La corsa degli hedge funds a cedere i loro assets [Archivio]

FaGal

18-05-05, 09:41

http://www.smartmoney.com/commonsense/index.cfm?story=20050517

The Catastrophe That Never Happened

By James B. Stewart
May 17, 2005

WALL STREET IS SKITTISH. Last week, rumors that a large hedge fund had experienced catastrophic losses precipitated a 200-plus-point decline in the Dow Jones Industrial Average. And then this week, as every market player of any importance appeared to have survived the weekend, the market rallied.

I've been hearing for months — ever since the Federal Reserve started raising interest rates — that some kind of financial crisis is looming on the horizon. Most of these scenarios draw on the 1998 collapse of Long-Term Capital Management, the hedge fund whose ill-fated bond bets triggered a world-wide panic and Federal Reserve intervention. Since then, the money rushing into hedge funds has grown exponentially, which has only heightened the sense that an accident is waiting to happen. I've even heard talk of a hedge fund "bubble," whose puncturing would lead to another post-9/11 collapse of the markets.

So last week's rumors fell on receptive ears. Supposedly many hedge funds had simultaneously bet that General Motors (GM1) stock would fall and its debt would rally, as investors absorbed the stark realities confronting the world's biggest auto maker. There was a certain logic to this, since debt has priority over equity in bankruptcy, should this scenario seem likely. But whatever the logic, expectations were whipsawed first by Kirk Kerkorian's above-market tender offer for a large stake in GM, and then, the next day, by Standard & Poor's downgrade of GM debt to junk status. The unthinkable happened: The price of GM stock surged, and its debt collapsed.

Not only were certain hedge funds suddenly facing a liquidity crisis, but, according to the rumors, so were their lenders. One of the more widespread of these reports put a major bank at risk, supposedly because of its massive and risky lending to hedge funds. It was enough to send many traders to the exits, at least until the dust settled over the weekend.

I doubt that most individual investors even heard these rumors until the damage was done, and news reports appeared. Sometimes it's a good thing that most of us aren't attuned to the pulse of Wall Street. In my experience, it's almost always a mistake to invest on the basis of rumor. Rumors confer the bogus impression that we're privy to some kind of inside information. But usually, they're nothing but speculation, occasionally accurate, but more often wrong. Short-term traders might be able to take advantage of them, but not for long — and I prefer to invest for the long term.

More fundamentally, I suspect that widespread fears of a hedge fund collapse or "bubble" are also misplaced. Financial crises have a way of being unexpected, not the subject of constant, unfounded rumors in the market. Hedge funds constitute a wide array of investment vehicles, unified primarily by the high fees they charge their investors. They're not like technology stocks in 2000, vulnerable to a collapse of investor sentiment. As a result of the huge flow of capital into hedge funds and increased competition, their returns are already slumping. In a sense this is healthy, making markets more efficient and wringing out excessive returns. But at some point hedge fund investors are going to wonder what they're getting for those exorbitant fees they're paying.

Recent moves in the market have no doubt generated some losses at hedge funds, and not just because of the GM news. Long-term interest rates have defied all the experts (not to mention my own predictions) by falling even as short-term rates rise. Some observers are even suggesting that 10-year Treasury rates could drop below 4%. I've parked my fixed-income allocation in money market accounts, which has softened the blow with a rising yield. But I'm glad I didn't bet against long-term rates. Even though I still believe I'm right that long-term rates are destined to rise, a money manager reminded me the other day that "markets can remain irrational a lot longer than you can remain liquid." That's a good aphorism to remember.

Even the dollar, which seemingly everyone predicted at the beginning of the year would continue to fall, has rallied strongly. Warren Buffett, who reiterated his weak dollar theory earlier this year, must be feeling the pain.

I doubt that we've heard the last of the hedge fund rumors. For those of us not in the super-rich category of most hedge fund investors, market turmoil based on rumor rather than fact is usually a buying opportunity. Even turmoil that is based on fact, when it is accompanied by forced selling based on margin calls or a liquidity crisis, is an opportunity, as it was in 1998. As I emphasized last week, whatever the turmoil caused by S&P's downgrade of GM and Ford (F2) debt, it was a golden opportunity for those of us looking for higher yields.

Hardly noticed last week among all the hand-wringing about hedge fund losses was that Moody's, the other big debt-rating service, lowered Ford debt by two notches, but nevertheless maintained its investment-grade status.

Although all the news reports I read focused on the downgrade, this was actually a vote of confidence in Ford, at least compared with S&P's downgrade to junk status. The Ford bonds I bought last week rallied on the news, though they're still yielding a generous return compared with most fixed-income alternatives. I reiterate my "buy" recommendation on short- to medium-term Ford and GM bonds.

http://www.smartmoney.com/commonsense/index.cfm?story=20050517

FaGal

22-05-05, 13:15

EU Commission eyes hedge fund regulation
www.ipe.com - May 20, 2005

EUROPE – The European Commissioner in change of the internal market, Charlie McCreevy, has identified the “patchwork quilt” of hedge fund regulation in Europe as something that needs to be looked at.

McCreevy told an audience in Dublin that there is currently no common regulatory approach to hedge funds within the European Union.

He said: “Many national regulators have however responded individually which in turn has given rise to something of a patchwork quilt of rules across the member states.

“The extent to which this might limit the future efficient development of the alternative investment market is something that needs to be explored.

“We need to see if at EU level we can facilitate the development of this sector in a way that stimulates greater efficiency for operators.”

Speaking at the Annual Global Funds Conference hosted by the Dublin Funds Industry Association and the National Investment Company Service Association, he also expressed concern over investor protection and the possible economic impact of hedge funds.

He said: “Regulators examining these changes in the landscape are focused specifically on the potential implications for unwary investors and for the possible impact of some of the investment and trading strategies in a macroeconomic context.”

But he said the Commission would try to keep a balance. “We don’t want to end up with rules that place excessive restrictions on financial innovation or that smother the market’s ability to efficiently meet real investor needs.”

The London-based Centre for Economics and Business Research yesterday likened investing in hedge funds to betting on horses, according to a Reuters news report.

FaGal

25-05-05, 09:54

24 maggio 2005

Più controlli per gli hedge fund

Dopo i crescenti timori di destabilizzazione dei mercati finanziari, varie autorità di regolamentazione studiano iniziative

MILANO • Gli hedge fund potrebbero essere sottoposti in futuro — ma non a breve scadenza — a una regolamentazione più puntuale rispetto a quella assai tenue di oggi, per evitare il rischio di possibili shock sui mercati finanziari. Il commissario europeo al mercato interno, Charlie Mc Creevy, ha confermato ieri di essere « piuttosto aperto » a considerare un rafforzamento della regolamentazione degli hedge fund, pur avvertendo che eccessi normativi non sono desiderabili. McCreevy ha però negato che la Commissione abbia in programma iniziative specifiche o che si sia già arrivati a un approccio comune europeo sulla materia.
Il presidente della Bce Jean Claude Trichet, poi, è parso indicare ieri la necessità di approfondimenti prima di nuove misure legislative. Inoltre, questa settimana a New York, le opzioni per ridurre la possibilità di crisi finanziarie sono all'ordine del giorno di una riunione di esperti e autorità di controllo. Da lì dovrebbero scaturire raccomandazioni su come prevenire sconquassi come quello che fu innescato nel 1998 dal collasso dell'hedge fund Ltcm. Continua peraltro a suscitare diffuse perplessità l'annuncio dei giorni scorsi del Governo tedesco di voler predisporre controlli più stretti sul settore, in quanto la mossa di Berlino viene collegata all'irritazione per il ruolo dei fondi nel terremoto provocato ai vertici della Borsa tedesca. Se sui mercati la grande paura di alcuni giorni fa sembra in via di rientro, resta intatta l'esigenza di una maggiore trasparenza per questi strumenti aggressivi di investimento " esplosi" negli ultimi due anni in numero e risorse: proprio le voci incontrollate sulle forti perdite da trading e sulle ampie posizioni precarie detenute da molti hedge fund contribuiscono all'instabilità complessiva dei mercati. Da aprile a metà maggio tutti gli stili di investimento degli hedge funds sono risultati in perdita — un fatto che accade raramente —, con un trend aggravato dall'esposizione verso strumenti complessi legati ai corporate bond ( il declassamento a junk del debito di Gm e Ford sta pesando, secondo uno studio Deutsche Bank, per un totale di 32 miliardi di dollari su hedge e banche).
Inoltre il mondo degli hedge non è immune da comportamenti illeciti. Un ex trader della Lipper Holding, Edward Strafaci, è stato condannato ieri a 72 mesi di prigione a New York e a un risarcimento di 89 milioni di dollari per aver sovrastimato ad arte il valore di due fondi. Sempre ieri, inoltre, tre manager degli hedge fund Galleon Management, Oaktree Capital Management e Db Investment Managers hanno accettato di pagare 2,4 milioni di dollari per porre fine a un procedimento che li accusava di aver utilizzato tattiche illegali di trading finalizzate a conseguire rapidi profitti in vista di emissioni azionarie. La prospettiva di una maggiore regolamentazione, comunque, suscita perplessità tra gli interessati. « Siamo sostanzialmente contrari — afferma James Jacklin, responsabile europeo di Man Investment — Semmai, oggi troppi hedge fund sono offshore e in quanto tali meno trasparenti: va stimolato il format onshore » . « Un po' più di regolamentazione può far bene a tutti — ritiene Stefano Cortesi, a. d. di Hedge Invest Sgr — a patto che non crei eccessi burocratici e sia coordinata tra Ue, Usa e altri Paesi. Comunque non dovrebbe essere limitata la flessibilità operativa dei fondi » .
http://www.assinews.it/rassegna/articoli/sole240505co.html

FaGal

29-05-05, 17:39

THE list of the fallen is getting longer. At Bailey Coates, a London firm, one hedge fund is believed to have lost more than 20% of its net asset value so far this year. The Strategic Allocation Program of John W. Henry, of Boca Raton, Florida, is expected to be down by 27% in the course of 2005. Quadriga, an Austrian hedge-fund group, has two funds which have lost more than a fifth of their value since last December.

