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
I am being discharged tomorrow from hospital but have to stay in the US for the rest of the week as I have been invited to a bash on Belle Haven (if you don't know where this is, you don't know anything about Hedge Funds), the most exclusive piece of land in the world. Despite many tests the consultants have told me my symptoms were stress related and I need to relax. It is interesting to note that many Hedge Fund managers go grey very quickly because the stress is enormous although I have yet to succumb. The job of a Hedgie is relentless. Day in and day out, it never stops. However, hob nobbing with the great and the good is not the best way to relax when you are in the company of people who collect 747's and live in 25,000 sq foot houses with a housekeeper and a dog for company.
I will grin and bear it of course.
Enough about me. Today we note that Hedgies are contributing to charities in a healthy way and China has started to buy out the West. The imminent crash / slump is being being willed on its way and the Russians complain about the lack of transparency in Hedge Funds (surely an oxymoron?)
Rumor Mill: Hedge Fund Collapsing? (dealbreaker) We're starting to hear chatter about a hedge fund meltdown. The outlines are still vague. Multi-strategy fund. Something like $3 billion under management. But nothing more.
There are way to many hedge funds that fit that description to get anywhere with just that information. So we're opening up the comments for random guesses, rumor mongers and, who knows, maybe some actual intelligence.
Keep in mind that these stories come and go, sometimes never amounting to anything.
Fintag says My heart sank when I read this, but a few calls and all was ok. FiNTAG is healthy and strong.
GIVING
Hedge funds get the bug for benevolence (independent) Their glittering fundraisers in London and New York have broken all records for charitable giving, but the latest masters of the financial universe are not content just to write the cheques - they want to see results
The music would have made Sir Mick Jagger proud, even if the crowd left something to be desired. As The Hypothecators belted out "Brown Sugar" on a stage in central London one evening last week, a solitary couple took to the dance floor. Despite their earnest cajoling, none of their fellow music connoisseurs joined in, content instead to engage in a bit of understated foot-tapping and beer-sipping. They might have been more enthusiastic. They had, after all, paid £125 apiece to hear a line-up that also included The HixVille Six, The Subscribers, The Systematics, and to close out the night, The Activists.
As the nerdy names imply, a typical music gig this was not. The event, held at Café de Paris just off Piccadilly Circus in the centre of London, was the Mayfair Hedge Fund Rock Benefit, the brainchild of American hedge fund manager and philanthropist Mead Welles. The entertainment was not provided by hardcore rockers, but rather by bands comprised exclusively of hedge fund industry professionals. Sporting a pair of kitsch Union Jack socks and nursing a Kronenbourg beer "backstage" before going on with his band, The Subscribers, Mr Welles said he hoped the evening would net at least $50,000 (£25,000) - it ended up bringing in $120,000 - for A Leg to Stand On, a charity that he founded to help disabled children in developing countries.
"We [hedge fund managers] get hit up for money left, right and centre. It's frustrating. You don't know who you should give to. This is about getting people to a comfortable place where they can learn more about the cause. If they want to become a donor, great," Mr Welles says.
It may have been a light-hearted affair, but targeting these new Masters of the Universe has become very serious business, attracting no less than Bill Clinton. The former US president swept into London for one night earlier this month to give the keynote speech to a room of 1,200 hedge fund managers assembled for a black-tie affair at Marlborough House in St James's. Madonna also spoke, and the rock star Prince brought down the house with an hour-and-a-half set. Before the night was out, Mr Clinton had received an $8m check from the assembled millionaires to launch an initiative for HIV/Aids in Mozambique in partnership with ARK, or Absolute Return for Kids, the charity started by the London-based hedge fund manager Arpad Busson.
All told, the event raised £26.6m, the most successful single fundraising event ever in the UK. Just two weeks earlier at a similar event in New York, the Robin Hood Foundation, started by hedge fund veteran Paul Tudor Jones, broke all records by raising $71m from hedge fund and private equity executives. Some may be tempted to say that events like the London fundraiser - where guests paid £100,000 per table, and a trip for two to the Oscars sold for £280,000 - is just the most striking example of the excess borne of the incredible boom being enjoyed by the City of London. Yet it also bears out what some assert is something far more significant: the blossoming of a new generation of philanthropists, who are making more money, at a younger age, than previous generations. And by applying the same business principles that made them successful to philanthropy, they are fundamentally changing the face of giving.
