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30 Nov 2006

Research shows Big Gains in '07 for Hedge Funds

Hedge funds, which control about $1.3 trillion in assets worldwide, have attracted $44.5 billion in the third quarter, the most since at least 2003, Hedge Fund Research said last month. Hedge funds are becoming more institutionalised and have begun to build organisations with often hundreds of employees.”

Union Bancaire Privee, the world’s second-largest manager of funds that invest in hedge funds believes that hedge funds will continue to attract superior investment talent in 2007, making more money in stocks than in bonds, with bets on rising markets likely to be more profitable than those on declining prices, the hedge fund manager said returns will be “significantly equity-driven” while opportunities to profit from falling prices will be “less numerous” next year, said Jan-Erik Frogg, head of alternative investments at UBP, which manages more than $33 billion in hedge-fund assets.

Event driven hedge funds in the Credit Suisse Tremont Index are up an average of 12% in the 10 months through October. The Standard & Poor’s 500 Index, which is a common indicator of US stocks, has added 11% in the period, while Lehman Brothers Aggregate Bond Index has climbed 4.6%.

Fund managers such as Union Bancaire Privee have benefited from well established hedge funds re opening to new investments from their biggest clients as they see more opportunities. Hedge funds that take new capital are “not announcing to the whole world they’re re-opening, they like to take money from sources they trust and work well with,” Mr Frogg said.

IncreMental Conference on Asset Classes

IncreMental Advantage, LLC announced today that they will be holding their first conference on due diligence for board members and fiduciaries of pension funds, endowments and foundations on February 6, 2007 at the Harvard Club in New York City.

The conference, which will cover both the role of the board member in selecting investments and sessions on the major alternative asset classes, will bring some of the top experts in many fields together. Last month IncreMental held a 'Hedge Fund Due Diligence Conference' to shed light on all aspects of researching hedge funds. Following the success of that meeting, this one will explain the basics of each asset class.“It isn’t easy to be on the board of a pension fund. You are trying to make sure that you have everything that you need for your fellow employees, but there are so many different options out there,” said Justin Meyer, Senior Research Analyst with IncreMental Advantage. “How do you know when you have the right team? This conference will give you the answers.”

The conference is even more relevant in the wake of the decision by the US Court of Appeals in Chao v Merino. In that case, two pension fund fiduciaries were found to be personally liable for over $175,000 because of the actions of a vender with whom they had contracted. “The court sent a very clear message,” said Meyer. “You have a responsibility to protect the money that is entrusted to you. And if you don’t take that responsibility seriously enough, you are looking at a lot of trouble.”

IncreMental Advantage is a think tank that publishes research developments on issues ranging from hedge funds to advertising to water utilities. Their research is highly regarded among institutional investors and senior executives from all over the world. The world’s largest companies sponsor and send their senior executives to their conferences.

Judge holds Hedge Fund manager in Contempt of Court

U.S. District Judge Kenneth Ryskamp in West Palm Beach ruled that John Kim, 38, head portfolio manager of collapsed West Palm Beach hedge fund firm KL Group, was in contempt of court for allegedly defying an asset freeze by spending money that is to be returned to investors.

Ryskamp cited Kim's use of $384,658 from the sale of a home in South Korea, and $110,000 from selling his wife's Mercedes and his Porsche 911. Investigators say the hedge fund took in more than $200 million from about 230 investors from 1999 to February 2005, when SEC examiners raided KL's luxurious offices overlooking Palm Beach.

KL Group closed March 1 after the SEC and FBI spent two days examining the firm's offices at the Esperante building in downtown West Palm Beach. An investigation by the SEC and court-appointed receiver Guy Lewis, a former U.S. Attorney for South Florida, indicates a shortfall of at least $200 million and perhaps as much as $300 million in KL Group's six hedge funds.

SEC records do not show any Florida hedge fund failures with losses larger than KL Group. An undetermined number of South Floridians were among the investors in the KL funds.

29 Nov 2006

Hedge Funds and Artificial Intelligence

Investment firms have increasingly begun exploring mathematics to it fullest, as arbitrage opportunities disappear so quickly now, neural networks have emerged that can consider thousands of scenarios at once.

Ray Kurzweil, an inventor and new hedge fund manager, said at a conference sponsored earlier this month by the Capital Group Companies, "Artificial intelligence is becoming so deeply integrated into our economic ecostructure that some day computers will exceed human intelligence......Machines can observe billions of market transactions to see patterns we could never see."

Microsoft executive and chairman of the Nasdaq stock market, Michael Brown, is an investor in Kurzweil's new hedge fund, FatKat, and Bill Gates once described him as "the best person I know at predicting the future of artificial intelligence."