These are just a few of the hedge funds whose recent losses are hardly the “absolute returns” for which their clients pay generous fees—typically 1-2% of assets, plus 20% of returns, often above an agreed minimum. Some lost money on credit-market positions involving the huge debt of General Motors and Ford, whose recent tumble to junk status pushed credit spreads sharply wider. Others came a cropper in convertible-bond arbitrage. Both strategies, reckon researchers at Morgan Stanley, an investment bank, have cost their adherents 10-15% so far this year. Quadriga, which invests mainly in futures, lost some of its wagers on commodity and Treasury-bond prices.

Hedge Fund Research, in Chicago, calculates that hedge funds lost 0.7% on average in the first four months of the year. That still beat the S&P 500, which shed 4%, but was far from brilliant. Other hedge-fund number-crunchers show different figures but a similarly depressing recent trend. Are the funds on the brink of disaster? No, but their glory days may well be behind them. In a sense, they are victims of their own success.

Hedge funds—loosely regulated pools of investment capital that are supposedly for rich and knowledgeable investors alone—have grown explosively, as chart 1 indicates. They preserved their investors' capital when stockmarkets plunged in 2000, beating the index by a wide margin for each of the next three years (see chart 2). Since then, with returns to cash minimal, stocks going nowhere and bonds looking overpriced, investors have flocked to hedge funds to improve sparse returns.

Pension funds and insurers dipped cautious toes into the hedge-fund water. So did the fairly rich (following the very rich). Fast-growing “funds of hedge funds”, which spread investment among a number of hedge funds, gave new investors an easy (if expensive) way in. Today, though no one really knows, it is thought that some 8,000 funds manage at least $1 trillion in assets.

As their industry has grown, hedge funds have changed. Many have pushed into less liquid and more esoteric markets (distressed debt and structured finance, for example), as well as into anything but exotic long-only equity investment. They have also begun to use more borrowed money to enhance returns. Today, 70% of hedge funds have the ability to use some amount of leverage, says Hedge Fund Research. Many firms have geared up with debt equal to twice capital and some up to five times capital—though even that is far less than the levels seen in the 1990s.

Another change is the new importance of funds of hedge funds. These now account for some 45% of hedge-fund assets, up from 18% in 2000, according to Morgan Stanley, and for 60% of inflows. Many fund-of-funds managers are traders at heart and lack the longer-term commitment of a pension fund or an individual investor. By imposing their own fees on top of hedge funds' hefty charges, funds of hedge funds may have helped to create impossible targets for investment returns. And many use borrowed money to improve returns. A number of well-established hedge funds say they refuse to take money from leveraged funds of funds, but some newer ones are not so picky.

Has the quality of fund management deteriorated? Many think so. “What now travels under the name of hedge fund is often just speculation,” says Tim Price, of Ansbacher, a private bank. The barriers to entry for funds of hedge funds, in particular, are minimal. As a result, “a lot of capital has gone to average or below-average money managers,” says Jacob Schmidt of Allenbridge, a hedge-fund research firm.

For all their drawbacks and recent troubles, hedge funds have their uses. They provide liquidity to the markets, and they help companies to raise money and financial institutions to lay off risks. Whether or not they are now set for the meltdown that some have prophesied depends mainly on four things.

Whither hedge funds?

The first is whether investors exit en masse. Fed up with returns less glorious than those they expected, many are growing restless. Inflows may have been slowing already in the second half of 2004; new money in the first quarter of 2005 was a healthy $25 billion or more. But Hedge Fund Research notes a reduction in money from funds of hedge funds, which normally drive asset growth.

Morgan Stanley's researchers believe that last quarter may prove to have been the peak. Private money is coming in at half the rate it did a year ago, especially from among the lower ranks of rich individuals. Institutional investors are proving stauncher but it remains to be seen whether they are rattled by calls for public bodies such as California's state pension scheme, CalPERS, to reveal their hedge-fund investments.

The second question is whether recent ructions in the credit markets provoke a wave of redemptions by investors, forcing funds to sell what they can rather than what they should. Many funds lock in investors for at least three months, and June could prove a moment of truth. Hedge funds trying to unwind unprofitable positions now are having mixed results. “Material” liquidation is taking place in the convertible arbitrage market, says Huw van Steenis of Morgan Stanley. Structured finance seems to be proving more resistant.

A third issue is what will happen as interest rates—in America, anyway—rise. At the moment, historically low rates have cosseted hedge funds and other investment groups with big borrowings. “If interest rates increase, leveraged industries might get into trouble,” says Olivier Khayat, head of debt capital markets at Société Générale, a French bank.

A fourth question is whether any liquidations, forced or otherwise, prove contagious, thus destabilising other markets and players. No one speaks so far of having seen the sort of contagion across asset classes that took place when Long-Term Capital Management got into trouble in 1998. But there are certainly risks that more and worse is to come.

The prevalence of funds of funds is one danger. Because they are often leveraged themselves (almost half can use borrowed money), if a fund in which they invest gets into trouble its losses are magnified at the fund-of-fund level, forcing it to pull money out of other, perhaps better managed, hedge funds in compensation. This could create a domino effect.

Another risk lies in the importance of hedge funds to the banks that serve them. Though hedge funds' assets account for only a tiny portion of global capital under management, their trading amounts to a high percentage of investment banks' revenues in some areas of business, especially convertible bonds and distressed debt, for example. They are also the banks' counterparties in transactions such as credit-default swaps. So any big troubles among hedge funds are likely to be felt by investment banks and prime brokerages. Small wonder that many analysts are downgrading the sector.

It can be argued that the sharp shock of recent weeks is just what was needed to scare low-quality money out of the hedge-fund business. “This is a healthy shake-up of the industry,” says Charles Gradante of the Hennessee Group, a research firm specialising in hedge funds. If he is right, a stronger industry will emerge.
http://www.economist.com/finance/displayStory.cfm?story_id=4010945

FaGal

29-05-05, 17:48

'Hedge Fund' Blowout
Threatens World Markets
by Lothar Komp

Decades of insane economic policies, and the stubbornness of central banks papering over the symptoms of a systemic crisis by providing ever more liquidity, have produced an impossible situation as of late May, after the GM/Ford credit shocks.

One of the effects of this unprecedented liquidity pumping has been the biggest explosion in mortgage and other private debt titles in history, as well as the emergence of new financial bubbles in the bond, housing, and commodity markets. All of these financial assets are again just the basis for financial bets of even larger proportions: "derivatives." As most of the derivatives bets are traded outside of official exchanges, in the form of private deals between two counterparties, nobody really knows the actual dimensions. A substantial amount of derivatives betting is done by "hedge funds," which are not subject to any kind of regulation or supervision. According to the Bank for International Settlements (BIS), the outstanding volume of OTC ("over-the-counter") derivatives alone amounts to $248 trillion, while the annual turnover of exchange-traded derivatives is close to $900 trillion. It's a conservative guess to estimate the current rate of derivatives trading at $2 quadrillion per year; that is, 50 times more than the annual economic activity, measured by the gross domestic product (GDP), of all countries on the planet. (See Glossary of terms on derivatives and hedge funds.)

On May 5, a big shoe dropped into this giant financial minefield. Standard & Poor's downgraded $453 billion in outstanding debt of General Motors and Ford Motor Corporation to junk. On May 8, Lyndon LaRouche indicated that the General Motors crisis is not only a "national disaster" for the United States, but could actually detonate the world financial-monetary system. Two days after LaRouche's statement, markets were shaken by the fear of an imminent repeat of the Long-Term Capital Management (LTCM) disaster, which almost destroyed the entire system in Autumn 1998. Stock and corporate bond markets suffered massive losses on May 10, after traders pointed to evidence of severe problems at several large hedge funds, as a direct consequence of GM's and Ford's downgrading. The hedge funds mentioned in this respect included Highbridge Capital, GLG Partners, Asam Capital Management, and Sovereign Capital. The London-based GLG Partners has $13 billion under management, and lists as the largest hedge fund in Europe and the second-largest in the world.

