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27 Dec 2006

Hegde Fund Funded Exco Doubles Oil Reserves

Exco Resources Inc. announced an agreement to buy producing oil and gas properties in Jackson Parish, Louisiana from Anadarko Petroleum Corp. for $1.6 billion, almost doubling its oil and gas reserves. The total acreage is approximately 66,000 net acres.

Exco's largest shareholder is legendary oilman and billionaire hedge fund manager T. Boone Pickens, who with his two hedge funds, owns 12.5% of Exco's outstanding shares. Pickens is also on the board of directors and this purchase is the largest of six announced this year by Exco.

Exco is the culmination of several acquisitions made in the last few years by Pickens and Exco CEO, Doug Miller. Pickens, 77, started Mesa Petroleum with $2500 in 1956, growing it into one of the world's leading independent oil and gas producers. He is also the founder and chairman emeritus of Clean Energy Fuels, the nation's largest supplier of natural gas to the transportation sector.

The fields are tapped by about 350 wells, and 96% of the proved reserves on the properties are in production, Exco said. The fields have proved reserves equivalent to about 466 billion cubic feet of gas of which 446 is producing today, Exco said. The acquisition also includes gathering systems, compression and treating plants.

Exco will use cash generated by the new fields to accelerate drilling on more than $2-billion of properties acquired since the public offering. The purchase of the Anadarko fields, expected to close in March, will be financed with a new revolving credit facility and a bridge loan from banks, Exco said in a separate statement.

Wine and Hedge Funds

Aside from the hedge fund millionaires investing in the land rich wine making lifestyle, a new trend is now being seen among hedge fund investors in the buying of premium wines. Merryl Lynch noted the surge in wine investment in their 2003 World Wealth Report, which found that the rich were devoting 13% of their assets to so-called alternative investments. The category also included art, hedge funds, and foreign exchange.

Peter Meltzer, author of the recently published "Keys to the Cellar: Strategies and Secrets of Wine Collecting," said in an interview with Reuters that six magnums of Domaine de la Romanee-Conti sold earlier this year for $170,375. "There has been a phenomenal growth in the collection of premium wines," said Peter Meltzer, the caretaker of the Wine Spectator index, a gauge of the most frequently sold premium wines, mostly Bordeaux and Burgundies. A single bottle of Chateau Latour 1955 sold with commission for $28,440.

Wall Street wine mavens interested in purchasing a Burgundy vineyard or expanding their investments, have the opportunity to invest in the some 105 million bottles of chardonnay white wines and 75 million bottles of pinot noir reds produced annually. There are about 4,000 “domaines” and 59 types of soil beneath the Cote d’Or’s 50-kilometer (31-mile) stretch.

It seems however, that buying a bottle of the stuff is less risky than trying to go for buying the vinyard “Owning a domaine is a venture capitalist’s dream, high in risk and if the weather is good and you’re really lucky, you might make a 4 percent return. But owning a domaine is the greatest lifestyle imaginable.” Says Wasserman, a vinyard owner in his own right.

It takes three years after the first harvest for the wine to be ready for market,” says Wasserman, who has been a Burgundy wine trader for 40 of his 62 years. “You’re not making a cent for three years, and then your buyers must wait a minimum of three to four years after that before they can drink it. Perfection wouldn’t appear until the wine is six to eight years old…..The land will cost you $6 million, and that will produce 90 casks of

26 Dec 2006

Higher Standards may be Welcomed by Hedge Funds

State Attorney General Richard Blumenthal, one of the nation's most outspoken advocates for increased hedge fund regulation has repeatedly urged regulators and legislators to consider raising the accredited investor standard.

Some hedge funds have now also expressed support for the proposal by the Securities and Exchange Commission that would shrink the pool of eligible hedge fund investors.

The number of households permitted to invest in hedge funds would be reduced by 88% if the change takes effect, according to SEC economists. Under the proposal, only investors worth $2.5 million or more, about 1.3 percent of U.S. households, would qualify. The proposal, which is open to a 60-day public comment period, also prohibits using the value of a primary home to meet the requirement.

"Raising net worth requirements is a critically significant first step toward helping protect vulnerable investors in the higher risk world of hedge fund investment," Blumenthal said in a statement.

"Especially in areas like Connecticut, increasing real estate values have escalated the retailization of hedge funds -- and entitled and exposed exponentially growing masses of middle class investors to hedge funds," Blumenthal said.