"The people creating wealth now are very different. They don't subscribe to the old idea that it must all be kept in the family, which has historically been the case, at least in the UK," says Nick Tucker, head of Global Private Clients at Merrill Lynch. "The old days when charitable giving was arm's length view are gone. It's a lot more scientific. People want to see a return."
The booming financial markets continue to defy sceptics; the Dow Jones index broke through the 13,400 barrier for the first time in its history last week, while the FTSE 100 has been flirting with the all-time highs reached at the end of the past decade. The result is a deluge of new wealth, with those at the top of the financial world's food chain pocketing outlandish sums. The top 25 hedge fund managers, for example, earned $14bn between them last year, an average of about $570m each. City bonuses have quintupled to a total of more than £8.7bn over the past decade. Private equity executives have enjoyed an unprecedented run of multi-billion-dollar returns.
Arpad Busson is a prime example of this new breed. Head of EIM, an $11bn fund of hedge funds, he started ARK five years ago. The charity focuses on three main areas: HIV/Aids, education and residential care for children. Its costs are completely covered by a core set of donors so that 100 per cent of donations go to its projects. Rather than investing in other charities, ARK sets up and runs its own programmes, which are rigorously followed up and reported on.
"ARK's guiding principles are measurability and accountability. As a charity you can't just take the money and not be transparent," Busson explains. "Charities should be just as accountable to their donors as businesses should be to their shareholders."
Nearly 15 per cent of the £8.7bn donated to charity in the UK last year was given by the 30 most wealthy individuals, nearly triple figure for the year before, according to the Charities Aid Foundation. While such a development is clearly welcome, it will undoubtedly ruffle some feathers.
"Charities are having to up their game - these guys that are now giving their money want to see tangible results," says Mr Tucker.
There are 187,000 charities of varying size, scope and quality in the UK today. New Philanthropy Capital, a not-for-profit organisation set up by ex-City bankers to help wealthy individuals sift through that mass, ranks a select few into the top tiers of each sector. That leaves most charities out in the cold when wealthy individuals are writing cheques. However, Harry Charlton, head of client development at NPC, says that the organisation does not give negative recommendations and actually broadens the possibilities of smaller charities that may not have the profile of better-known organisations but stack up just as well. NPC has seen a noticeable increase in demand for its services within the past 18 months, he says.
The Private Equity Foundation, a charity that was set up earlier this year with £5m from firms and individuals in the buyout industry, is another such manifestation. It aims to apply the same principles the industry uses to turn around businesses to the projects in which it invests.
Indeed, even the vocabulary of the City is creeping into the sector, with much talk of "scalability" and "synergies". One source suggests that the wave of mergers and acquisitions fattening the pockets of the City's bankers should be extended to the charities sector: "The philanthropic area is incredibly fragmented... Over time one would hope that there would be consolidation in the sector. Think of the costs that could be taken out."
The largesse is not all down to money, or having more of it. The profile of today's super-rich is changing. Rather than dynastic, old money that, if it was given away, was often done so via a trust or foundation, today's rich tend to be people from more modest backgrounds who "want to see with their own eyes" the effects their cash is having, says Mr Charlton. "A lot of our clients are self-made. They have a different perspective on wealth creation. They want to do it while they are living."
And in this increasingly connected, globalised world, it is hard to ignore the widening gap between those at the very top and those at the very bottom. "We can't just continue with our nice little lives here in London when right on our doorstep, a two-hour flight away, there are orphanages in Romania where children are tied to their beds for 10 years, living in their own excrement, fed only liquids because solid food will be stolen," says Mr Busson. "It's like the gates of hell. How can we not do something?"
Yet for all their good work, this new generation of donors is not without detractors. Indeed, the very lavishness of star-studded events such as that at Marlborough House earlier this month is perhaps the most eloquent expression of the imbalance between those that have so much and those they are trying to help. As one hedge fund manager says: "There's a lot of ego. It's about being able to stand up and just show that you can bid £200,000 for some nonsense."
And it is not all, of course, about simply helping out their fellow man. "It sounds bad to say, but we are all about maximising returns, and your donations mean a tax deduction [in America] as well as meeting a need," says Mr Welles.