GLG issued a statement on May 10: "All the funds are fine and we have no concern." Highbridge Capital, that same day, wrote a letter to investors, noting: "It is our understanding that recent volatility in the structured credit markets is apparently related to the unwinding of an unprofitable CDO [collateralized debt obligation] tranche correlation trade by one or more parties.... The purpose of this letter is to inform our investors that Highbridge has no exposure to the trades." Highbridge was bought up last year by U.S. megabank JP Morgan Chase. Sovereign Capital, a British hedge fund, is closely linked to Lazard Brothers. The fund is heavily involved in East Asian markets, and news of the possibility of its collapse had caused panic among Asian bankers. Sovereign Capital's chairman, John Nash, formerly worked for Lazard. Since May 10, the "LTCM-word" is in everybody's mouth. Asam Capital Management is based in Singapore and reportedly has lost most of its investors' money.
Top Banks Involved

The stocks of the same large banks that participated in the 1998 LTCM bailout, and which are known for their giant derivatives portfolios—including Citigroup, JP Morgan Chase, Goldman Sachs, and Deutsche Bank—were hit by panic selling on May 10. Behind this panic was the knowledge that not only have these banks engaged in dangerous derivatives speculation on their own accounts, but, ever desperate for cash to cover their own deteriorating positions, they also turned to the even more speculative hedge funds, placing money with existing funds, or even setting up their own, to engage in activities they didn't care to put on their own books. The combination of financial desperation, the Fed's liquidity binge, and the usury-limiting effects of low interest rates, triggered an explosion in the number of hedge funds in recent years, as everyone chased higher, and riskier, returns.

There can be no doubt that some of these banks, not only their hedge fund offspring, are in trouble right now. And the top banks are starting to point fingers at each other. Particular attention has been paid to Deutsche Bank. On May 17, Merrill Lynch issued a report noting that Deutsche Bank probably has suffered significant derivatives losses following the GM and Ford downgrading. The report states that Deutsche Bank will not be able to maintain its rosy performance, culminating in a pre-tax return on equity of 30% in the last quarter. Not only has the volume of bond emissions managed by Deutsche Bank dramatically declined during the second quarter, but the bank may have suffered reduced business from hedge funds because of the "recent turbulence" in the credit derivatives market, as well as losses in its own trading positions. "Deutsche must be taking some pain at present," concludes the report, which appeared just one day before Deutsche Bank's annual shareholder meeting in Frankfurt. According to Merrill Lynch, about 17% of Deutsche Bank's clients in its debt sales and trading business are hedge funds.

When it was named as one of the victims of the GM/Ford fall-out, Deutsche Bank chief financial officer Clemens Börsig was forced to claim at a New York conference on May 11, that the bank "has no cash lending exposure to hedge funds." Deutsche Bank's "exposure is fully collateralized." Börsig said that the bank's global markets unit "has no investments in hedge funds." The bank has a "conservative" approach to its business with the funds and "very strict criteria" for choosing clients, he added. Nevertheless, according to its own 2004 annual report, Deutsche Bank at the end of that year held derivatives positions, mostly interest rate derivatives, of a nominal volume of $21.5 trillion. That is about ten times the GDP of the German economy.

FaGal

29-05-05, 17:49

'Hedging' to Death

The unprecedented downgrading to junk of almost half a trillion dollars in corporate debt, which doubled the total volume of U.S. junk bond debt, had devastating consequences for different kinds of derivatives bets. In particular, the downgrading hit the credit derivatives market, which provides insurance against bond defaults. In the recent period, hedge funds have sharply increased their exposure to a form of credit derivative known as a collateral debt obligation (CDO). CDOs are pools of loans, bonds, and other debt titles from hundreds of different corporations which are bundled and sold to investors in much the same way as mortgages are turned into mortgage-backed securities. In exchange for hefty fees, many hedge funds have taken to selling insurance against corporate defaults. If there is no default during the life of the contract, the seller pockets a lucrative fee, but in the event of a default, the seller must pay out the face value of the contract. To raise that money, the hedge fund must often sell its most liquid assets, and that, often, in the face of a falling market. Such "distress selling" by several hedge funds was actually observed on May 10 and subsequent days. Europe is extremely vulnerable to the current crisis in the credit derivatives market, as 50% of all CDOs are euro-denominated. The same kind of financial instruments led to the Parmalat collapse in Italy last year.

A related kind of derivatives scheme is the so-called capital structure arbitrage (CSA). It's one of the latest inventions in the derivatives casino. CSAs also involve bets on corporate debt titles, or the derivatives on that debt, such as CDOs. But the overall bet is made more complex by adding another element: the stock price of the respective corporation. Usually, when the prices of corporate bonds or their derivatives falls, the stock price of the respective corporation goes down as well. By combining the bond or credit derivative with a bet on a falling stock price, the CSA investor can try to "hedge" against potential losses. More convincing for hedge funds than the limiting of risks, is the empirical discovery that once a corporation runs into trouble, the stock price often plunges much more violently than the bond price of the same corporation. And that is exactly the condition under which a CDA contract generates profit.

Now comes the problem: By the very combination—in the same week—of Kirk Kerkorian's announcement for a partial General Motors takeover, boosting the GM stock price by almost 20%, and the downgrading of GM debt to junk by Standard & Poor's, crashing the GM bond price, the arbitrage traders suffered the worst of all possible disasters.

Nobody knows how many hedge funds have already gone under in May. Further complicating matters is the fact that many hedge fund investors, faced with all the news and rumors circulating about derivatives losses, are panicking, and are right now pulling out their money—if they can. Hedge funds often allow withdrawals of funds just once a quarter. The next date is July 1. But how to pay out investors, when cash reserves are gone and every dollar of capital is tied up in highly leveraged derivatives bets? To be able to meet redemption demands, hedge funds are forced to liquidate contracts under the present, extremely distressed, market conditions. This means piling up even more losses, which in turn—once investors recognize it—will further intensify withdrawals.

One indicator for the ongoing "distress selling" is the average price of credit-default swaps (CDS), which on May 18 hit the highest level since records started one year ago. For every outstanding corporate bond, an investor can buy a CDS contract, by which the default risk is transferred to the counterparty of the contract. In exchange for this kind of protection, the investor pays a certain fee to his counterparty, which works like an interest rate deduction on the nominal return of the bond. Within ten days leading to May 18, the average CDS rate has jumped up by one third, from 42 to 60 basis points (from .42% to .6%). The sharp increase reflects not only the rising fear for corporate bond defaults, but even more, a sudden drop in the number of hedge funds that are willing, or able, to take over additional default risks. The surprising rise of the U.S. dollar and the fall of commodity prices, including oil, are also being attributed to hedge fund emergency sales.
Beyond LTCM

Andrew Large, the deputy governor of the Bank of England, issued a strong warning on credit derivatives on May 18. Speaking at an international conference of financial regulators in Turkey, he noted, "Credit risk transfer has introduced new holders of credit risk, such as hedge funds and insurance companies, at a time when market depth is untested." Large said the growth of derivative instruments has "added to the risk of instability arising through leverage, volatility, and opacity." Regulators should therefore act and, in particular, search for credit concentrations.

Among the many voices warning against a repeat of the LTCM debacle or worse, is non other than Gerard Gennotte, former senior strategist at LTCM, and now working for another hedge fund called QuantMetrics Capital Management. In statements picked up by London's Financial Times on May 18, Gennotte pointed to the rising risk of a liquidity crisis triggered by hedge fund blowouts, which then could lead to a 1998-style collapse. He emphasized: "You could expect something similar to 1998, with people starting to liquidate their positions. It starts with one position, but then they are afraid of getting withdrawals, and it spreads across strategies."

In private discussions with EIR, an international financier confirmed LaRouche's notion, that the downgrading of General Motors and Ford debt was just the beginning of a much larger crisis hitting the grossly over-extended global financial bubble—in particular the derivatives scam. The financier said that the international financial system is, in fact, facing a derivatives crisis "orders of magnitude beyond LTCM." He observed that one can be certain that the Federal Reserve, the President's Commission on Financial Markets (the so-called "plunge protection team"), and the relevant departments of major central banks around the world, are all on "emergency red-alert mobilization."

Hedge funds and banks are, of course, all publicly denying reports of a major derivatives blow-out. Any bank or hedge fund that admitted such losses without first working a bail-out scheme, would instantly collapse. Such implausible protestations of solvency are another source of instability. The source further said that there is no doubt that the Fed and other central banks are pouring liquidity into the system, covertly. This would not become public until early April, at which point the Fed and other central banks will have to report on the money supply.
Regulating Hedge Funds

In response to the GM and hedge funds crises, Lyndon LaRouche issued a statement May 14, "On the Subject of Strategic Bankruptcy," in which he called for "new governmental mechanisms" for dealing with these "strategic bankruptcies, bankruptcies with which existing mechanisms of governments are essentially incompetent to deal." LaRouche also renewed his call, from the early 1990s, for a transaction tax on all derivatives trades, to regulate hedge funds. By such a transaction tax, government authorities, for the first time, could get an insight into the hedge fund activity. Currently, there exist about 8,000 hedge funds worldwide, managing about $1 trillion in capital, compared to 4,500 hedge funds and $600 billion in capital just two years ago. When LTCM was going under in 1998, for every dollar of its capital, it had borrowed $30 from banks at was running at least $400 in derivatives bets.

