Hedge Fund

FSBA Selects Risk Model Finalists

by on November 1, 2011

Florida State Board of Administration has shortlisted finalists to provide a total risk model and a hedge fund risk model to its board

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FSBA Selects Risk Model Finalists

SFOs planning to Increase AI allocations, says report – HedgeWeek

by admin on June 17, 2011

SFOs planning to Increase AI allocations, says report HedgeWeek Nearly 90 per cent of single family offices (SFO) are planning to place additional money in hedge funds this year, according to a new report published by The Rothstein Kass Family Office Group, a division of global professional services firm Rothstein … SFOs To Raise Hedge Fund, PE Exposure As Mean Assets Rise – Rothstein Kass Report Wealth Briefing (subscription) all 2 news articles »

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SFOs planning to Increase AI allocations, says report – HedgeWeek

Small-Family Offices Investing More in Hedge Funds – Hedge Fund Net

June 16, 2011

HedgeCo.net Small-Family Offices Investing More in Hedge Funds Hedge Fund Net About 85% of single- family office executive directors surveyed currently invest in hedge funds, with almost half investing also in private equity investments. Single-family offices manage the money of wealthy families and their investments are usually … Single-Family Offices Planning to Increase Hedge Fund Allocations HedgeCo.net Rothstein Kass Report Finds Single-Family Offices Planning to Increase … PR Newswire (press release) Survey: Family Offices Embrace Hedge Funds, PE FINalternatives HFMWeek (blog) - Opalesque all 13 news articles »

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Video: Meyer Says Sharia Funds Can Beat Regular Hedge Funds

May 27, 2011

May 27 (Bloomberg) — Eric Meyer, chief executive officer at Shariah Capital Inc., talks about his Islamic law-compliant hedge fund. Meyer speaks with Lisa Murphy on Bloomberg Television’s “Fast Forward.” (Source: Bloomberg)

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Alaskan fund furthers alternative exposures

May 25, 2011

The Alaska Permanent Fund has made allocations to three alternative investment programs and begun a new push into timber and diversified inflation funds hiring Callan to conduct searches. At its recent board meeting the fund also had an additional $18.5 million approved for funds manager and custody fees in fiscal year 2011. This is up from the fiscal year 2010 where the fund spent $59.7 million on investment management and custody fees, the year before that $52.94 million. While the fund’s chief investment officer, Jeff Scott, was quick to point out that there were no changes to existing allocations, he said these latest asset decisions are moving in that direction. “This would be a logical step in that process but we have not officially or unofficially changed our asset allocation but this could be building blocks towards those steps,” he said. If a change in strategic allocations was to happen, it would be likely to occur at the fund’s September board meeting, Scott said. Scott said Callan Associates would look for diversified inflation fund managers to invest in liquid assets that would be a good hedge against what he described as “unanticipated short-term rises in inflation and also potentially long-term rises in inflation”. “Security types could include, but not (be) limited to TIPS, Global TIPS, commodities, equity investments where the companies have either a contractual arrangement with inflation or CPI or where companies tend to prosper in inflationary environments,” he said. There have been no allocations decided yet for either timber or the diversified inflation funds. In private equity, the fund’s two existing providers, HarbourVest and Pathway Capital Management, will have an extra $600 million to invest. This is in addition to the existing $3.1 billion the fund plans to invest in private equity by June 30. The new investment is in line with lifting the fund’s current private equity exposure from 3 per cent of the fund to 6 per cent. Scott said funding will come from public equity investments. To meet its existing target of a 2 per cent strategic allocation to private credit, APFC will invest an additional $750 million for the 2012 financial year. The funds will come from a combination of reducing exposure to public corporate credit and public equities. The board also agreed to amend its existing investment policy pertaining to credit opportunity funds such as distressed and mezzanine debt. It authorised investment via funds-of-funds in addition to direct investment. Callan Associates also received a broader approval than the previous hedge fund mandate which now includes corporate private credit, including high yield. The fund also uses Oaktree Capital Managers to invest in high yield, mezzanine debt and distressed debt. Spending in infrastructure will be boosted by $400 million and a search will be undertaken for up to two new infrastructure managers. This extra $400 million will take its infrastructure allocation from its current level of 2 per cent to the already stated aim of a 3 per cent strategic asset allocation. The extra infrastructure funds will come from equity and interest rate investments. While the move towards timber, infrastructure and diversified inflation funds would indicate an overall strategy of seeking to hedge against inflation, Scott said it had not made a firm call on that. “We are concerned both about deflation and inflation and have neither a bent on one or the other, that is, we don’t have the ability to see the future,” Scott said. “The future in the US could either be like Japan or it could be Brazil, we don’t really know.” While other State funds have liked timber funds for some time, Alaska Permanent Fund has been slower to take up the asset class. Scott said it had the combined benefit of returns that were not correlated to equity markets as well as providing some inflation hedge characteristics. “The driver of return for many of the (timber) funds is a function of biological growth so the greatest return being biological growth, then that is a different risk than we have in equities, credit or in interest rates,” he said. Scott notes that the timing of timber harvests and the eventual price is a function of the marketplace, which is heavily influenced by the construction industry, particularly the housing market. While not going as far as saying he saw good value in timber due to the current record low numbers of housing starts in the severely depressed domestic US housing market, Scott noted the long-term fundamentals looked attractive. “In the US housing starts are quite low and – – we are not trying to time the market – – but we are hiring managers that do a good job of buying property and this could be an interesting time,” he said. “We are going to put money in the hands of managers that we think make good value decisions and we want to look for those that have a history of selling when markets are frothy and buying when markets are stressed.” He compared the current move into timber with the fund’s previous real estate investments, which benefited from a long-term outlook where some properties held for more than 20 years had provided good returns. Scott said potential timber investments would include both domestic and international assets. The fund is more than half-way through a five-year plan to examine its risk culture and make subsequent changes to the fund’s portfolio. “We are educating staff, trustees, the public about the current composition of the portfolio and how we can make improvements to the portfolio to minimise drawdowns in stressed events,” he said. This focus on risk has involved a move away from standard asset buckets to five categories for its target allocations. These are company exposures, real assets, special opportunities, interest rates and cash. Scott said changing the weights in these five major buckets would be an important step to improve diversification.

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CalSTRS moves on innovation, risk

May 25, 2011

CalSTRS is in contract negotiation with a hedge fund consultant, with a view to hiring global macro hedge funds as part of its innovation portfolio, and the next tasks will be reviewing commodities and non-traditional benchmarks, as the innovation and risk unit comes of age. In November 2009, investment staff at CalSTRS recommended to the board that around $200 million be allocated to global macro strategies, to be managed by between three and six managers. The allocation would be incubated in the fund’s recently formed innovation portfolio, which has the purpose of improving the total plan’s risk and return profile. After some concerns regarding hedge funds, particularly about transparency, at the board level, the fund has now decided to hire a consultant to oversee the sub-class. In addition to being responsible for the innovation portfolio, charged with investment opportunities to improve the risk/return of the total fund not covered by other asset classes, the innovation and risk unit also manages risk at a total fund level. Because it is a brand new unit, the director of the innovation and risk unit, Steven Tong, says there has been focus on building the infrastructure and tools needed to evaluate managers on a quantitative basis. “In the hedge funds space we looked at every strategy, their return, correlation and volatility analysis to understand individual strategies. We spent a good six to 12 months on the analysis and found global macro and CTAs were good diversifiers compared to our existing strategies,” Tong says. The analysis showed that the broad mandate of global macro was a distinct advantage, such that manager, with fewer constraints could tactically choose the appropriate allocation and instruments to access opportunities. And because of their opportunistic nature, global macro thrives in high volatility environments. In the last market crisis, global macro performance was strong compared to global equities, with the MSCI World falling 55.4 per cent from November 2007 to February 2009, while the CS/Tremont Global Macro Index was only down 0.9 per cent. But despite the thorough analysis by Tong and his team, the board still wanted the security of an external consultant to guide the investment decision making. “The board had some concerns about hedge funds and wanted us to hire a consultant. We are in contract negotiation now, and they’ll help us find managers.” The idea is the innovation portfolio allows the fund to invest in new asset classes, and demonstrate success, before allocating large amounts to the strategy. It has a three-year window to decide if a strategy should be dedicated to a new asset class, be included with one of the traditional asset classes, or be terminated. It uses its own in-house analysis as well as risk tools provided by MSCI Barra. “We are in the public arena, it has been a long process but fair, and we have a fiduciary responsibility so we have to ensure a level playing field and everyone treated fairly.” The innovation portfolio can invest up to 1.5 per cent of the total CalSTRS fund or $2 billion whatever is smaller. Within that the CIO, Chris Ailman, has delegation authority up to $100 million, and Tong up to $50 million. The unit provides the board with updated quarterly reports. Tong, who previously managed global equities with the fund for 11 years, describes the portfolio as running an experiment, of both the strategy and the relationship with the mangers. “We will only manage it for up to three years, report back to the board and then decide to terminate, increase in the size and then find a place in strategic asset allocation. We look closely at correlations, rolling volatility, returns, and Sharpe ratios, to see how it behaves.” Tong says the next cab off the rank will be to examine a potential commodities exposure within the innovation portfolio. “We will be looking for managers and the first step will be those that manage commodities long-only using derivatives. Later we will look at long/short or private companies managing commodities,” he says. The team is also examining the use of non-traditional benchmarks, and alternatives to cap-weighted indexes. “Areas we will study in the next 12 months will be fundamental indexing, equal-weighted strategy and minimum volatility,” Tong says. At a total fund risk level, CalSTRS had been typical of many large public funds where risk was assessed at a security and asset level but not at a total portfolio level. “Staffwise, everyone was very focused on their own asset classes. Chris [Ailman, CIO] wanted a unit to look at research and manage risk at total fund level.” The development of that unit was in March 2009, and now that thinking has progressed to the CalSTRS board this February adopting a risk factor approach to asset allocation that includes six factors. Tong’s team will largely be responsible for analysing those risk factors. “We’re saying there are six risk factors present in all asset classes, they all have sensitivity to them. Now we are building models to measure how sensitivity to those factors changes. This will enable us to understand the risk/return drivers and be forward looking,” he says.

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CalSTRS moves on innovation, risk

May 25, 2011

CalSTRS is in contract negotiation with a hedge fund consultant, with a view to hiring global macro hedge funds as part of its innovation portfolio, and the next tasks will be reviewing commodities and non-traditional benchmarks, as the innovation and risk unit comes of age. In November 2009, investment staff at CalSTRS recommended to the board that around $200 million be allocated to global macro strategies, to be managed by between three and six managers. The allocation would be incubated in the fund’s recently formed innovation portfolio, which has the purpose of improving the total plan’s risk and return profile. After some concerns regarding hedge funds, particularly about transparency, at the board level, the fund has now decided to hire a consultant to oversee the sub-class. In addition to being responsible for the innovation portfolio, charged with investment opportunities to improve the risk/return of the total fund not covered by other asset classes, the innovation and risk unit also manages risk at a total fund level. Because it is a brand new unit, the director of the innovation and risk unit, Steven Tong, says there has been focus on building the infrastructure and tools needed to evaluate managers on a quantitative basis. “In the hedge funds space we looked at every strategy, their return, correlation and volatility analysis to understand individual strategies. We spent a good six to 12 months on the analysis and found global macro and CTAs were good diversifiers compared to our existing strategies,” Tong says. The analysis showed that the broad mandate of global macro was a distinct advantage, such that manager, with fewer constraints could tactically choose the appropriate allocation and instruments to access opportunities. And because of their opportunistic nature, global macro thrives in high volatility environments. In the last market crisis, global macro performance was strong compared to global equities, with the MSCI World falling 55.4 per cent from November 2007 to February 2009, while the CS/Tremont Global Macro Index was only down 0.9 per cent. But despite the thorough analysis by Tong and his team, the board still wanted the security of an external consultant to guide the investment decision making. “The board had some concerns about hedge funds and wanted us to hire a consultant. We are in contract negotiation now, and they’ll help us find managers.” The idea is the innovation portfolio allows the fund to invest in new asset classes, and demonstrate success, before allocating large amounts to the strategy. It has a three-year window to decide if a strategy should be dedicated to a new asset class, be included with one of the traditional asset classes, or be terminated. It uses its own in-house analysis as well as risk tools provided by MSCI Barra. “We are in the public arena, it has been a long process but fair, and we have a fiduciary responsibility so we have to ensure a level playing field and everyone treated fairly.” The innovation portfolio can invest up to 1.5 per cent of the total CalSTRS fund or $2 billion whatever is smaller. Within that the CIO, Chris Ailman, has delegation authority up to $100 million, and Tong up to $50 million. The unit provides the board with updated quarterly reports. Tong, who previously managed global equities with the fund for 11 years, describes the portfolio as running an experiment, of both the strategy and the relationship with the mangers. “We will only manage it for up to three years, report back to the board and then decide to terminate, increase in the size and then find a place in strategic asset allocation. We look closely at correlations, rolling volatility, returns, and Sharpe ratios, to see how it behaves.” Tong says the next cab off the rank will be to examine a potential commodities exposure within the innovation portfolio. “We will be looking for managers and the first step will be those that manage commodities long-only using derivatives. Later we will look at long/short or private companies managing commodities,” he says. The team is also examining the use of non-traditional benchmarks, and alternatives to cap-weighted indexes. “Areas we will study in the next 12 months will be fundamental indexing, equal-weighted strategy and minimum volatility,” Tong says. At a total fund risk level, CalSTRS had been typical of many large public funds where risk was assessed at a security and asset level but not at a total portfolio level. “Staffwise, everyone was very focused on their own asset classes. Chris [Ailman, CIO] wanted a unit to look at research and manage risk at total fund level.” The development of that unit was in March 2009, and now that thinking has progressed to the CalSTRS board this February adopting a risk factor approach to asset allocation that includes six factors. Tong’s team will largely be responsible for analysing those risk factors. “We’re saying there are six risk factors present in all asset classes, they all have sensitivity to them. Now we are building models to measure how sensitivity to those factors changes. This will enable us to understand the risk/return drivers and be forward looking,” he says.

