling in loans, hiking up collateral and margin calls and asking us for more clarification on how we have marked to makebelieve our illiquids and what our "days to liquidate" ratios are.
Of course if you had a managed account, you would see this information on a daily basis (next article)
TWO TO TANGO
More than just a clever algorithm for out-smarting the hedge funds (ft) Partners Group is best known for pioneering the ground-breaking strategy of hedge fund replication, the art of re-creating the returns of the secretive industry without the illiquidity, opacity and often painfully high fees that are usually part of the deal.
But the alternative asset manager, nestled in the small Swiss town of Zug, has a lot more to offer, from private equity and infrastructure to property, private debt and even its own fund of hedge funds managed account platform.
Partners' roster of cutting edge strategies helped propel it to the title of Europe's best-performing initial public offering last year, jumping 133 per cent after listing on the Swiss SWX Exchange in March.
Michel Jacquemai, one of the leading lights behind Partners Group's ascent, may spend his spare time flying a vintage 1939 German Bücker trainer aircraft, but his thinking is ultra-modern.
Alternative Beta Strategies, the hedge fund replication programme created by Mr Jacquemai and his colleague Lars Jaeger, was launched in October 2004, two years before the world's leading investment banks got round to creating their own hedge fund clones. ABS now has $1.1bn invested in it, with the Universities Superannuation Scheme, one of the UK's five largest pension funds, becoming a high-profile participant when it invested $200m in May.
Mr Jacquemai's journey into hedge funds began in 2000, while managing institutional derivative portfolios and mutual funds at Credit Suisse Asset Management.
"I proposed to the management team to create more products for hedge funds, but it was early 2000 and they wanted the next internet fund, a tech fund and a tech fund two and so on. I think the subject of hedge funds ranked at 23 or 24. That was the moment I decided: that was it."
Mr Jacquemai and two colleagues jumped ship and created saisGroup, a provider of managed accounts. When they presented their product to Partners Group, in 2001, Partners liked the idea so much that it offered to buy the company and integrate it into its own operations.
By this time the first academic papers on "alternative beta" - the belief that most hedge returns are due to market returns, or beta, which in theory can be replicated, rather than the intrinsic skill of the manager, or alpha - had begun to appear.
Mr Jacquemai, head of public alternative investment strategies, and Mr Jaeger, who followed his mentor from CSAM and saisGroup, believe that 80 per cent of the hedge fund universe is replicable, including strategies such as equity long/short, global macro and trend-following commodity trading advisers. Only a minority of approaches, such as credit and convertible arbitrage, are considered to be genuinely skill-based in aggregate.
Alternative Beta Strategies was born out of this belief. However, unlike more recent converts to the concept, such as Merrill Lynch and Goldman Sachs, Partners does not operate a purely mechanical replication process based on algorithms, but utilises its own in-house expertise to estimate how hedge funds are positioned.
"We also have a fund of hedge fund investment operation so we are constantly talking to the industry," says Mr Jacquemai. Once a week an investment committee meets to discuss changes in industry positioning, and decide how systematically to replicate these positions.
Unsurprisingly, he believes Partners' "bottom-up" strategy is superior to the "factor models" developed by investment banks. "We conceptionally try to do what hedge funds do, going long or short, and 600 to 700 positions in 38 strategies. We do not try to solve and explain hedge fund performance with five or six factors," he says, joking that some banks would include temperature changes in the North Sea as a factor if they were shown to be correlated with the past performance of hedge funds.
"Bottom-up is more labour intensive, but we believe it is the proper way to replicate generic hedge fund returns."
Since launch, ABS, has outperformed the strategy-weighted HFRX sub-indices by 4 per cent a year, according to Partners Group, aided by the advantage of having lower fees than hedge funds, although at 1.25 per cent, with a 15 per cent performance fee, these fees are above the 100 basis points or so charged by many recent rival products.
A variant of ABS that strips out all equity market risk is said to be doing slightly better still, with lower volatility. Nevertheless, as of June 30 Partners' hedge fund division accounted for only SFr3.4bn ($2.8bn, €2.1bn, £1.4bn) of the group's SFr22bn of assets under management.
By far the largest slice, some SFr14.3bn, is in private equity, where it operates a series of closed-end investment vehicles. Partners also operates a roster of listed and unlisted funds and mandates investing in private debt, from mezzanine funds to the secondary market, infrastructure, and real estate - where it bought San Francisco-based Pension Consulting Alliance in February.
PCA, an investment consulting firm focused on opportunistic situations in the US property market, is emblematic of the esoteric approach Partners Group is happy to take in some asset classes.
"For pure core investments [in property] you don't need Partners for that. We focus more on value-added and opportunistic situations: more like an event-driven manager, in hedge fund language," says Mr Jacquemai.
Amid turbulence in a number of alternative asset classes, from private equity and US property to parts of the hedge fund universe, Partners Group may seem vulnerable.
However, the Swiss company remains bullish, saying its private debt investments "do not show any significant change in credit quality", and that lower prices will increase returns on its new mezzanine investments, although it concedes that the planned rollout of its next collateralised loan obligation may be postponed.
In the hedge fund universe, Partners' argues that the high-profile failure of a number of funds attests to the benefits of investing through managed account platforms that allow for daily risk management, allowing "undesired" exposures to be identified quickly.
Indeed Partners claims to have benefited from the turbulence via exposure to hedge funds shorting the US subprime mortgage and high-yield bond markets.
It may take more than the current credit blow-out to bring the high-flying Mr Jacquemai back down to earth.
Fintag says Hedge Fund platforms - and we are a member of 2 - are great for investors as they can tell you what is going on pretty quickly when the markets start to play up. No need to wait for a quarterly newsletter or a distressing "I am sorry" letter (see above). I quite like the fact that one of Partner's competitor managed account platforms recently issued a press release telling the world what its constituent exposure to Asset Backed Securities was. Nice one.
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