Allegedly, the average leverage of hedge funds today is much lower than in the case of LTCM. At least one in ten existing hedge funds, in most cases the smaller ones, are quietly being closed down every year, while at the same time many more are being set up new.

A public debate on the regulation of hedge funds has already erupted both in Britain and Germany. On top of the fears for a systemic breakdown, there is the imminent concern that private equity funds and hedge funds are, right now, taking over or manipulating the stock prices of thousands of corporations in both countries. John Sunderland, the President of the Confederation of British Industry (CBI) came out with an attack on such funds, sounding similar to German Social Democratic Party chairman Franz Münterfering's famous earlier "swarm of locusts" statements. CBI Director General Digby Jones raised the alarm bells concerning certain derivatives—"contracts for differences" (CFD)—by which hedge funds are able to secretly build up stakes in corporations.

In Germany, the chief executive officer of Commerzbank, Klaus-Peter Müller, who also heads the German banking association, raised the question: Why are we regulating small banks, while hedge funds, moving much larger capital, are not being regulated at all? Bundesbank board member Edgar Meister described hedge funds as the "white spots on the map of supervisors," which are growing at alarming speed. Even Rolf E. Breuer, who just resigned as supervisory board chairman of the Frankfurt stock exchange (Deutsche Börse) after losing a power fight with the British hedge fund TCI, has now astonished the banking scene with a surprising conversion. The same person who, as head of Deutsche Bank, had praised derivatives trading as the shortest way to paradise on Earth, and become known in some circles as Germany's "Mr. Derivatives," is suddenly denouncing the short-term speculative investments of hedge funds, that are colliding with the need for long-term productive investments and therefore could "devastate the German economy."
Derivatives `Ticking Time Bombs'
In an article headlined "Ticking Time Bomb in Structured Credit Products," Switzerland's conservative financial daily Neue Züricher Zeitung on May 19 pointed to the precarious situation in the so-called "structured credit" market. This includes the use of capital structure arbitrage (CSA) contracts, combined bets on the stock price and debt titles of the same corporation. The daily states that the purchase of GM stocks by Kerkorian caused a "brush fire" on the bond market, which then, in particular, hit funds specialized in CDAs. The funds faced "painful" losses when the risk premiums on GM bonds "exploded" and the prices of related derivatives plunged, while GM stocks, because of the Kerkorian move, jumped by 20%. Overall, the downgrading of GM, in spite of "the fact that it didn't came as a full surprise, triggered a chain reaction on the bond market," centered around collateralized debt obligations (CDO). These CDOs fueled the "sudden explosion" of the GM risk premium. Trying to escape from their CDO adventure, investors "at some point engaged in panic selling, which then derailed the credit derivatives market."
—Lothar Komp
http://www.larouchepub.com/other/2005/site_packages/strategic_bankruptcy/3221blowout_threat.html

FaGal

29-05-05, 17:51

This testimony appears in the May 27, 2005 issue of Executive Intelligence Review.
EIR Testimony Scored
Scorched-Earth Looters

by John Hoefle

This article originally appeared in EIR on Sept. 17, 1993, reporting on testimony to the House Banking Committee.

A warning of the impending collapse of the international derivatives market, triggering the biggest financial blowout in centuries, was delivered by this writer to the House Banking Committee on Sept. 8, 1993, in testimony on the impact of the North American Free Trade Agreement (NAFTA) upon the U.S. banking system.

My appearance before the banking committee was requested by committee chairman Henry B. Gonzalez (D-Tex.), one of the few men in Washington with the courage to take on the international bankers and their scorched-earth looting policies.

"NAFTA is fundamentally a financial agreement, and to understand it, one must understand the systemic crisis facing the banking system today," I testified.

"Since 1978, the financial community has repeatedly insisted upon the deregulation of banks and other financial institutions, while demanding austerity and cutbacks everywhere else. Every time we have done this, it has led to disaster, as the destruction of the airlines and the S&Ls, and of the U.S. work force attest.

"In response to these disasters, the bankers demand further deregulation and deeper cuts.

"Now, with NAFTA, the bankers are demanding that the United States deregulate its international political and financial relations the same way we've deregulated internally. The purpose of NAFTA is to open up Mexico and eventually all of Latin America for unbridled speculation and looting, of the sort that has already devastated the American economy and bankrupted our banking system.

"When are we ever going to learn that the answer lies not in more deregulation, but rather in the abandonment of the policy of deregulation, and the return to rational rules and regulation?
Deregulation Killed Citicorp

"Take Citicorp, for example. Here's a bank that jumped with both feet into every harebrained, quick-buck scheme they could find. Citicorp made a killing in the 1980s, growing almost as much in 10 years as it had in the previous 168. This growth came, not from real economic activity, but from the growth of a huge speculative bubble, in real estate, junk bonds, derivatives, and other paper transactions which looked good until the bills came due.

"Citicorp's great deals of the 1980s have become the spectacular financial disasters of the 1990s. The list, which includes blowouts such as Olympia & York and Citicorp's humiliation in London after the Big Bang [the Oct. 27, 1986 deregulation of the British stock market], keeps on growing as the real economy dies. Citicorp has demonstrated an astonishing knack for losing money. It's the ambulance-chaser of banks: Every time you find a disaster, Citicorp is there.

"Citicorp made a killing all right—it killed itself.

"If Citicorp were headquartered in San Antonio, Mr. Chairman, it would have already been closed and its officers publicly humiliated and thrown in jail. But Citicorp is not headquartered in San Antonio. It's in New York, where a far different set of rules apply.

"So instead, the government—or rather, the Federal Reserve, which acts like it's the government, but is really owned by the banks—launched the biggest bailout in U.S. history.

"Three years ago, the Federal Reserve Bank of New York took the bankrupt Citicorp over, putting it into de facto receivership. Naturally, this was a secret action, since were the banks' depositors to know just how damaged their bank was, they would have run for the hills.

"Citicorp lied about its financial condition, and published phony financial reports. When Rep. John Dingell [D-Mich.] revealed that Citicorp was technically insolvent, Citicorp angrily denied it. And so did the banking regulators, who are supposed to serve the public, but who clearly serve the banks instead.

"When the Texas S&Ls hid their losses, and the Federal Home Loan Bank Board [FHLBB] looked the other way, the Justice Department created a task force to investigate, and poor [former FHLBB head] Danny Wall's career was ruined. But now, with Citicorp and the other big banks doing the lying, the attack dogs of the Justice Department and the press are silent. Executives of the Texas S&Ls were denounced as the symbols of greed and excess, but nobody says a word about Citicorp and John Reed.
Derivatives Bubble Ready To Pop

"We are on the verge of the biggest financial blowout in centuries, bigger than the Great Depression, bigger than the South Sea bubble, bigger than the Tulip bubble. The derivatives bubble, in which Citicorp, Morgan, and the other big New York banks are unsalvageably overexposed, is about to pop. The currency warfare operations of the Fed, George Soros, and Citicorp have generated billions of dollars in profits, but have destroyed the financial system in the process. The fleas have killed the dog, and thus they have killed themselves.

"What is required, as EIR founder Lyndon LaRouche has repeatedly stated, is a restructuring of the U.S. banking system, including the nationalization of the Federal Reserve, taking it out of the hands of the bankers and putting it back into the hands of the Congress as mandated by the Constitution. It is the welfare of the people which is paramount, not the maintenance of the speculative financial system. It's high time we put the speculators out of business, instead of surrendering to them even further by passing NAFTA.

"That's the issue. We'd better deal with it, and fast, while we still have a chance."

At the conclusion of this testimony, the silence was deafening: One could have heard a pin drop. Clearly, few of the committee members, staff personnel, or journalists present were accustomed to such forthright language, especially in contrast to the snake oil delivered earlier in the hearing by Citibank's Jack Guenther, vice president and senior international affairs officer. Guenther, in true banker doublespeak, insisted that NAFTA would create jobs in both the United States and Mexico.

The authority of my testimony was then underscored by Gonzalez, who put his respect for EIR's analyses on the record. "I've been reading Mr. Hoefle's articles for two and one-half years," Gonzalez said. "He gets information I have been unable to get. For example, statistics of the off-balance-sheet liabilities of U.S. banks: We've been looking for those statistics and couldn't get them."
Speculators Running NAFTA Negotiations

The Banking Committee chairman then levelled his own broadside against the derivatives speculators.

"How can we sit here comfortably when bank profits, about half of them, come from the gambling known as the derivatives market?" Gonzalez asked. "Derivatives are not so complicated. It's just a mega-Las Vegas. There are great dangers here. If NAFTA is passed, we'll be promoting the second-largest mega-Las Vegas."

