30 Jul 2010
The Chronicle For Higher Education reports that Greenwood and his partner, Steven Walsh, may have used the $900 million as a personal fund. Walsh has pleaded not guilty, and Greenwood will testify against him at trial.
“The two spent at least $160-million on mansions, horses, rare books, and an $80,000 collectible teddy bear.” The paper reports.
Offering low risks and high returns, the team’s investors included the University of Pittsburgh, who invested $65 million, Carnegie Mellon University, $49-million, Bowling Green State University, $15 million, and Ohio Northern University who invested $10-million.
Greenwood’s assets will be auctioned off in an attempt to recoup some of the investor losses. He also faces a prison sentence of as long as 85 years and hundreds of millions of dollars in fines at his December sentencing, according to The Chronicle For Higher Education.
29 Jul 2010
Investors’ confidence was shaken by the damage caused by the Greek crisis, and saw the average price for hedge fund shares drop to an all time low. Although the average price shows that secondary users continue to be wary of paying too much for assets, the rise does indicate an upturn in confidence.
The 8% rise in the average price has been helped by trading in the ‘near-par zone’ – trades which take place at just below the net asset value of each share. Originally a key driver of trading volume, significant trading in this area has not been seen since before the credit crisis. Previously, investors would offer small discounts for their shares in order to tactically manoeuvre within locked up hedge funds:
“The near-per zone was typically used by investors in locked up funds to raise short term capital or reduce the market risk in their portfolios. When the crisis first arrived, the ability of managers to raise any capital disappeared, and there are virtually no locked up funds around. This, and the fact that investors generally have much greater concerns than liquidity or tactical trading, has made near par trading virtually non-existent”, Elias Tueta, co-founder of Hedgebay said.
“It is a consequence of the change in the basic nature of the secondary market caused by the crisis. Where once the main use of the market was to access high quality, locked up funds, investors are now concerned with mitigating the damage within their portfolios.”
While Mr Tueta believes that near par trading is an interesting development, it is not yet conclusive evidence of what is to come on the secondary market. The return of near par trading in earnest will be the clearest indication that trading patterns on the secondary market have returned to pre-crisis conditions – and that the hedge fund market has finally and fully recovered. Mr Tueta says that the primary market will dictate when this occurs.
“The volume of near par trading is a good barometer of the health of the hedge fund industry. The performance of hedge funds in the primary market will give us a good idea of what we can expect in that regard. The success of capital raising among managers will depend on them sustaining the solid performance we have lately seen in the industry. If this continues, we may eventually see more managers closing to new investors or offering share classes with longer lock-ups, and then we may see the de facto return of near par trading.
Holland & Knight LLP (HedgeCo Blogs) - On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act). The Act has several potential impacts on our clients and within the investment management community.
"This memo is intended to summarize, in general, what we believe to be notable aspects of the Act that impact many of our clients." Scott R. MacLeod, Jay S. Crenshaw of Holland & Knight said, "A more explanatory summary from us is available upon request. However, you should review the Act as a whole to identify specific areas of relevance. Lengthy and detailed write ups regarding the background, impacts, and policy of all areas of the Act are available online."
Unless otherwise stated, any changes in law discussed herein generally are effective July 21, 2011.
I. Adviser Registration
A. If you manage any separately managed accounts and have assets under management ("AUM") in excess of $100 million, then you must register with the SEC (even if you only have one account /client).
B. If you have separate accounts and AUM of $25 million - $100mm, you must register with your home state unless exempt under state law, in which case you must register with the SEC.*
C. If your only clients are investment funds and you have AUM of more than $150 million, also register with the SEC.
D. If you are a non-U.S. adviser with any separate accounts, or with fund assets over $150 million, also register with the SEC unless you have (1) no place of business in the U.S.; (2) less than $25 million in AUM from U.S. clients and U.S. fund investors; (3) fewer than 15 U.S. clients and fund investors; and (4) do not hold yourself out generally to the public in the U.S. as an adviser.