Complicated stock-picking methods are nothing new. For decades, Wall Street firms and hedge funds like D.E. Shaw have snapped up people with math and engineering doctorates, the so-called quants, and assigned them to find hidden market patterns. When these analysts discover subtle relationships, like similarities in the price movements of Microsoft and IBM, investors seek profits by buying one stock and selling the other when their prices diverge, betting that historical patterns will eventually push them back into synchronicity.

"Five years ago it would have taken $500,000 and 12 people to do what today takes a few computers and co-workers," said Louis Morgan, managing director of HG Trading, a three-person hedge fund in Wisconsin. "I'm executing 1,500 to 2,000 trades a day and monitoring 1,500 pairs of stocks. My software can automatically execute a trade within 20 milliseconds - five times faster than it would take for my finger to hit the buy button."

Orhan Karaali, a computer scientist and director at the $1.7 billion hedge fund Advanced Investment Partners said "A machine that can generate complicated rules a person would never have thought of, and that can learn from past mistakes is a powerful tool."

The Apama Algorithmic Trading Platform has made it possible for day traders to build complicated trading algorithms almost as easily as they drag an icon across a digital desktop. Studies estimate that a third of all stock trades in the United States were driven by automatic algorithms last year, contributing to an explosion in stock market activity. Between 1995 and 2005, the average daily volume of shares traded on the New York Stock Exchange increased to 1.6 billion from 346 million.

28 Nov 2006

Hedge Funds and Film Companies

Hedge fund managers are beginning to see film financing as a high return sector that is on the rise, the global audio visual sector is expected to be worth $1.3 trillion by 2008 and is not correlated to returns in the stock, bond or commodities markets.

Hedge fund investors are developing a trend of financing film producers with a proven record of success directly. In dealing with the producer, the investors avoid the expensive and time consuming hassle of working through a major studio production agency.

Mark DiSalle, CEO of BioPassword, now has plans to launch his own hedge fund, Colosseum pictures. BioPassword is an Issaquah company that has developed software to protect computer passwords based on how users type. DiSalle bought the BioPassword technology for $500,000 in a bankruptcy sale three years ago, he said its roots can be traced to Morse code operators in World War II who figured out how to determine message senders based upon tapping patterns. BioPassword has already acquired over $25 million in venture capital and strategic investments.

Some major studios are also actively looking to outside financing sources to back independently produced films. Outside financing reduces the studio’s risk, reduces the amount of cash they have tied up in projects, and still allows them to obtain product for distribution in their existing pipeline.

Other hedge funds investing in film include Mark Cuban, entrepreneur and owner of the Dallas Mavericks, and eBay founder Jeff Skoll, each have a fledgling film company. Billionaire Phillip Anschutz is financing big budget films, David Sacks, a founder of PayPal, financed "Thank You for Smoking," for $7.5 million, and it has worldwide gross of over $27 million. Bob Yari, who made millions in real estate development, is backing the production of numerous films. Bill Pohlad, a multi-millionaire whose family owns the Minnesota Timberwolves, made "Brokeback Mountain" for $14 million and it has grossed $184 million worldwide. A recent $220 million deal with an individual producer included investors such as J.P. Morgan, D.E. Shaw, and GE Capital. George Soros also bought the DreamWorks library in a deal that valued the 59 film library portfolio at $900 million, later releasing all of them.

27 Nov 2006

Investec-Rowland-Blackfish Hedge Fund

The Rowland family and Investec have both invested $20m in Blackfish-Investec Resources Special Sitaution Fund and plan to raise a further $250m from other institutions and high net worth families. The fund plans to buy or sell underlying commodities to hedge equity investments. The pair have teamed up after the big success in revamping Western Goldfields earlier this year.

The two companies, having pooled their skills, expertise and resources plan to establish an event driven special situations hedge fund with a long strategic bias and opportunistic shorting. The fund will in the main target undervalued companies in the natural resources sector as well as seek to profit from shorting overvalued situations or use short positions as a hedge.

The financial and infrastructural support will be carried out by Investec Bank, contributing seed capital, personnel, systems and marketing support. The hedge fund offers a differentiated deal flow, and an investment philosophy to achieve returns throughout the commodity cycle.

The hedge fund is to be led by Martyn Konig and George Rogers, the Fund Advisors are supported by the Commodities and Resource Finance team of Investec, Blackfish Capital Managements Natural Resource team and the Fund's Advisory Panel.

Update-Ashburton Launches Chindia Fund

The Jersey based asset management firm Ashburton has launched a new fund which invests in both China and India, the Chindia Equity Fund plans to provide access to proven expertise in these rapidly-expanding economies.

Economic forecasts expect China to grow at a rate of 8% to 10% a year, while a growth rate of 8% per year is projected for India, combined, these two countries will be the second largest economic power in the next 15 years worth approximately US$16trillion, according to Ashburton.

