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.
LUXEMBOURG (Reuters) – A wave of mergers and acquisitions could sweep the fund management industry this year as players come under pressure from the market turmoil, said speakers at the Reuters Funds Summit.
One leading hedge fund manager added that the consolidation could lead to the disappearance of half of the current hedge fund players.
"I would say that if half had to close, I wouldn’t be surprised," said Ken Kinsey-Quick, head of multi-manager products at London-based hedge fund Thames River Capital LLP.
"The consolidation is happening right now. By summer it will be done and dusted. Those that are going to be around, it will be pretty clear in June who those will be," he added.
Both hedge funds and more mainstream fund management companies have faced having to merge or be taken over due to the effects of the financial crisis, which has led to massive withdrawals of clients’ money.
Reuters – The Madoff scandal could be a boon for mutual funds as investors shift into regulated asset management vehicles in Luxembourg or Ireland away from hedge funds in the Caymans, a German mutual funds executive said.
"There’ll be a drive clearly toward more transparency and stricter supervision. That could be good for mutual funds," Stephan Kunze, head of Europe at Deutsche Bank’s mutual funds arm DWS, told Reuters in an interview.
"A lot of strategies that have been set up in the Caymans will migrate to Luxembourg or Ireland-domiciled replicas (with) hedge fund strategies migrating onto mutual fund platforms," he said, speaking on the sidelines of DWS’s annual news conference.
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.
New York Post – Three board members at the embattled Dillard’s department-store chain lashed out at a pair of hedge funds that are agitating to oust the retailer’s top management.
In a rare public statement, the Dillard’s trio of independent directors rejected a call by Barington Capital and Clinton Group to fire Chief Executive Bill Dillard Jr. The hedge funds have accused Dillard and his three siblings of being "overpaid and underqualified."
The hedge funds note that the four Dillard siblings have earned more than $16 million annually for the past three years despite a steady decline in the company’s performance and stock price.
But Dillard’s directors Warren Stephens, Peter Johnson and Robert Connor countered that the CEO’s salary was "well below the median in its peer group in 2007," citing a report from Institutional Shareholder Services, a leading proxy adviser. The directors also noted that the board decided against paying out bonuses last year, based on the company’s poor performance.
New York (HedgeCo.Net) – The Securities and Exchange Commission charged San Francisco-based MedCap Management & Research LLC and its principal Charles Frederick Toney, Jr. with defrauding investors via “portfolio pumping.”
“Fund investors relied on MMR and Toney to abide by their fiduciary duties and put the fund’s interests ahead of their own,” said San Francisco Regional Director of the SEC Marc J. Fagel in a press release yesterday. “Instead, Toney engaged in trading activity which hid his poor performance.”
Engaging in “portfolio pumping” in this case meant that Toney invested heavily at the quarter’s end with a thinly-traded penny stock, which in turn quadrupled the stock price and allowed him to inflate his quarterly results to investors. By doing this, the fund was able to hide what would have been a 40 percent quarterly loss for MedCap.
Instead, the scheme helped the company up its reported value by $29 million thanks to Toney’s four day buying frenzy which pushed the price of the stock from $.85 to $3.72. The fund was then able to charge higher management and performance fees that were based on the inflated numbers.
While MMR did not confirm or deny the allegations, the company has agreed to settle out of court by paying $100,000 in penalties and giving back the amount received in inflated management fees totaling over $70,000. Toney has also agreed not to act as an investment advisor for the next year.
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
BloggingStocks – MetLife, Inc., which is the largest life insurer in the U.S., got its start 140 years ago. But the recent couple weeks may have been the toughest as the stock price has plunged.
It seems MetLife’s woes have just started, though, as the company announced Tuesday it has withdrawn its 2008 earnings estimates. As for Q3, the company expects operating profits of $600 million to $675 million.
At the same time, the company wants to sell 75 million shares to bolster its capital (obviously, this is something that’s pretty dilutive in the current environment).
Interestingly enough, MetLife is feeling the pain from heavy investments in alternatives such as hedge funds and private equity. What’s more, MetLife holds positions in losers such as Washington Mutual and Lehman Brothers.
Reuters Singapore – U.S. investment bank Morgan Stanley is weighing whether it should remain independent or merge with a bank, given the recent turbulence in the company’s share price, broadcaster CNBC reported on Wednesday.
Morgan Stanley officials were not in merger talks as of late Tuesday, CNBC said, citing unnamed people close to the matter.
"But senior people at Morgan concede that further zig-zags in the company’s stock price could and possibly will force the company to change course and seek a merger partner, probably a well capitalized bank," CNBC reported on its Website.