E. If you have AUM of less than $25 million or are exempt from SEC registration, then you must be registered or find an exemption in any state where you have a place of business or more than 5 clients.*
F. If you are a "Family office" or an adviser solely to one or more "venture capital funds" (both terms to be defined), then you are exempt from SEC registration.
*It is not clear what state exemptions may change as a result of the Act; we can help you analyze state law if you fit within one of the noted categories.
IMPORTANT NOTE RE: WHEN TO BEGIN IMPLEMENTING: IF, AS A RESULT OF THE ABOVE, ANY ADVISER NEEDS TO: (1) REGISTER WITH THE SEC; (2) REGISTER WITH ANY STATE(S); AND/OR (3) DE-REGISTER WITH THE SEC, SUCH ADVISER SHOULD SEEK TO IMPLEMENT ANY OF THE FOREGOING ACTIONS WELL IN ADVANCE OF THE JULY 21, 2011 EFFECTIVE DATE, PREFERABLY BEGINNING IN THE FALL OF 2010.
II. Investor Certifications
A. You must immediately amend your fund subscription agreement's definition of accredited investors to exclude primary residence from an investor's net worth. For now, this change seems to apply only to new investors or additional subscriptions from existing investors with no need to expel any existing investors. This change is effective immidiately and requires your prompt attention.
B. IF you are a registered investment adviser ("RIA") and charge performance fees/allocations to any investor in a 3(c)(1) fund, you WILL need to amend to adjust for inflation the "qualified client" certification obtained from each client/fund investor next year.
A. You may need to register with the National Futures Association ("NFA") as a Commodity Pool Operator (CPO) IF (1) you buy commodities and currently rely on an exemption based on margin and notional exposure percentage limitations because you will now need to include any swaps when determining compliance with such limitations, or (2) you are defined as a "major swap participant" when new rules are adopted.
B. You may need to report (1) pre-enactment swaps if applicable regulators issue related interim rules, and (2) future swaps which are not accepted for clearing.
- If you manage funds (whether or not you are a RIA), you will be required to maintain records and file reports to the SEC.
- Such reports will include a description of funds':
o amount of AUM;
o use of leverage, including off-balance sheet leverage;
o counterparty credit risk exposure;
o trading and investment positions;
o valuation policies and procedures;
o types of assets held;
o side letters;
o trading practices, and
o any other information that the SEC deems to be “necessary or appropriate…"
Future rules under the Act MAY require RIAs to take further steps to safeguard client assets.
C. The "Volcker" Rule.
If you are affiliated with a bank, you generally must not engage in proprietary trading activities or sponsoring or investing in a hedge fund, private equity fund or similar entity.
D. "Bad Boy" Provisions.
I further rules are adopted, you will be disqualified from using Rule 506 Regulation D offerings if your firm or principals have engaged in certain improper conduct in the past.
E. Securities Lending.
Within two years, the SEC will promulgate rules designed to raise the transparency of information available to investors with respect to the loan or borrowing of securities.
F. Shorting and Arbitrage.
The SEC may adopt further reporting rules and restrictions on such activities pursuant to the Act.
G. Mandatory Arbitration.
The SEC MAY adopt rules and regulations restricting or prohibiting the use of mandatory arbitration agreements by advisers.
Note from the authors: "This is a very brief summary intended to highlight aspects of rules that are very fact dependent. Please contact us to discuss specific questions."
Varna is a newly formed hedge fund manager based in New York and headed by Svetlana Lee. Following the signing of the strategic relationship, Varna is expected to launch its first fund during the fourth quarter of 2010.
“The long-term performance characteristics of fundamental equity long-short strategies are very attractive, and we look forward to bringing this opportunity to our investors.” Clive Peggram, CEO of FRM, said, “Lee is one of the most talented new equity long-short managers in the industry and we are very pleased to form a strategic relationship with her new firm and to support its development.”
