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.
Reuters – Hedge fund managers are reluctantly preparing to disclose their short positions to U.S. regulators on Monday, a move set to give a rare public glimpse into their secretive trading strategies two weeks later.
For shareholders who have blamed short sellers for driving down company stocks, it will be a chance to see who is targeting their firm.
It is also an experiment by U.S. securities regulators, putting short sellers briefly on a similar footing to large investors who accumulate stocks and are required to regularly disclose their positions publicly.
Under a temporary Securities and Exchange Commission order, big money managers will have to reveal the number and value of securities sold short each day last week.
Forbes – A federal judge in Florida ruled Wednesday that the head of two hedge funds deceived investors about the funds’ holdings. Elsewhere, federal regulators accused a California investment adviser of making tainted recommendations to clients.
In the Florida case, U.S. District Judge Kenneth Marra ruled that Michael Lauer, the head of Connecticut-based hedge funds Lancer Management Group and Lancer Management Group II, engaged in a fraud that cost investors about $500 million, according to the Securities and Exchange Commission.
Marra granted the SEC’s request for summary judgment against Lauer, finding that he overstated the hedge funds’ values from 1999 to 2002, manipulated the prices of seven securities that were an important part of the portfolios, and deceived investors about the funds’ holdings by providing them with fake financial statements.
Daily Telegraph – Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused "wide-spread capital destruction."
One said: "The FSA’s remit is to maintain orderly markets – the markets were working fine, only the banks were going bust. With one swoop, the regulators have wiped out perfectly legitimate businesses and have cost some funds millions. They have gone for the big political hit without a thought for the damage they are wreaking. There may be unintended consequences but it’s outrageous and illegal."
The backlash follows a week in which the multi-billion pound hedge fund industry has been plunged into crisis. Prime brokers in London estimated that 35 per cent of European hedge funds were organising emergency measures to avoid closing funds as a ban on short-selling has hamstrung managers at a time when they need flexibility to survive.
Reuters UK – Hedge funds are likely to increase short exposure to retail stocks following a ban on short selling financial shares imposed by UK and U.S. regulators, industry insiders said on Friday.
Equity long/short and market neutral hedge funds will be among those most affected by the ban as short selling — betting the price of a share will fall — is a key component of their investment strategies.
Shorting financial stocks has been a popular trade among hedge funds this year, but now they will be forced to switch their attention to other sectors.
John Godden, of hedge fund consultant IGS Group, said: "Commodity and infrastructure providers are continuing to be strong and showing signs of growth going forward. Some service industries are likely to be pretty heavily hit by a slowdown so from a market neutral perspective, there’s your long and short sectors."
Financial Times – US securities regulators were on Thursday night considering a ban on short selling as part of a group of new initiatives to restore calm to the stricken financial markets, people familiar with the situation said.
The US Securities and Exchange Commission was discussing a short-selling ban on some or all stocks and an announcement could come as early as Friday, these people said.
Reuters – Securities regulators are locking horns with some of the U.S.’s most powerful mutual funds and Wall Street players over plans to scrap requirements that money market funds hold investment-grade securities.
For years, the Securities and Exchange Commission allowed fund firms to buy only highly rated municipal bonds for money market funds but now the SEC is considering changing that rule in an effort to curb investors’ reliance on credit ratings.
Ironically, players like The Vanguard Group, one of the biggest in the $12.3 trillion (7 trillion pounds) mutual fund industry, want less freedom instead of more, arguing the SEC-mandated ratings offer would-be investors a sense of comfort.
Reuters – U.S. federal prosecutors asked securities regulators to delay a civil case against two former Bear Stearns hedge fund managers while they hold grand jury hearings in building a criminal case against the pair.
Fund managers Ralph Cioffi and Matthew Tannin were arrested and indicted in June, the first executives to face federal criminal charges in fallout from the subprime mortgage crisis. Both pleaded not guilty. A trial date has not yet been set.
The Securities and Exchange Commission had also begun civil securities fraud charges against Cioffi and Tannin, accusing them of misrepresenting the investments of two funds they oversaw.
A memorandum filed on Wednesday by U.S. Attorney Benton Campbell in the U.S. District Court in Brooklyn asked for a stay in the civil case until the conclusion of the criminal case.
"A stay is necessary in the civil case to preserve the secrecy of the ongoing grand jury proceedings," the memorandum said.
The document said the SEC was consulted and took no position on the stay, and that the defendants had declined to comment on the request.
Bloomberg – Daniel Loeb, whose Third Point LLC is being investigated by regulators, said his "give-and-take” with other hedge-fund managers doesn’t violate securities laws.
The U.S. Securities and Exchange Commission is probing New York-based Third Point, which manages $5.6 billion, for its communications with other hedge funds, Loeb said in a July 25 letter to clients. The investigation follows an SEC audit last year during which examiners noted the firm "regularly communicated with hedge funds about investment and trading ideas,” according to the letter.
"Such conversations permit us to test our hypotheses and refine our thinking and, as a result, we believe that participating in give-and-take with other managers is in the best interest of our investors,” Loeb wrote in the letter, a copy of which was obtained by Bloomberg News. "Our outside counsel has examined this matter thoroughly and assured us that our position is consistent with the securities laws.”
Los Angeles Times – Regulators had long classified a private Swiss energy conglomerate called Vitol as a trader that primarily helped industrial firms that needed oil to run their businesses.
But when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising was the massive size of Vitol’s portfolio — at one point in July, the firm held 11% of all the oil contracts on the regulated New York Mercantile Exchange.
The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.
The CFTC, which learned about the nature of Vitol’s activities only after making an unusual request for data from the firm, now reports that financial firms speculating for their clients or for themselves account for about 81% of the oil contracts on the Nymex.
Times Online – The esteem of John Waples for the hedge funds (“Get used to volatility: the hedgies are in control”, last week) was not very sound financial journalism.
Who else but these grossly leveraged entities would have the capital or the appetite for the short-selling that we have seen during the course of this economic turmoil?
Waples should turn his investigative attention to our so-called regulators who, with every conceivable avenue of inspection available to them, have failed to track down the City insider traders who have made millions from this financial system.
Reuters- It’s turning into a busy summer for U.S. lawyers who advise hedge funds as the industry faces growing questions about potentially manipulative trading and regulators are knocking at fund managers’ doors.
With the markets in turmoil, the loosely regulated sector is under increasing scrutiny. The U.S. Securities and Exchange Commission recently sent subpoenas to more than 50 firms regarding possibly abusive trading activity.
Some funds have sought advice to be sure they are complying with the rules, which include new limits on short-selling.
Others are calling for help to set up new funds as managers try to find ways to make money in a rough market.
Wall Street Journal- Wall Street executives expect the Securities and Exchange Commission to extend the temporary limits it has placed on short-selling and expand them to cover additional stocks beyond the 19 financial companies it targeted two weeks ago.
The limits are set to expire Tuesday, and executives, lobbyists and hedge-fund representatives of the Managed Funds Association, the biggest hedge-fund industry group, have been talking throughout the weekend, trying to come up with possible approaches to asking the SEC to reconsider expanding the rules, according to people familiar with the talks.
A call with regulators on Friday gave the funds group "a fair degree of certainty" that the SEC intends to seek an extension of the emergency period, these people said. Regulators said an extension could be for as short as 60 days and could involve insurance, housing-industry and a broader range of financial stocks, according to these people. SEC Chairman Christopher Cox indicated last week the rules might be extended to all stocks.
