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.
Economist – Hedge funds are supposed to hedge. This year, they haven’t. The fund-weighted composite index compiled by Hedge Fund Research, a firm that tracks the industry, fell by 4.7% in September, the second-worst month on record. Since the start of the year it has lost 9.4%. The industry’s promises of “absolute returns” for investors now ring rather hollow.
To be fair to them, hedge funds have not been allowed to hedge. The restrictions on short-selling (betting on falling prices) imposed by regulators round the globe have played havoc with managers’ strategies in recent weeks.
Take the worst-performing strategy, convertible arbitrage, which lost the average fund 12% in the month. Convertible bonds are fixed-income securities that can be exchanged for shares in the issuing company. Historically, these bonds have been underpriced, because too low a value has been placed on the right to convert them to equity. So arbitrage managers have tended to buy the bonds and sell short the shares. Thanks to the Securities and Exchange Commission’s ban on the shorting of more than 900 stocks from September 19th to October 8th, that strategy no longer worked. And since the managers could not short the shares, they had to sell the bonds. As a result, the bonds’ prices plunged.
USA Today – Markets braced for Wednesday night’s scheduled expiration of the ban on short sales of more than 900 financial stocks, as investment analysts and advisers gave differing predictions on the potential impact.
The emergency ban is set to expire just before midnight, 13 trading days after the Securities and Exchange Commission imposed it with the aim of halting trading the agency said appeared to be "contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation."
The expiration is timed to take effect three trading days after President Bush signed the $700 billion financial system bailout approved by Congress last week. Although the SEC retained authority to extend the ban through Oct. 17, the agency announced no changes Tuesday.
The ban has temporarily halted a legal practice in which traders borrow shares and sell them in the hope of profiting by replacing the borrowed shares with equivalents bought later in the market at a lower price. But it’s illegal to spread rumors or misinformation about a company in a bid to drive down its share price while short selling that firm’s stock.
New York Times Blogs – Turns out hedge funds will not have to publicly disclose their secret strategies after all, at least not any time soon.
The reprieve for the industry came late Wednesday. The Securities and Exchange Commission quietly said it would relent on an emergency order, first issued Sept. 19, that would have required hedge funds to publicly disclose vast amounts of detail on their short positions, which are the bets they make against individual stocks.
Hedge fund managers and their lobbyists in Washington immediately attacked the order, saying it amounted to making the Coca-Cola Company disclose its top-secret formula.
Many hedge funds would simply cease to operate, the argument went. Others would go to great lengths to avoid the rule, including by setting up offshore affiliates and conducting trades through complex swap agreements.
Forbes – Lobbyists for the $2 trillion hedge fund industry made a last ditch effort Wednesday to convince U.S. securities regulators to let an emergency order prohibiting short selling in more than 950 financial firms expire Thursday.
"The orders have not prevented price declines of financial institutions, volatility in the securities of these firms, or the failure of a financial institution," said Richard Baker, president of hedge fund lobby group Managed Funds Association.
Baker said the emergency orders have increased volatility, reduced liquidity and abruptly halted capital-raising, including through the issuance of convertible securities.
But a number of securities law experts expect the Securities and Exchange Commission to extend the ban beyond Thursday because of the current fragile state of the markets.
Under the SEC emergency measures, short selling in the U.S.-listed financial firms stocks has been prohibited for about two weeks.
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.
New York Post – As the Securities and Exchange Commission continues its assault on short sellers, hedge funds are discussing legal action to challenge Chairman Chris Cox’s recent moves – just as funds in the UK are considering lawsuits against their government regulator.
Since Friday, Cox has enacted a hodgepodge of emergency rules in an effort to give struggling Wall Street firms time to recover from their recent battering, including a widespread ban on shorting of financial stocks, and requiring hedge funds to disclose what they short.
That has prompted debate in the hedge fund world about what, if anything, might be done to temper efforts they say hurts good players along with the bad. Talk of legal action is still in the discussion stage, and no lawsuit may emerge.
"There are just a lot of questions right now," said an industry insider.
New York Times – Frazzled traders and money managers spent an angst-filled weekend struggling to fathom the sweeping bailout the Bush administration proposed for financial institutions in the United States and what it will mean for the world’s markets.
At big banks, staff members rushed to update trading records before the opening bell sounded on Monday morning in New York. Quants, those math-loving traders who use complex computer models to hunt out investments, tinkered with algorithms.
Some hedge fund managers, unsure where the markets will go or what the government will do, sought safety in cash. Securities lawyers sorted through new rules from the Securities and Exchange Commission that will require such funds to disclose their bearish bets on financial companies.
And in between, everyone tried to catch up on some sleep.
But after the Dow Jones industrial average cartwheeled a dizzying 1,023 points in 24 hours on Thursday and Friday, ending the week virtually where it began, just about the only thing people seemed to agree on was that this ride was not over.
Bloomberg – The U.S. Securities and Exchange Commission, seeking to jumpstart a hunt for suspected manipulation of financial stocks, will require hedge fund managers, brokerages and institutional investors to describe under oath their bets on the firms.
Investors with “significant” trades in the companies’ securities or credit default swaps must disclose their positions and provide “certain other information” in written statements, the regulator said yesterday. SEC spokesman John Nester declined to say who would receive the requests.
The SEC issued a series of emergency measures, rules and warnings to hedge funds this past week as lawmakers including Senate Banking Committee Chairman Christopher Dodd and executives such as Morgan Stanley Chief Executive Officer John Mack said traders may be spreading misinformation and using abusive tactics to attack companies. On Sept. 17, the agency said it may also force funds to hand over their communications.
CFO.com – At 12:01 a.m. this morning, the Securities and Exchange Commission pushed out a new "emergency" disclosure rule that requires hedge funds and other large investors to disclose their short positions. The mandate is one of three new SEC investor protection rules that went into effect early this morning in response to widespread drops in stock prices in the wake of a liquidity crisis exacerbated by this week’s Lehman Brothers bankruptcy and sale of Merrill Lynch.
In a joint statement, SEC chairman Christopher Cox and SEC Enforcement Division director Linda Chatman Thomsen said that the rule, which is designed "to ensure transparency in short selling," will affect funds with more than $100 million invested in securities. Those fund managers, who are currently reporting their long positions, will now be required to "promptly begin public reporting of their daily short positions."
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.
New York Post – The Securities and Exchange Commission met last night in emergency session to consider requiring hedge funds to disclose their short positions and institutional traders to secure their records in anticipation of subpoenas.
Under the proposals, managers with more than $100 million invested in securities would have to issue reports of their daily short positions.
The meeting came after the SEC adopted two regulations that go into effect today that will force traders and brokers to actually borrow shares used in all short sales, amid concern that so-called "naked short sales" are driving down prices by flooding markets with sell orders.
