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HedgeCo.Net (West Palm Beach) The FBI has targeted 14 corporations in a blitz of investigations on improper subprime mortgage lending, officials said Thursday. The crackdown, which includes mortgage lenders, investment banks, and subprime lenders, was initiated to sniff out fraud amongst loan originators.
“Some of the loan origination cases are spurred by individuals lying to qualify for mortgages, but about 80 percent of the cases involved fraud for profit,” said Neil Powers, head of the FBI’s economic crimes unit.
These investigations coincide with similar ones brought on by the Securities and Exchange Commission. The SEC launched their internal subprime mortgage task force to see how financial firms priced their mortgage-based securities, and whether they were up front with investors about the possible declining value of those securities. Some of the firms under fire from the SEC are Morgan Stanley, Merrill Lynch, Bear Stearns and MBIA.
The FBI is also looking to expose accounting fraud, insider trading, and other criminal violations, though criminal charges will probably not be pressed, said an official. Due to the overlap of investigations, coupled with separate state investigations, there is no set time line for completion.
"Like any white-collar crime investigation, these are very complicated, time-consuming investigations involving the examination of numerous records and interviews of various people. They don’t happen in a short period of time," said one FBI official.
Firms in Florida and California are expected to feel the heat, due to the high number of foreclosures in both states, but the investigations are spanning the country. Currently the SEC has about 1,200 open cases involving subprime lending.
Julie Scuderi Contributing Editor for HedgeCo.Net Email: julie@hedgeco.net
West Palm Beach (HedgeCo.Net)- Russia’s strong economic growth, rapidly expanding domestic market and increasing financial market liquidity has been fuel for rapidly expanding hedge funds and specialist investors in Russia and the former Soviet Union (FSU).
One such company is the Pharos Financial Group, which now runs three hedge funds, the Pharos Russia Fund, the Pharos Small Cap Fund, and the one-of-a-kind Pharos Gas Investment Fund.
Pharos has been Moscow based since 1997, making it one of one of the oldest Russian hedge funds, positioning it well for the new Russian market of 2008. The team has over 90 years of combined Russian and Western market experience. Their hedge fund strategy is long biased with shorting capability and has been stress tested with a track record featuring high returns with lower volatility.
Prior to founding Pharos Financial Group in 1997, CEO Peter Halloran was the principal contributor toward building the CS First Boston equity and fixed income brokerage businesses in Russia and the CIS.
He has been working with the development of the Russian capital markets since their inception in 1994, bringing more than $8 billion to the markets through debt, equity and private placements. Halloran has also acted as adviser to Soros Fund Management(the largest investor in Russia to date).
John J. Papesh, marketing director for Pharo said, "Since the Western public perception is different than the reality of the Russian market, I think it would be great to set the record straight when comparing Russia to that of Brazil, India and China, especially at a time when Russia is in favor to other EMs."
The Pharos Russia Fund has been in existence since 1997, offers daily liquidity and is a multi-sector Russia and FSU fund. It has a diverse portfolio of liquid equities, and can short and use derivatives. The fund is up 20% over the past 12 months.
The Pharos Gas Investment Fund is designed to take advantage of the transformation of the gas sector in Russia and Eurasia. As the only hedge fund focused on this sector, it invests in listed equity and offers monthly liquidity. The fund is up 21% over the past 12 months.
The Pharos Small Cap Fund invests in undervalued second and third tier companies and offers monthly liquidity. The fund is up 14% over the past 12 months. Two Pharos Funds have ranked in the Top 15 Hedge Funds globally by Bloomberg and in the Top 10 by Eurohedge.
Alex Akesson Editor for HedgeCo.Net Email: alex@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. www.hedgefundlounge.com, www.hedgefundtools.com, and www.hedgefundemployment.com
BusinessWeek- Few industry watchers were shocked when word came on Jan. 28 that the Chicago Mercantile Exchange (CME) wants to snap up the New York Mercantile Exchange (NMX), the big energy and precious-metals bourse, for $11 billion. With complementary product lines, shared technology, and the ongoing drive to consolidate exchanges around the world, the announcement that the two exchanges are in talks "wasn’t a huge surprise," says analyst Edward Ditmire of the Fox-Pitt, Kelton research firm.
But now that the long-awaited deal is in motion, rival bidders could emerge, and customers who are already uneasy about merger-mania in the markets could step up their efforts to develop alternatives. Some analysts believe that word of the Nymex talks has opened the door to more industry-changing moves. The deal, which would deepen CME’s hold on global futures trading, could trigger a potent backlash among customers and rivals alike.
