Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
guardian.co.uk – Morgan Stanley survived the recent panic in financial markets, but its prime brokerage business may never fully recover.
More than a third of Morgan’s prime brokerage assets went out the door during the past month — some rivals said attrition could be as large as one-half — as investors unnerved by the credit crunch lost confidence in the bank.
Across Wall Street, hundreds of investment funds that relied on broker-dealers established accounts with commercial banks boasting stronger credit. The moves have shaken up a business long dominated by Morgan Stanley, Goldman Sachs Group Inc and Bear Stearns.
"It’s a $2 trillion business and in normal market conditions, people kill themselves to move 1 percent of market share. In recent weeks, probably 35 to 40 percent of global market share has been redistributed," said Alex Ehrlich, global head of prime services at UBS. "Never has there been a more disruptive period."
Bloomberg – If Sherlock Holmes were analyzing the credit crunch, he would be drawing our attention to the dog that didn’t bark, just as he did in “The Hound of the Baskervilles.”
The dog, of course, would be hedge and private-equity funds.
Anyone tracking markets in recent years will remember the prediction that the unregulated, feverish trading of hedge funds, and the massive debts and complex financial engineering of buyout firms, would cause the next crash.
The crash happened, but it was started by what appeared to be safer institutions. It was the relatively dull mortgage lenders, and the investment banks that supplied their funding through the wholesale money markets, that sparked the collapse.
New York (HedgeCo.Net) – The largest hedge fund run by Citadel Investment Group has fallen 30 percent this year stemming from losses tied to convertible bonds. The $10 billion Kensington Global Strategies Fund has been hit hard by the credit crunch, prompting CEO Kennith Griffin to warn investors that returns may be extremely volatile in the next few weeks.
Yesterday, Mr. Griffin sent a letter to investors stating that September was the “single worst month, by far, in the history of Citadel. Our performance reflected extraordinary market conditions that I did not fully anticipate, combined with regulatory changes driven more by populism than policy.”
Rumors of the lagging performance were so strong that Mr. Griffin was forced to set the record straight. He also cited the temporary ban of short selling as one of the reasons for the losses, saying it “created material dislocations across many of our portfolios and disrupted our ability to assume and manage risk.”
Yesterday, Dealbreaker.com had published some of the swirling rumors highlighting Citadel’s problems, fueling fear and speculation in the market. The website eventually took the post down after Citadel expressed their disdain. Dealbreaker wrote: “We removed the citadel post after it was brought to our attention that it was a baseless rumor, and was irresponsible to repeat.”
Dealbreaker had pointed out that the fund uses 4 to 1 leverage, down from 7 to 1 earlier this year. Although they noted that this was high, it is not uncommon for hedge funds to use this much leverage, though some choose to use none. To put it into perspective, Long Term Capital Management and its infamous collapse used 25 to 1 leverage, or for every $1 they had, they borrowed $25.
Citadel was founded in 1990 and manages over $20 billion in assets throughout locations in the United States, Asia, England and Bermuda.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
Forbes – In light of the higher risks which are sweeping global markets, Finvest Asset Management is set to launch a new capital protected offering for investors who are seeking to generate annual returns of between 12-20 percent in a low risk structure.
The total offering is for $500 million and is open to non-U.S. investors only. It is anticipated, based on early interest in the product, that the product will be oversubscribed. The capital protected investment vehicle will be protected by a AAA institution which will not have any association with an investment bank or exposure to sub-prime which has been a crippling factor to global markets, and an issue of concern through the current credit crunch crisis. In an environment where cash is king, and several high profile hedge funds have experienced blow outs, this capital protected product offers investors an alternative possibility of security and the ability to earn above average risk adjusted returns.
Globe and Mail – Goodwood Inc., a value-oriented manager, briefed investors Thursday on a dismal September. There’s a lot of these letters going out from hedge fund managers. Goodwood’s funds were down 16 per cent last month, bringing the year-to-date loss to 32 per cent. Year-to-date, the S&P/TSX benchmark is down 13 per cent.