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APG’s IMQubator launches second fund

May 18, 2011

Dutch Pension fund administrator APG will open up innovative investment ideas to other institutional investors, with the IMQubator hedge fund seeding platform it has backed launching a second fund to channel money to emerging managers. The Amsterdam-based seeding fund for emerging hedge fund managers was founded in 2009 and has APG as a key backer. Since then it has allocated €170 million ($242 million) to seven hedge fund start-ups. It has an additional $114 million of unallocated capital. APG and one or two invited institutional investors will pump another $142 million into this original fund but will close it to further new capital by the end of the year. In a vote of confidence in the ideas emerging from the alternative investment managers, APG extended the original $356 million with a term of 3+1+1 years from the end of December. Of the original money, 70 per cent has been invested, with the new inflow of money used primarily to increase the capital invested in hedge funds already backed in the first fund. “APG’s renewed commitment to IMQubator says all about our confidence in IMQubator and how it invests in emerging manager,” a spokesman for the large Dutch pension fund said. It is expected that IMQubator’s investment committee will approve investment in an eighth fund by the end of May. The seven funds selected already specialise in a number of areas, from predominately European late-stage growth technology companies to a focus on companies developing green technology. Holland Private Equity (HPE) specialises in small- to mid-cap technology stocks in the Netherlands, Germany and Belgium. It focuses on areas in the technology industry that are “asset light” and quickly scalable. IMQubator chief executive officer Jeroen Tielman (pictured) said it was still early days but that the funds selected had performed strongly so far. “Most of the seven funds have become operational only in the last 9 months or so, so it is a bit early to say something meaningful about their track,” Tielman said. “As far as fundraising is concerned, we expect the HPE fund to have raised assets by this summer of about $185-213 million and the MCapital started earlier this year with assets of more than $71 million. I think all of our strategies are potentially of interest to institutional investors.” MCapital specialises in private equity investments across Europe and Asia, with a focus on distressed, restructurings and development capital. When looking at potential investments Tielman said they target “exceptional talents within the hedge fund space that have very pure strategies and are remote from having beta exposure”.

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San Francisco stays faithful to equities

May 11, 2011

While some funds move towards more defensive allocations, executive director of the San Francisco Employees Retirement System, Gary Amelio (pictured), says the fund will maintain its belief in equities as it embarks on its five-year asset liability study. The San Francisco Employees Retirement System has always had a reasonably aggressive investment strategy, with almost half of the fund in public equities (26 per cent of which were domestic equities) at the beginning of the year, private equities comprising another 12 per cent, and real estate a little less than 10 per cent. Throughout the recent financial crisis this did not change, and post the crisis it is not going to change either. “We’ve done the analysis on our strategic asset allocation and decided nothing major needs to happen as a result,” executive director of the fund, Amelio says. Although he adds there is a shift to increase international equities and global fixed-income (probably out of real estate). “We are following the same guidelines and believe there is no reason to do anything dramatic. We believe in equities, when some funds have moved away from those allocations. We don’t believe in investing your way out.” During 2007-08 the average size of the fund was around $16.5 billion, the market decline took it down to $11 billion in early 2009 and that has been steadily increasing to its position of about $15.2 billion in assets now. “Our assets have come back and I attribute that to a very solid investment policy which has been held to. We didn’t do anything reactionary, we watched the asset allocation, stayed with a long-term focus. So we didn’t ‘lose’ anything because we didn’t sell anything during that time,” he says. SFERS has a long history, with parts of the fund dating back to 1850 (the Police Widows Fund), and in its current form it’s been around since 1924. Amelio attributes a lot of the fund’s success, measured in longevity and funded status, to the city and county of San Francisco never failing to make an employer contribution. “It’s the single most prominent reason for maintaining our funding status,” he says. “We’ve had an aggressive strategy and a prudent and stable investment policy. But the contribution levels are set by the voters of San Francisco, not boards or consultants. The benefits are modest and employee contributions healthy, there is a high level of transparency.” The fund’s actuarial rate of return is 7.75 per cent and Amelio says a representation of the forward-thinking of the board is that it “went to less than 8 per cent long before the pension industry started talking about it”. “The SFERS retirement board commissioners are knowledgeable about investments, incredibly well-informed and have maintained an educated, aggressive strategy for a long period of time.” One of the few changes Amelio plans over the long-term, is to build up and out the investment team, with a number of senior hires to come. The fund manages an allocation of 8.71 per cent in an S&P500 fund, and 3.7 per cent fixed income internally, under the leadership of deputy director for investments (chief investment officer), David Kushner. “We have had new job descriptions written up and through the public process, it’s time-consuming but if you spend the time and do it right it is beneficial.” The hiring of two managing directors, in public and private markets, and five underlying positions, in real estate, and private equity will bring the internal team to 14. “The internal team’s function includes monitoring current manager performance, asset allocation guidelines and oversight of the current holdings of managers. In addition the staff co-ordinates the independent investment consultants and provides investment information to the board. They are also constantly on the lookout for new opportunities for appropriate fund investments. The fund does not invest in hedge funds and there is no current plan to modify that position.”

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HOOPP derives benefits to boost funding status

May 4, 2011

The extensive use of derivatives has been a big contributor to the C$35.7 billion ($37.4 billion) HOOPP reaching fully funded status. Jim Keohane, chief investment officer, explains how the fund manages its assets and liabilities through liability-hedging and return-seeking portfolios and the role derivatives play in dialling risk up, or down. The moved to liability-driven investing a few years ago means HOOPP has two portfolios – the liability-hedging portfolio and the return-seeking portfolio. This structure allows the fund to extensively use derivatives in its portfolio, in fact Jim Keohane, chief investment officer says most of the portfolio exposure is through derivatives while most of the physical investments are in long-term sovereign bonds. “Our move into derivatives started 10 to 12 years ago as a way to get around a foreign content rule, and we found there are a lot of things you can do with derivatives,” he says. The fund almost stumbled into using credit default swaps, as at the time it thought Canadian credit was overpriced. “The effect was it allowed us to reduce risk by diversifying credit and we improved return by decreasing risk.” The fund recently released some good headline figures, announcing it was fully funded, and had returned 13.68 per cent for 2010. And it only has 35 investment professionals, keeping investment management costs down. Risk is a big focus of the way the fund manages its assets, and the use of derivatives allows the investment staff to either take risk, or reduce risk. “Derivatives consistently get a bad rap in the press, they’re just a tool. You can do woodwork with hand tools or use a radial-arm saw – which is very precise – and if I’m not trained I can cut my thumb off. But if you are properly trained they are more efficient in time and cost,” Keohane says. He argues derivatives allow the fund to be more precise about the risk taken, for example in a US corporate bond investment there is credit risk, duration risk and foreign exchange risk, and through the use of derivatives any or all of those risks can be reduced or enhanced. Within the risk management framework, HOOPP has identified that in its liability hedging portfolio – which has a 4.5 per cent return expectation – the liabilities are sensitive to interest rates and demographic factors. This is a minimum risk portfolio which is long only, with interest rate sensitive and inflation sensitive assets, including 30-year bonds, interest rate swaps, interest rate futures, real return bonds, real estate and private equity. It also has a return-seeking portfolio which consists of a beta risk overlay, beta risk hedges and an alpha strategy. Within the beta risk overlay the fund uses S&P Futures, international futures, credit overlay CDX index and long-term options on the S&P 500. And the alpha strategies are equity-based strategies, interest rate strategies, funding strategy and cross-market arbitrage. “It’s a two-step risk process. The liability hedge portfolio is a risk reduction portfolio. Interest rates, inflation and equity are the three major risks, and interest rates are almost as big as equities. For example a 100 basis points decrease in long rates would cost us $5 billion,” Keohane says. The fund has a clear strategy to focus only on the areas of investment it does well, with Keohane pointing out it has a large balance sheet to allow collateral for shorting. “We are making beta work for us and we focus where we strategic advantage over time,” he says. The fund has a ‘vanilla’ portfolio, for example it does not invest in infrastructure, but acts more like an investment bank than a traditional pension fund investment division. “We break down the barriers that exist within most funds, they’re siloed according to asset classes. We have one large public markets group, and we can figure out where next arbitrage might be globally. We can run hedge fund strategies internally and offer competitive pay. People have a lot of scope in their jobs, we hire those with bigger visions, searching for the next great ideas.” Keohane believes there are a lot of investment myths out there that people blindly follow, one of those is that no one is good at big macro calls. “We do what we are good at, which is identifying over- and undervalued securities, not being directional. For example we can determine the position of one bank relative to another but not whether banks generally will go up or down,” he says. “We do certain things really well but don’t try to do everything. Running beta strategies with derivatives means you can run a large amount of money at a low cost.” In 2010 the operating expenses of the fund were $129.2 million, down 1.6 per cent from $131.3 million in 2009, with the decrease primarily related to strategic initiatives and the elimination of external investment manager fees. HOOP’s investment operating cost work to just under 26 basis points and yet 80 cents of every dollar comes from investment returns. The results speak for themselves. The fund is now fully funded with the effect that the contribution rates and benefits will be stable until at least the end of 2012. The asset allocation December 31, 2010

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Video: Barton Biggs Says He Was `Naive’ About Syria, Assad

April 29, 2011

April 29 (Bloomberg) — Barton Biggs, managing partner at hedge fund Traxis Partners LP, talks about his trip to Syria in 2009, where he met President Bashar al-Assad, and the need for a regime change in that country. Biggs speaks with Pimm Fox and Lara Setrakian on Bloomberg Television’s “Surveillance Midday.” (Source: Bloomberg)

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Video: Plenderleith Says Investors Preferring Large Hedge Funds

April 21, 2011

April 21 (Bloomberg) — Ian Plenderleith, chairman of BH Macro Ltd., talks about trading opportunities for hedge funds. He speaks with Andrea Catherwood on Bloomberg Television’s “Last Word.” (Source: Bloomberg)

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Video: Lippmann’s LibreMax Said to Gain as Mortgage Funds Rise

April 20, 2011

April 19 (Bloomberg) — LibreMax Capital LLC made money in mortgage securities last month, weathering the first loss for subprime-backed bonds in 10 months. Greg Lippmann’s $605 million LibreMax hedge fund rose 0.6 percent, bringing 2011 returns to 4.2 percent, according to investor documents obtained by Bloomberg News. Bloomberg’s Erik Schatzker reports in today’s Movers & Shakers. (Source: Bloomberg)

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Rational agents can upset asset-pricing paradigm

April 20, 2011

In contrast to the standard paradigm about momentum and reversal in markets being caused by agents reacting wrongly, new research shows that these phenomena can arise in markets with rational agents. Dr Paul Woolley and Dr Dimitri Vayanos, are proposing a rational theory of momentum and reversal based on delegated portfolio management. In research done for the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, Woolley and Vayanos turn the standard asset-pricing paradigm on its head. “Momentum and reversal are viewed as anomalies because they are hard to explain within the standard asset-pricing paradigm with rational agents and frictionless markets,” they say. Widespread explanations of these occurrences are behavioural, and assume that agents react incorrectly to information signals. Woolley and Vayanos’ research shows that momentum and reversal “can arise in markets with rational agents”, and they abandon the standard paradigm by assuming that investors delegate the management of their portfolios to financial institutions, such as mutual funds and hedge funds. Writing on “An Institutional Theory of Momentum and Reversal”, Woolley and Vayanos propose a rational theory say flows between investment funds are triggered by changes in fund managers’ efficiency, which investors see directly or infer from past performance. “Momentum arises if fund flows exhibit inertia, and because rational prices do not fully adjust to reflect future flows,” they say. “Reversal arises because flows push prices away from fundamental values.” Besides momentum and reversal, fund flows generate co-movement, lead-lag effects and amplification, with all effects being larger for assets with high idiosyncratic risk, while managers’ concern with commercial risk can make prices more volatile. Ironically, managers’ efforts to protect themselves against commercial risk can have the perverse effect of making prices more volatile, and increase co-movement. Woolley and Vayanos address the asset-pricing effect of commercial-risk management, that is of actions that managers can take to protect themselves against the risk of experiencing outflows. “A manager concerned with commercial risk is reluctant to deviate from the market index,” they say. “The intuition in the case of asymmetric information is that a deviation subjects the manager to the risk of underperforming, relative to the market index and experiencing outflows.” Commercial-risk concerns thus lower the prices of stocks that the active fund overweights, and raise those of underweighted stocks.

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Callan sticks to the long-term knitting

April 20, 2011

Unfortunately, from a journalist’s point of view at least, there is nothing new or radical about the investment principles that president and head of research at Callan, Greg Allen (pictured), is touting. He says investors should stick with the status quo of long-term, stable strategic asset allocation regardless of the recent market turmoil challenging investors. “I’m frustrated by the disconnect between what’s trendy and what’s real,” president and head of research at Callan, Greg Allen, candidly admits. “Institutional investors have been refining their approach for 25 years. I’m sceptical I still believe in equities and bonds and real estate, the rest of the stuff our industry does is designed to make that look interesting.” Allen says it has been a difficult 20 year period, but that people are looking at the short term results and trying to come up with ways to deal with that. “People are talking about an ‘equity-centric’ portfolio. I’ve never heard that before. Equities are a long-term investment, now it is seen as a bad word,” he says. “There are more strategies based on PowerPoint presentations and theories than on real track record. Everyone has an idea. People are led to believe there are big changes, but the old way is ok.” By way of demonstration, he says all the “heat and smoke and a little bit of light” that has been given to hedge funds and the average allocation in the US is only about 3 per cent, after all this time. “The money belongs to the people and the institutional investors’ job is to build a durable, sustainable portfolio. An internal CIO of a fund used to be a long-term position but in the last few years they are more like funds managers with the turnover, and everyone wants to make their mark. But with institutional portfolios 80 per cent is blocking and tackling, it’s the long-term strategic asset allocation, the exposure to markets, and adding a little bit of alpha on the margins.” There are many of these so-called contemporary strategies that Allen names as fitting into this fad: risk parity, dynamic asset allocation, and even risk management. “Portfolios went down in 2008 but it wasn’t because investors didn’t have a risk management system. Investors couldn’t have prevented it, most institutions have robust risk management in place.” He says from custodians to trading desks, which are increasingly regulated and professional organisations, as well as elaborate performance measurement where managers are being analysed daily, and investment policy statements, governance and reporting, investors have a clear focus on risk management. “To claim they have no risk management in place is absurd,” he says. “And now the systems arising to fill that ‘void’ instil a false sense of security. People are trying to boil it down to one or two things when it’s so complicated.” “You’re a long-term investor and have exposure to markets, you don’t get in and out.” Allen says another “tragedy” is the increasing focus on the short-term at the expense of long term, and says LDI is an example of this. “The construct of a pension fund is specifically/explicitly designed to engender long-term savings. It’s a savings vehicle but that has shifted to managing short-term volatility, funding and actuarial valuations. LDI is dramatic version of that, and dynamic asset allocation is a way to get there.” Allen says he can’t think of a corporation which isn’t trying to get equity risk out of its portfolio, when 10 years ago was it was the exact opposite. “It’s a 180 degree difference, they were fully funded and trying to add to equities a decade ago,” he says. Allen admits the philosophy of essentially challenging the latest demand-driven (or supply-side inspired) strategies “hasn’t been good for our business”. “It’s at odds with the trends and what clients are asking for. But we are not a dogmatic consulting firm.” Evidence of this, is the fact one of its clients has been one of the most vocal in its approach to adopting progressive asset allocation strategies, and a number of clients have risk parity allocations. “We’re here to serve. The consultant is not a setter of investment policy, but if you’re going to do it we ask what the pros and cons are.” Allen is sceptical about the trend towards allocating assets according to underlying economic fundamentals, adding that traditional asset allocation studies also do extensive scenario analysis. “I haven’t seen enough evidence it helps that much, I don’t get the great insight, how is it shedding any great light?” he asks. ‘In traditional asset allocation studies we do, we simulate asset and liabilities into the future and do scenario testing of a portfolio in for example high inflation. This approach has the benefit of going out afterwards and hiring a funds manager.” He does concede the newer approach may allow for more flexibility, as with traditional asset buckets there are often interesting strategies that don’t get allocated. Allen is positive on one new development in the industry. With the move to defined contribution he believes target-date retirement funds are an “elegant” solution. “I’m enthusiastic that once the regulatory environment around 401(k)s is more clear, instead of just buying Fidelity target-date funds, people will build their own and use all the tools of defined benefit – like asset classes and private markets, rebalancing, trading efficiencies, oversight, hire and fire managers. That is a positive trend,” he says.