Reuters- International investors are raising exposure to Russia after it lagged China and India in 2007 and see Russia’s new-found political stability and low subprime exposure as strengths in current market volatility.
"I’m extremely positive about Russia. Growth is under-priced and companies are doing better than expected," said Robin Geffen, managing director and chief investment officer at Britain’s Neptune Investment Management, who has near-doubled his Global Equity fund’s exposure to Russia since mid-2007.
"Of them (China, India and Russia), the growth that is least well discovered and understood has to be Russia, particularly given the very strong performance you’ve had from India and China last year."
- While many big-name hedge funds prospered in 2007, one notable group struggled: funds run by large Wall Street firms and traditional money managers.
As a group, hedge funds returned 12.5% last year, beating annual returns in the Standard & Poor’s 500 index of 5.5%, according to the Credit Suisse Tremont Hedge Fund Index. Despite difficult markets, it was the hedge fund industry’s third-best calendar year when compared to the broader stock market since 2000, according to Lipper Inc.
Funds run by the likes of Atticus Capital, Cerberus Capital Management, Eaton Park Capital Management and Third Point Management Company, contributed to the results with several of their multi-billion dollar funds posting above-average returns for the year, according to hedge fund investors and performance data reviewed by Dow Jones Newswires.
Guardian Unlimited- The cost of insuring Spanish banks’ debt against default has leapt by at least a third this year, as hedge funds use credit derivatives to short Spain’s fragile property market, market participants say.
Jackie Ineke, a banking analyst at Morgan Stanley, told Reuters that hedge funds were "phoning up every day" asking how to short Spanish property and the only effective way to do it was by buying credit protection on Spanish banks.
The trend began last year but appears to be broadening.
Smaller savings banks with exposure to coastal markets such as Caja de Ahorros de Valencia, Castellon, y Alicante (Bancaja) and Caja de Ahorros del Mediterraneo (CAM) have been hit especially hard since the summer.
According to Markit data, 5-year credit default swaps on Bancaja have jumped to more than 200 basis points (bps) from a little over 150 bps at the end of 2007 and less than 20 bps last July.
Houston Chronicle- A group of hedge funds is fighting to unravel Tousa Inc.s’ July 2007 refinancing, saying that would allow the homebuilder to pay unsecured creditors of its subsidiaries in full.
The investor group, which holds nearly a quarter of Tousa’s $1 billion in unsecured notes, contend the company "forced" its subsidiaries to guarantee first- and second-lien loans to refinance $675 million in debt it racked up by buying the homebuilding assets of Transeastern Properties Inc.
The "disastrous" refinancing, the investors said, unnecessarily saddled the subsidiaries with $500 million in new debt. In papers filed with the U.S. Bankruptcy Court in Fort Lauderdale on Wednesday, they said the refinancing rendered Tousa and its units insolvent.
SAN FRANCISCO (MarketWatch) — Scion Capital LLC, a $1 billion hedge fund firm run by Michael Burry, is shutting its Asian funds to focus on opportunities that will be created by a U.S. economic slowdown.
Scion’s Asian funds oversaw about $200 million in assets and returned between 80% and 116% since they started in early 2005. After the funds are closed, money will be returned to investors beginning at the end of the first quarter, Burry wrote in a recent letter to clients, a copy of which was obtained by MarketWatch.
The Asian funds aren’t being forced to close by client redemptions or other pressures, Burry noted. Investors can put the proceeds from the liquidation of the Asian funds into Scion’s main global funds, he added in the letter.
"The primary motivation for this move is that I foresee a significant opportunity to invest in dramatically undervalued distressed assets and out-of-favor businesses over the next several years," Burry wrote.
"The sheer magnitude of the troubles facing the leading companies in what is still the world’s largest and most significant economy cannot be missed," he explained. "The global credit bubble has burst, and the world has not yet learned the full impact."
Scion was one of the first hedge funds to spot problems in the subprime mortgage market in 2005. When the credit crisis erupted last year, Scion’s main Value funds generated returns of more than 130%, after fees, as bets against riskier parts of subprime mortgage-backed securities paid off. Since the funds started in 2000, they have more than quintupled. See related story.
Burry has closed most of those bets now. He has roughly $100 million worth of short positions, or bets against, subprime mortgages, down from a peak of $1.7 billion. Scion has also cuts bets against the creditworthiness of companies in the credit default swap market to a notional value of $800 million, from a peak of more than $6.7 billion in late 2006.
Scion’s main value fund is currently avoiding taking many big bets. Most of the portfolio is in short credit positions, cash, Japanese yen and Singapore dollars. It has very few U.S. equity holdings, four Korean stocks, one Chinese stock and one Taiwanese position, Burry wrote in another recent letter.