Yet as long as the money continues to flow, most are not bothered about the ultimate motivation. As Shaks Ghosh, chief executive of the Private Equity Foundation, explains: "Do I care if [donors] get some good PR from this? I don't think so. It's £5m that would otherwise sit in their pockets that's now going to a good cause. The really interesting question is who are these new philanthropists. Are they the next Gates, the next Carnegie? I hope so."
Fintag says Hedge Fund managers are usually well educated, cultured and responsible members of society. Unlike football players, pop stars or vanity politicians (thinking of Tony Blairs world tour), Hedgies feel that in making the world a more liquid and profitable environment that they should give a lot back. And thankfully a few high profile charity events show the caring side of an industry that is misunderstood and vilified.
The move will give Blackstone a head start in Chinese takeover deals and allow China's government to tap into the global private equity boom.
The news, which is likely to create some political opposition in the US, comes just days before Chinese Vice Premier Wu Yi visits America.
China is buying the stake through its newly formed state investment fund.
'Enhancing access'
"For both China and Blackstone, it's about enhancing access and developing deeper relationships," said analyst Monte Brem, chief executive of advisory firm Leucadia Capital Partners.
When the Chinese are buying into private equity every investor in the world should take note
Why the deal matters
"The Chinese government wants to increase its access and role in the global private equity market; Blackstone wants to increase its access and role in China."
For Blackstone, the deal will bring an inevitable advantage when investing in China, where foreign companies often struggle to gain support from Beijing when trying to buy Chinese companies.
But the deal will raise eyebrows among some US politicians wary of China's growing economic clout.
In 2005, China's plans to buy US energy giant Unocal fell through in the face of fierce political opposition in Washington.
China's purchase will be part of Blackstone's $7bn share floatation, planned for next month.
Blackstone was recently part of a consortium that abandoned plans to launch a takeover bid for UK supermarket group Sainsbury's.
Fintag says This is a cynical form of imperialism. Blackstone borrow mostly from US banks and buyout many foreign companies. For the Chinese or any country to buy out other countries assets would be near impossible. So in owning a Private Equity company, China is effectively beginning its communist imperialistic takeover of the West.
For One Hedge Fund, April Was the Cruelest Month (dealbook) For all the talk about how hedge funds are raking in cash and earning double-digit returns all the time, it's helpful to remember that they can lose — and lose big. Witness the letter that Jurg Buhler, managing director of Dighton Capital, recently sent to investors in his small ($34 million) fund registered in the Cayman Islands.
It was not a letter he likely enjoyed writing.
Last month, he told investors, the fund “had to take a big loss of 36.2 percent.” Why the downturn? “Our Long Term Long positions went down in sync,” he wrote. Ouch.
And while “individually they were still within their limits that they were allowed to move,” the letter goes on, “that obviously had a bad impact in the portfolio.” Obviously: The fund's Web page indicates that April was the worst month in the fund's history.
Dighton may already be on the road to recovery: Mr. Buhler said the fund was up by 24 percent so far in May. And to be fair, the fund seems to have done pretty well before. It booked returns of nearly 50 percent in each of the past two years.
As for April's debacle, Mr. Buhler wrote: “We will look for ways how such situations can be avoided in the future.”
Fintag says In the ruthless and short termist world of Hedge Fund management, the newsletter is often the only communication between investor and manager. Explaining stellar performance is easy but trying to convince your investors that the markets were wrong and you were right is hard.
So well done to Dighton for keeping it simple. With a fund as volatile as this, he has an uphill struggle and I am surprised he has any investors at all.
Cerberus Capital Management, the US private investment firm that last week bought US car company Chrysler, has raised a record fund of $7.5bn (€5.5bn) to target companies in trouble.
Investor appetite for Cerberus' fourth fund, which raised more than double its initial expectations, suggests concerns about a downturn are growing.
The fund's success comes as a report by Goldman Sachs warns that while there is plenty of liquidity in the European buyout market, it could become overstretched as takeovers become larger, more leveraged and the quality of debt to finance them deteriorates.
Cerberus, which acts as a one-stop shop for financing distressed companies, will invest $7.5bn of equity with a group of undisclosed investors to buy the US carmaker from its German parent DaimlerChrysler.
According to a placement memorandum seen by Financial News, Cerberus has limited the maximum investment from any of its private equity funds to 15% of the total raised, so it could invest $1.1bn. The equity is supported by a $62bn debt financing package to recapitalise Chrysler's finance division, which provides loans to car owners, according to Mark Neporent, chief operating officer.