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Video: Biggs Says S&P’s U.S. Credit Outlook `Grandstand Play’

April 18, 2011

April 18 (Bloomberg) — Barton Biggs, managing partner at hedge fund Traxis Partners, talks about the decision by Standard & Poor’s to revise its outlook on the U.S. AAA credit rating to “negative.” Biggs also discusses China’s move to increase banks’ reserve requirements to lock up cash and cool inflation. He speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Video: Biggs Says S&P’s U.S. Credit Outlook `Grandstand Play’

April 18, 2011

April 18 (Bloomberg) — Barton Biggs, managing partner at hedge fund Traxis Partners, talks about the decision by Standard & Poor’s to revise its outlook on the U.S. AAA credit rating to “negative.” Biggs also discusses China’s move to increase banks’ reserve requirements to lock up cash and cool inflation. He speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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John Paulson Says Go And Buy Houses

April 13, 2011

John Paulson, founder of $30 billion hedge fund firm Paulson & Co., tells investors to look at real estate, buy a house or two, and don’t hesitate to take out an extra mortgage.

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Alaska fund moves external CIOs into risk culture

April 13, 2011

Half way through a five-year plan, the Alaska Permanent Fund, has a new risk culture, which affords the investment team freedom, and is just about to embark on a new strategic asset allocation, which includes expansion of its external CIO program, as part of a drive for further diversification. For the executive staff and board of the $40 billion Alaska Permanent Fund, the past two years have almost exclusively been dedicated to risk – understanding it, measuring it and importantly creating a “risk culture”, which now underpins every decision the fund makes. A lot of that has been driven by chief investment officer, Jeff Scott (pictured), who arrived in the municipality of Juneau from a diverse corporate background including a multi-strategy hedge fund, and overseeing the absolute return portfolio of Microsoft. “The first year was all about education and looking at what is risk. The second year was about cultivating a risk culture and last May we completed a comprehensive risk-based investment philosophy,” he says. “The board used to be dollar-allocation focused, but they are now governance and risk-tolerance focused. Trustees are no longer picking managers,” he says. Through this process, and the change of focus for the board, the executive director and chief investment officer have the authority to hire and fire managers without prior board approval, although its consultant, Callan, is still involved. “When I arrived the time spent at board meetings on risk analysis was limited,” Scott says. “Now it’s at least 90 minutes every quarterly board meeting.” The fund has a new risk dashboard (commonly used in the corporate world, but unusually not so in the pension management), which colour codes risks, so it is easy for them to see trends. “It’s a point of communication as to what is happening in the portfolio, it highlights the portfolio’s current risk characteristics. Trustees can visually figure it out, where the portfolio deviates from the policy portfolio.” On the investment side of the business it went through an intense process of reallocating assets according to underlying risks or economic conditions, not asset buckets. It now has five categories for its target allocation: company exposures (the 2010 target was 53 per cent), real assets (18 per cent), special opportunities (21 per cent), interest rates (6 per cent) and cash (2 per cent). Within the special opportunities, Alaska has embraced the “external CIO” concept, whereby it has awarded $500 million to five managers – PIMCO, GMO, Bridgewater, AQR and Goldman Sachs. “These are the best and the brightest in the investment world, and we ask the CIOs to come to our board meetings and explain how to construct and implement their portfolio strategy.” These mandates have a real return target of 5 per cent, the same as the Alaska Permanent Fund’s policy portfolio. They have limits around volatility and tail risk, can invest in hedge funds but not private markets. “The focus is on how to build portfolios and look at risk, it’s turned out better than we expected,” he says. It’s part of the contract with the fund managers that they send their “top guys”. “When Mohamed El-Erian walks into a trustee board meeting, everyone listens,” he says. The next step in this risk journey for the sovereign wealth fund is to set a new risk allocation, Scott says, which will occur over the next few months, with the focus firmly on diversification. “In the US most institutional portfolios are 95 per cent invested in developed markets and the equity risk makes up 80 to 90 per cent of the portfolio total risk.” Scott is proposing to address this by reducing the fund’s “company exposures” bucket by roughly 10 per cent to about 43 per cent, and it will still be allocated across equities and credit in an 80:20 split. To increase the fund’s diversification there will be a subsequent increase in the real assets allocation, with increased allocations to assets such as TIPS and timber; and an increase in the special opportunities bucket including an expansion of the external CIO program. Cash will remain at 2 per cent, as this is used to fund the annual dividends, but the interest rate bucket will almost double with the expansion coming from exposure to emerging markets. “We are moving the buffalo from the centre of the herd,” Scott says. “By making these changes we will decrease the equity risk premium to about 60 per cent. We want to balance returns so it comes from income not predominantly from capital appreciation.” “So much of this is possible because of the education and knowledge of our board, now we can make the changes,” Scott says. “We have six people on our board who all believe are dedicated in doing something better for the people of Alaska.”

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Most managers set to look outside the US

April 13, 2011

The managers most in demand by US investors are those with compelling presences in global and emerging markets’ equities, hedge funds, funds of hedge funds, private equity and real assets. The 2011 Consultant Search Forecast by eVestment Alliance and Casey, Quirk & Associates shows that more than 80 per cent of investment consultants expect to look outside the US, according to the eVestment and Casey Quirk survey, the fifth of its kind. The survey, ‘Old Wine in New Bottles’, questioned 55 investment consultants in the US and Canada, with a total of $10.4 trillion in assets under advisement. The main trends were continuing globalisation of portfolios; a growth in alternative investments such as hedge funds, private equity and real estate; and more emphasis on outcome-oriented portfolios built by risk budgeting and return attribution. Heath Wilson (pictured), eVestment principal and founder, said sluggish growth in searches was expected because many investors were still emerging from the policy rebalancing done in the late 2009 and 2010. Casey Quirk partner, Yariv Itah, said that one of the most interesting findings in this fifth survey was the increasing interest in private equity and real assets. “Institutional investors increasingly manage towards outcomes rather than just excess return, and they want asset managers who can use illiquid investments to mitigate inflation risk and manager liabilities.” Other findings of the survey included: consultants expect significant increases in private equity and real estate mandates this year half those surveyed expect institutional interest in inflation-hedging strategies to rise three-fifths of consultants expect moderate or strong bond search activity more than one-third of consultants expect more emerging markets equity and less international developed markets activity for the rest of 2011 more than one-third of consultants anticipate more liability-driven investing mandates, and more than half of US equity, US bond and EAFE searches will involve manager replacements this year

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Most managers set to look outside the US

April 13, 2011

The managers most in demand by US investors are those with compelling presences in global and emerging markets’ equities, hedge funds, funds of hedge funds, private equity and real assets. The 2011 Consultant Search Forecast by eVestment Alliance and Casey, Quirk & Associates shows that more than 80 per cent of investment consultants expect to look outside the US, according to the eVestment and Casey Quirk survey, the fifth of its kind. The survey, ‘Old Wine in New Bottles’, questioned 55 investment consultants in the US and Canada, with a total of $10.4 trillion in assets under advisement. The main trends were continuing globalisation of portfolios; a growth in alternative investments such as hedge funds, private equity and real estate; and more emphasis on outcome-oriented portfolios built by risk budgeting and return attribution. Heath Wilson (pictured), eVestment principal and founder, said sluggish growth in searches was expected because many investors were still emerging from the policy rebalancing done in the late 2009 and 2010. Casey Quirk partner, Yariv Itah, said that one of the most interesting findings in this fifth survey was the increasing interest in private equity and real assets. “Institutional investors increasingly manage towards outcomes rather than just excess return, and they want asset managers who can use illiquid investments to mitigate inflation risk and manager liabilities.” Other findings of the survey included: consultants expect significant increases in private equity and real estate mandates this year half those surveyed expect institutional interest in inflation-hedging strategies to rise three-fifths of consultants expect moderate or strong bond search activity more than one-third of consultants expect more emerging markets equity and less international developed markets activity for the rest of 2011 more than one-third of consultants anticipate more liability-driven investing mandates, and more than half of US equity, US bond and EAFE searches will involve manager replacements this year

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Event-driven strategies attract the spotlight

March 30, 2011

News this week that the world’s largest hedge fund manager, Man Group, is to take full ownership of Ore Hill Partners Capital Management highlights the under-researched area of event-driven hedge funds. Man, which manages about $69 billion in a wide range of funds and strategies, bought its original 50 per

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Wind of Change

March 24, 2011

Luxembourg is emerging as a key gateway for hedge fund managers as rapidly evolving investor demands and legislative changes are creating a fundamental shift in their business models. Northern Trust’s Ian Headon, product manager for hedge funds in EMEA, explores the jurisdiction’s growing opportunities for hedge fund managers. Click here

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Video: Rifkin Sees `Modest’ Fallout for Goldman From Testimony

March 23, 2011

March 23 (Bloomberg) — Mark Rifkin, partner at Wolf Haldenstein Adler Freeman & Herz LLP, talks about the insider-trading trial of Galleon Group LLC co-founder Raj Rajaratnam and the implications for Goldman Sachs Group Inc. and the hedge fund industry. Goldman Sachs Chief Executive Officer Lloyd Blankfein testified that former Goldman board member Rajat Gupta violated the firm’s confidentiality policies by allegedly telling Rajaratnam about the firm’s earnings and strategic plans. Rifkin speaks with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (Source: Bloomberg)

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Public pensions shape insto era of hedge funds

March 23, 2011

The past four-year upsurge in the number of public pension funds investing in hedge funds is shaping the new institutional era of hedge fund management, with funds approaching the asset class for new reasons, says Preqin. According to recent research by the alternative assets research firm – which surveyed 295

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Video: Biggs Sees U.S. Stocks Rallying Back to February Highs

March 22, 2011

March 22 (Bloomberg) — Barton Biggs, managing partner at hedge fund Traxis Partners, talks about the outlook for U.S. stocks. Biggs says equities will probably rise back to their 2011 peak reached in February. Biggs also discusses Japanese stocks, his investment strategy and the outlook for Federal Reserve monetary policy. He speaks with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

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Texas Tech University Hires Two HFs

March 10, 2011

Texas Tech University Systems 775 million endowment has made two new hedge fund allocations

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Big Insurers Are Outsourcing Investments

March 2, 2011

While pensions endowments hedge funds and traditional asset managers adjust to a new landscape that features smaller portfolios morevolatile markets and tighter regulations insurance companies have been quietly remaking their investment practices

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Daniel Dicker: Why Gasoline Costs Are Too Damn High

February 21, 2011

The U.S. is being fooled to believe that the gas prices we see on TV and in newspapers aren’t actually so bad. But they are. Relatively, they are much worse now than they were in the past, and are likely to get even worse as spring and summer approach. We watch the TV and look in the newspapers, see that crude oil is selling for $87 dollars a barrel and think: “yeah, those are high prices, but I remember when oil was over $100 dollars, even $120 and $140 dollars a barrel — this doesn’t seem so bad yet.” But you’re being fooled. You’re being fooled because the price that the newspapers and television are referring to is the price of West Texas Intermediate crude oil, traded at the New York Mercantile Exchange (where I traded for 25 years). This financial benchmark has been used to set the price for virtually all of global oil for the past 25 years — even though there are hundreds of other specific grades of crude oil in the world, extracted from ground, water and stone, and delivered in hundreds of local markets across the globe. But the market for this one local grade of sweet crude, delivered at Cushing in Oklahoma has dominated the financial world of global oil for so long, it has also come to set the physical prices for real oil virtually everywhere else — until a few weeks ago. West Texas Intermediate (WTI) has disconnected with crude markets everywhere else and no longer represents the “real” prices of crude, or in other words, the real prices that are being charged at the pump to you and me. Take a look at some other physical benchmarks and their recent prices: Dubai and Oman sour crude is trading at $99 a barrel, Mars sour — a U.S. grade from the gulf coast — has traded at $96, Brent Crude from the North Sea is at $104 and Louisiana Light Sweet, a very similar grade to WTI delivered only 700 miles south in Port Arthur has recently traded at $106! What’s fascinating is that WTI has historically been much, much more expensive than ANY one of these other grades. The reasons that WTI no longer “works” — at least temporarily — as a global benchmark is two fold: Physically, Cushing is filled to the brim with supply and because it is small and landlocked, it is difficult to ship incoming crude further south. Financially, the WTI contract has become nothing more than a trading and investing ping-pong ball of asset managers, index investors, ETF’s, energy hedge funds and individual traders, all stuck long in a market that won’t react positively to Middle East unrest and a general commodity price spike — a spike that is overtaking every other grade of crude out there. I outline the mechanisms of all of this in my upcoming book Oil’s Endless Bid , but the bottom line is this — While financial oil may be subject to the whims of big money investors and traders, the gasoline market is far more insulated — and delivered in New York Harbor where no such physical constraints exist as in Cushing. So, gas isn’t being held back by the WTI disconnect — its pricing at the pump is a solid 40 cents a gallon higher than the “advertised” price of crude oil that’s going out to the world would suggest, up to $3.18 a gallon nationally, according to the Lundberg survey. And this is just the beginning. As unrest continues to heat up in the Middle East, and as the physical and financial roadblocks to WTI clear up — as they must — the financial benchmark at the NYMEX is much more likely to again represent where the rest of global oil is currently pricing — well above $100 a barrel and indeed closer to $110. And that means more pain — much more pain — at the pump as the summer approaches.