“A firm’s anchor investors are a critical element to a successful launch. FCA is a well respected institutional firm and its significant day one investment will provide us with a strong foundation to launch and grow.” Lee said.
Lee, together with the Varna team, previously managed an equity long-short fund at Citadel’s PioneerPath new manager platform. Prior to that she gained extensive investment experience at leading hedge funds Greenlight Capital, The Baupost Group and Perry Capital. Varna will implement a value-focused, equity long-short strategy that seeks to exploit event-driven situations, structural market dislocations and identify hidden fundamental business value.
28 Jul 2010
HedgeCo.net News -Based on the new Dodd-Frank Act that was just signed into law last week by President Obama, new legislation allows the SEC to award huge sums to whistleblowers in insider-trading cases such as the one against hedge fund Pequot Capital Management.
“As of this past Friday, the SEC now has greater ability to extract information from employees of corporations and others involved with those employees.” Ed Tomko, head of the White Collar Crime practice at Curran Tomko Tarski, announced.
On Friday, a payment was made by the SEC to Karen and Glen Kaiser who provided documents that helped the SEC build its case against Arthur J. Samberg, founder of the Pequot hedge fund and David E. Zilkha, a former Microsoft employee.
“This has broad reaching implications for public companies as well as businesses operating in the financial sectors,” said Tomko. “This is the largest amount awarded by the SEC to whistleblowers in an insider-trading case.”
As a result, there is the potential now for whistleblowers to be enticed by lucrative fees they will receive for providing information to the government. This can become a slippery slope for businesses. This can now provide possibly a powerful incentive for an employee or individual related to an employee who know of a securities violation to contact the SEC and provide information that may lead to a large payment in exchange for the information.
2 Jul 2010
SEC Director Andy Donahue has asked FINRA's Robert Ketchum for help in crafting legislation that is designed to curb pay for play activity while protecting the role of third party marketing firms. The SEC changed course, at least in part, because of an outcry of response from a wide spectrum of investment professionals, that articulated the positive role that third party marketing firms play in the industry.
The SEC had originally signalled that it intended to ban third party marketing to public pension plans in the wake of the New York State Common Retirement Fund pay-for-play fiasco. While eliminating pay-for-play activities is laudable, the SEC's original course of action completely ignored the positive impact that third party marketing has on the investment decision making process. Based on numerous complaints that the SEC received that articulated the positive impact that third party marketing firms play throughout the investment process, the SEC reversed course and asked for FINRA’s help in crafting legislation that would curb pay for play activities, but protect the role of third party marketing firms.
As you may recall, in early 2009, David J. Loglisci, former chief investment officer of the New York State Common Retirement Fund, and Henry Morris, (former chief political adviser and chief fundraiser for former New York State Comptroller Alan Hevesi), were indicted on 123 charges, including enterprise corruption, securities fraud, grand larceny, bribery and money laundering.
Following the indictment, New York state Attorney General Andrew Cuomo promised to eliminate the use of third-party marketers in the public pension allocation process. As the nation’s third largest pension plan, the Common Fund wields significant influence in the pension industry. Unfortunately, the initial debate regarding third party marketing firms was framed in part by the Common Fund and others who committed wrongdoing, who chose to deflect blame from themselves and their deficient internal governance practices onto others.
I am delighted that during its due diligence the SEC has listened to the outcry from investment professional and now recognizes the important role that third party marketing firms play in the industry. If the SEC had followed the New York State Attorney General's recommendation to ban third party marketing, the marketplace would likely sustain far-reaching negative consequences without resolving the breach of fiduciary duty and public trust that is alleged. I will go into greater detail regarding the benefits that third party marketing firms bring to the process later in the discussion.
While I applaud the SEC’s decision to reconsider its course of action, I would encourage the SEC and FINRA to adopt a series of measures.
