HEDGE FUND NEWS
@ Mon 14 May 2007 : GMT

FINTAG COMMENT

My hosts in Greenwich have been very kind. Last night, a well known Hedgie showed me around his Yacht and boasted that he was now a Pirate. I asked him what he meant and the answer was he had locked in all his investors, some for 10 years, so that he didn't have to work anymore to fund his extravagent lifestyle - just like the Private Equity boys and girls. If his hedge funds blew up or failed to perform, the exit penalty fees were so huge that he could launch a couple of new funds from the fees.

So no wonder the Art world is propped up by people like him, and presidential candidates can rely on his overwhelming support (in return for continued low SEC involvement and the IRS kept at bay). Such opulence and grandeur made me feel humble. My vintage Patek Philippe felt like a Swatch, my Gold BA card like the mark of a loser and my Black Amex a supermarket loyalty card. These people make serious amounts of disposable income and own capital that could be used as collateral to take out an African state - and yet Greenwich is old England and reminds me of the parts of Kent in England that the Labour Government haven't concreted over. It is quaint and doesn't suffer from the Dubai flashy gold and bling that is so vulgar.

I would like to live here.

Tail Between The Legs News

Jabre's USD1.9bn resurrection (aka Who said being a crook doesn't pay?) (ftalphaville)



The Dow of Murdoch: Is Rupert Losing Confidence? Or Is This Just A Deal Tactic? (dealbook)

Regulators could delay Reuters deal for a year (independent)

Shareholder activism is on the rise (financeasia)

Deutsche hires new boss for SE Asia from HSBC (financeasia)

Britain becomes a Prozac nation (times)



UBS asset chief moves (financialnews-us)

United front is needed against insider deals (times)

USD570m

The secret world of hedge funds (telegraph)
The world's top 25 hedge fund managers earned an average of $570m each last year, despite the crush of 8,000 funds all competing for a smidgeon of extra yield in the global marketplace. That much we know.

Dr James Simons, a maths PhD and former cryptanalyst for the Pentagon, netted $1.7bn at Renaissance Technologies Corp, followed by Citadel's Kenneth Griffin on $1.4bn.

Less known is how the stars operate, and how they view the world. For a glimpse into their clandestine affairs, try Steven Drobny's book, Inside The House Of Money, based on long lunches with 13 American, British and European fund managers, each a legend in their own sector, and each replete with tales of how they nearly "blew up" - hedge fund parlance for going bust.


Such funds are not new. John Maynard Keynes ran his "Syndicate" for a group of friends, and another for King's College, Cambridge. The "College Chest" made a 13.2pc annual return from 1928 to 1945, through the Great Depression. Keynes learned the hard way like everyone else, sage though he was. His personal account was wiped out by a margin call in the commodity slide of 1929.

Hedge fund man is by nature a contrarian. He - rarely she - bucks consensus as a way of life, profiting whenever the price of any asset, derivative, or country, looks out of whack. No surprise that so many view the current blow-off rally in junk bonds and Chinese stocks with deep suspicion, a sign that the cycle is nearing a top.

More unnerving is the number who fear something worse, afraid that governments may have upset the workings of capitalism by holding interest rates too low for too long - that is, by mispricing credit. The villain of this book is former Fed chief Alan "Easy Al" Greenspan.

"My gut feeling is that there will be a lot of pain because we still have to pay for the 1990s, and that worries me," said Christian Siva-Jothy, founder of SemperMacro. His ordeal by fire came as a cocky trader for Goldman Sachs when he bet $1bn that sterling would rise against the yen in 1994. Politics intruded, a recurrent theme.

President Clinton threatened Japan with car tariffs over alleged currency manipulation (sound familiar? China?). The yen soared. "If that wasn't bad enough, five days later UK inflation numbers were simply awful. Sterling went into a free-fall. It was classic - the market found me," he said.

"On day eight of this episode, when I lost about $40m in one day, I felt this overwhelming desire to walk out and pretend it wasn't happening. Instead I took a deep breath and liquidated everything. Confidence is a very dangerous thing," he said.