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SWIB Allocates 100M To Capula Fund

February 21, 2011

State of Wisconsin Investment Board has invested 100 million in a hedge fund

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Dan Dorfman: Too Many Bulls Could Gore Stocks

February 18, 2011

Rampant bullish fever is scaring a growing number of market watchers. No wonder. It’s generally a prelude to a sizable market decline. Raymond Stahler, a UK money manager who was recently in the U.S., tells me he’s deeply concerned by: the “overwhelming bullish sentiment” here — both on the part of the pros and the public — in the face of huge market gains in recent years (88 percent since March of 2009 and a tad above 20 percent since late August) and lots of question marks. He’s by no means alone in worrying about such lingering concerns as our huge national debt and budget deficit loads ($14.1 trillion and $1.3 trillion, respectively), growing weakness in housing, high unemployment and accelerating turmoil in the Middle East. “There’s too much bull fever, which invariably signals a falling market is on the way,” Stahler says. Charles Biderman, the CEO of liquidity tracker TrimTabs Research, partially owned by Goldman Sachs, also hoists some warning flags and recently toned down his bullish stance to one of caution, citing a resumption of exuberant and frothy investor sentiment and an outburst of new calendar offerings ($10 billion last week alone in initial public offerings and secondary offerings). Further, in the last four weeks alone, he points out, retail investors poured $12.3 billion into U.S. stock mutual funds, which, from a contrarian perspective, he regards as an ominous development, given it’s such a big inflow in such a short period by stock players with an awful track record. There’s way too much complacency, Biderman says. Adding to this exuberance, the American Association of Individual Investors reports that bullish sentiment the past week jumped 9.5 percent, to 51.5 percent, while the bearish sentiment fell 7.4 percent to 26.9 percent. On top of this, more sunny sentiment, with Investors Intelligence reporting that 52.7% of investment advisers are bullish, way more than double the 22 percent who are bearish. Yet another sign of bullish fever is the stepped-up inflows from sophisticated investors into hedge funds, which now boast $1.7 trillion in assets, the highest level since October of 2008. The latest inflow numbers, show an estimated $6.6 billion was invested in December, the sixth straight month of asset accumulation by hedge funds. In contrast, which has to be a worrisome note, those corporate insiders (officers and directors of companies) have been dumping stocks like crazy. For example, insider sales exploded to $11.6 billion in November and to $14.8 billion in December, the highest level since 2007. Insiders unloaded another $4.9 billion in all of January and have already sold another $4.1 billion so far in February. Interestingly, the ratio of insider selling to insider buying rose to 17.4, the highest level since November of 2009. This ratio has risen steadily since QE2 was announced last august. “That’s an ominous portent of what we think would happen to stock prices if QE2 stops (it ends in June),” Biderman says. What does it all mean? “The investment course is obvious,” asserts Biderman. “It’s time to take some profits off the table.” It all reminds me of a comment by American author Bill Vaughan, who wrote: “A February thaw is merely nature’s way of warning us against over-optimism.” What do you think? E-mail me at Dandordan@aol.com.

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‘Flash Crash’ Panel Calls For U.S. Market Overhaul

February 18, 2011

WASHINGTON/NEW YORK (By Roberta Rampton and Jonathan Spicer) – U.S. regulators should stem the growing tide of anonymous stock-trading and consider charging high-frequency traders for their disproportionate amount of buy and sell orders, said a panel of experts advising how to avoid another “flash crash.” The panel’s 14 recommendations for U.S. securities and futures regulators contained some bold ideas that, taken together, would overhaul the high-speed electronic trading market. The advisers on Friday told regulators that today’s markets can easily breed uncertainty among investors, and asked them to move urgently on the suggestions. Yet many of the ideas called only for “consideration” or “further study” — potentially raising more questions as the first anniversary of the May 6 flash crash nears. “The recommendations are a good first step … but from a practical standpoint of avoiding another (crash) in the future, it doesn’t go far enough. I don’t think it’s possible to prevent another one from happening,” said Adam Sarhan, chief executive of Sarhan Capital in New York. U.S. regulators were cautious about some of the boldest recommendations, including new fee structures to encourage liquidity and discourage high numbers of order cancellations. “I do not know where we as a commission would come down on fees,” Securities and Exchange Commission Chairman Mary Schapiro told reporters after the panel meeting on its recommendations. The unprecedented May 6, 2010, market crash sent the Dow Jones industrial average down some 700 points before rebounding, all in a matter of minutes. It rattled investors, exposed flaws in the structure of markets, and set regulators on a mission to fix the system and restore confidence. The eight-member panel suggested the SEC consider forcing the banks, hedge funds and others that facilitate stock-trading away from the public exchanges to give investors a better price by a minimum amount. It also wants regulators to consider a way to better allocate the “costs imposed by high levels of order cancellations, including perhaps requiring a uniform fee across all exchange markets.” That suggestion comes after regulators and others began raising questions this past summer about the massive amount of message traffic, or “noise” in the markets, and whether it allowed some high-speed, short-term traders to manipulate prices for profit gains. “What market regulation now has to do is limit uncertainty,” said Maureen O’Hara, professor of finance at Cornell University and member of the flash crash panel. “You limit uncertainty by limiting the amount of movement a price can have before it falls off the map.” The changes would require the SEC and fellow regulator, the Commodity Futures Trading Commission, to take on a massive amount of research and rulewriting at a time when the agencies are straining to carry out the Dodd-Frank financial reform law. REGULATORS VS TECHNOLOGY While some have argued the crash was a freak event that called for obvious adjustments, such as the new “circuit breaker” trading halts, others said it was a wake-up call to finally get a firm handle on what could destabilize capital markets. It wants regulators to consider a so-called “trade at” order routing rule — something that would hurt the growing ranks of “dark pools” where trading is done anonymously. Some 33 percent of U.S. stock-trading takes place away from exchanges, up from 20 percent four years ago. Some of the biggest internalizers are market maker Knight Capital Group Inc, bank Goldman Sachs Group Inc, and hedge fund Citadel. A “trade at” rule, which Schapiro on Friday expressed support for, would generally prohibit any of the dozens of U.S. venues and wholesale market makers from executing an incoming order unless they were already publicly displaying the best bid or offer in that particular stock. After the crash, one of the regulators’ first steps was to form the committee to come up with some answers. Many of its ideas fall squarely in the “esoteric” category, though even small adjustments could revamp the flow of tens of trillions of dollars annually in the markets. The panel wants regulators to consider adjusting trading fees so that firms that provide liquidity get additional rebates that would help stabilize markets during stressful times; “depth of book protection” that would cut down on investors getting poor prices; and a closer look at “disruptive trading activities” in the futures markets. Other recommendations unveiled on Friday, such as expanding and modifying the “circuit breaker” trading pauses, had been telegraphed by regulators and mostly endorsed by market participants and exchanges such as NYSE Euronext and Nasdaq OMX Group. The exchanges at the center of the breakdown, however, added a new wrinkle to the debate when in the last week they set off a new wave of planned global mergers, including the takeover of Big Board parent by Germany’s Deutsche Boerse. The mergers highlight the increasingly interconnected global marketplace, where drops in one region can rapidly trigger plunges elsewhere, and show how aggressively traditional exchanges are investing in newer, faster systems. “The whiz-bang technology in markets today means that when things go wrong, they go wrong very fast,” CFTC Commissioner Bart Chilton said. (Reporting by Sarah N. Lynch, Jonathan Spicer and Roberta Rampton, with additional reporting by Ryan Vlastelica; Editing by Steve Orlofsky, Dave Zimmerman and Tim Dobbyn) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Les Leopold: Wall Street Wins Big in Deficit Battle

February 18, 2011

Maybe it’s something in the water. Some potent little parasite has wormed its way into Washington, and now everyone’s coming down with the disease: certifiable deficit hysteria. Politicians and pundits are all marching in lockstep chanting “Cut, Cut, Cut,” fearing that if they don’t they’ll be assaulted by the right-wing budget police. They rationalize the madness with the slogan “equality of sacrifice,” a platitude that is supposed to make us feel better about destroying our public sector. For all the pompous pontifications, the real argument politicians are having is over which group of working Americans they should screw first. No one’s asking Wall Street to sacrifice. The bankers and hedge fund gamblers are getting a free ride — again. You’d think this would be a good moment to mention that we wouldn’t even be having these budget deficit hysterics right now if Wall Street hadn’t just destroyed over $13 trillion dollars in wealth as well as wiping out several hundred billion dollars in yearly government tax revenues. Do we even remember that the reason 30 million Americans can’t find full-time jobs is that Wall Street’s reckless gambling crashed the economy? (If you still have any doubt about this, please see The Looting of America for the sad tale of how we got here.) Instead, even NPR reporters (who may soon feel the sharp edge of the budget-cutting guillotine themselves) command us again and again to “Text, Twitter or Facebook us about what you think ought to be cut.” PBS News Hour’s Gwen Ifill seems to be on a righteous mission as she presses White House budget director Jack Lew over and over: “What about the entitlements, Mr. Lew? What about the entitlements, Mr. Lew?” Yes, Serious People everywhere know that Social Security and Medicare cuts are inevitable and that their job is to nail those slippery pols down: How much? When? But suggesting that perhaps Wall Street should sacrifice something is too ludicrous even to mention. Serious People don’t bring up issues that have been quarantined by deficit hysteria. New Taxes on Wall Street to Help Reduce the Deficit? But hold on, deep in the bowels of the president’s budget you can actually find new Wall Street taxes. If you look real hard you’ll see a category called “Total Reform Treatment of Financial Institutions and Products.” Hmm, looks promising. Maybe they’re proposing to finally tax the hell out of the derivative products that destroyed our economy a couple of years ago. So, let’s see. It says the total tax increases in 2012 come to … $159 million? Million, not billion? Is that a typo? Is the decimal point in the wrong place? Or is this the new definition of “equality of sacrifice”? Let’s do the math: John Paulson, the hedge fund manager who earned $2.4 million an HOUR in 2010, could pay off the proposed tax increases for the entire financial industry personally — by working less than two weeks. But not to worry, Mr. P. You and your fellow hedge fund elites have been saved yet again by the deficit fanatics’ exclusive focus on squeezing middle- and low-income Americans instead of you. No one’s talking about closing the shameless tax loophole that allows hedge fund managers to pay only a 15 percent “capital gains” tax on their enormous incomes instead of the top income tax rate of 35 percent. Closing that tax loophole on just the 25 top hedge fund managers — just 25 individuals! — would pull in twice the revenue compared to freezing the wages of 2 million federal employees. Apparently the new math of “equality of sacrifice” means that 25 people equals 2 million. To be fair, the president’s budget does propose gradually raising financial taxes by a total of $33 billion over the next decade. Unfortunately that only amounts to 3.3 percent of the trillion dollars he’s proposing to cut — more Orwellian equality. The nauseating ironies abound. The hedge fund managers are likely to pay a lower income tax rate than the families who find out they can’t send their kid to college because Congress cut their Pell tuition grant. It’s one thing to have an in-depth debate over steeper taxes on financial billionaires and lose. It’s quite another to see the entire debate buried by Democrats, Republicans, the media and just about every other force in society. Buried under great heaping mounds of deficit drivel. Wall Street owes the American people. And the American people, I am sure, would love Wall Street to make restitution for the damage it has done. In a saner world, we’d be considering a wider menu of real financial industry tax increases. Taken together these would raise more money than all of Obama’s proposed budget cuts combined: Close the hedge fund loophole so that hedge fund managers have to pay the top income tax rate. Enact a 50 percent surcharge on financial sector profits and bonuses until the unemployment rate drops below 5 percent. Impose a small financial transaction tax on all short-term financial transactions. This would both raise revenue and tap the brakes on reckless financial gambling. Together these taxes could raise federal revenues by $100 to $200 billion a year. In the process they would: a) reduce the size of Wall Street’s dangerous casino economy; b) reduce the outsized pay packages of financiers, whose “innovations” contribute next to nothing to the real economy; and c) make our economy more stable by reining in the reckless gambling. (This would be a return to the post WWII practice of keeping Wall Street salaries in line with salaries of those in other fields with similar educational levels.) But instead of looking for constructive solutions to our budget challenges, politicians are using deficit hysteria as an excuse to gut and privatize the public sector, invade the few remaining union strongholds, and turn working people against each other. The budget axes are flying, but on Wall Street all is peaceful and calm. The new financial oligarchs are quietly collecting the happy returns from all the taxpayer dollars we gave them. They’re back to flying high on their financial trapeze, making reckless bets in the hopes of outrageous returns. But no worries: Now more than ever, they’ve got a net. It comes in the form of an enormous implicit federal guarantee: If you fall, we will catch you (or actually, the taxpayers will). Because the institutions that were too big to fail in the last round are now way too big to fail. Remember, there now are even fewer of them and they are much bigger. The obsessive focus on budget cuts keeps us from noticing that we, the people, now own billions of dollars of toxic assets (via the Federal Reserve) that once were rotting on the books of our largest financial institutions. We’re the ones who are paying off the largest Ponzi scheme ever created. (If you want to really get a rage on, read the Financial Crisis Inquiry Report’s account of how banks traded the most toxic slices of CDOs back and forth to create a make-believe market in toxic assets. You’ll either want to free Bernie — the sacrificial lamb — or throw the whole bunch of them in jail with him.) “Equality of sacrifice?” There ought to be a law against any politician uttering that phrase. But despite it all, something good is percolating. Financial billionaires are whining more and more about the criticism they are receiving for bankrupting our economy. One plutocrat even waved legal action at me for suggesting that maybe his financial “genius” involved some fraudulent activities. Think about it. If our financial titans are coming after lowly bloggers, maybe they’re just a tiny bit worried. Maybe events in Tahrir Square or Madison have them spooked. Maybe they fear the sparks could ignite into a massive conflagration of demands for financial billionaires finally to pay up for the damage they have done. Let’s blow harder on those sparks. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the One-sided Class War, (hopefully to be published in 2011).

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TRS To Boost Large Cap Stocks Holdings

February 18, 2011

The Teacher Retirement System of Texas is seeking to increase its investments in large cap stocks real estate and hedge funds

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Financial Crisis Inquiry Commission Report Creeping Onto Best-Seller Lists

February 16, 2011

Good news for people who like the published findings of government inquiries! “The Financial Crisis Inquiry Report,” by the Financial Crisis Inquiry Commission, is something of a modest best-seller. And the chairman of the commission, Phil Angelides, is doing book signings . Dale Kasler of the Sacramento Bee has the good news : While it’s no threat to “The Girl with the Dragon Tattoo” mysteries, the book has climbed up several charts since its release in late January. The report, which documents the causes of the 2008 crash in the financial markets, is No. 10 on the New York Times’ list of best-selling nonfiction paperbacks, for instance. It’s also made lists compiled by the Washington Post and USA Today. It sounds pretty good to me that people are taking an interest in the commission’s findings. If you’d like some recommendations for further reading on the subject, I personally enjoyed Diary Of A Very Bad Year: Interviews With An Anonymous Hedge Fund Manager , 13 Bankers , and I.O.U.: Why Everyone Owes Everyone And No One Can Pay . Kasler reports that the commission’s report had an initial print run of 25,000 copies, which have sold well enough that its publisher, Public Affairs has “since run off another 5,000 copies.” It’s also available as a Kindle edition . To put this in perspective, it’s still lagging behind the all-time best selling government inquiry report, “The 9/11 Commission Report,” which “sold more than 1 million copies.” SPOILER ALERT: The financial crisis was “avoidable.” Also, Dumbledore dies. (By “Dumbledore,” I mean “the entire economy” and “most of the jobs.”) RELATED: ‘Financial Crisis Inquiry Report’ book is a best-seller [Sacramento Bee] PREVIOUSLY, on the HUFFINGTON POST: Financial Crisis Inquiry Commission’s 10 Major Findings [Would you like to follow me on Twitter ? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here .]