The group's acquisition financing package for Chrysler, the largest backing a private equity-led deal, is being underwritten by JP Morgan, Goldman Sachs, Citigroup, Morgan Stanley and Bear Stearns.
Cerberus declined to comment about its fundraising but sources close to the firm said it had increased it from a cover target of $4bn on the back of exceptional demand.
Placement agent Monument Group helped Cerberus raise $7.5bn, more than five times the $1.4bn it raised in 2003, having worked on its previous funds, sources close to the firm said.
Goldman Sachs said in a recent report that excess liquidity and a shortage of suitable targets could be stretching the European buyout market.
The report, by Hiten Savani and the European strategy team, said that valuations have soared from an average multiple of 6.8 times earnings before interest, tax, depreciation and amortisation to 9.1, times between 2003 and the first quarter of this year.
Leverage has increased from an average four times debt to ebitda, to record levels of more than six times this year, as debt costs have declined. Debt quality has deteriorated, with that rated at BB- or better taking a smaller proportion of buyout financing than before, based on research by credit rating agency Standard & Poor's.
The report also said the number of European public companies that are attractive targets for private equity has fallen by two thirds in less than a year.
Of the 800 European companies that Goldman studies, only 7% would deliver annual returns of more than 20% for private equity firms. Last September, 21% of public companies would have met this internal rate of return criteria.
Georgina Taylor, a European strategist at Goldman, said: “Our global macroeconomic outlook on private equity is pretty benign and the level of funds is huge. A lack of targets won't derail the sector but risks will increase and leveraged buyouts will become more expensive.”
Fintag says Not only is debt quality getting worse (more low grade players coming into the market doesn't help) but the leverage is about 8x EBITDA in many funds. With assets like Chrysler being bought for silly money, I seriously cannot see how this company can be turned around. The Japanese have sewn up the car market and the Chinese just behind ready to steal their thunder.
It is like borrowing cash from all your mates and a bunch of strangers with dark glasses, buying a house on a flood plane and painting it with waterproof paint and renting it out. [Editor: uh?]
Vigilance on hedge funds eroded (guardian) Investment banks are so keen to win business from hedge funds that they are relaxing their risk assessments, international regulators warned this weekend as they set out plans to protect the financial system in the event of a hedge fund collapse.
The Financial Stability Forum, made up of 26 national regulators, found that there had been a recent "erosion in counterparty discipline" which made it important for counterparties and investors to demand more information about hedge funds' investment strategies.
The FSF fell short of recommending a stricter code a conduct, instead setting out areas for improvement, aimed largely at financial supervisors. These require supervisors to urge intermediaries such as investment banks to strengthen their risk management practices and consider more ways of collecting data about hedge funds. Counterparties to hedge funds and investors are urged to obtain accurate information about the funds while the hedge funds are urged to enhance their existing practices.
The report was presented at the weekend G8 meeting in Potsdam where a UK treasury source said: "This should not frighten the horses as far as the UK industry is concerned."
Finance ministers at the meeting acknowledged the need "to be vigilant". The report points out the difficulty in measuring the impact of a hedge fund collapse
Fintag says Tis true. Just like in the dot com days, limits are relaxed and reality goes out of the window.
Slump? Don't say they didn't warn you (observer) It has been the Week of the Warning. The alarm bells are not being rung by the usual gloomy suspects, but by figures whose views command worldwide respect because they have generally read the runes right. First, Anthony Bolton, arguably Britain's most respected fund manager, stepped down from his throne at Fidelity saying he fears a stock market slump and worries about the banks' eagerness to finance private equity deals with risky 'covenant-lite' loans.
Article continues The banks have embraced cov-lites, a US import, in their sheer desperation to mop up a slice of the private equity business, even though these relaxed contracts reduce their ability to intervene if a borrower shows signs of distress.
The Bank of England shares Bolton's concern, as does Ben Bernanke, the chairman of the US Federal Reserve, who issued a warning of his own. Then yesterday G7's financial stability forum issued a report calling for greater protection against possible risks to the financial system from hedge funds.
Tycoon Li Ka-shing, Asia's richest man, voiced his belief that China's stock market is now a bubble that could burst painfully, as we report on pages 4-5.
