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Bloomberg – The U.S. Securities and Exchange Commission, seeking to jumpstart a hunt for suspected manipulation of financial stocks, will require hedge fund managers, brokerages and institutional investors to describe under oath their bets on the firms.
Investors with “significant” trades in the companies’ securities or credit default swaps must disclose their positions and provide “certain other information” in written statements, the regulator said yesterday. SEC spokesman John Nester declined to say who would receive the requests.
The SEC issued a series of emergency measures, rules and warnings to hedge funds this past week as lawmakers including Senate Banking Committee Chairman Christopher Dodd and executives such as Morgan Stanley Chief Executive Officer John Mack said traders may be spreading misinformation and using abusive tactics to attack companies. On Sept. 17, the agency said it may also force funds to hand over their communications.
Proactive Investors UK – The top thirty gainers for the London Stock Exchange (‘LSE’) read out like a roll call for the British and Irish financial industry, after the Financial Services Authority (‘FSA’) announced late last night that it was imposing a temporary ban on short selling financial stocks. Groups with short positions over 0.25% in the 29 companies included in the ban will have to declare their positions by Tuesday.
Not surprisingly, the FTSE 100 roared to life this morning, climbed a whopping 340 points, or 7.1% to 5225 by 10:30am, the biggest single day gain in more than two decades. The surge higher was lead by financial institutions, which have been offered a temporary reprieve from the usually lucrative tactic by hedge funds to short sectors out of favour with the market. Even large spread betting firms, like CMC Markets, informed private investors this morning that it was not accepting any new short bets on financial stocks, as under normal circumstances, it would hedge those bets, but can no longer do so.
Interactive Investor – Investors are cheering the temporary ban on shorting financial stocks which came into play on Friday morning.
The Financial Services Authority introduced the four-month freeze on profiteering from falling share prices after the markets closed last night in a bid to stem the chaos in the financial sector. The new rules, which cover 29 shares, prevent investors from taking out new short positions or adding to existing ones in all publically listed financial firms.
Investors currently shorting more than 0.25% of a financial company’s shares have until Tuesday to either close their position or declare it to the regulator.
Short-sellers have been blamed for sending share prices in the financial sector plummeting in recent weeks with HBOS the latest victim of speculators looking to make a quick buck from its demise.
Hector Sants, chief executive of the Financial Services Authority, says: "While we still regard short-selling as a legitimate investment technique in normal market conditions, the current extreme circumstances have given rise to disorderly markets. As a result, we have taken this decisive action, after careful consideration, to protect the fundamental integrity and quality of markets and to guard against further instability in the financial sector."
Seeking Alpha – Some analysts say a big-picture trend presently unfolding involves hedge funds and other players unwinding bets on commodities/foreign currencies and plowing the proceeds into U.S. financial and other stocks. They are doing this for valuation reasons and as a haven against weakening economies overseas.
There is some evidence that it at least partly reflects hedge funds scrambling to raise cash to meet redemption requests. Financial stocks have risen for sure, but that likely reflects hedge funds buying back short positions to generate cash, not to go long because they think the fundamentals are turning.
I remain somewhat skeptical of the thesis that the U.S. economy is close to coming out of the downturn, and so the places to shift into are U.S. stocks and the U.S. dollar. When one looks at the problems the U.S. has, especially in its financial sector, they would seem to have the potential to inflict more pain on the economy than we have seen to date.
Reuters – Hedge fund manager Jim Chanos, who makes money betting that companies’ stock prices will fall, said financial stocks have probably seen the worst and his fund has fewer short positions now than it did in the past.
"We have probably seen the worst in the financials," Chanos said on cable television channel CNBC. He also said that he has fewer short positions on financials now than he has had in the past, largely because much of the bad news is known about financial sector stocks.
Instead, Chanos, whose roughly $5 billion hedge fund Kynikos Associates often has between 40 and 60 short positions, said he is concentrating more on shorting some companies involved in the commodities area. "We would short companies that might depend on cement prices or steel prices going up," Chanos said, declining to reveal the companies he has shorted.
Reuters – Blackstone and Kohlberg Kravis Roberts & Co are each looking to buy parts of Lehman’s real estate and asset management units, sources familiar with the situation said on Friday, sparking a broad rebound in financial stocks.
The real estate unit of Lehman Brothers Holdings Inc, which includes property and some asset-backed securities, could be worth about $5 billion (2.8 billion pounds), the sources said.
Lehman shares jumped 5.3 percent after the Reuters report. That helped lift the S&P financial index , which had slipped earlier on Friday, by 1.8 percent.
"Lehman has been so shredded in terms of confidence that anything like this is something that can ignite a upward movement at any point," said Michael Holland, founder of money manager Holland & Co LLC.
Globes – Priority Investments Ltd.’s Israeli hedge fund index, Hedge Fund Priority Index (HFPI) fell 0.85% in July, compared with a 4.66% drop by its benchmark, the Tel Aviv 25 Index. However, the Hedge Fund Research Inc. (HFRI) fund weighted composite index fell 2.17% compared with a 0.98% drop by the S&P 500 Index.
During the first half of July, high oil prices continued to trouble the US economy, and weighed down financial stocks, which weakened the dollar against other currencies. The US government bailout of Fannie Mae (NYSE: FNY) and Freddie Mac (NYSE: FRE), plus the restrictions placed on short sellers, contributed to gains in the second half of the month.