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Phil Trupp: The Tipster Calls: Do You Take the Money and Run?

February 15, 2011

Your friend who works at ABC Company tells you that the company is about to be acquired for more than it’s worth by XYZ Company, and that the stock price of ABC is likely to double. You trust your friend’s tip because he’s an executive at ABC and he or she is doubling down on the buyout. Question: As a retail investor, what would you do based on your friend’s tip? Do you call your broker and buy up as much ABC as you can afford? Or do you betray your friend, contact the Securities and Exchange Commission and volunteer to be a wire-wearing whistle blower hoping to bag a big, fat reward? Like many Wall Street operators — especially if you’re a hedge fund manager — you have been given inside information, which translates into money and power. But now you’re faced with an ethical dilemma. You read the newspapers and financial blogs and you are well aware of two things: insider trading is illegal, and yet it is an often-used business model with a long and inglorious history. What exactly is insider trading? Basically, it is the practice of buying or selling stock or other assets by corporate officers, other insiders or ordinary investors on the basis of information that is not public and is supposed to remain confidential. Insiders can buy or sell stock based on information they report to the Securities and Exchange Commission, thus making the public aware of the good, bad or perhaps the ugly data on a company’s balance sheet. Reporting this information to the SEC presumably gives the average investor a break, a level playing field upon which to make informed decisions. Fair enough. But if you are a major player or a hedge fund magnet, giving ordinary investors a break isn’t your concern. To pull down those hefty hedge fund fees you need to offer an edge, and that edge often amounts to inside knowledge played close to the chest and out of public view. So if the “whales” of Wall Street constantly are in search of inside tips, despite the legal and ethical pitfalls, why shouldn’t you cash in on your friend’s possibly profitable tip? The February 13 edition of the Washington Post business section features a story by David S. Hilzenrath and Jea Lynn Yang headlined “The federal dragnet on Wall Street’s inside game” which explores the insider trading business model and the government’s all-out push to put a stop to it. Insider trading has grown in recent years, the reporters conclude. But is this a growing epidemic enhanced by digital technology and unique ways of tracing cons? Or has technology merely exposed a practice that has been at work for generations? My experience brings me down on the side of the latter. Wall Street is not the Land of the Fair Deal. Indeed, insider trading is a means of taking advantage of ordinary investors and making a killing in the dark. For example, those insiders privy to special, non-public knowledge can — and often do — sell investors stock that is teetering on the edge of the cliff. The insiders sell you on the upside while betting the farm on the inevitable collapse. For example, hedge fund billionaire John Paulson recently worked with Goldman Sachs to produce a derivative made up of bad mortgage loans. Paulson bet against this so-called Abacus package, knowing in advance that it was built to crash, while Goldman sold it to clients as a bullish move. Paulson made out big-time, as did Goldman, while unsuspecting investors took the fall. The Abacus scam made headlines in the wake of populist outrage directed at the 2008 market meltdown. It was a sexy example of greed and insiders feeding at the public trough. The Street shrugged it off. It was by all accounts business as usual. It now appears that the Obama Administration is determined to crack down on such insider deals. The Department of Justice (DOJ) is focusing on a wide circle of expert network firms which feed inside information to financial management companies, matching various company insiders to stock traders. Wall Street argues there’s nothing wrong with this practice, that it is part of due diligence. The trouble with this argument is that the public isn’t connected to the process and is often enough victimized by it. DOJ is now trolling for insiders willing to wear wires to help build cases against billionaire hedge funds and those who feed them insider information. If there is honor among thieves, DOJ is proving the opposite is true. If stock and bond traders can’t cash in using legal practices, they can always snitch and pick up whistle blower awards granted by regulators that are often equal to, and at times exceed, the bonuses given to top financial executives. So where do you come down on my initial question? Do you call DOJ or do you take your insider tip and run straight to your broker? Critics of insider trading say the “integrity” of the market depends on your answer. Yet these same critics are challenged to find — let alone protect — the integrity they are so eager to preserve.

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Robert Creamer: No Mr. Boehner, America is Not "Broke"

February 15, 2011

Once again on the Sunday news shows, Republican Leader John Boehner declared that “America is broke” — his premise for why we “can’t afford” important investments that are critical to America’s future. In fact, of course, America is far from “broke”. It is the largest economy in the world. After collapsing as a result of the recklessness of the big Wall Street banks — and Republican economic policies in late 2008 — the economy has, in fact, grown for six consecutive quarters. The stock market has almost doubled since the crash — regaining most of its value. Corporate profits are soaring. And American corporations are now sitting on close to two trillion dollars in cash. What’s more, we still have the same highly-skilled, productive labor force and the same stock of plants and equipment that we did before the financial meltdown — the same ability to create the goods and services that are the real measures of economic wealth. The problem isn’t that America is “broke.” The problem is that economic growth is not being shared with most Americans. The problem is that the very rich are wealthier than ever and everyone else is falling behind. Not only does that mean that the massive store of wealth that we create today is not widely shared. It also means that — taken together — we have less wealth as a nation because so many Americans who could be creating goods and services are unemployed, creating nothing. Of course the implication of the “America is broke” mantra is that we have to make massive cuts in programs and services that benefit the middle class and poor because we “can’t afford them” — us being broke and all. Frankly, you have a hard time taking that kind of talk seriously from a guy who just recently demanded that America continue to give massive tax breaks for the wealthy for the next two years — and who wants to flat out abolish the estate tax that, by definition, benefits only the sons and daughters of multimillionaires and billionaires. Is America broke? Have a look at John Paulson. In 2007, as the financial crisis descended, he made $4 billion in personal income betting against subprime mortgages that helped sink the rest of the economy. Last year he made a record $5 billion in personal income as the manager of a hedge fund. By the way, had he somehow managed to make that astronomical sum of money laying bricks or sweeping floors, he would have paid taxes at a rate of 35% on the bulk of that income. Instead, he paid at a rate of only 15%, since he earned his money by speculating as a hedge fund manager instead of making a useful good or service. Makes sense, right? Last year Mr. Paulson made as much as 100,000 of his fellow citizens who earned $50,000 per year. Paulson’s haul may have been a record, but Appaloosa Management’s founder David Tepper and Bridgewater Associates chief Ray Dalio each did pretty well too — between $2 and $3 billion each. And the rest of Wall Street was back in the money as well. Boehner’s attempt to justify massive cuts in investments that will grow the economy in the future — like education and infrastructure; or his insistence on cutting money that is used by the states to pay firefighters and police; or cuts in programs that take food out of the mouths of poor children — are outrageous so long as most of our economic growth goes into the hands of the wealthy few. Let’s remember a few key facts about our current federal deficit: The last time the federal budget was actually in balance was not under the Republicans — but rather under Bill Clinton. The current deficit was caused exclusively by the Bush tax cuts, two unpaid-for wars that cost trillions, and the largest recession in eighty years — caused by the same Republican economic policies Boehner is trying to sell today. Between 2001 and 2008, the Bush Administration and the Republican Congress rolled up more federal debt than all other Administrations in the history of the United States combined. It is entirely possible to deal with the federal deficit without making the middle class and poor pay the bill. My wife, Congresswoman Jan Schakowsky, who was on the President’s Fiscal Commission, outlined precisely such a proposal last fall. It makes many cuts to spending that go for unnecessary tax expenditures like subsidies to Big Oil and it relies on making the wealthiest among us pay their fair share. It makes the people who had the economic party over the last two decades pay the bill — not middle class and low income Americans who didn’t even get an invitation. The deficit is not some inevitable consequence of our being “broke” — or some law of nature. It was caused by human decisions to allow wealthy people to reduce their contribution to our common activities and to use them, instead for themselves. For example, it is entirely possible to raise the same amount that Boehner has proposed cutting in the 2011 (this year’s) federal budget simply by adding a few new tax brackets to the tax code for those who make more than a million dollars. You bump the tax rate up at a million dollars, at ten million, at fifty million — and a billion. You don’t even have to raise them that much. Right now people who make5 billion per year — America’s economic royalty — pay taxes at the same rate as upper middle class professionals who make360,000 — where the current highest tax rate of 35% kicks in. Often, because of tax loopholes — or because they’re hedge fund managers — they actually pay less. The reason why this approach works so well is that all the new income is going to that tiny percentage of the population. To fix the deficit, you have to go where the money is. Yesterday the President proposed his fiscal 2012 budget. It makes major investments in precisely the areas that will help us out-build, out-educate and out-compete the rest of the world in the 21st Century. His budget includes new investments in education, clean energy and infrastructure. Many of these initiatives have already been attacked by Republicans because “we can’t afford them — after all, American is broke.” We may not be broke now, but we really will be broke if we don’t invest in the future. The President also proposed cuts in a number of areas that we truly can’t afford (and really never should have done in the first place) — like subsidies to the oil and gas companies that are making record profits. He also proposes $78 billion cuts in military spending over the next five years. But the President was also forced to propose cuts in important programs that benefit average Americans. He proposed cutting the home-heating program, community block grants that are critical to low-income communities, and even the fund to clean up the Great Lakes. These are important programs that are critical to real people and to our future. The President himself supports these programs. He was not forced to propose the cuts in programs like these because America is broke — he made these proposals because the Republicans insisted on continuing the Bush tax cuts for the wealthy for the next two years and that limits investment in important priorities. Think of it. It is outrageous that we should cut money that assures that people don’t freeze in the winter so that the likes of John Paulson — the $5,000,000,000,000 dollar man — will not have to pay a couple of percentage points more on his income taxes. But that is exactly the consequence of Republican insistence that the Bush tax cuts for the rich continue. And it is just the beginning of the menu of Republican “priorities” that we will see laid out over the next several weeks. All of this “America is broke” — “just stop the spending” — rhetoric sounds very appealing until you start looking at who is hurt by the cuts, and who benefits by not paying their fair share to finance government — the things we do together. Over the next few weeks, the budget debate will shift from the rhetorical and abstract to the personal and concrete. If progressives can make that happen, the Republicans will be forced into a full retreat when it comes to the budget debate. It’s about time. Robert Creamer is a long-time political organizer and strategist, and author of the book: Stand Up Straight: How Progressives Can Win, available on Amazon.com .

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Video: Level Global Closes Firm, Returns Capital to Investors

February 11, 2011

Feb. 11 (Bloomberg) — Level Global Investors LP, one of four hedge funds raided by the FBI in November as part of a federal insider-trading probe, decided to close and return cash to clients, according to a letter sent to investors. The $4 billion firm, co-founded by David Ganek and Anthony Chiasson in 2003, said it expects to sell all of its holdings by the end of March. Bloomberg’s Jon Erlichman reports. (Source: Bloomberg)

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Lynn Parramore: Crank Up the Casino! Hedge Funds to Short American States and Cities

February 9, 2011

Today, Washington’s lawmakers began hearings on the massive fiscal problems the Great Recession dumped on American states and cities. The looming possibility of municipal defaults, which some say could total hundreds of billions of dollars, is causing grave concern. Hedge funds are also deeply concerned about America’s municipal debt crisis. They worry about how to best profit from it. The Wizards of Wall Street have looked over the catastrophe of cash-strapped America and found it good for business. In their corporate laboratories, they are working furiously to whip up wondrous new financial products that will allow them to reap millions from misery. You might think that after plunging the country into said Recession with their fancy financial products, these Wizards might feel a little indelicate about gearing up for a game of shorting a community near you. Clearly you don’t know Wall Street. The Financial Times reports that once-boring muni bonds are suddenly sexy: For decades, this $3,000bn bond market was safe, predictable and dull. The traditional buyers of the bonds issued by states, cities and other local bodies were wealthy local residents lured to them by the tax breaks on offer for individual investors. They bought the bonds, held them until they matured and then bought more. Not now. State deficits have ballooned, local authorities are grappling with huge public sector pension liabilities and triple A bond insurance that used to prop up even the riskier municipal bonds is harder to find. The mounting concern over “munis” has brought with it hedge funds and financial institutions who want to bet on the bonds’ creditworthiness, or make money on the back of volatile “spreads” — the premiums at which munis trade relative to benchmark debt. So much suffering. So many ways to squeeze money from it. The FT quotes the head of municipals at Arbor Research and Trading, who sums up the current hedge fund frenzy building: “There is a lot of blood in the water in the municipal space. Hedge funds smell that blood and are trying to figure out the best way to make money in the marketplace.” What the Wizards have to do is figure out how to take short positions that will soar in value as the creditworthiness of munis fall into the crapper. And it’s to credit default swaps — those “innovative” financial products that helped bring you the financial crisis — that the hedge hogs are turning. Credit default swaps are like insurance. Except that unlike insurance, which you can only buy on assets you really own, you can buy these goodies on your neighbor’s house, too. The moral hazard problems of this sort of nonsense are well known, which is why Wall Street fought so hard to make sure credit default swaps were not regulated like insurance. Once upon a time, as my colleague Tom Ferguson explained to me, English insurers discovered that scoundrels would buy insurance on ships they didn’t own and then leak voyage details to the French navy, so they could collect. Guess who sells most municipal bonds? Many of the same people who’ll be betting on their failure now. See a problem here? If you don’t own the underlying asset, then credit default swaps are simply gambling. So what we are talking about is an extension of casinos to every state and city in America. The European Union is finally moving on these vultures. But not us, it seems. The perversity of gorging on suffering never seems to bother the American financial sector. JPMorgan feeds on our hunger with its lucrative food stamp card business. And AIG gets into the game of letting strangers bet on your life. Why shouldn’t hedge funds make a little extra dough from the collapse of your hometown? Cross-posted from New Deal 2.0 .