His top trade is to buy eurodollar futures whenever the Fed starts cutting US rates.

It worked like a charm after the Russian crisis in 1998, and again after the dotcom bust in 2001. "It's the most obvious trade in the most liquid market in the world. It's not brain surgery," he said.

Dr Sushil Wadhwani, best known for his stint on the Bank of England's Monetary Policy Committee, also came unstuck on the yen when at Paul Tudor Jones, this time in 1998 as China was threatening devaluation (ironically).

"I got seduced by stories that said dollar/yen was going to 180. I remember one or two people saying they thought the US would intervene because of China's complaints, but I'm afraid I didn't pay enough attention," he said.

"In June, the Fed intervened, along with the Bank of Japan, and the dollar dropped like a stone. When something is going up or down in a straight line and you start getting political resistance, you had better pay attention," he said.

Dr Wadhwani politely accused the Fed and old MPC colleagues of fatally ignoring property and asset inflation. "If you take your eye off the ball vis-à-vis asset price misalignments, then you are storing up trouble. What you've got now is huge asset market distortions and one of these days the chickens will come home to roost," he said.

"Alan Greenspan has always argued that it's better to deal with a bubble after it has burst than to worry about pre-empting the bubble. I take a different view," he said.

As for Britain, Mr Wadhwani said that the MPC should have tightened interest rates earlier to cool house prices, even if inflation fell below target.

Like others, Jim Leitner from Falcon Management is waiting pensively for the denouement. "Right now there are a lot of bad things lurking, but I'm just not sure when we're going to fall on the knife," he said.

Or take Scott Bessent, from Bessent Capital: "At some point, we will have the Big One. It's out there. I don't know whether it's financial asset depression, or a real depression. Financial assets can't keep doing what they're doing, with so many people rewarded for being imprudent," he said.

Or the anonymous currency guru in the last chapter: "When you look at the whole world and see what it's built on, it is totally, clearly not sustainable. I get so bearish that I think about buying a castle in Scotland and moving up there with a couple of loaded shotguns and a truckload of canned food," he said.

Regulators are now fretting, afraid that the funds have grown too big. They warn that speculators clustered on the same trades might lurch en masse across deck, capsizing the boat.

That is a self-serving critique. Hedge funds have multiplied in a sea of credit, and who is ultimately responsible for that excess credit? Central banks, of course.

THE OC

Is Greenwich, Conn., Obama Country? (dealbook)
Considerable amounts of ink and pixels have been devoted lately to characterizing Barack Obama as the presidential candidate of the hedge-fund set. A Financial Times article last month quoted an anonymous United States businessman as saying, “The whole of Greenwich is backing Obama” — a reference to Greenwich, Conn., the leafy suburb that many hedge fund managers call home. (That breezy statement turns out to be quite untrue, as we will see later.)

An article on The New Republic's Web site this week, titled “Money Man,” picks up this theme.

It begins by referring to Mr. Obama's “playing the role of the 'grassroots candidate',” while at the same time taking lots of campaign cash from hedge funds and private-equity firms — “relying on a growing cadre of young, eye-poppingly rich hedge-fund and private-equity managers to keep him at the head of the money primary.”

The larger issue is that managers of hedge funds, which are private pools of capital for institutional and wealthy investors, are feeling their political oats. They have begun taking up lobbying activities, and Washington has turned its attention to the fast-growing industry. As a result, election watchers are eager to know who will win favor with this emerging political force.

To be sure, Mr. Obama has taken considerable sums from hedge fund sources, and he is likely to take more. There are reports that Paul Tudor Jones II, founder of hedge fund Tudor Investment Corporation, will be hosting a fund raiser for Mr. Obama at his sprawling Greenwich mansion later this month.