Goodwood executives Peter Puccetti and Cam MacDonald used their September letter to unitholders to explain the madness of markets, and plead for patience and perspective. They certainly deserve a hearing. But investors who bought into hedge funds on the basis of absolute returns – making money in good markets and bad – are going to struggle with these pleas.
“We have seen many well-known investment management operations badly harmed as a result of their leverage exacerbating the effects of the ongoing credit crunch and deleveraging we are currently living through,” said Goodwood’s team.
Independent – Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week’s shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch "to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use".
The group’s "imploded funds" list has hit 51 companies since the sub-prime mortgage crisis in the United States kicked off a widespread downturn. That compares with its historical list, stretching back more than a decade to the end of 2006, of just 14, including the collapse of Long-Term Capital Management and Amaranth.
Guardian.co.uk – MEPs will call tomorrow for EU legislation to force private equity groups and hedge funds to disclose unprecedented amounts of information about their activities.
The demand for tougher regulation comes as private equity groups are warning that the enduring credit crunch will reduce new money inflows into their funds by up to 30% over the next two years, and mirrors a call from the UK’s largest trade union, Unite, for hedge funds to be forced to demonstrate that their investment strategies are not perpetuating the current market turmoil.
The union, which has put forward an emergency motion to the Labour party conference on the Lloyds TSB takeover of HBOS, is demanding that hedge funds be more transparent, give greater disclosure and must be subject to risk management.
International Herald Tribune – As world markets shudder, the hedge funds based in London, once the toast of the city’s flashy financial elite and magnets for cosmopolitan capital, have stumbled badly.
The increasingly global sweep of the credit crunch and the collapse of Lehman Brothers have punished all manner of hedge funds – secretive investment pools that rely on generous lenders and a high tolerance for risk to thrive.
But in London, where a number have already shuttered, the hedge fund retreat has a pointed resonance. Along with celebrity chefs, Russian oligarchs and Italian soccer coaches, hedge funds that established operations here in the past decade have been seen as a mark of London’s hip new spirit of decadent cool – a notion reinforced by the pound’s long period of strength and the boom in home prices.
Now, the failure of Lehman Brothers, which had deep financial relationships with some of the largest hedge funds in the world, has unsettled an already jittery market – sparking fears that some hedge fund assets might be frozen there and thus be unavailable for sale if investors choose to redeem them.
New York (HedgeCo.Net) – Just one day after reaffirming their stance they would not rescue America International Group Inc., the Fed has agreed to lend the collapsing insurer $85 billion in exchange for a 79.9 percent majority stake.
The Fed justified the move, stating “a disorderly failure of AIG could add to already significant levels of market fragility.” The two-year loan will assist AIG in “meeting its obligations,” although the government has the right to halt dividends to common and preferred stockholders. Parts of the company may also be broken off and sold to pay off the debt.
The move came after a whirlwind week of plunging share pricing and other Wall Street firms trying to stay afloat. With the recent bankruptcy of Lehman Brothers and Bank of America’s purchase of Merrill Lynch hanging in the background, AIG looked to be another casualty of the credit crunch.
The federal government had urged AIG to seek a private investor, not wanting to use taxpayer funds to support a bailout. However, fears of larger worldwide market implications forced the Fed to retract on that belief while denying any aid to Lehman Brothers, who collapsed this week.
Fears of systematic risk and greater market turmoil have been the catalyst for many actions taken by the federal government as of late. Just weeks ago, the Fed stepped in and took over Fannie Mae and Freddie Mac after it was clear the companies could not weather the mortgage crisis. Earlier this year, the Fed helped to facilitate the purchase of Bear Stearns by JPMorgan by providing the needed financing.
AIG has agreed to an interest rate that is 8.5 percentage points above the three-month London Interbank Offered Rate, putting it at about 11.4 percent.
After helping AIG avoid surpassing Lehman as the largest bankruptcy ever filed, the U.S. government has now spent over $700 billion in efforts to stabilize the markets and reverse the damage caused by the housing crisis.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@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. For more information, visit www.hedgeconetworks.com
Cayman Net News – Despite the ongoing housing crisis in the US, the credit crunch, and the general slowing of the American economy the number of hedge fund terminations in the most recent financial year has been only slightly higher than last year.
