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.
New York (HedgeCo.Net) – Following in the footsteps of other large hedge funds trying to weather the credit crunch, Blue Mountain Capital Management has suspended withdraws on its $3.1 billion fund.
The Blue Mountain Credit Alternatives Fund lost a little over 2 percent in October, while posting admirable returns the rest of the year. The firm decided to halt redemptions hoping they won’t have to sell assets in the current falling credit markets.
“We are not comfortable with this state of affairs,” Feldstein wrote in a letter to investors obtained by Bloomberg News. “If we were to unwind or sell positions to meet current redemptions, the severe liquidation costs would be borne inequitably by the remaining investors.”
The move comes as a shock to some, since the Credit Alternatives Fund has posted an average return of over 45 percent since its inception in 2003. The firm’s other funds aren’t faring too bad either, with its $1.1 billion equity alternatives fund losing only 0.9 percent and its $400 million BlueCorr Fund boasting returns of 21.3 percent, according to the letter. Hedge funds as a whole have had their worst year ever, losing 20 percent according to the Chicago-based HFRX Global Index.
Investors were given until November 10 to decide whether they wanted to redeem their current investment or exchange it for any one or more of three share classes. If they choose to stay, the lock up provisions of the fund will be waived.
For an industry that was once thought to manage close to $3 trillion in the beginning of 2008, assets are falling off sharply according to an estimate by Morgan Stanley, who says that number might drop to $1.3 trillion.
Fears of liquidity crunches have forced investors to rush to redeem their cash, causing several notable funds to freeze up capital this year. Last week, Deephaven Capital Management froze their $1.6 billion fund after investors rushed to withdraw 30 percent of their capital. Meanwhile, RAB took a more drastic route, opting for a three year lock-up in their Special Situations Fund after losing half of its value this year.
“This level of redemptions in the current market environment forces the question of whether such redemptions can be processed in the ordinary course without disadvantaging both continuing and later redeeming investors,” explained Deephaven CEO Colin Smith in his letter to investors.
It is unclear how long Blue Mountain Capital plans on restricting access to redemptions. The company manages an estimated $5.5 billion from locations in New York and London.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
New York (HedgeCo.Net) – A former UBS AG executive has been sentenced to 6-1/2 years in prison after pleading guilty to selling private information about the bank’s stock recommendations. Mitchel Guttenberg, a former manager in UBS’ equity research department, was accused by the prosecution of running the most pervasive insider trading rings since the 1980’s.
“From the moment he joined the investment review committee he planned to give that information to others to use illegally,” Judge Deborah Batts of U.S. District Court in Manhattan said yesterday.
Guttenberg didn’t try to deny the allegations and instead plead guilty to two counts of conspiracy and four counts of securities fraud. He admitted that on numerous occasions he tipped off two traders about analyst stock recommendations along with dispersing information about UBS analysts’ upgrades and downgrades that were used to net more than $17.5 million over hundreds of transactions.
Guttenberg was one of a dozen people charged with orchestrating the insider trading ring. Other employees came from such companies as Morgan Stanley, Bank of America and Bear Stearns. His sentence includes three years of supervision following his incarceration at a minimum security prison in New Jersey.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
Reuters – Goldman Sachs could post its first ever quarterly loss as a public company in December, as market turmoil weighs on revenue for investment banking businesses and forces asset writedowns.
One Wall Street analyst, Glenn Schorr at UBS, predicted a loss for the bank on Friday. The potential for a quarterly loss, combined with the generally weaker environment for financial institutions, has some investors wondering if Goldman Sachs really deserves to trade at a higher valuation than Morgan Stanley, the other major independent investment bank that is now a commercial bank.
Goldman’s shares trade at about 1.1 times their tangible book value, while Morgan Stanley’s shares trade at less than half their tangible book value. A spokesman for Goldman declined to comment.
Goldman Sachs is legendary for its risk management expertise. In early 2007, it saw the storm clouds gathering above the subprime mortgage market and positioned itself to profit from the expected home loan downturn.
Bloomberg – Five straight quarters of losses and a 70 percent slide in its stock this year haven’t stopped Merrill Lynch & Co. from allocating about $6.7 billion to pay bonuses.
Goldman Sachs Group Inc. and Morgan Stanley, both still on track for profitable years, have set aside about $13 billion for bonuses after three quarters, down 28 percent from a year ago. Even some employees at Lehman Brothers Holdings Inc., which declared the biggest bankruptcy in U.S. history last month, will get the same bonus they received a year ago.