Industry insiders agree. "The change is long overdue," said the head of a Connecticut-based multibillion-dollar fund of funds, who declined to give his name because of company policy.

"It's totally appropriate that the SEC should be updating the standard, which has not increased for inflation for many, many years," the fund manager said. The new rule would have "virtually no impact" on the industry in terms of the amount of assets being pumped into hedge funds, he said.

Victor Zimmermann Jr., managing partner of the Stamford office of Curtis, Mallet-Prevost, Colt & Mosle LLC, a law firm with many hedge fund clients, agreed that the impact would not be extreme. "The industry has changed quite a bit in the last five or 10 years," he said. "It is much more dominated by institutional money, rather than individuals."

Even hedge fund startups, which historically sought out wealthy individuals for seed money, are now turning to large banks as initial seed investors, Zimmermann said. "It is just fewer and fewer funds relying on individual investors," he said.

Zimmermann said hedge funds probably won't oppose the SEC rule, recognizing that it wouldn't have much impact on the industry and at the same time might satisfy some state regulators such as Blumenthal who have been clamoring for more oversight.

New Laws Create Investment Opportunities in Russia

Sberbank, Russia's central bank, says that in 2006 48 Russian banks were fully owned by foreigners, and the total share of non-residents in Russian banks stood at 12.92%.

According to a report by Reuters, the lower house of Russian parliament has just made it easier for foreigners to gain exposure to the booming sector by passing legislation that would put foreign and domestic investors on an equal footing when buying shares in Russian banks, also making it easier for Russian banks to go public.

The new rules would oblige residents and non-residents to inform regulators if they purchase more than a 1% stake in a Russian bank and seek permission to build a stake of more than 20%, according to the report by Reuters.

After approval by the upper chamber of parliament and signed into law by President Vladimir Putin, the amendments should pave the way for a $7.6 billion additional share issue by Russia's largest bank, state-owned Sberbank, as well as a $4 billion initial public offering by domestic rival VTB.

"These amendments will clearly facilitate secondary trading and be positive for all banking stocks traded in Russia," Alfa Bank analysts said in a research note, suggesting the new law will have a positive effect on Russian banks going public.

Citigroup buys Morgan Stanley Fund

Citigroup has agreed to buy wealth manager fund Quilter from rival Morgan Stanley as it seeks to expand in the UK. The acquisition places Citigroup among the top 10 wealth managers in the UK, the bank said in an e-mail.

Quilter, which manages $11 billion, will become part of the bank's global wealth-management division in Europe, run by Marianne Hay, Citigroup said.

Quilter has more than 18,000 clients and 300 employees in 10 offices in Britain, Ireland and the Channel Islands. The fund manages assets worth more than 5.6 billion pounds, has 18,000 clients and employs 300 staff, said the companies, which did not disclose details of the transaction such as the price paid by the bank.

"With strategic investments geared especially for Brazil, India and greater China, Quilter is an important step in establishing a meaningful presence in the UK, with an excellent platform to support the further growth of our Private Bank and international Smith Barney businesses," said Todd Thomson, Chairman and CEO of Citigroup Global Wealth Management, in the Citigroup statement. The bank said it plans to fuse Quilter into its CWA unit.

Goldman Sachs names New Hedge Fund Manager

Goldman Sachs has named the new head of their alternative investments asset-management units as Marc Spilker, he will be overseeing hedge funds and private equity.

Goldman named Spilker, 42, to replace George Walker, who left in May to run the funds unit at Lehman Brothers. Spilker will report to Eric Schwartz and Peter Kraus, co-heads of Goldman Sachs Asset Management.

Spilker is a 16-year veteran of the investment bank, he was co-head of U.S. equituies trading and global head of volatility trading. He previously headed currency options and Japanese fixed-income.

Asia's $100 Million Bonuses

Some traders in Tokyo and London are rumoured to be in the $100 million bonus club. The "giant" bonuses at Morgan Stanley and the $40 million John Mack took home has started rumors inside Wall Street about who might be in the running to get $100 million checks this year.

Several members of the $100 million club are in Goldman Sachs Asian offices. Morgan Sze, a head trader in Goldman's principal strategies group based in Hong Kong, is mentioned by several sources as a possible member of the club according to the New York Post. Sze's counterpart in London, Pierre-Henri Flamand is also rumored to be receiving a $100 million bonus.