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Insider Trading Accusations Describe Network Of Hedge Fund Corruption

February 8, 2011

In the latest charges to be brought against Wall Street financiers, Federal authorities depict insider trading in dramatic detail. Two hedge fund managers — Samir Barai and Donald Longueuil — were arrested Tuesday morning on charges of insider trading, Bloomberg reports. Two others — portfolio manager Noah Freeman and analyst Jason Pflaum — pleaded guilty. The charges are the latest example of a Federal crackdown on insider trading that the Wall Street Journal detailed in November. In a pair of documents, the Securities and Exchange Commission and the Federal Bureau of Investigation describe an illegal exchange of information, which allegedly allowed hedge funds to reap $30 million in profits. According to the Federal complaints, employees at publicly traded technology companies sold secret information about those companies to workers at hedge funds, which then used that information to make big trades in the companies’ stock. The information was enormously profitable for the firms that received it, according to the court documents. Many of the allegations involve Winifred Jiau, who, the documents say, was employed by various technology companies and, at the same time, by Primary Global Research LLC, as a “private expert.” PGR would allegedly receive information from Jiau and then pass it on to clients, including Freeman and Barai. In May 2008, for instance, Jiau allegedly gave Freeman and Barai early information about the earnings of Marvell Technology Group. According to the SEC, Barai’s hedge fund subsequently reversed its short position on Marvell’s stock, and reaped close to $1 million in profits and avoided losses. In another case, Freeman earned about $9.7 million for his hedge fund, after learning secret information, the SEC says. The FBI documents add more color to the accusations. In November last year, after he read about the probe into insider trading, Barai allegedly wrote to Pflaum from his BlackBerry: – This scope is said to focus on the use of so-called expert network firms – Concern for years that some experts may be passing out confi [meaning, confidential] info about to go public cos [meaning, companies] to traders…. – [The Firm] was only one named!!!! – F*****ck The next morning he said, according to the FBI: – Didn’t sleep much either. – I dunno – I think we ok tho – I think U just go into office – Shred as much as u can He also said, according to the FBI: – Let’s not worry…. – No evidence we got exact info – So it doesn’t matter…. – Forget the past – No proof – So ur fine During a conversation between Freeman and Longueuil, which they recorded, they describe how to destroy electronic evidence, the FBI says. From the document: Freeman then remarked, “I don’t see how you get rid of this sh*t,” to which LONGUEUIL explained, “Oh, it’s easy. You take two pairs of pliers, and then you rip it open … and then, it’s just a piece of NAND. … So I just f*cking ripped it apart right there. … I had two external drives that had like wafer numbers on ‘em. F*ckin’ pulled the external drives apart. Destroyed the platter. … Put ‘em into four separate little baggies, and then at 2a.m. … 2a.m. on a Friday night, I put this stuff inside my black North Face [u/i] jacket, … and leave the apartment and I go on like a twenty block walk around the city … and try to find a, a garbage truck … and threw the sh*t in the back of like random garbage trucks, different garbage trucks.” Longueuil and Freeman have been accused of insider trading while they were employees of SAC Capital Advisors, the $12 billion hedge fund run by Steven A. Cohen. The company released a statement saying it is “outraged by the alleged actions of two former employees, which required active circumvention of our compliance policies and are egregious violations of our ethical standards.” Cohen, who is worth more than $6 billion , and who owns artist Damien Hirst’s embalmed tiger shark, “The Physical Impossibility of Death in the Mind of Someone Living,” has been sued repeatedly by his ex-wife, Patricia Cohen. In the latest version of the suit, she alleges that Cohen himself participated in insider trading. From the suit : Such privileged information was provided to Steven as part of his relationship with Mr. Newberg and as part of an effort to “take care of one another.” They sometimes referred to their group of Wharton friends as “the Wharton mafia.” READ the complaints below, from the SEC and the FBI: comp-pr2011-40 CNBC_Barai_et_al_Complaint

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Dan Dorfman: Dire Warnings From a Bear and His Top Stinkers

February 5, 2011

If anything, the latest bummer of an employment report, last month’s creation of just 36,000 jobs, versus a widely anticipated gain of 130,000 to 150,000 jobs, is a renewed S.O.S. that the wave of euphoria engulfing Wall Street may be way overdone. Apparently investors don’t want to hear — or they don’t believe — any dissent. Indicative of this, with the sizzling 12,000 Dow already up about 84% from its March 2009 low of around 6,500 and 20% since late August, investors are once again scurrying to the stock market on the heels of a peppier economy. Last month, for example, they snapped up an estimated $8.3 billion worth of U.S. equity mutual funds, the biggest such buying outburst since May of 2009. But where there’s assent, there’s always dissent just around the corner. One dissenter is Dallas portfolio manager John Del Vecchio, who believes the recent buyers are waking on thin ice, are way too late to the party and predicts a 9,000 Dow later this year, which reminded me — if he’s right — of a noteworthy comment by Robert Louis Stevenson: “Sooner or later, everyone sits down to a banquet of consequences.” He’s right. Just ask Egyptian president Hosni Mabarak; he can tell you all about it first hand. On a very different scale — call it a financial scale — Del Vecchio believes America’s more than 80 million stock owners should also prepare for their 2011 banquet of consequences. “I wouldn’t buy a stock now with counterfeit money,” he says. That’s highly contrary stuff, given the widespread bullish sentiment sweeping Wall Street. Del Vecchio is practically a lone voice in the wilderness. Still, give the man his due because the 35-year-old portfolio manager is gutsy enough to bet his career he’s right. In effect, he’s essentially attempting to do what not even the bravest matador would do — basically enter a bull ring armed with little more than a ball point pen. Essentially, that’s what our bold market matador did January 27 by launching, in what appeared to be an act of atrocious timing, given the vigor of the market, an exchange-traded short fund — AdvisorShares Active Bear. The Dallas-based fund which manages assets of more than $25 million, is traded on the Big Board under the symbol HDGE. Its thrust: to short equities of companies that it concludes has low earnings quality, aggressive accounting and which may also be understating expenses. Del Vecchio, a forensic accountant and a former hedge fund manager the past 2.5 years at the Ranger Capital Group in Dallas where he averaged a 16.5% gain during that period, singled out the government’s inability to create jobs as one of the key reasons for his bearish outlook. He also spotlighted a number of his top stinkers, stocks he’s short and sees underperforming the market this year by about 20%. These include such well known names as Bank of America, Amazon.Com, Juniper Networks, Avon Products, Kohl’s Corp., Abercrombie & Fitch, Yahoo, Salesforce.Com, Visa, Broadcom Corp. and Stanley Black & Decker. As far as the economy goes, Del Vecchio is convinced it won’t really come back until jobs come back. And QE2 (quantitative easing) is not creating jobs, he says. In conjunction with this, he sees the economy continuing to suffer from shrinking incomes, people dipping into savings to pay their bills, inflation (namely higher food and gas prices) and deepening housing woes. As such, in contrast to most economists, he expects very little economic growth year, with the likelihood of a double-dip recession starting some time in the second half. The economy aside, Del Vecchio also believes the market is foolishly brushing off the Egyptian mess, In particular, he points to the danger of extremists infiltrating any new leadership. “The market has now added a new element of uncertainty,” he says. The manager is also worried about the overwhelming amount of bullish sentiment pervading Wall Street, noting there are three bullish investment advisers for every bearish adviser, that 93% of stocks are trading above their 200-day moving average and that 80% of equities are trading above their 50-day moving average. The risk here, says Del Vecchio, is there’s so much complacency, with too many investors following the herd. The added danger, he notes, is that “investors could follow the herd off the roof.” An obvious question: With the market as strong as it is, what is the trigger that could drive the Dow down to 9,000? Del Vecchio offers two of them: debt rollovers involving Europe or U.S. municipalities. Running out his current list of his stinkers, our bear points to such additional shorts as Hasbro, Digital River, Green Mountain Coffee Roasters, Herbalife, Netapp, Citrix Systems, Paccar, Netgear, Foot Locker, Trinity Industries, QLogic, Sandisk Corp., WMS Industries, Rackspace Hosting, Expeditors International, Asiainfo-Linkage and Pegasystems. A golf lover, Del Vecchio shoots in the high 70s and low 80s, he tells me. That’s impressive. The $64,000 question, of course, is whether a bear can tee off as well in a bull market? What do you think? E-mail me at Dandordan@aol.com.

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Penny Herscher: White-Collar Americans Are Guilty Until Proven Innocent

February 4, 2011

Americans have a legal right to be presumed innocent until proven guilty, and yet for white-collar workers, that’s nice in theory but simply not the case in practice. I am CEO of a California software company and saw this issue up close a few days ago. We are hiring right now. My team and I follow a rigorous hiring process — screen resumes, look for experience fit, interview on the phone, interview in person, discuss the candidate as a team, reference check and then hire. We look for skills, experience and values — will the candidate be a great fit for our open position and our company? Will they be successful working with us? I have been interviewing candidates over the past month and was sent the resume of an individual currently charged in the active New York insider trading case . NY prosecutors have charged six employees of high-tech firms and the expert network service Primary Global Research with leaking and profiting from sharing insider information with hedge funds. The state is proceeding against both high-tech insiders who allegedly leaked confidential information — like Walter Shimoon from Flextronics — and the conduit of the information to the hedge funds like PGR employee James Fleishman . And today the SEC piled on with additional charges of insider trading. My candidate was one of the six accused individuals. He had an excellent experience fit for the position we have open and, because he was a qualified candidate, and I believe everyone is innocent until proven guilty, I explored the next step and consulted with my lawyers at Wilson Sonsini on the risks of bringing him in for interview and potentially hiring him. Bottom line — it’s not practical to hire someone in a customer-facing position who is facing criminal charges. My lawyer’s advice was pragmatic: The individual won’t be available 100 percent of the time to do the job. If you live and work in California, but you are being prosecuted in New York, you are going to have to take time out to travel, stand in court and defend your liberty. That’s going to be more important than any job. They’ll be distracted. Successful sales takes 1,000 percent focus, especially in this economy just emerging from a recession. You can’t afford to be distracted by anything. If the employee fights for their innocence they’ll be fighting for months or years — if they plead guilty and cooperate with the state in order to reduce their sentence or not serve any time then they are a convicted felon. And the toughest reason for a CEO to hear: Your company will be painted with their tainted brush if you put that person in a customer facing position. This is because you would have knowingly hired someone the government has stated is fraudulent — and if a customer has a dispute with your company that fact will hurt your defense. Your company will be presumed to be OK with fraud and on the defensive as a result. If we, as a business community, truly believed each person is innocent until proven guilty, then our customer base would be fine with us hiring someone under indictment, but my lawyers were right to advise me as they did. I checked. Most customers would not want to work with someone under indictment — it would be uncomfortable for them, and my company would be tainted. Most customers (and employees) would doubt and assume there is compelling evidence or the government would not have charged the candidate. I find myself terribly conflicted in the situation. I’m a CEO with a responsibility to my company and my employees, and yet I am a private citizen with faith in the law. I did not proceed with the candidate because I recognize that the law is our culture’s minimum moral standard, not the maximum, and so as a CEO I had to make a gray-area judgment that I did not like. The harsh reality for white-collar workers is that ” doubt is as powerful a bond as uncertainty ,” and in our current business climate, if accused by the State, they are at a practical level guilty until proven innocent.

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Lawrence G. McDonald: Fannie Mae and Freddie Mac’s Days Are Numbered, But It’s a Big Number