The Chindia Equity fund, managed by Jonathan Schiessl has a minimum investment of £10,000. An initial fee of 5% is charged as well as a 1.75% annual management fee. Schissel has had responsibility for the Asia-Pacific region for the past six years at Asbhurton.

Schiessl said: “This growth will be primarily driven by demographics as the working population of both countries is expected to increase by 250m by 2020. Furthermore, reliance on growth from exports is decreasing in both China and India, and consumer demand is growing exponentially as a result of an expanding generation with much higher aspirations. Combined, these two countries will be the second largest economic power in the next 15 years and the opportunities this offers to investors is tremendous."

The Ashburton Chindia Equity Fund is open for investment from 10 November 2006 and launching on 1 December 2006, which allows clients to invest in these fast growing regions. Ashburton has successfully obtained the all important Foreign Institutional Investor (FII) status in India and established links in China that enable the fund to directly access these markets.

24 Nov 2006

India as Asia's top Performer

India's benchmark BSE index is up nearly 45% this year, making it Asia-Pacific's best performer. It rose 42 percent in 2005, 13 percent in 2004 and 73 percent in 2003 as investors poured money into stocks to ride the rapid expansion of Asia's fourth-largest economy.

Indian software, banking and infrastructure-related stocks were still attractive investments, but the runaway rises of recent years can no longer be expected, the head of fund management at HSBC Asset Management (India) said. Mihir Vora, who oversees of 33 billion rupees of equity investments, said on Tuesday his funds were underweight on stocks in the commodities, energy and personal care sectors.

"Returns still will resemble corporate profitability growth of 15-20% compounded for next few years,...We have gone up very significantly in a short period of time," he said, adding other risks included a renewed rise in oil prices, interest rates and a change in sentiment on emerging markets.

State-run banks looked good value and, in a time of rapid growth in credit demand, their extensive branch networks were an advantage in raising term deposits that could be lent out.

"Their valuations are amongst the cheapest in the sector and the market. They are undervalued and the volatility in earnings has gone," Vora said.

Government and private investment to upgrade infrastructure could ensure steady earnings growth for companies in the engineering and construction sectors, and demand for outsourcing of software services would continue to be robust, he said.

23 Nov 2006

Hedge Fund Blogger Celebrities

Tyler Cowen, an economics professor at the George Mason University started a blog three years ago with colleague Alex Tabarrok. The blog, called Marginal Revolution, has had more than 6 million visitors, Cowen has become an economics celebrity. Since he began writing about economics and hedge funds in "understandable language", people are approaching him on the street and, "I'm invited to give a speech or something at least once a week," Cowen said.

The readers find commentary about regulating hedge funds combined with a section featuring odd inventions such as a fan that attaches to chopsticks and cools noodles as they're being eaten? The postings are injecting life into the field often called the dismal science.

He isn't the only economist who has found an audience on the Web. Nobel laureate Gary S. Becker and former Harvard President Lawrence H. Summers are among those who have set up blogs, which are typically part lecture, part journal and part college seminar, with reader participation expected. Becker started a blog two years ago with federal appeals court judge Richard A. Posner.

Gregory Mankiw, a Harvard lecturer and former chairman of President Bush's Council of Economic Advisors, started a blog in the spring to supplement his lectures for the popular course "Social Analysis 10: Principles of Economics." He had been getting queries from students who weren't enrolled in the class and thought the blog was the best way to make information accessible to all. He quickly had 5,000 readers a day.

Econo-fans are responding, Becker figures, because the blogs put important pocketbook issues into understandable language. Whereas former Federal Reserve Chairman Alan Greenspan had "Greenspeak" — the carefully convoluted jargon whose comprehensibility rivaled that of Klingon — the blogs connect economics to daily life.

"Most people are afraid of economics. It seems so technical," Becker said. "But what is surprising is that if you put economics in a simple enough phrase, people are very much interested in it." Most of the economists say their readers aren't students. Cowen describes his fans as "high IQ, possibly nerdy, looking for kicks or for something different."

Hedge Fund Regulator Opposes Over-regulation

Hedge fund regulator and Edinburgh's top financial services commissioner Charlie McCreevy said in a statement Tuesday that Europe’s hedge fund managers may shift operations from the continent to less-regulated jurisdictions if the European Union started regulating the investments designed for wealthy clients and institutions.

This is why the 25-nation group made a decision last week to leave scrutiny of the funds at a country level. “If we went too far we could drive the industry out of Europe,” McCreevy said. Hedge funds have attracted attention from regulators and politicians concerned that their growing influence in financial markets may hurt investors.

