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istockAnalyst.com - Mutual funds and hedge funds are very similar. An investor puts $10,000 into a mutual fund or hedge fund, and the manager uses that $10,000—along with the rest of the fund’s capital—to buy and sell securities.
Though often shrouded in mystery, hedge funds are pretty easy to understand. A mutual fund has to register with the Securities and Exchange Commission; a hedge fund does not. Why? Hedge funds are exempt from registration because they generally operate under one of two exemptions provided by the Investment Company Act of 1940:
Section 3(c)(1): Hedge funds are exempt from registration if they have "not more than one hundred" investors, all of which are accredited investors; or,
USA Today - It is last call for investors to ask for their money back from poorly performing hedge funds. Whether that is a bullish or bearish sign for battered stocks is anyone’s guess.
Wall Street hopes the passing of the Nov. 15 deadline — the last day for many investors to make a request to redeem hedge fund shares payable at year’s end — could mark the beginning of the end of "forced selling" by funds to raise cash. If the selling recedes, it could help lift some of the downside pressure on stocks. Forced selling has been blamed for sharp stock price swings and plunging asset values in the financial crisis.
Investors have redeemed an estimated $85 billion from hedge funds through the end of the third quarter, says Charles Gradante, co-founder of hedge fund adviser Hennessee Group.
International Herald Tribune - Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.
The money managers — Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.
The topics are likely to range from the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down; their funds’ bets in the markets; and the managers’ pay.
Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.
Times of India - Often-touted as manipulative, hedge funds have been time and again blamed for indiscriminate selling and thereby pulling down the domestic stock prices even in India. But India-focused hedge funds have also been affected by the meltdown.
The big and secretive India-focused funds have booked losses to the tune of 46% in 2008 — in the process effectively wiping out the 50% returns clocked by the posted by them in 2007. Hedge funds have an aggressively managed portfolio of investments which use advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.
New Yorker - “Death by a thousand cuts.” “Fire-sale liquidation.” “A vortex of selling.” No matter how people described the market collapse that hit a month ago, the message was the same: it felt like there was nowhere to go but down, and it felt like we’d be going there forever. (Given last week’s dip, it still does.)
Beginning on September 29th, the U.S. stock market fell on nine of the next ten trading days, plummeting twenty-six per cent; then, after a short, sharp rally, it lost ten per cent more in less than two days.
Explanations for the crash often focussed on the hysteria and panic that periodically seem to seize investors. But the madness of crowds wasn’t the whole story. In a healthy market, there are countercyclical forces—mechanisms and institutions that go against the general market trend and encourage diversity of thinking—that make it harder for feedback loops and vicious cycles to take hold. Lately, though, many of these institutions and mechanisms have become procyclical: instead of countering trends, they amplify them.
Wall Street Journal Blogs - In an effort to forestall more redemptions and panic, hedge-fund managers preached “strong stomachs” and washed their hands of responsibility for losses in the latest round of investor letters.
A review of nearly a dozen investor letters sent by hedge funds around the beginning of October finds a tone that could, at best, be described as somber — and, at worst, dire. Oaktree Capital Management L.P.’s Howard Marks called the last couple of weeks “the greatest panic I’ve ever seen,” while Tontine Associates LLC’s Jeffrey Gendell said he was “embarrassed by this performance.”
All told, Chicago-based Hedge Fund Research Inc. said assets at hedge funds declined by $210 billion in the third quarter, the biggest quarterly decline ever, with investors redeeming $31 billion in the third quarter alone. That was the largest quarterly redemption in history.
At the same time, the main focus of these letters is to calm investors sufficiently enough so that they don’t start another round of redemptions later this year — or perhaps invest more money. And to accomplish that feat, many of the letters said investors’ lack of understanding of the markets and the whims of government leaders had hurt them, rather than their own misevaluation of the current environment.
One of the pleasures of flying out of Newark — and there are so many — is the epic view of Manhattan, that soaring bulwark of affluence and might just off the coast of America.