Even top-end art dealers are bemused by the exuberance in the markets. Prices for post-war works, fuelled by demand from Russian and Chinese buyers, hit a record this week when a 1950 Rothko sold in New York for $73m. That prompted seasoned Manhattan dealer Richard Feigen to liken the modern art frenzy to tulip mania.
There are concerns over the mergers and acquisitions boom, not least the eyewatering 85 per cent premium Microsoft is paying to take over online advertising business aQuantive. Closer to home, the chief executive of Land Securities said the £710bn commercial property market had peaked and was already showing signs of a slowdown.
Plenty of City folk have been bearish for some time about the domestic housing market, though they dare not say so publicly as prices continue to defy gravity, despite clear hints in the Bank of England's inflation report that interest rates will have to rise again. Whether a further increase will be enough to dampen the appetite for debt remains to be seen. Debt is no longer seen as a financial tool to be treated with caution, but as the magic lever that will unlock huge gains, whether in housing or in private equity deals.
Quoted companies are routinely criticised for being 'under-geared' - not borrowing enough - and urged to mend their ways. Even BT's outgoing chairman Sir Christopher Bland, who this week left a parting gift of £2.5bn of capital to be returned to shareholders through a buyback, had to fend off an analyst's criticism that the company is under-geared. Sir Christopher, who restored BT to health, remembers that in 2001 BT nearly went bankrupt under £30bn of ill-advised debt, even if the analyst does not.
Amnesia is part of the problem. Negative equity is about as real a concept to today's housebuyers as ration books. People have also forgotten that 1980s conglomerates like Hanson were the forerunners of the private equity players. They fell apart because they had to chase bigger and bigger deals to maintain momentum. The remnant of the group that still bears the Hanson name last week fell to a German predator.
The mood in corporate Britain is uncertain. Profit warnings among quoted companies in the first quarter of this year leapt 17 per cent, according to accountant Ernst and Young, taking the number above 100. Companies are worried about interest rates and the strong pound, but another cause for concern is the cutback in public spending that will happen early in Brown's premiership. Bank of England governor Mervyn King said last week that women were already dropping out of the workforce because of a falling-off in public sector employment growth. With about 30 per cent of the working population employed either by the government directly or by firms heavily dependent on government contracts, firms are right to be jittery.
It was hardly an auspicious week for Gordon Brown to have his accession confirmed. But Brown has taken plenty of credit for running the UK economy through benign conditions. Perhaps it would be poetic justice if he is forced to take the blame if it all goes horribly wrong.
King's cashback is a little too rich
One big winner from the failed private equity takeover bid for J Sainsbury is chief executive Justin King. He is already in line for a £5m bonus next year if he meets his targets, but the board is aware that he would have received much bigger rewards under private equity ownership and is working on a new, improved set of incentives.
This testosterone-rich attitude to pay is out of proportion. It is true that King has led a recovery in sales - but operating margins, up from 2.2 per cent to 2.5 per cent, are still a long way behind Tesco and Asda. Hopes of a new bid, or the idea Sainsbury will at some point fall in with the wishes of lurking shareholders Robert Tchenguiz and Delta Two, are propping up the share price. A property deal would be tricky, however, because of the low margins and the fact that Sainsbury is already highly geared compared with its peer group. The rent bills and the loss of control would compromise its ability to invest and to compete on prices.
King has done well but still has plenty to prove. He may well feel rueful that his private equity payday was scuppered, but it is premature to be sending even more lavish rewards in his direction.
Fintag says Question is when? What will the trigger be? Will it be a wimper or a bang?
Well looking at the negative savings ratio in the USA, I think a bang is more likely.
"Distressed" will soon be the new black.
PROBLEMS
Hedge funds are a problem in Russia and world over - Kudrin (itar tass) Hedge funds are a major problem in Russia and around the world, Russian Finance Minister Alexei Kudrin told a news conference on Saturday following a meeting of G8 finance ministers, who discussed this theme at length alongside other subjects.
“They have fewer rules, their participants take risks and they are aware that they take risks,” Kudrin said. In his opinion hedge funds often add uncertainty to the operation of markets and far from always meet the interests of rank-and-file shareholders.
The effects of hedge funds on the markets of capital have not been studied well enough yet, and Russia is no exception in that sense, Kudrin said, adding he would like to see more clarity in the operation of hedge funds.
Fintag says Yes ... and how much Russian money has ended up in Hedge Funds? Quite a lot ...
facebook
free daily e-mail
feed