Still, Mr. Obama's competitors have also been busy collecting checks in Greenwich. PoliticalMoneyLine, a Web site that tracks political donations, reports that between January 1 and March 31, the presidential exploratory committee of Hillary Clinton took in $146,050 from 72 donors whose addresses are in Greenwich. The committee of Rudolph Giuliani, a Republican, also did well there, getting $117,050 from 62 Greenwich donors during that period. (In fact, Mr. Jones of Tudor Investment was one of Mr. Giuliani's early contributors.)

And then there is Christopher Dodd, the Democratic senator from Connecticut who also aspires to be the next president. Mr. Dodd's presidential committee has found plenty of support in Greenwich, raising $152,250 from 86 donors there. This may be because hedge fund managers want to avoid greater regulation of their industry, and they see Mr. Dodd, the head of the Senate Banking Committee, as a valuable ally.

By comparison, Mr. Obama's committee reported just $80,600 from 42 Greenwich donors in the first three months of the year.

Of course, “Greenwich” is not synonymous with “hedge fund.” Many donors with Greenwich addresses are not hedge fund workers — they may be doctors, lawyers or plumbers.

And there is no question that Wall Street has opened its wallet for Mr. Obama. The New Republic, citing PEHub, reports that Mr. Obama got nearly twice as much cash from employees of private equity firms ($85,350) than Ms. Clinton did. And among all the candidates, he got the most ($479,209) from investment banks.

SOUTH AFRICAN GOES SOUTH

SA's first hedge fund blow up (moneyweb)
Evercrest Capital's hedge fund lost 66% of its value in April after a bad trade went sour.

A hedge fund with close to R200m under management lost 66% of its clients' funds in April after a leveraged bet on the Sanlam share price went sour. This is the first time a hedge fund has "blown up" in South Africa.

The Evercrest Aggressive Fund, managed by Marc Van Veen, had taken a short position on Sanlam, which meant that it stood to profit from a fall in its share price.

During the month of April, Sanlam shares rose as much as 17%, causing severe losses for Evercrest. The share rose from R20,46 at the beginning of the month to R24,05 on the 26th.

At the time of publication Van Veen had failed to respond to messages left by Moneyweb on his cellphone.

Van Veen managed a fund with assets of close to R200m, says Carl Liebenberg, CEO of Clade Investment Management. Clade compiles a hedge fund index, of which Evercrest comprised about 2,5%.

Despite Evercrest's blow-up, Liebenberg says Clade's South African Hedge Fund Index Fund still turned a profit to investors for the month of April, thanks to strong performances from other constituent hedge funds.

Liebenberg says that Van Veen ran a "moderately aggressive" hedge fund that took long and short positions on local shares.

Before launching Evercrest, Van Veen used to be employed by Old Mutual Asset Management, where he ran a hedge fund.

An industry player says Evercrest's blow up is ironic, because Van Veen had a reputation for being an ultra-conservative manager. "While he was at Old Mutual he ran the most conservative hedge fund," he says. "He used to barely beat cash!"

In 2004, Cubed Life described Van Veen's fund as follows: "The Old Mutual SA Hedged Fund was launched in July 2000, under the stewardship of Marc van Veen. This unleveraged low volatility fund has little market risk and aims to add return through effective top-down asset allocation coupled with a solid foundation of stock selection."

Liebenberg says that Evercrest's blow up will come as a warning to other hedge fund managers. "It's rare that guys take such large positions on a single share," he says. "I don't think he [Van Veen] will get back into the hedge fund industry again."

ASSET STRIP

US private equity firm poised to win battle for Chrysler (times)
Cerberus, the US private equity firm, is poised to acquire Chrysler, the ailing carmaker, in a multi-billion dollar deal, after a fierce three-way battle against Blackstone, the private equity firm, and Magna International, a Canadian car parts maker.

The finishing touches were being put last night to a complex deal, in which the financing of Chrysler's $18 billion (£9 billion) worth of healthcare and pensions liabilities will play a significant role.

Cerberus was also thought still to be working out exactly how to absorb Chrysler's car financing operations into GMAC Financial Services, the former General Motors unit it recently acquired.