"With equities amounting to roughly one-third of assets, the Funds are awaiting not only the birth of opportunities, but the recognition of such opportunities by me," he wrote. "I patiently await a deepening of the U.S. recession and the string of bankruptcies that are sure to follow."
Scion will still focus mostly on equities. The firm may also invest in the debt of bankrupt and distressed companies, but mainly as a way to claim a stake in the future equity of the business, Burry explained.
Scion may take positions in futures contracts to bet more directly on certain commodities, Burry said. Rising wages in Asia are creating more demand from consumers, which will likely push commodities prices higher.
But commodity-related companies may not be the best way to benefit from this trend because they’ll be pressured by the rising cost of labor and borrowing, Burry explained.
Avoiding financial Armageddon
Burry expects a strong response to the housing crisis this year from federal and local governments and regulators, part of the reason he’s cut negative bets against mortgages and companies.
Companies’ equity can be endangered when investors become nervous about pressures on large asset bases. However, that can be remedied by a relatively small injection of additional equity, he noted.
"The capacity of the American government, sovereign investment funds and large global companies to do so remains prodigious," Burry wrote. "The pressure is immense in politicians, policymakers and corporate leaders globally to keep this from becoming a financial Armageddon."
"The form and nature of these interventions will have a significant influence on the fate of many short credit trades going forward," he explained. "The time had come to step back, and I am not currently looking to add to credit derivatives positions."
West Palm Beach (HedgeCo.Net)- U.S. District Judge Colleen McMahon said of Daniel Marino, the former finance chief of the bankrupt hedge-fund firm Bayou Group LLC, "You are as much a career criminal as any mobster or any drug kingpin." The Judge then sentenced him to 20 years in prison.
His prison time will be followed by three years of supervised release. Restitution will be determined at a later date, but the judge said it likely will be in the amount of hundreds of millions of dollars.
Hedge fund founder Samuel Israel III and finance chief Daniel Marino pleaded guilty in 2005 to using fake results and a phony auditing firm. Investors lost approximately $400 million according to court papers, but the government put the loss at over $450 million.
The co-founder James G. Marquez was also implicated in the conspiracy and was sentenced to 51 months in prison. Israel is awaiting sentencing.
"I am truly sorry," Marino said.
Alex Akesson Editor for HedgeCo.Net Email: alex@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds! Be sure to check out our sister sites. www.hedgefundlounge.com, www.hedgefundtools.com, and www.hedgefundemployment.com
Reuters- The global share sell-off may have wiped up to $1.5 trillion off the value of global institutional pension fund assets since the start of this year, consulting firm Watson Wyatt said on Wednesday.
With the average allocation to equities within pension funds in the 11 largest pension markets at 56 percent, they have felt the pain of the global equities market slump, while pension liabilities grew faster than their assets last year, said Watson Wyatt.
"2007 was a year of two distinct halves," said Roger Urwin, Watson Wyatt’s global head of investment consulting. "In the first half pension fund balance sheets continued to strengthen, but faltering markets in the latter half largely undid these gains. Severe market events this year suggest that balance sheets will remain under pressure."
Forbes- Two prominent hedge fund managers owning a 5.3 percent stake in Dillard’s Inc Tuesday demanded the retailer run its business better to help boost its long-sinking share price.
James Mitarotonda, who heads hedge fund Barington Capital Group, and hedge fund Clinton Group Inc’s Michael Popson, in a letter to Dillard’s board of directors, said the company must manage its inventory better, close underperforming stores, and sell properties or sell and lease back some stores.
"We are committed to taking all actions necessary to enhance shareholder value," the fund executives wrote in the letter, which was filed with the U.S. Securities and Exchange Commission.
The two hedge funds were especially concerned about Dillard’s plunging share price. Since Barington first began pushing Dillard’s to make changes last summer, the price has tumbled 52 percent, more than the benchmark Standard & Poor’s Retail Index which has fallen 23 percent.
MarketWatch- George Patterson, co-founder of Menta Capital LLC, said on Tuesday that he has left the San Francisco-based quantitative hedge fund firm.
Patterson started Menta in late 2006 with Asriel Levin and Laurent Dubois. The three were formerly portfolio managers at Barclays Global Investors, a unit of British bank Barclays PLC, which is one of the largest "quant" investment firms in the world.
Patterson said he left for personal reasons and remains an investor in Menta. He’s now looking for new opportunities in the investment-management business, but said he may consider positions outside of the $2 trillion hedge fund industry. Menta has roughly $750 million in assets, he said.