Morgan Stanley shares closed down 10.8 percent at $28.70 on Tuesday, having fallen 46 percent so far this year.
Morgan Stanley officials in Hong Kong declined to comment on the report.
New York Post – With just two large investment banks remaining – Morgan Stanley and Goldman Sachs – questions are growing over who might step into the suddenly emptier playing field.
Many Wall Street watchers are pointing to the looming presence of large hedge funds and private-equity firms, which have been stealthily encroaching on many of Wall Street’s traditional lines of business for years now.
"I think the new Wall Street is not going to be on Wall Street," said Ferenc Sanderson, a hedge fund researcher at Thomson Reuters. "The headquarters of Citadel is in Chicago," he said.
Indeed, the $20 billion Citadel Investment Group is more often compared to Goldman these days.
Last year, Citadel branched into providing administrative and technical support to other hedge funds, not unlike the investment banks. Citadel also has a unit that executes trades for retail brokerages, akin to market makers like Morgan Stanley and Merrill Lynch.
It’s a far cry from the small operation Ken Griffin had when he founded Citadel with a modest $1 million in trading money in 1990.
International Herald Tribune – In May, David Einhorn, an outspoken hedge fund manager, took the microphone at a large industry gathering and laid out his case against the investment bank Lehman Brothers.
The firm, he told the crowd, had used "accounting ingenuity" to avoid large write-downs and remained tainted by bad commercial real estate investments. Einhorn stood to profit by convincing people of his view: He had been betting against Lehman’s stock, which stood at around $40 when he spoke, since July 2007.
In the four months that followed, the tactic known as short-selling, in which an investor bets on a decline in a stock price, played a role in hastening a fire sale of Lehman’s shares – an erosion that ultimately helped bring the venerable 158-year old firm to its knees.
At emergency meetings led over the weekend by Timothy Geithner, the president of the Federal Reserve Bank of New York, and Treasury Secretary Henry Paulson Jr., the heads of major financial institutions said they feared short-sellers would now capitalize on the climate of fear surrounding Lehman and target other financial firms. They raised the idea of having the Securities and Exchange Commission reinstate a temporary rule to limit short-selling, according to two people who were briefed on, but did not attend, the meetings.
Milwaukee Business Journal – An activist British hedge fund has taken a 5 percent stake inSovereign Bankcorp Inc.,according to a filing with the Securities and Exchange Commission.
London-based Toscafund Asset Management said its passive stake amounts to 33.5 million shares.
Banco Santander Central Hispano, Spain’s largest bank, owns roughly a quarter of Sovereign’s stock and ultimately can exercise an option to buy the Philadelphia-based bank.
Sovereign has struggled after years of rapid expansion through acquisition. The bank’s stock price has fallen in the last year from roughly $20 and bottomed out at $7 as it suffered negative earnings caused by some problem loans. The stock closed down 1 percent Thursday at $9.52. Under new CEO Joseph Campanelli, Sovereign has focused the last year on reducing the size of its balance sheet risk and zeroing in on its core mid-Atlantic and New England retail markets.
Pittsburgh Tribune-Review- Activist shareholder Highfields Capital Management LP has alerted Alcoa Inc. it may increase its stake in the aluminum maker to as much as 8 percent, a move that would make the Boston-based hedge fund the company’s largest shareholder.
Highfields notified Alcoa last week that it intends to raise its stake, Alcoa said Monday in a statement. Highfields, which oversees $11 billion in investments, owned 1.9 percent of Alcoa, or 15.4 million shares, as of July 23, according to data compiled by CNBC.
Highfields already is familiar with Pittsburgh companies. In 2005, the company leaned heavily on Mellon Financial Corp. to take action to increase its stock price by buying an investment unit from Merrill Lynch and selling off Mellon’s processing businesses — even if it meant moving its headquarters from Pittsburgh. At the time, Highfields was one of Mellon’s largest institutional shareholders.
Nashville Tennessean- A filing made with the Securities and Exchange Commission Thursday revealed another institutional investor who placed large bets on shares of Nashville-based Gaylord Entertainment as its stock price drifted to new lows almost two weeks ago.
New York-based hedge fund Eminence Capital LLC, headed by Ricky C. Sandler, disclosed that it acquired 2.8 million shares, or 6.9 percent, of Gaylord stock on July 14, the same day a Goldman Sachs downgrade sent the stock to its 52-week low of $19.30 per share.
The stock closed at $29.20 Thursday, up nearly 35 percent in the past 10 days, but still only trading at about half of its yearly high, reached last August.