But on Friday, when we pulled out for points west just after sunrise, I imagined all the brick-and-mortar ambition sinking into the rivers that encircle it. No need to ask why so glum, not with everybody watching their 401(k)’s pirouette down a black hole. Each passing day has brought new nightmares on Wall Street and more shared misery.
Still, by the end of the day, I was sitting on a hotel patio in Los Angeles, staring up the hill at that Hollywood sign and chatting with a smart young woman who markets movies. When the subject of the tumbling economy finally came up, she said that she had indeed been cutting back — by ordering drip coffee instead of a latte.
I waited a bit for the woman to crack a smile, to hammer me for being so credulous, but then I realized she was serious.
Hartford Courant - Michael Lauer’s estate in the prestigious backcountry neighborhood of this wealthy town looks almost as troubled as the U.S. economy.
The grounds are overgrown with waist-high weeds. A pool cover is filled with filthy, stagnant water. Inside, paint is peeling around the soaring windows.
So when the house of the disgraced hedge fund manager goes up for foreclosure auction today by the Internal Revenue Service, bidders will have to look for its potential — and think about how much they will have to invest to make the 7,300-square-foot contemporary livable again.
Just like taxpayers and business managers eyeing the U.S. economy.
New York Times - Making millions — or even a few billion — by managing a hedge fund has been a running dream on Wall Street in recent years. But suddenly even the masters of this $2 trillion universe are falling on hard times, at least by their own gilded standards.
Hedge funds, those secretive investment vehicles for the rich and, increasingly, the not-so-rich, are supposed to make money whether markets go up or down. But many of them are being swept up in the turmoil in the financial world.
The funds’ investment returns are sinking, and so are those big paydays for their managers, whose riches have helped redefine modern notions of wealth and helped drive up the price of everything from Picassos to Manhattan penthouses.
Several big funds have faltered in recent weeks, some of them spectacularly so. While many funds are still flying high, the average hedge fund has lost more than 4 percent this year, according to Hedge Fund Research, putting the industry on course for its worst year on record.
CFO.com - Even hedge funds are not immune to the credit crunch. A small hedge fund that provided short-term debt to companies has filed for Chapter 11 bankruptcy protection.
Greenwich, Connecticut-based SageCrest Finance, managed by Windmill Management, said in its Chapter 11 petition filed in U.S. bankruptcy court that it had listed assets of $50 million to $100 million, and debt between $1 million and $10 million, reported Reuters. The fund had about $1 billion in assets under management as recently as a year ago, according to hedgefund.net.
In fact, the website points out that the credit crunch put the squeeze on SageCrest’s business strategy — which is providing asset-backed specialty financing to smaller private companies that have been closed out of traditional sources of capital. Many of its projects involved extending art-, real estate-, and structured settlement-based loans.
Fort Worth Star Telegram- Citadel Investment Group is bullish on RadioShack, buying 6.9 million shares, or 5.3 percent of the electronics retail chain’s stock, according to a federal filing Monday.
With the purchase, the Chicago-based hedge fund becomes the fourth-largest holder of RadioShack stock — but the only one of the top seven that has been buying, not selling.
Why RadioShack, which is attempting a turnaround?
Citadel wouldn’t say. "We don’t comment on positions," spokeswoman Katie Spring said.
The filing with the Securities and Exchange Commission indicated that Citadel was not contemplating a takeover. Rather, reports described the purchase as a passive investment with no intent of influencing the company.
TheChronicleHerald.ca- Two U.S. private equity firms are offering about $7.8 billion — or $39 a share in cash — for Alberta-based utility TransAlta Corp., which had been under pressure by a major investor to boost its stock price.
LS Power Equity Partners and Global Infrastructure Partners presented TransAlta with a "non-binding approach" on Monday.
TransAlta said its board will "carefully consider the letter and will respond in due course."
LS Power Equity Partners is linked to Luminus Management LLC, the New York-based hedge fund that fought earlier this year to persuade TransAlta to shed assets and to load up on debt as a means to buy back shares.
LS Power president James Bartlett said in a telephone interview that the suitors are seeking a "consensual, negotiated transaction."