A deal could be announced as soon as today, although sources gave warning last night that the talks could still collapse, paving the way for a rival bidder to steal the prize.

Chrysler lost $1.5 billion in 2006 and is undergoing a recovery plan that will cut 13,000 jobs in Canada and the US and pare back production. Daimler-Chrysler announced in February that it was considering all options for the unit, which was taken to mean that it was being put up for sale.

This month, Magna had been viewed as the frontrunner to buy Chrysler because of the close ties between its chairman, Frank Stronach, and Daimler-Chrysler, his perceived determination to be a major player in the industry and his firm's car industry expertise.

But Mr Stronach appeared to play down his interest last week, saying he would be content for Magna to be one of four or five members of a larger ownership consortium, rather than the driving force. A further question mark emerged over Magna last week as Mr Stronach sold a $1.5 billion stake in the company to Basic Elements, a private Russian conglomerate controlled by Oleg Deripaska, the 39-year-old Russian billionaire with close ties to President Putin.

The link with Mr Deripaska raised concerns that a deal between Magna and Chrysler could face opposition by the United Auto Workers trade union and possibly create regulatory issues.

For its part, Cerberus helped its chances of winning the auction by hiring Wolfgang Bernhard, the former chief operating officer of Chrysler, to lead its bid. Mr Bernhard held that position from 2001 to 2004, during which time he masterminded Chrysler's last comeback.

Mr Bernhard is working alongside Robert Rewey, a former marketing executive at Ford Motor, JD Power and Associates, a research firm with extensive knowledge of the car industry, and its senior vice-president, Gary Dilts, formerly head of Chrysler's sales team.

Like General Motors and Ford, Chrysler has suffered from the rising cost of petrol causing consumers to switch from SUVs and pickup trucks to smaller vehicles.

Toyota, which overtook Ford and Chrysler to become the world's second-biggest carmaker, last month revealed that it was now the biggest.

Cerberus's worldwide investments include businesses involved in aerospace and military equipment, cars, building products, retailing, financial services, health care, distribution, paper and packaging, property, telecoms, transport and travel.

SILLY QUESTION

Will the credit bubble burst? (times)
EVEN at the helm of one of London's biggest and most lucrative hedge funds, Hugh Willis, co-founder of the credit specialist Blue Bay Asset Management, says his job is not glamorous.

“There has traditionally been little excitement around corporate debt markets,” he said. “It has been seen as the poor relation of equities. But people are beginning to realise that in a typical buyout there can be $4 of debt created for every $1 of equity invested.”

There is little doubt that the focus has been on equities in recent weeks. Stock markets are close to all-time highs with takeovers, buyouts - and rumours - fuelling a frenzy of share dealing.

Yet, even at the end of another week in the maelstrom of deal activity, the strength and reliability of the debt markets has become a worry, nagging away at the back of most traders' minds.

One said: “Debt markets are a slippery problem. If you say you're worried, you look like a real doom-monger in the middle of all the breaking deals. But everyone's thinking about a bubble. I suppose nobody really [understands] the credit cycle, but we can all see the huge volumes going through. There must be a saturation point - and that will hobble deals.”

Sitting in his Pall Mall office in a green cardigan and open-necked shirt, Willis is proof that the times have been good in the credit business. Six years ago Willis - nicknamed Rik Mayall because of his resemblance to the comic actor - and his long-time colleague Mark Poole set up Blue Bay to invest in the credit markets, which were still undeveloped in those days. Since then Blue Bay has become one of London's top 10 biggest hedge-fund houses, with £11 billion of assets under management.

Through its four hedge funds and five long-only funds, Blue Bay invests in fixed-income securities such as corporate bonds, as well as credit default swaps and distressed debt. Six months ago, Blue Bay floated on the London Stock Exchange in a move that valued the company at £571m and brought the two founders about £30m each. It is now worth almost £1 billion and is in the FTSE 250.

