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.
Boston Globe – US Representative Barney Frank yesterday staked out the next battlefront in the economic crisis gripping the world: more regulation of hedge funds, investment banks, and other financial institutions.
Frank, who heads the House Financial Services Committee, blamed a lack of strict oversight for the failures of Wall Street investment banks such as Bear Stearns Cos. and Lehman Brothers Holdings Inc., as well as dozens of subprime mortgage companies. He said hedge fund investments in arcane securities based on those mortgages deepened the crisis, which has spread worldwide. In contrast, heavily regulated commercial banks escaped the crisis largely unscathed, Frank said.
"The cause of this problem was a lack of financial regulation in the industry," the Massachusetts Democrat said at a Newton City Hall press conference, one of two events he held in the Boston area yesterday. "If the regulated institutions had made loans, we would not be in the crisis we’re in."
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.
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.
New York (HedgeCo.Net) – The $700 billion rescue plan proposed by the Treasury and backed by President Bush seems to be greeted with disdain by republicans and democrats alike. After excruciatingly long hearings and even an emergency meeting with the two presidential candidates, an agreement was still not reached as to how the rescue will play out.
“There will ultimately be $700 billion available, but how soon and with what other steps, are still being debated,” House Financial Services Committee Chairman Barney Frank told reporters.
Some issues that lawmakers are trying to come to terms on include executive compensation, foreclosures, accountability, regulation, and how taxpayers can be provided equity stakes in the companies whose rescues they would be helping to fund.
Some republicans are pushing for financial institutions to purchase insurance on mortgage-backed securities, while the Treasury is opting for a plan where the government would instead purchase the bad debt.
"I don’t believe this Paulson plan will solve the problems, it might exacerbate them,” said Richard Shelby, a Republican member of the Senate Banking Committee.
Experts agree that unless the majority of the party hops on board with the president, it’s unlikely this will be passed through congress.
“Ms. [Nancy] Pelosi will not bring a partisan bill to the floor,” Frank said. “If the House Republicans continue to reject the president’s approach then there is no bill.”
Julie Scuderi Senior Editor for HedgeCo.Net Email: julie@hedgeco.net
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Minyanville.com – While they’re not deviously plotting the demise of the worlds’ most powerful financial institutions, hedge funds are loading up on another popular trade: Cash.
According to the Financial Times, Citigroup estimates hedge funds have recently squirreled away as much as $600 billion in cash, of which $100 billion is held in money market funds -those same money market funds Washington so graciously propped up last week.
With good risk-reward investment opportunities in short supply, hedge funds — paid handsomely to manage risk — are relying heavily on the safety of cash to ride out recent market turmoil. It’s telling that for those whose livelihoods depend on beating the market, the investment du jour is no investment at all.
Reuters – Hedge funds are unlikely to be among financial institutions clamoring to unload their bad debts under a proposed $700 billion Wall Street bailout plan, the chief of the funds’ lobbying group said on Tuesday.
"I think it’s unlikely that they would include us and I think it’s unlikely that we would ask to be included," said Richard Baker, president of the Managed Funds Association.
In an interview with Reuters, Baker said it was still unclear whether hedge funds are among financial institutions that would be allowed to participate in the massive Bush administration plan now being debated by Congress.
The former Louisiana congressman said one thing is crystal clear to hedge fund managers: "We understand that if you ask for benefits from the government, you generally get regulation, whether you like it or not."
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.
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.
Times Online – Why did HBOS need to be rescued by Lloyds TSB? Where should the finger of blame point?
For many, the answer is clear – Mayfair.
The streets of London W1 house some of the world’s biggest hedge funds, which now stand accused of bringing HBOS and other financial institutions to their knees.
Their weapon? Short-selling, the process of betting that a share price will fall.
Proactive Investors UK – The top thirty gainers for the London Stock Exchange (‘LSE’) read out like a roll call for the British and Irish financial industry, after the Financial Services Authority (‘FSA’) announced late last night that it was imposing a temporary ban on short selling financial stocks. Groups with short positions over 0.25% in the 29 companies included in the ban will have to declare their positions by Tuesday.
Not surprisingly, the FTSE 100 roared to life this morning, climbed a whopping 340 points, or 7.1% to 5225 by 10:30am, the biggest single day gain in more than two decades. The surge higher was lead by financial institutions, which have been offered a temporary reprieve from the usually lucrative tactic by hedge funds to short sectors out of favour with the market. Even large spread betting firms, like CMC Markets, informed private investors this morning that it was not accepting any new short bets on financial stocks, as under normal circumstances, it would hedge those bets, but can no longer do so.
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.
BusinessWeek – Some participants in South Korea’s nascent alternative-investment market have grown pessimistic over the ability of incoming legislation to support the development of an onshore hedge funds industry.
The Capital Markets Consolidation Act will become effective in February. It is a sweeping attempt to give Korea a securities law akin to those in the United Kingdom or Australia, in which financial services are regulated by function rather than by business license, and in which most types of businesses will be thrown open to all kinds of financial institutions. It will allow the development of a universal bank and plenty of cross-selling.
As part of this, the Financial Supervisory Service has been keen to encourage the development of an onshore hedge funds industry. There are a growing number of Korea-focused hedge funds, but nearly all of them operate offshore, in Singapore, Hong Kong or the United States. The government wants to position Seoul as a financial hub for northeast Asia, and has seen how hedge funds have become a vital and welcome part of the milieu in places like Singapore.
The Consolidation Act makes no mention of hedge funds, however, and industry players have lobbied the Ministry of Strategy and Planning (what they call the Ministry of Economy and Finance these days) to address this. The government has responded by floating an amendment to the Consolidation Act that is expected to go before the National Assembly, probably in October. This amendment specifically addresses the ability of onshore fund managers to employ leverage.