Earlier in the hearing, Gonzalez announced his intention to hold further hearings on NAFTA, to question the negotiators about who was involved, and how.

"I have found it very difficult since President Bush announced the agreement last December, to find out exactly what are the procedures, and who participated in what were really secret negotiations," Gonzalez said.

The difficulty of getting straight answers was exemplified by the elusive Guenther.

"Mr. Guenther, were you or any other Citibank personnel involved directly or indirectly in negotiations; that is, in these processes involving the financial services chapter of NAFTA?" Gonzalez asked. "Did you advise negotiators or did anyone from your bank? Did you review drafts of the agreement? And if so, would you be able to share with us the substance of your comments and advice, and to whom they were given? See ... we in the Congress don't have the names of the individuals participating in these negotiations. We don't even know who is in there, and I think that that's a very important factor, and that's the only reason why we're going to have the second hearing."

"I don't think I could give you the answer that should really be the definitive answer on that," Guenther weaseled; he then admitted, "All through the past year or so, I've been attending weekly meetings" on the subject. "Mr. McDonough from the Fed would be there.... Our Washington office here has been working on this throughout ... and I'm sure the answer is, yes, we participated in some indirect way. But I think I should undertake to get you a more precise description than that."

The financial community is also worried about a blowout of the derivatives market, which was made evident in an opinion column in the Wall Street Journal by Wendy Lee Gramm, entitled "In Defense of Derivatives," which appeared the same day as the Banking Committee's hearing. From 1988-93, Wendy Lee Gramm was chairman of the Commodity Futures Trading Commission, and promoted the burgeoning market in derivatives by exempting them from regulatory procedures. Her husband is Texas Republican, Sen. Phil Gramm, whose free market nostrums for the economy give cover to the "mega-Las Vegas" that Gonzalez referred to.

Wendy Lee Gramm's article complained that derivatives have been unfairly "characterized as purely speculative instruments" that "pose grave risks with potentially dire consequences for the whole financial system." But her article reads more like a plea not to blame her for the coming catastrophe. "Most important," she concluded, "if another major default or market shock occurs, we must all resist the urge to find scapegoats, or to over-regulate what we just do not understand."
http://www.larouchepub.com/other/2005/site_packages/strategic_bankruptcy/3221testimony_1993.html

FaGal

31-05-05, 09:03

Hedge funds are seen as threat to central banks' role
www.iht.com - By Natsuko Waki - Reuters - May 31, 2005

STOCKHOLM - A flood of aggressive hedge fund players into the global foreign exchange trading place, long dominated by wholesale bankers, makes it harder for central banks to police the giant foreign exchange market, according to industry executives.

Central banks, responsible for the stability of the financial system, have long used commercial banks as their eyes and ears in the 24-hour global foreign exchange market, which operates mainly on an unregulated basis.

Wholesale interbank traders operate under market conventions developed under the gaze of central banks. But they are being replaced as major drivers of the foreign exchange market, valued at $1.9 trillion a day, by the often opaque trading activities of hedge funds, which use leverage to make their business worth many times the $1 trillion or so of assets they manage globally.

This situation worries central bankers who still remember the way hedge funds savaged the pound in 1992, forcing Britain's withdrawal from the European exchange rate mechanism, and almost caused a global financial meltdown when the hedge fund Long-Term Capital Management collapsed in 1998.

Godfried de Vidts, president of ACI, an industry group for foreign exchange traders, said the anxieties of central banks could be eased only by increasing dialogue with the market.

"We are the market practitioners, we see the flows," he said, and if central banks "talk to the industry more, they would understand the industry more."

Hedge funds are gaining wider access to foreign exchange markets through prime brokerage, a service offered to hedge funds by some banks.

Prime brokerage allows hedge funds to trade with other banks in the name of their broking bank, using that bank's credit lines. The anonymous feature of the service has raised concern among central banks and regulators, who say participants could exploit the service and manipulate the price.

"Regulators have been clearly concerned about hedge funds for some time, particularly after LTCM," said Adam Burke, managing director of currencies and commodities at J.P. Morgan Chase. "In an anonymous world, it is hard for them to monitor" the activity of the funds.

In Britain, the Financial Services Authority said that prime brokers had extensive security measures in place and that those measures might not be sufficient in extreme circumstances. There is also potential for conflict between different parts of investment banks, the British regulator said.

FaGal

01-06-05, 10:51

1 giugno 2005

« Ma sugli hedge timori eccessivi »

Foglia ( B. Ceresio): « Norme italiane controproducenti »

MILANO • Gli hedge fund vivono un momento di difficoltà, ma le preoccupazioni su un'eventuale destabilizzazione del sistema finanziario sono esagerate. Lo ritiene Antonio Foglia, che da 20 anni ha dimestichezza con il settore esploso negli ultimi tempi come una industria da mille miliardi di dollari. Membro del comitato esecutivo dell'istituto di famiglia ( la svizzera Banca del Ceresio) e director di alcuni prestigiosi hedge fund, Foglia è da poco tornato da New York, dove in una quindicina di giorni ha visto stemperarsi i più acuti timori di crisi da hedge, il che lo induce a ritenere assai improbabile l'emergere di casi come quello del ' 98 dell'Ltcm. « Dopo settimane di allarmi sulle difficoltà degli hedge fund, in fondo non è emerso alcun problema specifico, se non la percezione di perdite diffuse nel settore » , afferma Foglia, secondo cui si sono incrociati due fattori: « Da una parte, le performance del primo trimestre e di aprile sono state generalmente negative per tutte le strategie, il che accade di rado; dall'altro, il mercato è andato a caccia delle possibili vittime del rialzo dei tassi, soffermandosi sulle difficoltà dei soggetti più in leva. Ma visto che il ritmo e l'entità di questo rialzo è avvenuto secondo i pronostici correnti, è chiaro che il fattore tassi non può essere in grado di provocare sconquassi » .
Bisogna però distinguere, secondo Foglia, tra le diverse categorie dei fondi alternativi. I fondi direzionali hanno sofferto nei mesi recenti perché non hanno indovinato le tendenze dei mercati, con le Borse principali che restano sotto i livelli di inizio anno e i movimenti di dollaro e bond contro le attese: di qui le perdite, comunque non troppo vistose. Più difficile, invece, la situazione dei fondi non direzionali, a bassa volatilità, che fanno arbitraggi: essi probabilmente sono « ormai di fronte a un problema strategico e potrebbero soffrire più a lungo » , ritiene Foglia, riferendosi in particolare al mercato degli arbitraggi sulle convertibili e su crediti, penalizzati da eventi specifici come l'allargamento degli spread cui ha contribuito anche lo shock di offerta ( dopo il declassamento dei bond Gm e Ford).
Il timore del mercato per queste strategie meno liquide è quello di un avvitamento negativo dei prezzi qualora ci fossero riscatti importanti. Ad attutire le ventate di allarme, comunque, gioca la crescita del peso degli investitori istituzionali nel settore, unito anche all'allungamento dei tempi per i riscatti. Lo sviluppo esponenziale degli hedge fund e dei capitali a loro disposizione, tuttavia, crea il dubbio che oggi questi strumenti stiano diventando troppo numerosi e troppo grandi — il che rende più difficile ottenere i rendimenti del passato —, soprattutto in tema di strategie di arbitraggio.
Le ampie risorse a disposizione, del resto, stanno anche « cambiando la natura dei mercati in cui gli hedge funds operano » : basti pensare al fenomeno per cui sono oggi gli stessi hedge fund a finanziare non di rado le aziende high yeld, anziché le banche. Una situazione fluida e in tensione, dunque, su cui, secondo Foglia, sarebbe sbagliato intervenire con un giro di vite suLla regolamentazione.
« Sono molto scettico sui risultati di una eventuale regolamentazione degli operatori: del resto, anche nel caso dei fondi comuni, già ampiamente regolamentati, la stessa Sec si è accorta con 10 anni di ritardo di una serie di pratiche discutibili » .
Semmai si tratterebbe di « intervenire sui mercati non regolamentati e opachi in cui operano i fondi, soprattutto quelli non direzionali » . Una regolamentazione degli operatori invece che dei mercati è controproducente, secondo Foglia, come si è visto in Italia dove ha contribuito a impedire che nascessero fondi speculativi puri " imprenditoriali" di diritto italiano ormai a 5 anni dall'entrata in vigore della normativa, mentre ne sono nati a dozzine a Lugano o a Londra, dove attivarli costa 5 10 volte meno

il sole 24 ore

FaGal

01-06-05, 22:03

Banks warned on derivatives record
news.ft.com - By Gillian Tett in London and Richard Beales in New York - May 31, 2005

The Financial Services Authority, the main UK regulator, will take action against banks and other financial companies later in the year if they do not improve their back-office systems in the fast-growing credit derivatives market.

In particular, the FSA fears investors may still be too complacent about settling necessary paperwork – even though the regulator broached the issue in a formal letter three months ago.

“If we do not see an improvement over the summer, the FSA will take appropriate supervisory action,” Gay Huey-Evans, head of the FSA’s capital markets sector, told the FT.