Although one of the first and biggest, Blue Bay is not alone. Many credit specialists are operating in London, feeding off the new appetite for debt at Britain's biggest companies and the burgeoning private-equity houses.

The credit hedge funds have recently usurped banks as the primary holders of corporate debt, taking on debt the banks would probably seek to write off. According to Hedge Fund Research, funds that could specialise in distressed debt have assets of more than $250 billion (£126 billion) - five times as much as in 2000.

As one commentator said: “It's hard to keep tabs on the credit funds. Suddenly, the debt structures have become so complex that it's hard to tell what is debt and what is equity. Increasingly, it doesn't matter because the hedge funds rule it all.”

The growth has created suspicions of hidden and misunderstood risks - both inside the credit hedge funds and on corporate balance sheets.

Theo Phanos, of Trafalgar Asset Management, the London credit hedge fund, said: “It is cheap for companies to borrow. But excesses are growing in the loan and corporate credit markets which can only lead to serious problems.

Willis, who has worked in credit markets for more than 20 years, says he is always vigilant, watching the markets for any change in the credit cycle.

“The European credit market is very young,” he said. The advent of the single currency in 1999 was the catalyst for the development of European fixed-income credit as a large new asset class. In the years that followed, investors burnt by equities when the dotcom bubble burst began to turn to fixed income. At the same time, European companies began to adopt a more American approach to leveraging their balance sheets to make them more efficient, a process that was accelerated by the rise of private-equity activity.

Willis said: “By 2000 it was obvious to Mark and me that European credit markets were going to take off and we founded Blue Bay to respond to this. Growth has been dramatic, aided by the fact that America has had a fully functioning corporate debt market for many years that has served as a model. There has been exponential growth - the European credit market is already more than 40% of the size of its American cousin and within five or six years it will be of a similar size.” Others agree there is plenty of capacity in credit markets and that the feared “saturation point” is misleading.

Phanos said: “There is plenty of capacity in the market. Hedge funds now account for more than 50% of the loan market, because they are more aggressive and will take better spreads than banks.”

Many chief executives are uncomfortable with the change in debt ownership. One FTSE 100 chief executive said: “If anything went wrong, we used to be able to call up the bank managers who had lent us the cash, go over and have a grown-up conversation. Now, because the banks syndicate all our debt, we haven't a clue who owns it.”

Willis is unsympathetic: “Companies could instruct banks not to syndicate their loans - but they would have a tough time raising any money. The expertise of the distressed-debt specialists is crucial when things go wrong. These specialists can often save companies that would otherwise fail.”

So when will the credit cycle end? “There are four stages to the cycle,” said Willis. “The first, when spreads tighten dramatically, started in October 2002 and ended in late 2004. The second, which ended early this year, tends to be characterised by low volatility both at the index and the single credit level. The third stage, which we believe is just beginning in the current cycle, is one in which index volatility can remain low but single credit differentiation becomes more marked. The fourth and final stage tends to be one in which markets can become disorderly and credit failure can become briefly systemic. We do not see the catalysts in place for this fourth stage, but we remain vigilant.”

ARTY

Art fund reveals taste for the exotic (ft)
An art hedge fund has raised £10m and hopes to secure £25m by the time it launches this summer, demonstrating the soaring interest in exotic investments.

The Art Trading Fund is thought to be only the second launch of a hedge fund manager investing in art and the first to attempt to hedge its investments against a fall in the market, using derivatives.

The launch of the fund, structured as a Guernsey-listed closed-end company, comes as some hedge funds are beginning to invest in art and wine as part of their search for returns not linked to stock and bond markets.

Chris Carlson, co-founder of Artistic Investment Advisers, which is setting up the fund, said the aim was to offer “significantly less correlation” to traditional investments than other hedge funds, mainly by trading art for short periods.

Several hedge funds have been putting money into art, according to Philip Hoffman, chief executive of Fine Art Management Services, which runs the first art hedge fund, the Fine Art Fund, and two sister funds.

He said a handful of hedge funds had become co-investors in pictures bought for short-term trades and “one group are just putting up $5m (£2.52m) to invest in some of the pictures we are buying”.