First, I would require all marketing professionals that call on public funds to be registered with FINRA, whether they are employed with third party marketing firms or employees of alternative investment firms.
This measure will level the playing field for everyone soliciting business with public funds. Second, I believe that greater transparency including fee disclosure be required of all third party marketing firms. THIRD, I would also suggest a ban on political contributions from third party marketing firms and all alternative investment firms seeking to do business with public funds. Finally, I would expect that strict policies regarding Travel and Entertainment Expenses of all third party marketing firms be enforced by FINRA. Effective legislation combined with rigorous enforcement will protect the positive role that third party marketing firms bring to the table and protect the broader interests of all market participants.
The State of New York Common Retirement Fund pay for play disaster serves to remind us that we have no outright protection from fraud and unethical behavior in our society. However, we do have powerful regulatory bodies capable of enacting and enforcing laws that promote ethical and responsible behavior. I am encouraged that the SEC has solicited feedback and is apparently willing to be thoughtful in its approach to third party marketing firms.
The value that third-party marketers add to the allocation process is manifold. Third-party marketers act in the role of an investment bank by raising capital for many private equity firms, hedge funds and other organizations in the alternative investment arena. Third party marketing firms are paid a fee for their efforts, typically a percentage of assets raised or a percentage of all fees generated by the investment in the future. The elimination of third-party marketers would likely cause many of these alternative investments firms to close their doors while simultaneously creating a higher hurdle rate for new managers considering entry into the business. It would also disproportionately harm minority- and woman-owned firms, which tend to be smaller. Many small and medium-sized hedge funds and private equity firms provide seed capital to start-up and small businesses and are an integral part of the global economy's shadow banking system. Small businesses represent a significant portion of our country’s job growth and are the backbone of our nation’s economic competitiveness on a global scale. Retarding the growth of the nation’s shadow banking system, during a time when traditional banks and lending institutions are less active, will likely have negative consequences for the market.
In sum, third party marketers contribute to the health and existence of the alternative investment arena, which in turn provides capital for the global economy and increases market efficiency. Banning third-party marketers from the investment process would also shrink the opportunity set for investors and speed the migration of investor’s capital to the largest hedge funds and private equity firms, who can afford large marketing infrastructures. Many would argue that compared with their smaller brethren, larger organizations are not able to generate the same returns as their smaller, more nimble competitors, which would negatively impact market efficiency. Given that small and mid-size hedge funds and private equity firms have the potential to generate a significant amount of alpha, any legislation that impacts their existence should be carefully considered. Hedge funds can choose to build their own sales teams, outsource the fundraising effort to a third-party marketing firm, or choose a hybrid approach.
There are some important distinctions between third-party marketing firms and in-house sales staff. Third-party marketers are required to be licensed and regulated by the SEC and FINRA. These firms are heavily regulated and are required to follow all rules and regulations. Most hedge funds are not regulated and their internal sales people in many cases are not licensed. As it now stands, third-party marketers face a much higher degree of regulatory scrutiny than hedge funds that have not voluntarily registered with the SEC. Another critical role played by third-party marketers is the screening of the manager universe. The best third-party marketers perform extensive due diligence before making the decision to represent a hedge fund. In some cases, third-party marketers represent less than 1% of the firms on which they perform due diligence. If one of the firms they are representing becomes less marketable for any reason, they have the option to focus their efforts on the other managers they represent.
All of the reasons articulated above suggest that the SEC is wise in its most recent efforts to explore a framework of rules and regulations that protect third party marketing firms and market participants.
I am pleased that the SEC has listened to the marketplace and recognizes the value that third party marketing adds to the investment process. The SEC’s appreciation of the role that third party marketers play and its request for help from FINRA to create rules that will level that playing field for all of us is welcomed.
Donald A. Steinbrugge is managing member of Agecroft Partners LLC, a Richmond, Va.-based consulting and third-party marketing firm specializing in hedge funds and other alternative investments.