The worst financial crisis since the Great Depression, a $700 billion taxpayer bailout, public outcry over excessive pay and the demise of three of the biggest securities firms won’t deter Wall Street from offering year-end rewards to employees on top of their salaries, compensation experts say.
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."
Street.Com – Zoe Cruz, the Morgan Stanley co-president pushed out by the firm late last year, is eyeing a role at an asset management firm, or possibly raising money to start a hedge fund, according to a person familiar with her thinking.
Cruz would prefer to join an existing business, as she enjoyed being a high-level manager at a large prestigious firm, the person says.
The Greek native was seen as a possible successor to CEO John Mack after spending her entire 25-year career at Morgan Stanley, starting as a foreign exchange trader, until her exile last year. She was shown the door following heavy losses in Morgan Stanley’s fixed income division, which she oversaw.
Bloomberg - Morgan Stanley Chief Executive Officer John Mack said tumbling markets may drive some hedge funds out of business, prompting his firm to “resize.”
“Friends in that community say that by year-end, you’ll see the number of firms in the hedge-fund area shrink, I’ve heard as large as 30 percent,” Mack, 63, told CNBC today. As the industry contracts, “we need to resize our prime brokerage,” he said.
Morgan Stanley’s prime brokerage unit, which lost clients last month after the bankruptcy of Lehman Brothers Holdings Inc. fueled a global bank crisis, is regaining some customers since sealing a $9 billion investment from Mitsubishi UFJ Financial Group Inc., Mack said.
“Funds that took some of their money, in some cases all their money, are coming back,” he said. “Without question those people who pulled out are coming back.”
Bloomberg – The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government’s latest attempt to shore up confidence in the financial system.
The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan.
Reuters – Japan’s Mitsubishi UFJ Financial Group, which has watched Morgan Stanley’s share price plunge 58 percent last week, is seeking more favorable terms to its $9 billion deal, a person briefed on the matter said.
The Japanese lender will still buy a 21 percent stake from Morgan Stanley for $9 billion, but will amend the terms to include only convertible preferred shares and no common stock, the source said.
Morgan Stanley is the latest stricken U.S. financial institution to seek refuge in a deal with a larger bank as the worsening credit crisis and accompanying market meltdown has narrowed the options of once stable banks and brokerages.
The Morgan Stanley news comes as Spain’s Banco Santander SA was in advanced talks to buy full control of Sovereign Bancorp Inc in a deal valued at $2.5 billion, according to another source familiar with the matter.
Boston Globe - Hedge funds usually thrive when markets turn volatile. But even these fast-money investors are struggling to cope with the wild swings in the markets, raising concern that some may not survive.
Even before the Bush administration proposed its vast bailout for financial institutions, the hedge funds – those secretive, sometimes volatile investment vehicles for the rich – were on course for their worst year on record. The average fund is down nearly 5 percent so far this year.
One major hedge fund investor said he had started to buy Morgan Stanley at $23 on Wednesday, convinced the rumors of Morgan Stanley’s demise were unfounded. But as the stock began to plummet, he canceled his trade and watched with amazement as the stock sank to a low of $12 on Thursday.
The Times of Trenton – Stocks prices fell sharply again yesterday, ending the Standard & Poor’s 500 Index below 1,000 for the first time since 2003 on speculation banks and real-estate companies are running short of money as the credit crisis worsens.
Bank of America tumbled 26 percent after cutting its dividend in half and saying it plans to sell $10 billion in common stock to brace for a recession. Morgan Stanley, KeyCorp and JPMorgan Chase slid more than 10 percent as investors shrugged off signs the Federal Reserve will reduce interest rates. General Growth Properties, a mall owner, plunged 42 percent on concern it won’t be able to repay debt.
"We’ve approached the edge of the cliff," Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors, said at the Value Investing Congress in New York. "Do we go over the cliff or begin to recede? History says we recede, but there’s no guarantee.
Trading Markets – Morgan Stanley is looking at scaling back its prime-brokerage operation, selling assets or buying a faltering regional bank, the New York Post said citing sources.
The firm may also try to work out a way to piggyback on to the $1.3 trillion deposit base of Japan’s Mitsubishi UFJ Financial Group, the paper said citing people familiar with the matter.
Mitsubishi UFJ took a 21 percent stake in Morgan Stanley for $9 billion earlier this week.
The firm is also eyeing trimming its balance sheet and exiting, or scaling back, from businesses that don’t provide high returns, like prime-brokerage, trading of corporate bonds and high-yield debt, the paper added.