Wine is also attracting hedge fund money, according to Peter Lunzer, who manages almost £10m in the Wine Investment Fund. He has one hedge fund investor that put in £1m to reduce its own volatility and is in talks with others.

Mr Carlson, a former proprietary trader at Deutsche Bank and UBS, and two co-founders, are aiming to hedge their investments in pictures using exchange-traded options that they believe are closely correlated to the art market.

The fund will use several strategies, including buying work direct from a group of 10 established contemporary artists to sell on, buying privately from distressed sellers and trading impressionist and post-impressionist works.

I AM IN THE WRONG BUSINESS

Carlyle to raise $1bn with fund IPO (ft)
Carlyle Group, the private equity firm, plans to raise $1bn with its first public offering of one of its investment funds, people close to the matter said.

Carlyle on Monday is expected to announce it will offer shares on Euronext in a leveraged finance fund made up mostly of mortgage backed securities.

The move comes as other private equity and hedge fund groups seek to tap the public markets to raise permanent capital. Unlike the Blackstone Group, Carlyle will not be offering investors a stake in its management company.

A person close to the matter said Carlyle, like other private equity groups, has looked closely at an initial public offering of the management company. However, the person said Carlyle, which manages over $56bn, was not currently inclined to pursue such an offering. A Carlyle spokesman declined to comment. Businessweek.com first reported the planned float.

Blackstone, for its part, is hoping to raise around $4bn by offering investors a 10 per cent stake in its management company.

Blackstone is planning to go public as a listed partnership, a structure that would lessen its corporate tax bill. The structure would also offer public investors essentially no voting rights. There has been some talk among lawmakers in Washington about disallowing the structure. However, any such action is not likely to occur before the IPO, which is expected as soon as next month.

Fortress, the hedge fund and private equity group, staged a highly successful initial public offering in February, leading other alternative asset managers to quicken their plans for public offerings. Several other hedge fund groups, including $35bn AQR Capital, are expected to soon file for IPOs.

James Hance, a senior advisor at Carlyle and a former Bank of America chief financial officer, will serve as non-executive chairman of the publicly listed Carlyle fund. John Stomber, a structured finance specialist who joined Carlyle last year from Cerberus, will be chief executive.

The listing will be a first for Carlyle but other private equity and hedge fund groups have listed funds in Europe and not all have done well. Shares in KKR Private Equity Investors, listed in Amsterdam, still trade slightly below their $25 IPO price.

SAMSUNG

S. Korea to mull allowing hedge funds: finance minister (yonhap)
South Korea will consider allowing hedge funds as part of efforts to promote its financial markets once its asset management market becomes solid, the finance minister said Monday.

"Once a solid foundation is laid for asset management after the Capital Markets Consolidation Act takes effect, we will consider plans for allowing hedge funds," Finance and Economy Minister Kwon Oh-kyu said in an international financial forum in Seoul.

Hedge funds can "be used to provide new investment opportunities to investors and to promote the development of financial techniques, thereby upgrading Korea's financial markets to the next level," he said.

Seoul is pushing to effectuate the law in an effort to further advance its capital market.

The minister said the government will try to improve the requirements for foreign companies that list on the domestic bourse and overhaul its procedures in an effort to boost their listings here.

He further said South Korea's economic growth is forecast rise this year, given forecasts of improvements in major economic indicators for the second half.

"The annual economic growth rate is expected to reach the mid-4-percent range, in line with our expectations," he said. "In the first quarter of this year, the economy grew 4 percent from a year ago."
Both government officials and private economists are optimistic about the second-half performance of the world's 11th-largest economy, citing a strong revival in consumer spending since late last year.

South Korea's government plans to front-load its budget in the first half and create more jobs to boost consumer spending, one of main drivers for the country's economic growth.

The Bank of Korea also froze its key interest rate for May last week, marking the ninth straight month that it has done so, to spur economic growth amid benign inflation.