Caroline Williams, a partner at Walkers told Cayman Net News: “It is interesting that the number of hedge fund terminations in the last financial year is only slightly higher than in the previous 12 months.
“In some cases where funds have run into difficulties, the hedge fund manager has employed certain techniques to try and weather the storm and continue trading, such as imposing gates, which limit the amount of redemptions that can be made, or by creating side pockets in which the illiquid or hard-to-value securities are placed.
“Overall, for both investors and hedge fund managers, the winding up and dissolution of a hedge fund is very much a last resort and as such these situations are quite rare. Investors prefer to avoid having the fund wound up and dissolved, because they realise that there is less chance that they will have their benefits maximised.”
West Palm Beach (HedgeCo.net) – Recruiters at WhiteRock Group are seeing increased opportunity for job-seekers and hiring firms.
The meltdown in sub-prime mortgages, and the ensuing credit crunch, has led to uncertainty and turmoil throughout financial markets worldwide, says WhiteRock, but as with any deal, what’s bad news for one party is often very good news for another.
"There’s never been a better time to look for a job on Wall Street, or the Asian financial markets," says Gustavo Dolfino, founder and chief executive officer of WhiteRock Group. And amazingly, there’s never been a better time to be looking for talent either."
To understand why the recruitment business is booming even as the industry appears to be retrenching, one must understand that the overheated markets of the past few years have actually made recruiting more difficult.
Dolfino, who was quoted last week in Crain’s New York Business as well as the Wall Street Journal and is frequently interviewed for market perspective by CNBC, Bloomberg News and other financial news services, explains.
"With markets soaring these past few years, the price of top talent went through the roof. Everyone had golden handcuffs. Nobody wanted to work for anything but a top-tier firm. Now, you’ve got a situation where suddenly all those people who were ‘unhirable’ might be available. And they don’t necessarily want to work at a top-tier firm – those are the ones who’ve been in the paper everyday, mostly with bad news. Right now, the smart money is picking people up."
Dolfino pointed out that the greatest growth is currently in Asia, especially China, where "If you can get a CFO on the phone, you can get a job." He adds, "And we have everyone’s phone number."
To keep up with this still exploding demand, WhiteRock Group has opened three new offices, all in Asia, and brought on more top recruiting talent. The company is now nearly fifty professionals strong and expects to add to that number before year’s end.
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!
New York (HedgeCo.Net) – Despite valiant efforts to find investors and stay afloat the credit crisis, Lehman Brothers Holdings Inc. is now at the center of the biggest bankruptcy filing in history.
The fourth-largest investment bank filed for Chapter 11 protection in a Manhattan court today, after write downs stemming from the subprime mortgage fall-out that it helped create proved to be too much to take.
Lehman, who was the largest underwriter of mortgage-backed securities, listed over $613 billion in debt, including over $157 billion owed to unsecured creditors and over $155 billion owed to bondholders.
"The uncertainty, particularly among the banks through which the company clears securities trades, ultimately made it impossible for the company to continue to operate its business,” said Chief Financial Officer Ian Lowitt in the filing.
Shares of Lehman were trading as low as 29 cents this morning; a fitting finale after losing 94 percent of its market value this year. Treasury Secretary Henry Paulson and the Federal Reserve had been trying to come up with a deal that would keep Lehman afloat. Paulson made it clear that he did not want to use taxpayer money to bail out Lehman.
While London-based Barclays looked to be interested in investing in Lehman, they pulled out yesterday amidst concerns over the lack of guarantees from the U.S. government to protect against losses on assets. Bank of America then followed suit, withdrawing from talks with Lehman only to acquire Merrill Lynch shortly thereafter.
Lehman was planning on selling a majority stake in their asset-management unit for around $4 billion. While talks are still in the works, no conclusion has been reached. Speculations that more losses were to come coupled with its liquidity crunch have prevented any sale from taking place as of yet and ultimately led to the demise of the bank.
Lehman now joins Bear Stearns and Merrill Lynch in the group of banks that were "too big to fail,” that couldn’t weather the credit crunch.
Lehman’s assets are listed at $639 billion. They have about 25,000 employees worldwide.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@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. For more information, visit www.hedgeconetworks.com