February 3, 2011

In my New York Times Best Selling book, A Colossal Failure of Common Sense — The Inside Story of the Collapse of Lehman Brothers , I make a strong case. Our government allowed Fannie Mae and Freddie Mac to become a giant mortgage backed security hedge fund, complete with 70-1 taxpayer funded leverage. They had sub Libor financing, meaning the luxury of borrowing money at one of the lowest interest rates in the world, all risks backed by the US taxpayer. To understand this kind of leverage imaging walking into the most profitable casino in Las Vegas, all you have is $100 in your pocket. Yet, because of your good credit, the casino allows you to play blackjack with $7000 at risk on the table. The slightest loss and your equity is wiped out. That’s exactly what happened to Fannie and Freddie and today the US taxpayers have lost well over $360 billion in this reckless risk taking bonanza. That’s over half the cost of the entire war in Iraq. It wasn’t always this way but as Samuel Johnson once said, the road to hell is paved with good intentions. In the 90′s Fannie and Freddie only used 30-1 leverage but the great enabler, US Congress, was there all they way either ignoring or clueless as to the real risks lurking below the surface. I know a thing or two about risk and leverage. My former employer was levered 40-1, that was before we filed Chapter 11 bankruptcy. Uncle Sam chose not to save Lehman yet letting her fail cost the taxpayer dearly. When that $660 billion domino fell, she obliterated the value of Fannie and Freddie’s $5 trillion mortgage portfolio, crushing the US taxpayer in the process. Thank you Hank Paulson. Where We Stand Today The recent conferences in Washington debating reform of Fannie Mae and Freddie Mac are filled with political mud slinging, it’s the ultimate blame game. Last week’s release of the Financial Crisis Inquiry Commission’s (FCIC) Report and Dissents are making big headlines. Yet, the story within the story is how political infighting tore this dysfunctional commission apart, ten million dollars spent and we have very little to show for it. I am outraged that President Obama has not stepped in here. I think he blew a golden opportunity to lead and protect billions of US taxpayer dollars at stake. The FCIC report is a joke, it’s the rehash of all rehashes. It looks like my book, Andrew Ross Sorkin’s Too Big to Fail and Michael Lewis’ The Big Short . All thrown into one 700 page document. Is there anything new we have learned in the Commission’s report? Are there clear recommendations that will help prevent another financial crisis? No. The commission was divided by politics and their conclusions are as messed up as a Brett Farve retirement party, his 7th one no less. Ironically the most hapless part of the commissions report is probably the most important. What really went wrong with Fannie and Freddie and how do we fix them? The real battles are being fought within the Obama Administration, among regulators over smaller related housing issues, and between Republicans in the new Congress. The next few weeks will show significant developments in some of these areas, but the process for reforming Fannie and Freddie, the housing finance system more broadly, lags far behind the deficit and job creation in the minds of Congress and the Obama Administration. It’s a shame but look for this battle to take years, not months, dragging out the uncertainty and sclerosis which has plagued the housing markets for the past several years. The Obama Administration has recently leaked reports to the press that their report outlining suggested reforms to Fannie Mae and Freddie Mac, will be delayed till mid-February, from the statutory due date of January 31. The Deadly Divide? My friends at DCTripwire [firewalled] tell me the likely causes of this delay are twofold: (1) A lack of senior staff at Treasury and the Federal Housing Finance Agency (FHFA)–the same over loaded team responsible for implementing many of the rules and regulations of the Dodd-Frank Act. Guess what? They’re also in charge of Fannie and Freddie reform. (2) The fact that there is a divide within the Obama Administration, both substantively and politically on any reform efforts. One side is determined to maintain some sort of government (and hence taxpayer) guarantee of mortgage securities, providing support of middle class homeowners. The other side seeks to remove the government from having either an explicit or even implied guarantee. Instead they hope to trade this removal of the government from the market for the creation of a fund to assist low-income citizens in attaining affordable rental housing. We all know President Lincoln once said “A house divided against itself cannot stand.” Well, this one can’t even roll over. Why? Because Treasury Secretary Geithner (and former National Economic Council Director Larry Summers) are in the former group, while Housing and Urban Development (HUD) Secretary Shaun Donovan and other progressive members of the Administration are in the latter. This might explain President Obama’s silence over the politically handicapped Financial Crisis Inquiry Commission. Even with the Administration’s move back towards the political center, I think the President’s chum Tim Geithner wins and their report, whenever it is issued, will maintain some government role in the mortgage market. I’m told the report will also spell out several options for housing finance reform, in very broad terms, and will not be in legislative language. The Obama Administration wants this report to add to the discussions on Fannie and Freddie, but for political reasons, they want to allow Republicans in the House of Representatives to launch the first salvo in this legislative battle. Inside the Reform Process Despite the lack of concrete action by the Administration, there are several regulatory actions that are being discussed or implemented at present. The first actions have been taken internally by Fannie and Freddie. They each have improved their balance sheets since conservatorship began. Credit standards have been raised, and both they are refusing to purchase mortgages from borrowers with poor credit scores. Fees that each entity charges to banks to guarantee their loans have also been increased and this income has helped to rebuild their balance sheets. Fannie and Freddie still owe a substantial quarterly payment to the Treasury Department in the form of a 10% dividend on the Treasury’s preferred stock. If this dividend was lowered, it would allow the them to begin to repay the billions in taxpayer support and simplify any future restructuring. Any change to the dividend would need to be approved by both Treasury and the Federal Housing Finance Administration (FHFA) which is the GSEs conservator. Expect that any changes will be subjected to heavy Congressional scrutiny. In a move I support, Fannie and Freddie are contemplating is a shift in the ways that servicers are compensated. This is crucial because the incentives in the mortgage servicing business are all screwed up and have hurt the foreclosure process. According my DCTripwire, a Federal Housing Finance Administration / HUD study is being made of future mortgage servicing structures and compensation for single-family conforming mortgage loans. Servicer compensation at present is based on a minimum servicing fee that is included in the mortgage rate, and thus decreases the flexibility of servicing non-performing loans, which has the potential to affect negatively both borrowers and guarantors. Democrats will continue to hammer on mortgage servicers and the lack of investigation and sanctions by the Obama Administration on servicers. Special Inspector General for TARP, Neil Barofsky has assured the Congressional Oversight Committee that criminal investigations and audits of the largest servicers are currently underway, in addition to the 50 state attorneys’ general investigation, though he also emphasized that the Administration could and should do more in this area. Fannie and Freddie Reform Efforts in Congress After the release of the White House report on options for the future of housing finance, look for Congress, especially Republicans in the House of Representatives, to take the lead in proposing GSE reforms. The House Financial Services Committee has already scheduled four hearings on housing and GSE-related topics. When following these developments, it is important to note that the Committee’s rules have reverted to “regular order” whereby the Subcommittee Chairs will hold all, or nearly all, of the hearings on individual topics and investigations , leaving the full Committee hearings, led by Chairman Spencer Bachus (R-AL), for marking up legislation and receiving prominent figures, such as Federal Reserve Chairman Bernanke. Reading between the lines, in my opinion I don’t think House Speaker Boehner and House Finance Committee chair Bachus are all that close these days, especially on reform of Fannie and Freddie. Boehner’s Boys This Subcommittee move is significant change and will introduce important new names and characters into the contentious world of housing finance, including the Rep. Neugebauer (R-TX); Rep. Jeb Hensarling (R-TX), Committee Vice-Chair; Rep. Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets & GSEs (Fannie and Freddie). The list of hearings shows that housing finance and GSE reform are the main focus of the Committee, save Dodd-Frank oversight and macroeconomic policy. What has also become apparent is that Committee Republicans are no further along in devising a credible plan for reform of the GSEs than they were during Dodd-Frank Act negotiations. After conversations with House staff, it is likely that Vice-Chairman Hensarling’s bill from the 11th Congress remains the starting point for Republican legislative reforms. The bill was widely derided in the 111th Congress as “unserious,” since it remains ideologically pure, and refuses to acknowledge the fact that the GSEs currently represent nearly 100% of the mortgage securitization market, alongside an extremely weak housing market. With this in mind, look for the Obama Administration, despite their internal disagreements, to acknowledge this reality and allow Republicans to take the lead in this contentious area as part of a delaying tactic, hoping to push reform off for as long as possible. As mentioned earlier, House Republicans have painted themselves into a corner, consistently and eagerly proclaiming that any government guarantee or involvement in the housing finance markets, save perhaps the Federal Housing Administration and Veterans Administration (for providing assistance to first-time moderate income homebuyers), is unacceptable. Look for any House Republican bill to draw heavily from the work of Peter Wallison, who along with Alex Pollock and Edward Pinto, have recently released a White Paper entitled : “Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market.” Rep. Garrett, who is expected to lead the way on this issue, has been quoted this past week saying definitively, “There can’t be any explicit guarantee. The main problem has been that the taxpayer has been on the hook for this credit risk for a long time. We are adamant there should be no more bailouts.” This will make any compromise with the Democrat-controlled Senate very difficult, if not impossible, let alone with the Obama Administration. Although Garrett and his fellow House Republicans are often portrayed as sympathetic to the financial services industry, the Congressman has also been quick to pour his scorn on an industry proposal, from the Financial Services Roundtable, which proposes to replace the GSEs with several privately capitalized firms that would package mortgage-backed securities, while the federal government would guarantee the interest and principal for investors. In theory the very same entities securitizing nonconforming and private label securities would also be the co-owners of the guaranteeing entities, but these would only be allowed to work with traditional, conforming, 30 year mortgages. The Federal guarantee would not apply to the new entity itself, or any debts or securities issued by them to cover the costs of their operation. The Long Road Ahead The problem for Garrett and other Republicans will be the presence of a “federal catastrophic insurance fund,” similar to that which was put in place after 9/11 for terrorism reinsurance. This fund would support the guarantee only if one of these firms fell into financial trouble. The guarantee firms would contribute to the insurance fund and several layers of capital would need to be used up before the government was responsible. Even this level of taxpayer exposure is unacceptable to many Republicans. Instead of any government support, the Republican school of thought espouses a housing finance sector where the government operates only on the margins, by setting and enforcing standards for what types of mortgages can be securitized, what are appropriate servicing standards and procedures, and potentially by explicitly offering rental assistance for affordable housing. Most plans for privatization of the GSEs are implemented chiefly through the gradual reduction in the size of the conforming loan limit (at a rate of around 20% per year), so that in theory, the private sector is able to securitize more and more newly originated mortgages, and/or an alternative such as covered bonds are introduced. Due to the problems that may result from such a plan, it is likely that the Senate Banking Committee will proceed on GSE reform at a far more deliberate pace than the House akin to the recent Dodd-Frank Act preparations. The Senate Committee (which has yet to hold its first organizational hearing) also will have several new personalities, including a new Chairman, Tim Johnson (D-SD). Its increased Republican presence, which is increasingly made up of conservative-leaning members, will likely echo the House Republicans. Two Senate Republicans are likely to emerge as key thought-leaders in this debate, Senator Mike Crapo (R-ID) and Bob Corker (R-TN). Early indications are that although they each consistently show concern for taxpayers, they both recognize the inherent risks of rushing though a privatization of the GSEs with a weak housing market and without deep and serious reforms of the other aspects of housing finance, such as the rules regarding securitization (including servicing standards, representations and warranties.) It is doubtful that any substantive legislation will be introduced before the summer and even then, it will likely only be in the House, with the Senate months, if not nearly a year behind. For more info go to www.lawrencegmcdonald.com or www.dctripwire.com

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Wall Street Preps For Exodus Of Talent To Hedge Funds

February 2, 2011

BOSTON (By Aaron Pressman) – The usual flurry of brokerage firm traders seeking to join hedge funds after the payout of annual bonuses could be more of a blizzard this year, with compensation shrinking on Wall Street and a regulatory crackdown in the offing. Wall Street’s leading banks cut bonuses by an average of 5 percent for all employees, according to a Reuters survey conducted last month. But executive recruiters say the drop for traders was more severe, closer to 25 percent to 30 percent, because of weaker results and the expected implementation of the Volcker rule ending proprietary trading at the banks. “People on proprietary trading desks are showing a greater level of interest in hedge funds than in the past,” said Paul Sorbera, president of executive recruiter Alliance Consulting. “Even if their bank isn’t shutting the desk down, the pending rules make people in the seats concerned for their longevity.” Details of the rule, first proposed by former Federal Reserve Chairman Paul Volcker, are expected from U.S. regulators within months. Mandated as part of the Dodd-Frank financial reform law last year, the Volcker rule seeks to ban proprietary trading at banks, but it is not clear how tight the restriction will be. Last week’s headlines about hedge fund star John Paulson’s $5 billion 2010 paycheck also certainly got the attention of Wall Street’s top traders. Goldman Sachs’ recent award of a $2 million annual base salary and $12.6 million in stock to its chief executive officer, Lloyd Blankfein, pales in comparison. GLORY DAYS OVER? Hedge fund compensation overall is recovering from a dip during the credit crisis. And after a burst of fund closings and client redemptions, the $1.9 trillion industry is getting an influx of cash again. “Where we are now, it’s certainly much more difficult for the banks to compete for that talent,” said Lawrence Lieberman, senior managing director at Orion Group, an executive recruiting firm that focuses on the money management industry. On average, senior equity professionals at hedge funds — including portfolio managers, traders and analysts — made $875,000 last year, up from $800,000 in 2009, according to a survey by compensation consultants at Greenwich Associates and Johnson Associates. The average for fixed income pros rose to $1.1 million from $1.0 million. While pay for bond traders at the hedge funds slightly exceeded pre-crisis levels, equity market specialists still have a lot of ground to make up before they again reach the 2007 average of $1.7 million. The Greenwich/Johnson survey found much lower salaries in its “other” category, which includes banks, but the group’s data is skewed by the inclusion of much lower pay at insurance companies and government agencies. In equities, senior professionals made $385,000 on average in 2010, up from $350,000 in 2009. On the bond side, the average pay increased to $450,000 from $400,000. Making comparisons between average pay at hedge fund and Wall Street firms is almost impossible, Johnson Associates Managing Director Alan Johnson said, but people are moving for more money. “It’s driven by pay — that’s a lot of it,” he said. On Wall Street, compensation is shrinking for many traders. Profits are down from the glory days, and new rules from Dodd-Frank and the Securities and Exchange Commission have increased pressure to curb pay. Morgan Stanley not only reduced bonuses, but also increased the portion of the payouts that cannot be spent for up to three years to 60 percent from 40 percent. Senior executives will see 80 percent of their bonuses deferred, the investment bank said. Even before the figures had leaked out, Morgan Stanley’s head of proprietary trading, Peter Muller, had decided to take his group independent. Top traders at Goldman Sachs, including Morgan Sze, Pierre-Henri Flamand and Daniele Benatoff, have left to open their own funds or are making plans to do so. In October, private equity firm Kohlberg Kravis Roberts & Co grabbed nine Goldman traders led by Bob Howard. Moving to a hedge fund may not be an option for everyone who wants to leave a Wall Street trading desk, given the smaller size of the fund industry, Johnson noted. “We are not talking about thousands of people because there aren’t enough jobs,” Johnson said. “But you will see a lot of the most valuable and most prominent people go.” Beyond 2011, further regulations will probably determine the long-term trend in the sector, according to University of Virginia economics professor Ariell Reshef, who studied the after-effects of Depression-era regulation on Wall Street. Rules put in place so far pale in comparison to what was done in the 1930s to curb risk-taking, including the Glass-Steagall Act of 1933, which separated banking and underwriting, Reshef said. “We have not seen any significant regulatory changes,” he said. “What has transpired is small cash compared to 1933-34 regulatory reforms — pun intended.” (Reporting by Aaron Pressman; Editing by Lisa Von Ahn) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Ireland Credit Rating Slashed Again

February 2, 2011

DUBLIN â Ratings agency Standard & Poor’s cut its credit grade for Ireland on Wednesday and warned it could fall further because of doubts about the true scale of defaulting loans yet to surface in the country’s largely state-owned banks. S&P joined fellow agencies Moody’s and Fitch in dropping Ireland’s credit score following the nation’s November negotiation of a potential euro67.5 billion ($93 billion) credit line from the European Union and International Monetary Fund. Ireland already has drawn down euro8.4 billion ($11.6 billion) this year from that rescue fund â and plowed much of it straight into the cash-strapped coffers of Dublin banks. Still, S&P’s reduction Wednesday was just one notch to A minus, one step above the multi-grade cuts imposed last month by Moody’s and Fitch. Both dropped Ireland into the higher-risk BBB tier in the immediate wake of the EU-IMF bailout deal. The BBB level is considered the lowest investment-grade rating, whereas BB and lower indicate “junk bond” status. S&P senior analyst Frank Gill warned the agency could also drop Ireland’s rating somewhere into the BBBs in April, once a new Irish government settles in and the impact of the current infusion of EU-IMF cash into Dublin banks can be assessed. The S&P announcement coincided with Wednesday’s formal launch of campaigning for Ireland’s Feb. 25 election. The free-market government of Prime Minister Brian Cowen – who presided over the country’s spectacular collapse from Celtic Tiger success in 2007 to a bank-crippled debtor today – is universally forecast to be ousted from power in favor of a left-leaning coalition. The two parties expected to form the next coalition government, Fine Gael and Labour, are both campaigning on promises to reopen negotiations with the EU and IMF to loosen some of the strings attached to the aid deal. Both question Cowen’s determination to slash euro15 billion ($21 billion) from the economy over the next four years through spending cuts and tax hikes. Troublingly, the two would-be government partners criticize Cowen’s brutal austerity effort from opposite extremes, with Fine Gael favoring more cuts and Labour insisting on more taxes for the rich. Gill warned that Ireland’s economic forecasts presume that the total bank-bailout bill funded by taxpayers won’t top euro50 billion ($70 billion) while the current unemployment rate of 13.4 percent – near a 17-year high – will stabilize in 2011 and decline in 2012. He noted the total debts of the six Irish banks – Allied Irish Banks, Bank of Ireland, Irish Life & Permanent, Anglo Irish Bank, Irish Nationwide and Educational Building Society – actually approach euro275 billion ($375 billion), more than 170 percent of Ireland’s gross domestic product. “Irish domestic banks currently depend almost entirely on the (European Central Bank) to refinance expiring market debt,” Gill said. “Were the labor market to deteriorate further, a rise in the level of delinquencies in the domestic banks’ mortgage books could result in higher new capital requirements than we presently assume,” Gill said. On the flip side, he said Ireland’s prospects would be boosted if European Union leaders agree to change its bailout rules, which currently require donors to tack a profit margin on its loans of approximately 3 percentage points. That means Ireland’s EU-IMF loan package comes with an average interest rate of 5.8 percent rather than the donors’ actual financing costs of 2.8 percent. This premium will add tens of billions to Ireland’s annual deficits, which last year soared to a modern European record of 32 percent of GDP. European leaders are also planning to discuss this week possible bailout-rules reforms that would make it easier for governments to negotiate hefty discounts on repayments to a bank’s foreign creditors. Ireland so far has repaid tens of billions to those banks and hedge funds rather than risk poisoning the country’s credit worthiness with a major default. Ireland’s government and main opposition parties remain publicly committed to a goal of slashing the deficit to just 3 percent of GDP by 2014, the limit that eurozone members are supposed to observe. But that plan presumes Ireland’s economy will grow by at least 2 percent each year, whereas the most recent forecasts from the Irish Central Bank and the Economic and Social Research Institute, Ireland’s main think tank, expect much weaker growth if any in 2011.