Raanan Agus, who is the New York-based head of Goldman's principal strategies hedge fund group makes bets using nearly $10 billion of the firm's capital, could get $70 million. "Apparently, a $100 million payout isn't as uncommon as some originally thought," said one Goldman source in the Post.

Goldman CEO Lloyd Blankfein is likely to get about $50 million, while co-presidents Gary Cohn and Jon Winkelried are expected to receive between $40 million and $45 million, sources said. Goldman bonuses make up between 80% and 90% of the traders and bankers annual salaries.

Word of the nine-figure bonuses came as Goldman named Marc Spilker to oversee its money management unit's alternative investments operation, which includes private equity and hedge funds.

16 Dec 2006

SEC Votes on new Hedge Fund Rules

The Securities and Exchange Commission has voted to propose several new rules to provide additional protection to investors in hedge funds and other pooled investment vehicles.

The proposing release, which has not yet been published on the SEC's website, will need to explain why there is more risk associated with hedge funds than, for example, raising money to start a coffee kiosk or a pet rock distribution organization. Investors and hedge fund managers may decide that the explanation is insufficient and decide to challenge the SEC's authority to make this distinction.

In an email to the company's clients, HedgeCo lawyer Jay Gould describes one of the proposals being discussed as the reinstatement of the Anti Fraud Provision under the Investment Advisers Act of 1940. This proposal would make it a fraudulent, deceptive, or manipulative act, for an investment adviser to a pooled investment vehicle to make false or misleading statements or to otherwise defraud investors or prospective investors in that pool.

The other one being the application to hedge funds of the Amendment to Private Offering rules under the Securities Act of 1933. This proposal would define a new category of accredited investor that would apply to offers and sales of securities issued by hedge funds and other private investment pools. The proposed definition would include any person who meets either the net worth test or income test, or owns at least $2.5 million in investments.

The increased investor standard will only apply to hedge funds and not to private companies that rely on other exemptions of the federal securities laws. Comments are due 60 days after publication in the Federal Register.

Germany to Determine if Hedge Funds are a "Systemic Risk"

Germany's Deputy Finance Minister Thomas Mirow held a briefing with reporters on Germany's upcoming presidency of the Group of Eight in 2007, the G8 are the top 8 major industrialized countries, and Mirow plans to examine next year whether hedge funds pose systemic risks.

Mirow said hedge funds were "insufficiently transparent" and the industry had already seen one big hedge fund fail although with few market repercussions. He said industrial nations would try and coordinate efforts to reduce risks posed from hedge funds by promoting more transparency but not necessarily through regulations.

He said, "All over the world, people who are in charge of the stability of the international financial system are dealing with the problem,....There is a sufficient amount of experts saying we should have a closer look at it so to prevent a possible crisis," he added.

"What we would like to know is are there systemic risks, yes or no, and if so, what could we do to deal with it in a reasonable manner," he said.

Mirow's comment came as the U.S. Securities and Exchange Commission prepared to vote on a proposal on Wednesday to raise the limit investors can invest in hedge funds to $2.5 million from $1 million set in 1982.

The SEC's proposed rule, if adopted, would shut the door on a lot of the just-barely wealthy who have been piling into hedge funds lately, although one market analyst said it would likely not affect larger funds with big clients.

U.S. Treasury Secretary Henry Paulson has also weighed in on the issue on December 8 and said it was important to make sure hedge fund liquidity and borrowing were closely monitored, but said they were making a helpful contribution to financial markets.

Morgan Stanley Gives Record Bonuses

Controversial "Mack the Knife" CEO, John Mack was recently cleared by the SEC after investigations into accusations of hedge fund insider trading. Now he has received a record bonus of $40 million as chief executive officer of Morgan Stanley.

Mack, son of Lebanese immigrants, was given $36.2 million in stock, and about $4 million in options to buy Morgan Stanley shares, the company said in a filing with the U.S. Securities and Exchange Commission. The firm also granted more than $57 million in bonuses for seven other top executives.

The bonus is 44% more than Morgan Stanley gave him last year, the previous record was the $38.3 million bonus Henry Paulson received in 2005 as CEO of Goldman Sachs Group Inc. Shares of Morgan Stanley, the second-biggest U.S. securities firm by market value, are having their best year since 2003 after Mack put the firm on course for record earnings.