The appeal is being given added urgency by a recent sharp increase in the volume of trading in credit derivatives following the woes at General Motors and Ford. Some banks estimate trading volumes of European credit default swaps were four to seven times higher in recent weeks than the levels of the first quarter of the year.

That acceleration follows a doubling in the number of global trades handled by dealers in 2004 from 2003.

Back-office controls are particularly important for the credit derivatives market because when two parties agree a sale they, in effect, transfer the risk of default on a bond, or group of bonds. However, the contract does not become valid until all the parties sign the documents, or confirm it electronically.

In the past year, there has been evidence that some investors are failing to sign these documents on time, which could create a nasty legal quandary – and potentially cause a market seize-up – if any player suddenly collapsed or stopped trading. What further complicates the issue is that many financial players are selling on their contracts to third parties without telling the original parties.

“The FSA supervisory team is in a dialogue with various involved firms with regard to outstanding confirmations [of credit derivative trades] and the risks surrounding assignment of existing transactions. We are worried that there is a lack of notification to brokers when transactions are assigned,” Ms Huey-Evans said.

The issue has been complicated by the growing role of hedge funds, which are not regulated and whose trading systems are more opaque.

As a result, some bankers and hedge fund players now claim they are refusing to deal with some potential counterparties because they are concerned about the systems issue.

FaGal

06-06-05, 00:58

L’attività degli hedge fund nei centri offshore dei Caraibi
Le oscillazioni trimestrali delle posizioni verso mutuatari non bancari nei centri
offshore dei Carabi – dove è considerevole l’attività finanziaria non bancaria –
sono divenute un importante fattore propulsivo dei flussi creditizi complessivi
delle banche dichiaranti alla BRI3. Di fatto, dal secondo trimestre 1996 la varianza dell’oscillazione trimestrale delle attività verso questi centri offshore è
stata più elevata di quella degli impieghi verso ogni altra singola controparte
nelle statistiche BRI, ad eccezione degli Stati Uniti4. Tra i fattori all’origine di
queste variazioni trimestrali, quello di gran lunga più importante è costituito dai
prestiti affluiti al settore non bancario nelle Isole Cayman, provenienti spesso
da banche situate negli Stati Uniti. Nel terzo trimestre 2004 i crediti verso tale
settore hanno raggiunto i $436 miliardi, al terzo posto dopo quelli verso
soggetti non bancari negli Stati Uniti e nel Regno Unito. Tuttavia, molto poco si
sa sulla natura di questa attività finanziaria. Molti tipi di istituzioni non bancarie
– inclusi hedge fund, compagnie di assicurazione e società veicolo (“special
purpose vehicle”) – hanno sede legale nelle Isole Cayman, il che rende
difficoltosa l’interpretazione dei movimenti trimestrali nei dati BRI5.
Se si considera un orizzonte temporale più lungo, l’attività degli hedge
fund (o fondi speculativi) sembra in effetti aver contribuito direttamente alla
crescita complessiva dei crediti verso le Isole Cayman. Il diagramma di sinistra
del grafico 2.3 fornisce un confronto tra la crescita su base annua delle attività
totali in gestione per un campione (limitato) di hedge fund con sede legale nelle
Isole Cayman e quella dello stock di attività in essere verso soggetti non
bancari nelle stesse isole6. Sebbene in passato questi tassi di crescita abbiano
mostrato andamenti divergenti (cfr., ad esempio, 1997 e 2004), essi sembrano
nondimeno muoversi in sintonia su periodi di tempo più estesi. La caduta di
entrambi nel periodo dell’inadempienza russa e del quasi tracollo dell’hedge
fund Long-Term Capital Management nel 1998 emerge con particolare
evidenza. La stessa dinamica è riscontrabile nel medesimo periodo anche in
altri centri offshore dei Caraibi (grafico 2.4)7.
Le oscillazioni dell’ultimo trimestre negli impieghi verso le Isole Cayman
sembrano, almeno grosso modo, in linea con le indicazioni aneddotiche
relative all’attività degli hedge fund. Gli operatori hanno individuato in questi
fondi uno dei responsabili dell’aumento degli acquisti di titoli del Tesoro USA
da parte di residenti nelle Isole Cayman nel 20048. Tali investimenti possono
essere collegati alle attività delle banche dichiaranti, quantomeno nella misura
in cui i fondi speculativi finanziano gli acquisti con il ricorso al credito bancario.
Come mostra il diagramma di destra del grafico 2.3, l’aumento delle attività
verso il settore non bancario nelle Isole Cayman nel corso del 2004 sembra
corrispondere approssimativamente con quello degli acquisti di titoli del Tesoro
USA da parte di soggetti con sede nelle stesse isole.
3 Ai fini dell’analisi, i centri offshore dei Caraibi comprendono le Isole Cayman, le Bahamas, le Bermuda, le Indie Occidentali Britanniche e le Antille olandesi.
4 La varianza dei flussi creditizi a cambi costanti verso soggetti non bancari delle Isole Cayman è la più elevata dopo quelle di Stati Uniti, Regno Unito e Giappone.
5 Per una trattazione dell’attività nei centri offshore, cfr. l’edizione del giugno 2001 della Financial Stability Review della Bank of England.
6 I dati relativi agli hedge fund sono rilevati dalla banca dati HFR, che include i dati sulle attività totali in gestione e la sede legale per un campione di circa 900 hedge fund. Non tutti i fondi con sede legale nelle Isole Cayman sono compresi in questo campione. Un tasso di crescita
positivo può essere dovuto all’aggiunta di nuovi hedge fund nella banca dati o alla crescita nelle ATG dei fondi già esistenti.
7 Il comovimento dei tassi di crescita delle attività totali in gestione e delle posizioni creditorie delle banche dichiaranti alla BRI verso il settore non bancario in questi altri centri sembra interrompersi dopo il 1999.
8 Cfr. “Treasury Islands”, Bloomberg Markets, febbraio 2005. Gli investimenti in obbligazioni del Tesoro USA da parte di residenti nei Caraibi hanno innalzato la regione al quarto posto fra i detentori di titoli di Stato USA, dopo Giappone, Cina e Regno Unito.

Alink, consigliatissimo, trovate anche grafici
http://www.bis.org/publ/qtrpdf/r_qt0503ita_b.pdf

FaGal

06-06-05, 15:59

Sovereign Society Newsletter

COMMENT: The Devil & JP Morgan.

Dear Reader:
Last week, JP Morgan confessed to some ugly news on trading revenue.

And you have to wonder if it could be the tip of a much bigger problem
lurking beneath the surface.

It seems the big bank made some very bad bets. "Market making and
proprietary trading activity has been worse to date across the credit,
rates and equities businesses, and generally weaker in Europe than
elsewhere," Jamie Dimon, JPM’s president, told a Sanford Bernstein
investment group. He added that the bank's quarter trading results
"are the worst the firm has experienced in sometime."

Hmm...could JP Morgan have received an unexpected trim around the
hedges...hedge funds, that is?

At the Sovereign Society's recent Offshore Advantage seminar in Panama,
I offered up some undervalued offshore opportunities - and also laid
out my list of what I saw as risks hanging over US stocks. And topping
that list is hedge funds.

Here are some figures to think about...

Hedge funds:
* Manage over ONE TRILLION DOLLARS – up from $39 billion in 1990.
* Attracted a record $27 billion of new capital in Q1.
* Now number nearly 8,000 – up from just 600 in 1990!
* Account for as much as 50% of NYSE big board volume.

Now, I'm not against hedge funds as a class – not at all. But when hedge
funds start running from one side of the boat to the other as a group –
and many of them are – this can present a real danger.

Institutions (like JP Morgan) are plowing money into hedge funds to make
big bets on the market. The problem is, those bets can go wrong.

There's no way to know for sure what bad bets JP Morgan is making, but
it wouldn't surprise me to learn the bank got gob-smacked in the Ford
and GM stock and bond trades. Funds bought GM's corporate bonds and
hedged the risk of default by shorting GM stock. The plan was to hold
the bonds, and the funds would lock in the interest rate spread between
the coupon on the debt and the dividend on the common stock.

This trade imploded when GM debt got downgraded (causing its bonds to
go down) and mega-investor Kirk Kerkorian made a tender offer for 3% of
GM's stock, causing shares to rise. Hedge funds got shredded. A similar
thing happened with Ford stock and debt.

And the word on the street is more than a few hedge funds got burned
trading in bonds, interest rates, and credit derivatives. JP Morgan
probably won't be the last to step into the confessional.

How big of a hit is JP Morgan taking? Well, the bank reported $2.2 billion
in trading revenue in the first quarter of this year. Now, it says second
quarter revenue could drop by more than 60% – maybe more.
Ouch!

But this is actually small potatoes compared to the other big bet that
JP Morgan makes in derivatives. The global derivatives market is huge –
somewhere around $272 trillion, according to the recent figures from the
Bank of International Settlements. And three big American banks – JP
Morgan Chase, Bank of America and Citigroup – account for a mind- bending
$77.6 trillion of that.