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Even After Record Growth, Hedge Funds Don’t Pose Risk, Group Says

January 31, 2011

Even as hedge fund assets grew at a record-breaking pace last quarter, no firm is so big that its failure would pose a threat to the financial system, a hedge fund trade group asserts. The comment comes after two regulators — the Securities and Exchange Commission and the Commodity Futures Trading Commission — proposed new rules that would require advisers to hedge funds to regularly disclose financial information to a government watchdog. More than two years after the near-failure of widely interconnected financial firms prompted a taxpayer bailout, many of these firms are larger than ever. But this danger doesn’t apply to hedge funds, the trade group said. “I don’t believe there is a firm that would be systemically relevant today,” Richard Baker, president of the hedge fund industry group Managed Funds Association, told the New York Times . The issue of “systemic risk,” the phenomenon of a firm’s being so large or interconnected that its failure would take down the system, was graphically displayed in the fall of 2008, when the U.S. government gave the financial industry a more than $700 billion taxpayer rescue. While hedge funds were not direct recipients of the bailout, they remain a key component of the financial system, managing trillions in assets. Baker defended the way hedge funds do business, saying transparency is already a central tenet. “Hedge funds are the last corner of financial free market enterprise,” he said, according to the NYT . Even in the wake of the financial crisis, hedge fund growth has broken records. In the fourth quarter of last year, hedge fund assets grew by a record $149 billion, Reuters reported this month. The global industry now manages more than $1.9 trillion. John Paulson , the hedge fund manager who made billions betting against the housing market, reportedly earned roughly $5 billion last year, logging not only a personal best but also a record for the industry. His firm, Paulson & Co., manages $35.9 billion in assets, according to Bloomberg News . A decade before the government bailout of the financial system, Wall Street banks pooled their resources to bail out Long-Term Capital Management, a fund on the verge of failure. If the firm had gone under, banks would have been exposed to “tremendous — and untenable — risks,” writes Roger Lowenstein in the book When Genius Failed . “Undoubtedly, there would be a frenzy, as every bank rushed to escape its now one-sided obligations.”

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Robert Lenzner: Why The Financial Crisis Could Not Have Been Prevented

January 29, 2011

The multi-trillion dollar meltdown of financial markets in 2007-09 could not have been prevented. It was absurd speculation on the part of the special Presidential Commission to even suggest this impossible nirvana. No way Jose! Let me tell you why. As my esteemed friend Jim Stone, chairman of Plymouth Rock Assurance, headquartered in Boston, puts it so succinctly; “We have wagered our place in history on our relative strength in finance. Bad bet.” The financial markets crisis could not have been prevented because Alan Greenspan, chairman of the Federal Reserve Bank, for 18 long years the power center in the nation for monetary policy, did not believe in reining in the animal spirits on Wall Street. He chose to ignore pleading from wise titans like Loews Corp. Laurence Tisch, and Wall Street great John Whitehead, who begged him to turn off the spigot of easy money and rock-bottom interest rates. Yeah, it could have been prevented if Greenspan had actually taken steps to dampen down “irrational exuberance,” his description of the craziness that began in the mid-1990s– and continued to accelerate until mid-2007. Regrettably, Greenspan’s utter and naive faith in free market ideology, makes him look a fool– not the God-like figure we all created. Yeah, it could have been prevented if the Clinton administration led by Robert Rubin and Larry Summers had not blithely agreed to deep-six the discipline of the Glass-Steagall Act- which in 1933 wisely separated the activities of the investment banks and the commercial banks– and had ensured relative stability on Wall Street for over half a century. Sure, the meltdown could have been prevented if these very same chaps in cahoots with the SEC and some conservative members of Congress had not ambushed an attempt to regulate the fastest growing financial market in the world– the explosion in the use of derivatives– from being regulated in any way, shape or form. The leverage unleashed by these new securities was never understood or considered to be a danger despite warnings from wise heads like Warren Buffett. Ignorance ruled the day. Yeah, the meltdown could have been prevented in 2004 if SEC Chairman Bill Donaldson and 2 of the other 4 Commissioners had not buckled under to Wall Street’s demand that the ceiling on the use of leverage– borrowed money– be raised to unimaginably dangerous levels like being able to borrow $30 or $40 for each $1.00 of capital the banks held. So was endangered the entire financial system with the verdict applied from Washington, DC. Yeah, the meltdown could have been prevented if only Tim Geithner, then President of the New York Federal Reserve Board, had only carried out the duties handed him to oversee, i.e. regulate the money center banks like Citigroup. He did nothing to protect the system before the crisis exploded and the financial system was threatened. I’ve been dying to ask Geithner if he ever reviewed Citigroup’s financial statements to recognize just how dangerous to its survival were the excessive off-balance sheet operations that were not at all in the “shadows” of the shadow banking system– but were right there in front of him. Need I remind you that Citigroup shares fell from $60 to 97 cents in 2009? Yeah, maybe the panic that ensued in September, 2008 might have been prevented if Hank Greenberg– while he was CEO and Chairman of AIG– had liquidated the $240 billion of risky credit default swap contracts on his balance sheet– or if his successors had comprehended the hari-kari they were committing by doubling the 100% leveraged book of insurance to over $500 billion of disaster waiting to happen. And I could go on. But, I’ll leave you with this uncomfortable and disturbing thought. The absurdity of this commission’s conclusion is expressed so bluntly by Douglas Holtz-Eakin, the Chicago economist, who revealed yesterday that the majority Democrats on the commission and the Republican minority were so alienated from each other they weren’t even communicating– well before the reports were even written. All this sordid and tragic mess that Wall Street made for itself with the passive lack of assertion by those responsible for cleaning up the mess. And how ironic it comes in the wake of hedge fund operator John Paulson making for himself some $5 billion in one year of operation– an unbelievable multiple of what the chairman of Goldman Sachs, Morgan Stanley, JP Morgan Chase earn– which is not chump change either. So, I turned to a financier I highly respect, Jim Stone, chairman of the CFTC in the Carter administration, now the CEO and Chairman of a private insurance company in Boston, Mass.– Plymouth Rock Assurance– a hardy competitor to Berkshire Hathaway’s Geico. Here’s what Stone sent me; It’s definitely food for thought. “I think the crash would have been easy to prevent: leverage limits of 5 to 1(or even less) would have done that. Cut leverage and we can all relax a bit” ” A society can be judged by whom it chooses to reward most highly. The closer the reward scale is to the contribution scale, the better for the nation’s future. A trader may be brilliant and honorable, as many are, but their work is not of the sort that will keep America a great, strong nation. That problem is not so easily correctable. We have wagered our place in history on our relative strength in finance. Bad bet.”

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Robert Lenzner: How John Paulson Made $5 Billion Last Year

January 29, 2011

The secret to the spectacular returns Paulson and his employees reported for 2010 is due to their keeping much of their money- $14.9 billion or 42% of the total assets under management($35 billion)- in the funds. That’s called putting your money to work alongside your clients. That $14.9 billion commitment is revealed in Paulson’s yearend letter to investors. Some of Paulson’s personal share must come from the $4 billion he made going short against the subprime mortgage bubble in 2007. The Paulson funds made gross gains in 2010 of $8.4 billion before fees. So, 42% (their share) of the $8.4 billion meant $3.5 billion in gains for Paulson and his employees. Add to that a 2% fee on $35 billion of capital- $700 million- and then the 20% fee on the total profits made adds another $1.7 billion to the pot shared by Paulson and his team. By my figuring then, the total take comes to roughly $6 billion before taxes. Overall, the fund’s strategy made a transition during the year from a short equity bias with a focus on being long distressed securities to a long equity event focus, according to Paulson’s yearend letter. This growing bullishness on the stock market is due to Paulson’s careful tracking of the equity risk premium measured by J.P. Morgan; the difference between the yield on equities and the yield on bonds. Paulson is a buyer of stocks because he sees the equity risk premium in the market as “the highest it has been in over 50 years., indicating to us that equities are due to rise as the current economic environment is by no means the most challenging it has been in 50 years,” he wrote in his yearend letter which was posted Friday on the internet. Last year, for example, Paulson made a 43% return or over $1 billion on Citigroup- buying shares at $3.20 a share and selling them for $4.60 a share later in the year. The Paulson Gold Fund was up over 35% on the year, as positions in Anglo Gold, Osisko and GLD, the giant gold ETF all paid off bigtime. Paulson is optimistic that gold will outperform for the next 5 years and is “the ideal vehicle to hedge against the risk of the U.S. dollar.” The funds held $20 billion in 40 different distressed situations where most of the companies have “repaired their capital structures.” He also sold off positions in major banks like Bank of America, and went long Anadarko, the oil and natural gas producer. Paulson’s hedge fund has piled up gains of 26 billion since inception in 1994- 3rd biggest killing of all hedge funds. Quantum Endowment Fund, begun by George Soros in 1973, has racked up $32 billion in net gains. Renaissance Medallion Fund, founded in 1982 by James Simons, has delivered net gains of $28 billion. He expects all his funds “to outperform in 2011.”

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Hedge Fund Manager Reportedly Brought In $5 Billion Last Year

January 28, 2011

BOSTON (By Svea Herbst-Bayliss) – Billionaire hedge fund manager John Paulson, whose bet against the overheated housing market made him one of the world’s wealthiest people, became a lot richer last year. By earning an estimated $5 billion in 2010 thanks to bets the economy would recover, the 55-year old investor likely set a new record for the $1.9 trillion hedge fund industry’s biggest-ever annual payday. He beat his own record, which he set in 2007 with a $4 billion haul made off the subprime bet. The Wall Street Journal first reported Paulson’s payout in its Friday edition, and investors familiar with Paulson’s portfolios said the number is likely correct given the manager’s asset size and his recent profitable bets on Citigroup and gold. For Paulson, the payday comes after he reversed deep losses in his funds halfway through the year, and it may put to rest lingering talk that his investing prowess was limited to a lucky bet during the subprime era, investors said. “He did it on the short side and on the long side,” said Brad Alford, founder of Alpha Capital Management, which invests with hedge funds. “He proved that he can really do it all.” Other prominent managers like Appaloosa Management’s David Tepper and Bridgewater Associates’ Ray Dalio likely also earned 10-figure paychecks, the Journal reported. EYEBROWS RAISED But Paulson and other managers’ eye-popping earnings are sure to raise new questions about how managers are paid in an industry known for charging hefty fees that often guarantee generous payouts even if returns were merely average. Last year, the average hedge fund gained 10.5 percent, lagging the Standard & Poor’s 500 index by 15 percent and falling short of their own 19 percent return in 2009, data from Hedge Fund Research show. But managers will collect 2 percent management fees and about a 20 percent cut of their gains. By definition, this raises the payouts for managers at the industry’s biggest firms. In Paulson’s case, the fact that his 17-year old firm Paulson & Co oversees about $35 billion fattened up his payout. To be fair, Paulson also invests his entire fortune in his funds and since his gold fund gained 35 percent, his investment gains added billions to his payout. For other managers, including ones who lost money, however, the industry’ payouts may seem less fair, investors and analysts said. “People are fine with hedge fund fee structures as long as they are making great returns,” said Stewart Massey, who invests with hedge funds at Massey, Quick & Co. “But where they get antsy is where managers have middling returns and the managers are still making a lot of money.” As hedge funds look for new investors, experts say that investors’ demands on pay will hold more sway. A push from some investors to set a so-called hurdle rate, or minimum accepted rate of return, for manager pay, or to reward them only if they exceed certain benchmarks may gain traction. ROAD TO BIG PAYDAYS The big paydays at hedge funds are likely to confirm that hedge funds can be modern-day gold mines on Wall Street and spark even more movement from the world of banking and mutual fund management into this asset class. “Many of these big hedge fund managers are now earning more than professional athletes,” said Kenneth Murray, president of Mercury Partners, which recruits staff for hedge funds. “And they can do this for the rest of their lives, unlike sports stars who have to find another job after the age of 35…. 100 percent, hedge funds are the places where everyone wants to be.” But he and other recruiters agreed that the hedge fund industry’s biggest payouts really will be limited to its biggest stars, noting that working at a hedge fund is no longer a sure way to easy riches. As the industry matures, these people said that it is becoming harder for newcomers to break in and that portfolio managers need to bring long records of top performance before getting a job. Also with investors becoming pickier, it is harder to raise a lot of money. “If you’ve been in the game and successful, you may be set for life, but for everyone else it is becoming tougher,” Murray said. (Editing by Robert MacMillan) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Man Gets 2 Years Prison For Disney Insider Trading Plot

January 28, 2011

NEW YORK (By Bernd Debusmann Jr) – A man who admitted to scheming with his girlfriend to try to sell inside information about Walt Disney Co to hedge funds was sentenced on Friday to 27 months in prison. Yonni Sebbag was sentenced in New York after pleading guilty last August to one count of wire fraud and one count of conspiracy. Sebbag, a 30-year-old Moroccan citizen, also faces deportation after his release from prison. His girlfriend, Bonnie Hoxie, admitted to the same two charges in September. Prosecutors said the pair had tried to sell information to more than 30 hedge funds about Disney’s upcoming earnings and possible mergers, which Hoxie learned about as an assistant to the company’s corporate communications chief. They were arrested after several funds reported their activities to authorities. Among the leaks were details of possible advanced talks over a sale of Disney’s ABC television network, prosecutors said. Disney has called references to such talks “false.” More than a dozen family members and friends from Morocco and France were in attendance at his sentencing. Sebbag’s lawyer had sought a sentence of no more than a year in prison, saying Sebbag’s was desperate after the cafe he ran in Hollywood began losing money and he had become addicted to gambling. The U.S. Securities and Exchange Commission filed civil charges against Hoxie and Sebbag last May. The SEC said Hoxie had told Sebbag she coveted expensive shoes and a $700 Stella McCartney handbag. (Additional reporting by Jonathan Stempel; Editing by Lisa Von Ahn) Copyright 2010 Thomson Reuters. Click for Restrictions .

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