Mack, who's also Morgan Stanley's chairman, received the 2006 bonus in stock and options, according to the filing. Last year, Mack declined the $28 million bonus he was offered because he had worked at Morgan Stanley for only five months. He accepted a pro-rata payout of $11.5 million in stock and also received a $337,534 salary.

Since Mack joined, Morgan Stanley has fired more than 1,000 under performing brokers, made acquisitions to bolster the firms energy, fixed-income and hedge fund businesses and created new incentives to keep top-producing employees. Morgan Stanley has surpassed analysts' profit estimates by at least 20% for the past four quarters.

14 Dec 2006

Ritchie sells Hedge Fund to Refund Investors

Ritchie Capital Management Ltd. has "decided to terminate the restructuring and effect an orderly disposition of the assets,'' of its flagship hedge fund, the Multistrategy Global Fund.

After consulting with investors, an email was sent to Ritchie's clients revealing their negotiations with an undisclosed buyer for the assets of the hedge fund, and the plan to return the cash to investors. Ritchie Capital has been struggling the past two years with returns that were below average, the fund suffered last year from losing energy bets.

Thane Ritchie, the founder of the company, had previously planned to refund 80% of clients' money over the next 2 1/2 years and keep the fund open for at least three years. The fund, which invests in everything from bonds to energy, lost more than 2% through August from the start of 2005. That compared with an average gain of 14% for competing funds, according to data compiled by Hedge Fund Research Inc. in Chicago.

The sale does not include the mostly private-equity investments that the firm separated into a so-called side pocket last year. Those holdings accounted for about 20% of the fund. The deal would be structured so that Ritchie Capital will continue to manage the assets, Doug Rothschild, the firm's chief administrative officer, said in an interview with Bloomberg. Based in Geneva, Illinois, Richie capital oversees about $2.8 billion including borrowed money.

12 Dec 2006

Hedge Fund Averages Up this year

An index of managers compiled by Hedge Fund Research climbed 2.45% in November, leaving it up 11.69% this year. Five of the six hedge-fund strategy indexes run by Dow Jones also rose last month.

Hedge funds also outperformed the benchmark Standard & Poor's 500 stock market index in November for the first time since May as managers benefited from a falling U.S. dollar, sliding bond yields and a rebound in energy prices.

Managers tracked by returned 2.18% on average last month, compared to 1.65% for the S&P 500, leaving them up 10.65% so far this year.

A rebound in energy prices also helped hedge funds focused on that sector. Energy funds tracked by Hedge Fund Research gained 4.41% in November, leaving them up 16.59% so far this year.

Hedge Funds and the Middle East

The Middle East accounted for 8%, or $28.9bn, of the global hedge fund market last year. According to a new Bank of New York study, hedge funds will draw a forecast $140.3bn in investments from the Middle East by 2010, accounting for 15% invested globally. Institutional investors provide 40% of the global market, which will increase to 65% by 2010, the study said.

The report by the Bank of New York and Casey, Quirk and Associates LLC, entitled “Institutional Demand for Hedge Funds 2: A Global Perspective”, also estimates that by 2010 nearly 25% of institutional investors will have investments in hedge funds, up from 15% today. It estimates institutional investors will account for more than 50% of flows into hedge funds through 2010 compared to 30% today.

The forecast demand for hedge funds is set to triple to $1 trillion by 2010, up from $360 billion today, as investors continue to embrace alternative investments, the report shows.

11 Dec 2006

Hedge Fund buys stake in A1 Grand Prix

RAB Capital has bought a stake in the A1 Grand Prix. The RAB Special Situations hedge fund, run by Philip Richards, has taken an 80% stake worth £100m. The fund has been known in the past for taking large positions in natural-resources firms.

According to The Times Online, as part of the deal, A1’s management will be restructured, Tony Teixeira will move up to chairman while Peter da Silva, Brazilian-born motor-racing fanatic who has spent 20 years at Siemens, has been appointed chief executive. Ben Hill of RAB will also join the board.

Philip Richards said A1, which was launched two years ago and pits nation against nation rather than team against team as in Formula One, represents an opportunity to make a lot of money in China. “Our focus has always been on western-owned and western-run companies that sell successfully to Asia.

"A1 fits with this. Motor racing is one of the fastest-growing sports in Asia, it is watched by both the elite and the masses. It is also the only single event that spans the region and so offers a unique advertising opportunity for global brands.” Richards said.