In simple terms, a derivative is merely a bet. And it can be a bet on
absolutely anything: interest rates, exchange rates, stocks, commodities.
Find a counter-party who's willing to wager against you, and you have
created a derivative. And to make the bet you often only have to put down
a fraction of the amount.

This is where derivatives can become dangerous. Derivatives are mostly
used to guard against risk. But they are also used to make highly leveraged
and highly dangerous bets.

For instance, remember Long Term Capital Management, a hedge fund that
careened to the brink of failure in 1998? Its derivatives shenanigans
almost triggered the collapse of the entire global financial system – and
would have if the Fed had not organized an emergency bailout.

Again, we don't know what particular bets JP Morgan is making, but you have
to wonder, if its trading models aren't working, how secure are its bets
in the derivative markets? Just how much trouble could the bank be getting
into? There might be the devil to pay.

Sure, JP Morgan may just take its lumps on trading and bounce right back.
But that doesn't seem like a smart bet to me. In fact, a look at a weekly
chart of JPM shows me a stock that is in a downtrend – the smart money is
exiting – and potentially poised for a big leg down.

And here's something else to consider: We're in a low interest rate
environment. If a bank like JP Morgan has trouble making money when rates
are low, what will it do when rates go higher? Heck, its earnings growth
and dividend ratio already lag the industry, while it trades at a
higher-than-average multiple to earnings.

I'd say this stock is primed for a plunge, and it's a good short candidate.
As always, I'd use a trailing stop.

SEAN BRODRICK, Editorial Director
The Sovereign Society Ltd.
E-mail: seanbrod@bellsouth.net

FaGal

07-06-05, 14:59

Greenspan warns on hedge funds
edition.cnn.com - June 7, 2005

WASHINGTON - U.S. Federal Reserve Chairman Alan Greenspan has warned that hedge funds have picked the "low-hanging fruit" of easy profits and may be set for a fall as they assume more risks in a quest for high returns.

He said, however, that the financial system should escape widespread damage from hedge fund woes as long as banks lending to them managed risks effectively.

"After its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," the influential Fed chief cautioned in remarks prepared for delivery via satellite to a bankers conference in Beijing.

"Continuing efforts to seek above-average returns could create risks for which compensation is inadequate," Greenspan said.

"Significant numbers of trading strategies are already destined to prove disappointing, a point that recent data on the distribution of hedge fund returns seem to be confirming."

Hedge funds are largely unregulated entities that cater to wealthy and institutional investors. Their assets are estimated to have doubled over the last five years to around $1 trillion, although observers think funds suffered perhaps the heaviest redemptions in a decade in the second quarter of this year.

In his remarks, Greenspan tied the big risks hedge funds have taken on with the unusually low long-term interest rates prevailing around the globe.

As in February, when he termed the low level of long-term interest rates "a conundrum," the Fed chief wrestled with a number of potential explanations for the atypical environment -- but again found them all inadequate.

"One prominent hypothesis is that the markets are signaling economic weakness," he said. "This is certainly a credible notion. But periodic signs of buoyancy in some areas of the global economy have not arrested the fall in rates."

He said stepped-up demand by pension funds for long-term assets was likely no more than "a small part" of the cause.

Greenspan said while foreign central bank purchases of U.S. government debt may have lowered long-term borrowing costs in the United States, Fed staff estimates suggested only a modest impact. Further, he said this would fail to explain the lower long-term rates elsewhere around the globe.

He said the integration of low-cost producers like China and India into global markets likely had lowered the inflation compensation investors had previously demanded for holding long-term debt. But he said that more readily explained trends of the past decade, rather than of the past year.

The Fed has raised overnight borrowing costs by 2 percentage points since June 2004, taking the benchmark federal funds rate to 3 percent. Long-term rates, however, are lower now than when the Fed started.

Greenspan said the abnormal behavior of interest rates had encouraged greater risk-taking.

"Whatever the underlying causes, low risk-free long-term rates worldwide seem to be one factor driving investors to reach for higher returns, thereby lowering the compensation for bearing credit risk and many other financial risks over recent years," he said.

And for high-flying hedge funds, the increased appetite for risk seemed likely to lead to losses, Greenspan said.

"But so long as banks and other lenders to these ventures are managing their credit risks effectively, this necessary adjustment should not pose a threat to financial stability."

Although warning of hedge fund troubles ahead, Greenspan, who was to speak on a panel with European Central Bank President Jean-Claude Trichet, Bank of Japan Deputy Governor Toshiro Muto and People's Bank of China Governor Zhou Xiaochuan, reiterated his view that the industry had helped increase the economy's resilience.

He said this was important, since economic policy-makers were not always able to head off brewing trouble in time. He urged countries not to become resistant to free trade because it would lessen their economic flexibility.

"In this regard, the recent emergence of protectionism and the continued structural rigidities in many parts of the world are truly worrisome," Greenspan said.

FaGal

08-06-05, 12:14

Hedge funds face tougher times, says Greenspan
money.telegraph.co.uk - By Malcolm Moore, Economics Correspondent - June 8, 2005

Alan Greenspan, the chairman of the Federal Reserve, yesterday warned that hedge funds had already picked the "low-hanging fruit" of easy profits and that greater risks lay ahead.

"After its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," he said.

"Continuing efforts to seek above-average returns could create risks for which compensation is inadequate. Significant numbers of trading strategies are already destined to prove disappointing, a point that recent data on the distribution of hedge fund returns seem to be confirming," he added.

Mr Greenspan was addressing a bankers' conference in Beijing. He went on to say that hedge funds "should not pose a threat to financial stability" as long as lending banks managed their risk sensibly.

Standard & Poor's said on Monday that its hedge fund index had risen 0.29pc in May, despite many funds getting burnt by the downgrade of General Motors and Ford bonds.

The ratings agency said a strong equity market had helped hedge funds make up ground, although it noted that European funds had not seen "the same level of gains as found in the United States".

Many funds also benefited from taking long positions on the dollar against the euro ahead of the French and Dutch rejections of the European constitution. Hedge fund assets in the US have grown 27pc in the last year to more than $1,000billion (£546billion), according to Hennessee Group, which tracks the industry.

Hedge funds, which are largely unregulated investment vehicles for wealthy private and institutional investors, have been demonised for causing market volatility.

John Gaine, president of the Managed Funds Association, said: "Hedge funds are a poster child for any ill that befalls the economy." He went on to say much has changed since the collapse of Long Term Capital Management, and that prime brokers lending money to funds are now more cautious.

Mr Greenspan's comments that the Fed could pause before raising interest rates sent the dollar down more than a cent against sterling to $1.83.

However, the US stock market was buoyant and Google, which floated last year at $85 a share, came within sight of the $300 mark. The Dow Jones Industrial Average rose 93.4 points to 10,560.4 as investors took heart from Mr Greenspan's comments.

The Fed chairman also said he supported a revaluation of the Chinese yuan but warned it would have little impact on the US trade deficit.

FaGal

08-06-05, 12:14

German govt body opposes restrictions on hedge funds' voting rights - report
www.forbes.com - June 8, 2005

FRANKFURT (AFX) - A government committee has rejected proposals to impose restrictions on the voting rights of hedge funds that invest in listed German companies, the Frankfurter Allgemeine Zeitung reported.

The working party, comprising officials from the finance, economy and justice ministries, opposes withdrawing hedge funds' voting rights or restricting them to longer-term investments, the newspaper said, citing a leaked copy of conclusions from the committee's report.

The report, which will form the basis for any government reforms, did however recommended greater transparency over individual shareholdings below 5 pct, the threshold above which investors are currently obliged to declare their stakes.

The committee was convened in response to a debate over possible curbs on private equity firms' influence over Germany's corporate sector.

The debate intensified with the resignation of Deutsche Boerse CEO Werner Seifert after a public clash over strategy with some of the exchange operator's foreign hedge-fund shareholders.

FaGal

08-06-05, 12:29

June 8, 2005
A Relief: Some Gains for Hedges
By RIVA D. ATLAS

Whew.

Hedge funds, which had been buffeted in early May by talk of huge losses tied to General Motors securities, managed to end the month with modest gains, according to firms that track the funds' performance.

That is a far better outcome than many investors had expected after a cut in General Motors credit rating to junk status on May 5 led to a sharp drop in G.M. bonds and speculation that some hedge funds were caught wrong-footed. The tumult highlighted concerns that the growing use of credit derivatives by hedge funds might make them vulnerable to losses in the event of a market downturn.

A rally in stocks - May was the best month this year - a turnaround in credit derivatives and a bet against the value of the euro all helped salvage hedge fund performance last month, analysts said.

"It's not surprising that this was a good month," said Joshua Rosenberg, president of Hedge Fund Research, a data firm that tracks the performance of 4,800 hedge funds. "Worries about the credit trades were overblown, and probably provided opportunities for some."

Returns for hedge funds, private investment partnerships favored by wealthy investors and large institutions like pension funds, rose 1.16 percent for the month of May, according to preliminary results from Hedge Fund Research, based on reports from a quarter of the funds it tracks. That compares with a decline of 1.52 percent in April and puts the average hedge fund up 0.35 percent for the year.