Earlier this month, International Financial Services London said European managers oversee $401 billion of hedge fund assets under management, about $317 billion of that is managed in London. Criticism of hedge funds in Germany followed a campaign by some managers to oust Deutsche Boerse executives. “There are some people who are philosophically opposed to hedge funds and who would like to have them regulated out of existence,” McCreevy said.

US Senate Finance Committee chairman Charles Grassley requested more scrutiny of the $1.3 trillion industry after the collapse of Amaranth Advisors in September. The Financial Services Authority in the UK said earlier this year it was probing whether the funds treated customers fairly and whether they accurately valued their assets. Former German chancellor Gerhard Schroeder last year sought unified international rules for hedge funds after ordering a three-ministry probe into the funds.

The SEC is probing potential insider trading by hedge funds, while US Treasury Secretary Henry Paulson said on Tuesday his department would “continually assess their actions and impact on the market.”

Amaranth’s collapse was the biggest since Long-Term Capital Management’s 1998 demise. In Europe, rules that can help limit the effects of a fund’s collapse are already in existence, McCreevy said.

22 Nov 2006

Hedge Fund buys 4 million shares in Pogo Producing

Activist hedge fund Third Point LLC, said in a statement on Tuesday that the company has acquired a 7.2% stake of U.S. oil and gas producer Pogo Producing Co.

In a filing with the Securities and Exchange Commission, the hedge fund said it also bought options to purchase 200,000 additional shares in addition to the 4 million shares of Pogo common stock.

Third Point, which has about $4 billion in assets under management, holds stakes in several publicly traded companies. The hedge fund is New York based and is known for taking activist positions. The fund, run by Chief Investment Officer Danies Loeb, has frequently been a loud critic of the companies in which it invests.

In the filing with the SEC, Third Point said it believes Pogo "represents an attractive investment." The fund also said it "may suggest or take a position with respect to potential changes in the operations, strategy, management or capital structure of such companies as a means of enhancing shareholder value."

Pogo Producing Company explores for, develops and produces oil and natural gas. Headquartered in Houston, Pogo owns approximately 4,800,000 gross leasehold acres in major oil and gas provinces in North America, 6,354,000 acres in New Zealand and 1,480,000 acres in Vietnam. Pogo common stock is listed on the New York Stock Exchange under the symbol “PPP.”

21 Nov 2006

Rare Coin Dealer faces 18 years

The guilty party in the 2005 loss of up to $13 million in a rare-coin fund managed by Maumee coin dealer Thomas W. Noe, has played out with Noe receiving the maximum sentence for his involvement in the scandal.

Judge Thomas J. Osowik sentenced Noe to 18 years in prison for for stealing state money from the Ohio Bureau Compensation fund. The judge also has scheduled a hearing to determine what restitution Noe must pay. Prosecutors are seeking at least $13.7 million, the amount they say Noe stole from the coin funds. Osowik also fined Noe $139,000, plus the nearly $3 million cost of the investigation.

Noe began stealing and spending state money seven years ago in order to buy yachts, positions on state boards, a multimillion dollar house in the Florida Keys and other luxuries in order to present himself as having a "bottomless cup of wealth and luxury", while managing the $50 million rare-coin investment for the state.

Osowik also ordered that Noe begin serving the state sentence after he finishes a 27-month prison term on an unrelated federal conviction for illegally funneling $45,400 to President Bush’s reelection campaign. Ohio Democrats used the scandals Noe sparked to help reclaim the governor’s office and other statewide posts in the Nov. 7 election. "Tom Noe violated the public trust by using $50 million as his own ATM, living a lavish lifestyle at the expense of real people whose lives depended on agency monies."

The loss of up to $13 million in the rare-coin fund managed by the Maumee coin dealer was made public on the heels of the unrelated MDL Capital loss of $215 million from what was a $355 million investment. The hedge fund founded by Aliquippa entrepreneur Mark D. Lay, also lost $215 million last year in a case involving the activities of the Ohio Bureau of Workers’ Compensation investment fund.

MDL Capital also manages $500 million for the Pennsylvania State Workers Insurance Fund, and $91 million of the nearly $27 billion portfolio of the Pennsylvania State Employees Retirement System. MDL Capital is one of 13 fixed-income portfolio managers. Since it started in December 2000, the annualized return on its portfolio has been 4.5 percent.

Hedge Fund Investment possibilities in India, Pakistan and China

Emerging markets are again catching the eye of more foreign firms as an investment destination.

Morgan Stanley sees India's FDI rising to $10 billion, or 1 percent of GDP by 2008, with the flows mostly targeting low capital services and manufacturing for the domestic market, rather than factories for exports like many in China.