“We’ve made a fortune selling natural resources, copper, zinc, coal and so on, to the Chinese. This is the same: we’re selling motor racing to Asians, and with it the only event available for global brands to advertise across the continent in the context of a western company.”

Gargoyle's flagship Hedge Fund Exceeds Forecast

Gargoyle Asset Management announced today that its flagship hedge fund, the Gargoyle Hedged Value Master Fund, has exceeded $200 million in assets under management.

This fund is designed to allow investors to participate in the large cap U.S. equity market with enhanced performance and lower risk. Since January 2000, this Fund has shown a cumulative return of 118%. During the same period, the S&P 500 is up 6%. The Gargoyle Hedged Value Funds’ results are driven by a relative value stock selection process tightly coupled to an index option writing strategy. The skillful blending of those components has provided a consistent edge for the Gargoyle funds in all market environments.

Joshua B. Parker and Alan L. Salzbank are the fund’s managers. Additionally, Mr. Parker is a partner in Gargoyle's sister business, one of the country's largest independent market makers for equity options.

The Gargoyle company philosophy endeavors to protect and to grow the treasure of its investing partners through the use and appropriate application of equity options. Their website states that when used properly, equity options, have the potential to enhance investment performance and simultaneously to reduce investment risk.

BB&T Asset Management adds Hedge Funds to its Invesment Lineup

BB&T Asset Management, $15 billion investment adviser and subsidiary of BB&T Corporation, said they are now offering a broader range of alternative investment strategies to the bank's Wealth Management and Institutional Services clients.

These strategies will include hedge funds, private equity funds, private real estate funds, structured notes, commodity funds, covered call writing strategies, and multiple tax-efficient single-stock risk management strategies.

"We continue to develop our alternative investment services in order to meet the needs of our clients," said Shawn Gibson, director of Alternative Investments. "Research has shown that these asset classes can add significant diversification and performance benefits to investors, especially if they are invested with the top managers. And our platform includes some of the top alternative investment managers in the world, according to several industry experts."

BB&T Asset Management's Alternative Investment Group will be looking at high investment minimums strategies ranging from $1 million to $10 million, access to the top performing managers, and diversification among managers and strategies. The new lineup of products and services appeals to both conservative and aggressive investors," said BB&T Asset Management President Keith Karlawish.

"We are committed to building out our alternative investment capabilities and will continue to explore the various strategies that are available in the market," Karlawish said. "Our ability to offer these strategies allows us to deliver a complete menu of services and products to our clients."

Raleigh, N.C.-based BB&T Asset Management is a registered investment adviser and subsidiary of BB&T Corporation with more than $15 billion in discretionary assets under management.

Winston-Salem, N.C.-based BB&T Corporation has $118.5 billion in assets under management, BB&T operates more than 1,450 financial centers in the Carolinas, Virginia, Maryland, West Virginia, Kentucky, Tennessee, Georgia, Florida, Alabama, Indiana and Washington, D.C.

8 Dec 2006

Hedge Fund Survey

Hennessee Group's 12th annual hedge fund manager survey reported that hedge fund assets grew 21% from $1.009 trillion as of June 30, 2005, to $1.2 trillion by Oct. 31.

"Hedge funds are evolving in a manner similar to that of investment banks of old," said Charles Gradante, managing principal of Hennessee's survey. "The fact that they’re getting into venture capital and private equity is no big surprise," Mr. Gradante said. Though the investment vehicles once were "pigeonholed" as bond and stock players, today’s hedge funds have taken significant positions in tech and biotech companies, are floating bonds and are even funding movies made by actor Tom Cruise after his split with Paramount Pictures. A New York-based hedge fund, Fortress Investment Group, with $26 billion in assets, has become the first in the nation to file for an IPO.

The 2006 Hennessee survey also found that the number of hedge funds grew 10%, from 8,050 to 8,900. The survey was conducted on 440 hedge funds from 97 management companies representing over $256 billion in assets.

Though hedge funds traditionally have stood apart from regulated investments like mutual funds, the survey found that 86% of hedge funds are registered with a regulatory agency, such as the Securities and Exchange Commission, the NASD or state authorities. That compares with 61% in the earlier period.