Forbes - U.S. activist hedge fund Atticus Capital has lost more than $5 billion this year, a source familiar with the matter told Reuters, after its funds were hit by heavy falls in financial stocks. Atticus, a high-profile player in deals such as Barclays‘ unsuccessful bid for ABN Amro last year, saw total assets under management fall to around $14 billion at end-July from more than $20 billion last year, the source said.
The losses were mainly due to a 32.9 percent loss in the $7 billion Atticus European fund from the start of the year to the end of August and a 25 percent fall in the Atticus Global fund.
The firm, which employs a variety of investor lock-ups, saw few investor redemptions. Atticus declined to comment. The firm, which views itself as a long-term investor, has nevertheless delivered strong performance in recent years.
In 2006 founder Tim Barakett earned $675 million, according to hedge fund industry publication Alpha Magazine.
Reuters UK – The hedge fund industry’s trade-of-the-moment — betting on falling financial stocks and rising commodities — is set to offer further profits, despite July’s setback, but managers may have to alter their tactics.
Hedge funds may well profit from betting July’s bounce in battered financial stocks and decline in commodities was only a blip in a longer-term trend, since the fundamental reasons for disliking bank stocks and holding commodities remain intact.
However, with investors nervously watching every piece of performance data, many funds have had to scale back the size of these bets to avoid further poor numbers — or are taking bets likely to be less painful if markets go against them.
Reuters – Some bearish option players are betting that Wells Fargo & Co and SunTrust Banks Inc could both lose as much as 10 to 15 percent of their current stock values by October options expiration.
Nagging worries about the credit markets on Monday have been slamming financial stocks, including banks and brokerage firms.
"We are seeing some limited speculation based on put spreads going up in SunTrust and Wells Fargo showing that investors are still nervous about earnings, potential failures and other industry events," said Scott Fullman, director of derivative investment st
Hedge funds reduced their bets in the past year that U.S. stocks would gain as the Standard & Poor’s 500 Index declined and credit conditions tightened, Goldman Sachs Group Inc. said.
Such wagers accounted for 32 percent of funds’ equity investments as of June 30, compared with 45 percent a year earlier, analysts led by David Kostin said in an Aug. 21 report.
Hedge funds cut their holdings in financial, consumer and industrial companies, while investments in utilities, telecom services and materials were little changed in the period, Goldman said. Bets that financial stocks would fall accounted for 24 percent of holdings at the end of June; the previous year, 32 percent of funds’ portfolios wagered that financials would rise, the bank said.
Goldman analyzed quarterly filings of 745 hedge funds with combined equity holdings valued at $881 billion. The filings exclude trades using options and futures contracts as well as indexes that may offset funds’ equity holdings. The filings also exclude holdings of companies not based in the U.S.
West Palm Beach (HedgeCo.net) - Hedge funds saw their worst monthly performance in the history of the Morningstar 1000 Hedge Fund Index. The index returned a negative 3.07% in July 2008, an eventful month for the markets.
In the first half of July, high oil prices and continued trouble in the U.S. banking sector caused equities to tumble and the U.S. dollar to slide, hitting a low point mid-month when the Federal Reserve expressed concerns about economic growth. The announcement of a U.S. government bailout plan for Freddie Mac and Fannie Mae, along with the Securities and Exchange Commission’s short-sale restrictions on financial stocks allowed for a partial rebound in the second half of the month. "In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar.
Commodities showed their worst month in more than five years. The S&P GSCI Index, a commodities index heavily weighted in energy, fell more than 12% in July, as the price of crude oil plunged from its July 2 peak on weaker demand forecasts. European and Asian central banks attempted to combat inflation with interest rate hikes, causing a slide in those equities markets.
Consequently, the Morningstar Europe Equity, Morningstar Asia Equity, and Morningstar Emerging Markets Equity Hedge Fund Indexes saw much strife in July, though not as much as the Morningstar Global Equity Hedge Fund Index, which lost almost 8%. The Morningstar US Equity Hedge Fund Index also performed poorly, underperforming the S&P 500 Index by more than two percentage points.
"It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer” added Farkas. The MSCI World Index outperformed the Morningstar 1000 Hedge Fund Index in four of the 24 down months since January 2003, the inception of the Morningstar 1000 Hedge Fund Index. Three of these four months occurred in the last year.
Because July also saw big losses in commodities, the Morningstar Global Trend Hedge Fund Index halted its upward trend. For the year, however, this index still outperformed every other Morningstar hedge fund category index by a wide margin. Year-to-date through June 2008, hedge funds in the Morningstar Global Trend category also experienced the highest inflows, at almost $10 billion. For the month of June, hedge funds overall saw more than $10 billion of inflows.
Multi-Strategy hedge funds had more than double the inflows of other categories, placing second only to Global Trend hedge funds. In a dynamic macro-economic environment, Multi-Strategy hedge funds can be more nimble than single-strategy hedge funds, quickly allocating assets to strategies with a brighter outlook, while pulling away from strategies with more dismal prospects. In July, however, most hedge fund strategies proved unprofitable, and the Morningstar Multistrategy Hedge Fund Index lost more than 3.67%.
Funds-of-Funds outperformed the Morningstar 1000 Hedge Fund Index in July, returning a negative 2.41%. Year-to-date, the Morningstar Hedge Funds of Funds Index has lost 2.52%.
Returns are based on hedge funds in the Morningstar hedge fund indexes that reported performance as of August 8, 2008.
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