Since the start of 2002, the Pakistan market has risen 741%, topping the 297% gain for India's Sensex. Still, Pakistan stocks only trade at about 10.6 times forecast profits, while Indian stocks trade at 20 times earnings. Pakistan, one of the world's hottest emerging markets despite current instability, has an economy that grew by 6.6% in the financial year that ended in June, a rate that the government expects will rise to 7% this year. Liberal rules on foreign investment are luring overseas players, with foreign investors pouring $307 million into the market since July 1.

Pakistan's biggest listed firm, Oil and Gas Development Co., is planning the the $1.4 billion sale of global depository receipts (GDRs) and local shares in December. Money from the Middle East, and increasingly Singapore and elsewhere in East Asia, has been helping drive growth, with infrastructure, energy, financial services and makers of consumer goods such as motorcycles seen as attractive plays.

Last month, MCB Bank raised $150 million in a London GDR issue. Earlier this month, Pakistan Mobile Communications (Pvt.) (Mobilink) attracted nearly $4 billion in orders for its $250 million bond, the country's first corporate offshore bond issue.

The Karachi 100 index is up 12 percent this year on daily turnover that exceeds $400 million, making it more active than markets such as Thailand, Indonesia, and Malaysia.

In China the government wants foreign money to help with an estimated $350 billion worth of projects to build an efficient road network, expand ports and address a woeful power deficit. Michael J. Cannon-Brookes, vice president of business development for China and India at IBM, said to Reuters in Bejing; "In manufacturing you need infrastructure to run your plants, get your goods to market and bring in supplies. That's clearly a strong selling point for China."

Hedge Fund Mergers show Substantial Profits

Atticus, a New York-based hedge fund that manages more than $12 billion has been having talks with Freeport-McMoRan Copper & Gold Inc. Freeport has already undertaken the world's biggest mining takeover, valued at about $26 billion when the mining company acquired hedge-fund Phelps Dodge Corp.

Phelps Dodge Corp manager Timothy R. Barakett saw his investment jump by about $517 million, capping a 13-month campaign to find a buyer for the mining company and get more of its cash. Shares of Phelps Dodge are trading at below Freeport's offer price, which may mean investors don't expect a higher bid, analysts said.

Atticus Capital is the largest Phelps Dodge shareholder, with about a 10% stake.

Barakett had been seeking a buyer for the copper producer since he opposed a proposal by Phelps Dodge CEO J. Steven Whisler to acquire two Canadian nickel producers for $40 billion. Before that, Barakett successfully pushed for the company to give more of its $2.5 billion cash pile to investors, after a rally in metals prices sent profit to a record.

"Some of their efforts have done shareholders of Phelps Dodge a great service," said John Rosenberg, who helps manage $900 million including Phelps Dodge shares at Geneve Capital Group in Stamford, Conn. "There's a place in the market for activism."

According to financial research firm Dealogic, the value of global mergers and acquisitions for 2006 reached a record $3.368 trillion, beating the previous high set in 2000 of $3.332 trillion. Private equity firms such as hedge funds accounted for 22% of total global M&A volume in the first nine months of the year, hitting a new record of $570.1 billion in deals.

20 Nov 2006

Investcorp to offer Global Depositary Reciepts

Investcorp, one of the leading institutional investors in hedge funds with approximately $9.8 billion under management has said their bank has decided to proceed with an offer of ordinary shares in the form of Global Depositary Receipts (GDRs).

The new GDRs application for admittance for trading on the London Stock Exchange will be listed under the ticker symbol IVC.

Nemir A. Kirdar, Investcorp’s president and chief executive officer, said: “This offering and our GDR listing on London’s main market will help us scale our platform to capture the accelerating growth in alternative investments in the Gulf, while also further enhancing our international presence through improved brand awareness.”

The program offers clients a selection of funds of hedge funds with varying risk/return profiles. These are invested across different strategies through approximately 40 hedge fund managers. Investcorp launched the world’s first collateralized debt structure backed by hedge funds.

Investcorp specializes in four lines of business, hedge funds, private equity and venture capital in North America and Western Europe and real estate in the United States. Its investment products are offered to institutional and individual clients, primarily in the Persian Gulf.

Investcorp also plans to expand existing product lines in the fiscal year 2007 by launching a private equity fund targeted at North American and European institutional investors, and a real estate fund dedicated to mezzanine investments.

40% of Investcorp is owned by more than half of its total staff. A further 40% is owned by a group of the Firm’s most prominent clients, some of whom are also Directors of the Firm. The balance of the stock is held by public shareholders through Investcorp’s listing on the Bahrain Stock Exchange.

17 Nov 2006

Sears as a Hedge Fund?

The prominent investor, Edward Lampert, who runs his own hedge fund in Greenwich, Conn., and is chairman of Hoffman Estates-based Sears, has has turned the largest U.S. department-store chain into an investment vehicle.