Mr. Gradante likened the changes in hedge funds to the evolution of investment banks such as Lehman Brothers and Goldman Sachs from the 1930s to the early 1990's. "Hedge funds are evolving in the same way investment banks evolved," he said. "They’ll play an important role in financing venture capital in the future." Mr. Gradante also noted that one of the white-shoe investment banks, Goldman Sachs, also is the nation’s No. 1 hedge fund.

Hedge Fund Breaks Asset Record

MW Tops, an Amsterdam hedge fund, has outperformed in a variety of market conditions, breaking the world record for a listed hedge fund float after successfully raising €1.5 billion. Capital was first allocated to the Tops strategy in 2002 by Marshall Wace Asset Management Limited, a London hedge fund manager.

The amount is well over three times as much as the previous record holder, an offering from the Anglo-French hedge fund group Boussard & Gavaudan, which raised €440 million, according to the Times Online.

MW Tops is chaired by the former Bank of England deputy governor Sir Andrew Large. Marshall Wace Asset Management was established in 1997 by Paul Marshall and Ian Wace and transferred its business in 2003 to Marshall Wace LLP, a limited liability partnership incorporated in England and Wales.

According to Marshall Wace, the greatest interest in new hedge fund managers is being shown by rich individuals or family offices, private fund management operations devoted to managing wealth.

New investors include institutions precluded from conventional investment in illiquid, unlisted hedge funds, including some pension funds and insurance companies, as well as wealthy individuals. Investors are also attracted by the liquidity and visibility of a listed stock, where a price is also quoted. Traditional hedge funds are highly illiquid, with investors paying big penalties for sudden redemptions.

The minimum investment was set at €75,000 for the initial offering, but small investors will from today have access to MW Tops for the price of a €10 share in the secondary market.

7 Dec 2006

4 Billion Hedge Fund Rewrites Contract

Deephaven Capital Management, a $4 billion hedge fund is close to making a multimillion-dollar contract with Knight Capital Group.

Knight bought the hedge fund more than three years ago and Deephaven is listed on the companys website as their in house asset management business.

Deephaven is an alternative investment manager founded in 1994, with more than 120 people in Minneapolis, Hong Kong, and London. The new contracts are expected to be completed as early as next week and could give Deephaven chief Colin Smith and his deputies millions more than they previously earned.

Smith and other Deephaven managers have been in heated negotiations with Jersey City-based Knight since September. That has some investors speculating that the firms principals might separate from Knight or try to buy majority control of the firm, according to the New York Post.

Any deal struck between the two parties comes as profits from Deephaven have continued to boost Knight's earnings at a time when the traditional trading business has slowed.

In the third quarter alone, Deephaven contributed $50 million to Knight's $203 million in overall revenue - a threefold increase from the year before.

As Deephaven's assets under management surpass the $4 billion mark, the cash from management fees alone could amount to $80 million a year.

Under the current contracts, which are set to expire at the end of the year, Deephaven's management team earned roughly $20 million through September, according to an analysis by CIBC World Markets.

The Hedge Fund Hearings

The Senate Judiciary Committee conducted re-investigation hearings Dec. 5 on the hedge fund industry, looking into the handling of hedge fund giant Pequot Capital.

The Committee hearing focused on the regulation and enforcement issue. It is trying to determine whether the Securities & Exchange Commission might have been improperly influenced when it allowed Morgan Stanley Chief Executive John Mack to avoid questioning in an inquiry.

Although the SEC has cleared Pequot Capital and Morgan Stanley chief John Mack, questions still linger over allegations that the initial investigation was quashed when the lead investigator sought to subpoena Mack. Now two Senate investigations are underway to determine whether the SEC failed to thoroughly conduct the initial investigation and whether politics played a role in that failure.

The inquiry is focused on the trades that involved Morgan Stanley and Pequot, where Mack previously worked as chairman. As the hearings proceed industry observers will be looking for clues into just how much enthusiasm lawmakers have for imposing broader controls on the hedge fund industry.

Many hedge funds done tremendously well, attracting more capital and allowing them to pull off larger, higher-profile deals. But lawmakers and the media have focused on the blow up of a few funds, such as Amaranth Advisors.

Such problems have been relatively few in number, and the damage has largely been contained. Yet they have nonetheless led to calls for more regulation of hedge funds, which have been drawing more money from pension funds and even from some smaller, individual investors.

