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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.