Cash holdings have doubled in the past year, and Lampert says he’s looking for acquisitions, perhaps outside of retailing. The investors in Sears Holdings Corp. are getting their payoff even as sales are falling. In the reported third quarter profit, more than half, $101 million of $196 million, came from investments as sales fell. Sears warned in its most recent earnings report, “These investments are highly concentrated and involve substantial risks.”

“At the end of the day, what you’re going to have is a publicly traded hedge fund” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment banking firm.

Lampert has proved adept at investing the company’s cash in financial assets. Sears had $2.1 billion in cash on hand at the end of the third quarter ended Oct. 28, almost double the $1.2 billion from a year earlier and down from $4.4 billion at the end of January.

Investors flocked to Sears after Lampert acquired the Hoffman Estates, Illinois-based chain for $12.3 billion in March 2005, combining it with his Kmart Holding Corp. Anticipating cost cuts and sell-offs of weaker stores, they sent shares up 35 percent between March 24, 2005, the day shareholders approved the merger, and Nov. 15.

Hedge funds and private equity funds are attracting billions of dollars from private investors giving them unimaginable financial strength in order to make friendly acquisitions. In some cases they use these funds to position themselves, even in a hostile manner, commanding significant stakes in large companies where they perceive the management is not doing a good enough job and that value can be extracted by using shareholders’ rights to push for changes in management.

Hedge Funds Sued by Attorney General

State Attorney General Eliot Spitzer sued Samaritan Asset Management Services Inc, their advisors, Johnson Capital Management Inc, and Edward Owens, a principal at the hedge fund.

The company allegedly engaged in a fraudulent mutual fund market-timing scheme. The defendants secretly “piggy-backed” their trades on the investment accounts of retirement plans. The suit claims that the market timing trades hurt long-term investors and the suit seeks restitution and an order to stop them from carrying out improper trades.

Last month Spitzer also sued the mutual fund manager J. & W. Seligman for the same practice, contending that it owes investors $80 million in compensation for improper market-timing trades. In July, Waddell & Reed Financial Inc., one of the nation’s oldest mutual fund management companies, agreed to pay $50 million to settle Spitzer’s investigation into improper trading.

That was the 19th settlement for Spitzer since he began the mutual fund investigation in 2003. Investors have received $3.4 billion in restitution under the settlements, Spitzer said.

Market timing involves rapid in-and-out trades that can disadvantage ordinary shareholders by diluting the value of their shares. It’s not illegal but it’s prohibited by many funds, as any standard that favors one investor at the expense of another tends to undermine the credibility of the industry.

16 Nov 2006

New Frontiers of Risk: The 360° Hedge Fund study

According to a report by the Bank of New York, pension plans and nonprofit organizations worldwide are attracted to hedge funds because of the losses that pension plans suffered in the equity bear market after 2000.

The study, “New Frontiers of Risk: The 360° Risk Manager for Pensions and Nonprofits,” found that while market risk remains the foremost concern for plan sponsors, managers are now spending close to 40% of their risk-related time on operational and political considerations, an increase of nearly 20% from five years ago, and about 80% indicate they will increase the time spent on operational risk over the next five years.

The report predicts that by 2010, institutions will put half of the assets directly into a hedge fund and the other half through a fund-of-fund platform. As institutional clients become more confident about investing in the $1.7 trillion hedge fund industry, these clients will increasingly demand that fund-of-hedge-fund companies give tailor-made advice and consultancy service in order to justify their fees.

The Bank of New York and Casey, Quirk & Associates report predicted that institutional investors like pension plans and insurance firms will hold more than $1 trillion of assets in hedge funds by 2010, up from $360 billion now.

According to the study, several factors are influencing the popularity of hedge funds, including the widespread under funding of pension funds. More than half of the participants categorized their funds as “under-funded”.

“The study shows that investors increasingly recognize the non traditional risk factors associated with the global investment landscape. The challenge for all organizations will be embracing this new 360° view and taking the formal steps necessary for eliminating, transferring or managing critical risks,” said Debra Baker, managing director and head of Global Risk Services for The Bank of New York.

The study found that plan sponsors such as hedge funds can ably evaluate fund-wide allocation decisions, broadly monitor market risks, and tap new asset classes with more security and knowledge than ever before. Working together, hedge funds and industry providers are developing advanced analytics and reporting required to quantify risk level and focus on interventions.

Results were compiled from surveys of more than 75 representatives from leading pension institutions and nonprofit organizations from around the world. It is the latest in a series of studies conducted by The Bank of New York, including ones on institutional demand for hedge funds.