Earlier this year there was an effort to require hedge funds to register as investment companies, which would force them to disclose a certain amount of information about their strategy. The U.S. Court of Appeals in Washington overturned an SEC rule that would have required hedge fund registration. Some industry executives fear that would depress returns because funds would tip off their moves to rivals.

If the government were to impose leverage limits, the impact on the markets could be significant, industry observers say. Firms use debt to boost their return on investment. If deals become less profitable as a result of leverage limits, big pension funds may cut back on their allocations to alternative investments. Deals could become less competitive, and deal volume and price could decline as a result, weakening the investment market overall.

5 Dec 2006

Hedge Funds in Stock

Brookville Capital Management, a 4 year old hedge fund with less than ten employees and about $221 million in assets under management, has been bought by Morgan Stanley.

Morgan Stanley has already acquired a large stock of hedge funds, in late October the giant agreed to buy FrontPoint Partners, a hedge fund with about $5.5 billion, for about $400 million. Last month said it would buy a minority stake in Avenue Capital Group, which oversees about $12 billion of distressed debt investments, and in Landsdowne Partners. John Mack, Morgan Stanley’s chief executive, has assembleed these hedge funds to help the firm catch up with rivals like Goldman Sachs in offering clients alternative investments.

The company said in a memorandum that the expansion is part of Morgan Stanley's aggressive push to catch up with rivals in providing hedge funds and other alternatives to traditional money management products such as mutual funds. The price of the acquisition was not disclosed in the memo.

Brookville is based in New York and was formed in August 2002 by former Bankers Trust New York Corp. traders David Reiss, Jacob Gulkowitz and Abraham Gulkowitz. The hedge fund specializes in what is known as credit arbitrage, taking long and short positions in companies whose stock prices are driven by takeover speculation and other "event-driven" opportunities, the memo said.

The memo was signed by Owen Thomas, president of Morgan Stanley's asset management division, along with alternatives investment chief Stu Bohart and the group's strategic acquisitions and absolute return strategies head, Yie-Hsin Hung.

Hedge Fund Clones

Goldman Sachs has set up a hedge fund replication tool in a move that could lead to a shake-up of the $1,300bn hedge fund industry.

With a minimum investment of £10.00 ($19.87)and £10.00 Issue Price, Goldman’s Absolute Return Tracker index will undercut the high fees of the hedge fund sector with a 1% flat fee. Hedge funds and funds of funds can charge 47%. At maturity, the investor receives a one-for-one exposure to the performance of theiiindex return.

According to the Financial Times the tracker is set to be among the first of a flood of hedge fund cloning products likely to be launched in a revolution being compared with the arrival of index trackers in the mutual fund world a generation ago. “There is a lot of dead wood in the industry – people who should not be running hedge funds,” said Harry Kat, professor of risk management at London’s Cass Business School, who has just launched his own hedge fund replication tool.

Replication strategies are based on academic research that suggests hedge fund performance is largely driven by movements in underlying markets, such as equity, bond and commodity prices, rather than the intrinsic skill of managers.

Goldman has spent two years developing the algorithm that underpins its platform. The performance characteristics of thousands of hedge funds will be fed into the system monthly and Art is designed to decompose these data and calculate the aggregate position of the hedge fund universe. This position can then be replicated, potentially allowing Goldman to generate hedge fund performance at a fraction of the cost.

It will be far more liquid, with trading available on a daily basis. “This may be ideal for any large institution that has been looking at hedge funds but doesn’t like the fact that it takes six months to put money [in] and to take it out again,” said Edgar Senior, executive director in Goldman’s fund derivatives structuring team.

1 Dec 2006

Nomura launches Fund of Funds in Ireland

Garry Topp, a director at Nomura International said on Thursday that the company hoped to raise more than $100 million for a new open-ended global fund of funds invested in property securities which offered investors downside protection.

Based in Ireland, Nomura said its Global Property 80% Protected Fund would initially be spread across six funds run by Morgan Stanley, Henderson, and Credit Suisse, with each focusing on European, U.S. or Asian securities such as property company shares an real estate investment trusts (REITs). The fund's relative regional weightings will be reviewed every quarter. Nomura said it will charge a 1.5% annual management fee for the fund. The fund has invested 100% in property from the start, but wants to to ensure a continuous level of protection for 80% of the fund's highest value.

Topp said property securities offered investors a reasonable proxy for direct property and provided a more flexible form of global real estate investment. "The benefits of liquidity is that it allows people to move around the different parts of the property cycle around the world, allowing them to move between residential developers in the U.S., say, and offices in Australia," he said.

Topp said the fund was primarily aimed at the high-net-worth and the sophisticated end of the retail investment market. But he said it would also interest institutional investors looking to take some profits on their existing property investments and to put the proceeds to work in a liquid and diversified global property portfolio that offered them protection over any future gains.

The European branch of Nomura is headquartered in London, with offices in major financial centers across Europe. Nomura works closely with Asian and American networks, as well as with Tokyo. Their four business lines (Global Markets, Investment Banking, Merchant Banking and Asset Management) are co-ordinated globally, however each European operating entity is incorporated and regulated separately and reports to local management as well as to Tokyo-based business heads.

Judge Favours Hedge Funds in Company Sale

Delaware Vice Chancellor Stephen Lamb ordered Metromedia International Group Inc. to hold a shareholder vote on its plan for asset sale.

The deal follows years of lawsuits among its 20% owner, John Kluge, and 18% owner Stuart Subotnick, against minority investors, many of them hedge funds, over the company's failure to hold annual shareholders' meetings or file income statements with the U.S. Securities and Exchange Commission.

Metromedia claimed that since it has been unable to file financial statements for several years due to accounting issues, it can not legally hold a shareholder vote on the sale. Instead, it planned to file for Chapter 11 bankruptcy protection to execute the sale, even though it is not insolvent.

Hedge funds Esopus Creek Value LP and Black Horse Capital, which together hold 8.2% of the over-the-counter traded stock, sued the company and certain directors on Aug. 18 in Delaware to force it to hold a vote on the sale.

According to court documents released on Thursday, Judge Lamb favoured the hedge funds that sued the communications company. He ruled that the proposed sale has "glaring inequities," in that it allows preferred stockholders to vote on the deal but not common shareholders. He also ruled that preferred shareholders would get "excess" payments through the sale compared with those accorded common stockholders. "Metromedia's proposed transactional scheme, though technically within the letter of the law, works a profound inequity upon the company's common stockholders," Lamb ruled.

Metromedia, founded by billionaire media mogul John Kluge, had previously disclosed that it plans to sell its main asset, a 50.1% stake in Magticom, a leading wireless phone provider in the Republic of Georgia, for $480 million. The proposed buyers of Metromedia include Emergent in Salford Georgia, of which Badri Patarkatsishvili is a major client, and Istithmar, described in the company's press release as a "leading alternative investment house in Dubai, United Arab Emirates."

Judge Favours Hedge Funds in Company Sale

Delaware Vice Chancellor Stephen Lamb ordered Metromedia International Group Inc. to hold a shareholder vote on its plan for asset sale, the deal follows years of lawsuits among its 20% owner, John Kluge, and 18% owner Stuart Subotnick, against minority investors, many of them hedge funds, over the company's failure to hold annual shareholders' meetings or file income statements with the U.S. Securities and Exchange Commission.

Metromedia claimed that since it has been unable to file financial statements for several years due to accounting issues, it can not legally hold a shareholder vote on the sale. Instead, it planned to file for Chapter 11 bankruptcy protection to execute the sale, even though it is not insolvent.

Esopus Creek Value LP and Black Horse Capital, which together hold 8.2% of the over-the-counter traded stock, sued the company and certain directors on Aug. 18 in Delaware to force it to hold a vote on the sale.

According to court documents released on Thursday, Judge Lamb favoured the hedge funds that sued the communications company. He ruled that the proposed sale has "glaring inequities," in that it allows preferred stockholders to vote on the deal but not common shareholders. He also ruled that preferred shareholders would get "excess" payments through the sale compared with those accorded common stockholders. "Metromedia's proposed transactional scheme, though technically within the letter of the law, works a profound inequity upon the company's common stockholders," Lamb ruled.

Metromedia, founded by billionaire media mogul John Kluge, had previously disclosed that it plans to sell its main asset, a 50.1% stake in Magticom, a leading wireless phone provider in the Republic of Georgia, for $480 million. The proposed buyers of Metromedia include Emergent in Salford Georgia, of which Badri Patarkatsishvili is a major client, and Istithmar, described in the company's press release as a "leading alternative investment house in Dubai, United Arab Emirates."