15 Nov 2006

Hedge Fund commitee Object to Dura's Bankruptcy Filing

Hedge funds with large holdings in Dura Automotive Systems Inc.’s $1.7 billion debt are protesting the auto parts maker’s plan to finance its bankruptcy, saying the deal threatens to jeopardize their rights.

A committee made up of hedge funds that claim to own most of Dura’s $225 million in second-lien debt say they don’t like Dura’s plans. Dura listed assets of about $2 billion and debts of $1.7 billion.

The Rochester Hills-based auto parts supplier filed for Chapter 11 protection Oct. 30 with plans for a $300 million debtor-in-possession finance package that would allow it to pay off holders of first-lien debt, who are owed $125 million.

Auto suppliers have drawn more interest lately from private equity firms and hedge funds, an indication that there may be possibillities for the struggling sector to be turned around.

Several firms and hedge funds are vying for control of Delphi, and Visteon Corp. has drawn interest from hedge fund Pardus Capital Management. Lear Corp. recently closed a private stock placement with funds controlled by hedge fund investor Carl Icahn, who is set to become the supplier’s largest shareholder.

US Hedge Fund to parner with Investcorp

Bahrain-based Investcorp has formed an alliance with US hedge fund manager Silverback Asset Management, a convertible arbitrage-focused hedge fund in Chapel Hill, N.C.

The single manager hedge fund partnership will be run by Elliot Bossen, Silverback’s chief investment officer. Investcorp has approximately $5bn in assets under management, of which around $2bn is proprietary capital.

Mr. Bossen said in a statement that the partnership represents a return to Silverback’s roots of dedicated convertible arbitrage investing and gives it access to Investcorp’s substantial global base of clients.

This “will allow us to effectively manage our liquidity cycles while focusing fully on our top priority of generating superior returns for our investors,” he said.

In addition to its single manager platform, Investcorp has a fund of funds programme. Two other hedge funds that Investcorp has partnered with are Interlachen Capital Group, a multi-strategy firm, and Cura Capital Management, a fixed-income manager.

Silverback Asset management was launched in 2002, having over $237 million in assets this September, according to a filing with the Securities and Exchange Commission.

10 Nov 2006

Man Group Gains Higher than Forecast

Overall gains at Man Group, the world’s largest listed hedge fund, were higher than the company forecast. Sales for the six-month period came in at $10.6 billion, compared with the $10.4 billion forecast in September.

Harvey McGrath, Man chairman, in an interview with Reuters said, “We are in a market that is growing very rapidly … inflow of assets into these kind of products across the industry is strong,” Man Group, like its hedge fund industry peers, continues to benefit from investors’ ongoing shift away from traditional ways of holding equities and bonds in favour of hedge funds, property and private equity, McGrath said.

According to their statement, Man’s profit before taxes on all operations rose to $766 million (33%) and its recurring net management fee income rose to $452 million (38%).

Assets under management reached $56.8 billion at the end of September and are now estimated at around $58 billion.

McGrath said in a statment “Looking forward we expect Man’s Financial markets to continue to expand and believe that our business model, focused on growing market share, diversifying revenue streams, controlling overheads and exploiting scale advantages will support a continued growth in profitability from this business.”

Women in Hedge Funds

Pomegranate Capital, in a international study by CEO Susan Solovay, found that there are 250 female hedge fund managers worldwide, and wants to open the first fund to invest in hedge funds solely run by women.

Solovay has gained backing from Fortress and a Monaco-based Safra family to open this first of its kind hedge fund. After researching the performance of hedge funds run by women, Solovay claims that the studies showed women fund managers performed consistenly better than those run by men.

In an interviev with Reuert Stiener, one prospective investor said: “What she is trying to do is launch a business that capitalises on this inefficiency. She feels she can put together a fund of outstanding female managers that don’t have enough investment and build a successful product on the back of this research. Many of the male-run funds are closed whereas the female-run ones still have capacity to take in money.”

She claims that the research showed that male-run hedge funds managers tended to shoot from the hip making big returns one year and poor ones the next. The research, which was undertaken over a period of years, showed women produced more consistent long-term growth with less volatility than those managed by male fund managers. But the research also showed that women struggled to raise the same levels of funding as men.

Pomegranate identified more than 250 funds managed by women, investing in a range of strategies: long/short equity, distressed, special situations, event-driven, global macro and arbitrage.

9 Nov 2006

Hedge Funds and Elections

Democrats have said they will differ from Republicans by being tougher watchdogs of corporate wrongdoing and government spending, recomending heightened scrutiny of sectors such as hedge funds, pharmaceuticals and defense spending.

The Democrats will want to distinguish themselves from the Republicans early on, but this may not be good for their prospects on Wall Street as leading hedge funds have been making major contributions to the Democratic Party heading up to the midterm elections.

Democrats are promoting an economic agenda that would put more money in the pockets of ordinary citizens and government, while leading to greater oversight of big business.

The Center on Responsive Politics says about two thirds of the money the top 50 hedge funds have given this election cycle has gone to Democrats. According to, the DSCC has raised about $25 million more this election cycle than its Republican counterpart. Joe Schocken, a prominent Democratic fundraiser says not just hedge funds, but private equity and other alternative investment groups are giving more.

Nevertheless, according to Wachovia Securities economist Mark Vitner,”there are not going to be wholesale changes in economic policy” because neither party has an overwhelming majority in either the House or Senate and this may explain the stock market’s recent strength.

8 Nov 2006

Indian company Expanding through Hedge Fund Investments

Optical networking vendor Tejas Networks India Ltd. has plans to further expand its operations outside India and into Southeast Asia.

The Bangalore-based company is said to be raising $20m from India-focused hedge fund Sandstone Capital, followed by a private equity fund buying out existing investors like IL&FS, which holds around 15% stake in the company. Sandstone Capital is one of many investment funds that have sprung up to back Indian startups.

Sandstone Capital is one of the largest India-dedicated investment funds, based in Boston, Massachusetts the company manages capital for U.S. and European universities, foundations and families. Sandstone invests in public and private Indian companies with strong growth prospects.

Tejas Networks was started in 1998 by Guru Raj Deshpande, the founders are Sanjay Nayak, Kumar N Shivrajan, and Arnob Roy. The company has raised funding from investors like Intel Capital, Battery Ventures, ASG Omni, Sycamore Networks, IL&FS and Gabriel Venture Partners.

CEO Sanjay Nayak says the company has won small OEM deals in other emerging markets such as Indonesia and Vietnam, which it will use as a starting point to expand its sales in the region. Tejas is “shipping in the thousands” to OEMs, he says, which include as yet unidentified partners in the U.S. The company has been profitable for the past three quarters and expects to reach $50 million in revenues for the financial year ending in March.

“We believe that the time is ripe for Indian product companies. Tejas has performed very well not only to gain significant market share in the fast-growing but highly competitive Indian telecom market, but has also reached international customers through strong global partnerships”, said Paresh Patel, Managing Director of Sandstone Capital in a statement.

International sales account for around 25% to 30% of the company’s revenues, but “the objective next year is to have an equal split between India and international sales,” Nayak says.

Average Hedge Fund Returns fall Short

According to the recently released data by Hedge Fund Research Inc., hedge funds returned a global average of 1.98% in October, but managers still failed to keep pace with gains by the Standard & Poor’s 500 index and average returns fell short.

Because hedge funds typically use leverage/gearing or debt to invest, the positions they can take in the financial markets are larger than their assets under management. The number of hedge funds increased 10% during the past year to reach around 9,000 according to HFR.

Hedge funds have returned 9.22% in 2006 through last month, compared with a 12.1% increase including dividends by the S&P index. Hedge funds attracted $44.5 billion from wealthy investors and institutions in the third quarter, the most in one quarter since at least 2003.

Event-driven managers in the HFR indexes earned 1.73% in October, pushing their year-to-date return to nearly 11%. Convertible bond specialists earned 1.34% in October and can claim 10-month returns of 12.31%.

Funds of funds tracked by HFR returned 1.56% last month and are up 6.4% on the year.

Hedge Funds in Hollywood

Hedge fund money has been flowing into Hollywood as people who have made big fortunes develop an appetite to be in the movie business.

The hedge funds have been popping up rapidly, helping to steady studio film slates by allowing studios to finance pics at larger and more flexible budgets as the economics of the movie business cause more and more studios to rely on outside financing.

Last month the Cruise/Wagner team negotiated what they call “an unprecedented multi-faceted financing deal” for $100 million, with “two top hedge funds.” when they had trouble at Paramount.

Now, Fortress Entertainment, set up by hollywood producers Forbes and Rizzotti, is up and running. The two entrepaneurs created the American Film Capital fund, which now represents over 100 private investors. The company has raised over $6 million since starting to work with Wall Street investors.

Rizzotti said “We created a formula where we only went to individuals asking for $20,000 to $30,000. So it was never huge risk money for anybody. We would just say, ‘Give us a little, a small fraction, just a little bit.’”

Amir Malin, the former CEO of Artisan Entertainment who is running the investment fund Qualia Capital said, “The more sophisticated equity and hedge funds have developed a great learning curve, and they are much more conservative about film financing,” he says. “There is so much capital out there, and there are hedge funds out there that have not entered that are enamored of the industry…...This is something that we have seen in the past four or five months.”

One veteran hollywood agent said “It’s all about the formula, the numbers. It’s the conglomeratization of the business….if you have money, the studios show you the red carpet,”