Such a weak overall performance is still nothing to brag about, of course, especially after taking into account the stiff fees hedge fund investors pay on average: 1 percent of assets and 20 percent of any profits.

"This has not been a great year so far," said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. Investors are still probably showing flat performance at best at funds of funds, which are portfolios of hedge funds and charge another layer of fees, he said.

Some hedge fund executives said they were disappointed at how closely the performance of certain hedge funds, especially those investing stocks, mirrored the results of the broader markets. Many investors, particularly pension funds, have been drawn to hedge funds because they were seeking better returns than more conventional investments.

"The fundamental appeal of these funds is that they are supposed to be uncorrelated to the markets," said one fund executive, who declined to speak for attribution. "If your hedge fund is just riding along with the markets, you should just buy an index fund - it's a lot cheaper."

Yet after months of dismal returns and the recent market jitters, hedge fund investors say they are grateful for some positive signs.

Andor Technology, the flagship fund managed by Daniel C. Benton, a onetime top technology stock picker, rose 8.4 percent, people briefed on the firm's results said.

Mr. Benton, who has had more than two years of disappointing results, benefited from a rally in technology stocks last month, with the Nasdaq rising 7.6 percent. A spokesman for Andor declined to comment.

Other strong performers included Caxton, the fund managed by Bruce Kovner, a well-known trader of currencies and commodities. Caxton's flagship fund rose 2.9 percent in May.

Funds managed by Omega Advisors, run by Leon Cooperman, another longtime hedge fund manager, rose around 3.5 percent last month.

Some big hedge funds, though, are still doing poorly for the year, as losses persist in convertible bonds and other areas of the debt markets.

The flagship fund of Tudor Investment, run by the commodities trader Paul Tudor Jones II, is down 2.5 percent for the month of May, and 2 percent for the year, according to people briefed on the results.

Highbridge Capital Management, which oversees some $7 billion in hedge funds, had essentially flat performance for the month of May, but its funds are still down some 4 percent for the year, according to people briefed on the results.

Rumors circulated last month that Highbridge, which was acquired by J. P. Morgan Chase last year, was nursing losses after the downgrade of General Motors' debt last month. But an investor in Highbridge said the firm had reassured him that while the firm's managers had made an investment tied to G.M.'s securities, they had not lost money on the trade.

A spokesman for the firm declined to comment.

Over all, hedge funds that invested in credit derivatives do not appear to have fared as poorly as feared in early May.

Hedge funds have been increasingly active in the credit derivatives market, accounting for some 30 percent of all trading volume, according to a recent report by Greenwich Associates, a research firm.

A widely followed index for credit default swaps, which are linked to the probability of a company paying its debts, has rebounded to levels reached just before General Motors' credit rating was cut by Standard & Poor's on May 5. The cost of insuring a $10 million portfolio with credit default swaps was $59,000 at the end of May, down from a peak of nearly $78,000 on May 17.

"If you fell asleep on April 30 and woke up on June 1 you might not have known that anything happened in the default swap market," said Jeffrey Rosenberg, chief credit strategist at Bank of America. That may have limited losses at some hedge funds that had made bullish bets on these contracts, if they did not unwind trades at the height of anxiety in the credit market, he said.

Nonetheless, Mr. Rosenberg said, some hedge funds could face continued losses from investments in certain baskets of credit default swaps known as synthetic collateralized debt obligations. These products are further divided into three or more layers that reflect varying levels, or tranches, of risk. For example, the lowest layer, known as the equity tranche, usually absorbs the first 3 percent of losses.

Last month, investors lost money on certain of these C.D.O. tranches. The losses had less to do with the underlying health of General Motors or other companies than with the relationship between the various layers, which failed to perform according to quantitative models devised by traders. That miscalculation was reminiscent of the trouble with other sorts of derivatives trades that led to the near-collapse of Long-Term Capital Management in 1998.

The relationship in price between these C.D.O. layers has rebounded some but has not returned to levels before the G.M. downgrade, Mr. Rosenberg said.

The prospect of continued volatility in the market for credit derivatives is high on the list of lingering concerns for hedge fund investors. Hedge funds attracted $73.5 billion last year, and money is still flowing in this year, according to Hedge Fund Research.

But investors in hedge funds said they were treading carefully amid the uneven performance.

What happened in May "was not an earthquake, but at some point there will be repercussions" if performance does not rebound, Mr. Bernheim of the U.S. Offshore Funds Directory said.

NYTIMES

FaGal

09-06-05, 22:31

Hedge funds manage to squeak by a rocky May
By Riva D. Atlas The New York Times
THURSDAY, JUNE 9, 2005

NEW YORK Hedge funds, which had been buffeted in early May by talk of huge losses tied to General Motors securities, managed to end the month with modest gains, according to firms that track the funds' performance.

That is a far better outcome than many investors had expected after a cut in General Motors' credit rating to junk status on May 5 led to a sharp drop in GM bonds and speculation that some hedge funds were caught off balance. The tumult highlighted concerns that the growing use of credit derivatives by hedge funds might make them vulnerable in the event of a downturn.

A rally in stocks - May was the best month this year - a turnaround in credit derivatives and a bet against the value of the euro all helped salvage hedge fund performance last month, analysts said.

"It's not surprising that this was a good month," said Joshua Rosenberg, president of Hedge Fund Research, a data firm that tracks the performance of 4,800 hedge funds. "Worries about the credit trades were overblown, and probably provided opportunities for some."

Returns for hedge funds, private investment partnerships favored by wealthy investors and large institutions like pension funds, rose 1.16 percent in May, according to preliminary results from Hedge Fund Research. That compares with a decline of 1.52 percent in April and puts the average hedge fund up 0.35 percent for the year.

Such a weak overall performance is still nothing to brag about, of course, especially after taking into account the stiff fees hedge fund investors pay on average: 1 percent of assets and 20 percent of any profits.

"This has not been a great year so far," said Antoine Bernheim, publisher of the U.S. Offshore Funds Directory. Investors are still probably seeing flat performance at best in funds of funds, which are portfolios of hedge funds and charge another layer of fees, he said.

But after months of dismal returns and the recent market jitters, hedge fund investors say they are grateful for some positive signs. The flagship fund at Caxton, managed by Bruce Kovner, a well-known trader of currencies and commodities, rose 2.9 percent in May. Funds managed by Omega Advisors, run by Leon Cooperman, another longtime hedge fund manager, rose around 3.5 percent last month.

Over all, hedge funds that invested in credit derivatives do not appear to have fared as poorly as feared in early May. Hedge funds have been increasingly active in the credit derivatives market, accounting for some 30 percent of all trading volume, according to a recent report by Greenwich Associates, a research firm.

The prospect of continued volatility in the market for credit derivatives is high on the list of lingering concerns for hedge fund investors. What happened in May "was not an earthquake, but at some point there will be repercussions" if performance does not rebound, Bernheim said.
http://www.iht.com/articles/2005/06/08/business/gflede.php

FaGal

10-06-05, 12:53

Treating A Hedge Ache
www.washingtonpost.com - By Steven Pearlstein - June 10, 2005

Alan Greenspan has finally become something of a worry wart.

Yesterday, up on Capitol Hill, Greenspan's concern was the "froth" in the housing market, which he delivered along with avuncular assurances that no great crash was in the offing.

And earlier in the week, in a talk to a monetary conference in Beijing, Greenspan spoke with unusual clarity about the risks posed by giant hedge funds, which have assumed the role in the current marketplace of Internet stocks and junk bonds of earlier eras.

With a trillion dollars in assets leveraged up to the hilt, hedge fund capital has become the x-factor in virtually every market you can think of -- stocks, bonds, commodities, currencies, futures, options, derivatives and swaps. These unregulated pools of global capital now account for an enormous portion of daily trading volumes, a sizable percentage of the profits of Wall Street investment houses, and a worrisome share of the credit exposure of major banks. The people who run these funds take home annual compensation that makes corporate chief executives look like pikers -- $1 billion last year in the case of Edward Lampert of ESL Investments, according to Institutional Investor.

But to hear it from Mr. Greenspan -- who has lavishly praised them for making global financial markets more liquid, more efficient and more shock-resistant -- hedge funds are headed for a fall.

When they were small and new, Greenspan explained, hedge funds could achieve above-average returns by finding small inefficiencies in the markets, buying up financial risk that was priced too low or selling short risk that was priced too high. To identify these anomalies, hedge fund traders relied on sophisticated computer models and historical data to calculate probabilities and correlations out to the second decimal point. And to fully leverage this knowledge, they relied increasingly on complex derivative instruments to slice and dice and repackage various kinds of risks.

But, in time, as more money poured into more funds, all looking to profit from the same anomalies, the chance to make above-average returns began to disappear. As a result, "significant numbers of trading strategies are already destined to prove disappointing," according to Greenspan. So far this year, the average return has been nil.

"Consequently, after its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," Greenspan explained to his Beijing audience via satellite hookup. "But so long as banks and other lenders to these ventures are managing their credit risks effectively, this necessary adjustment should not pose a threat to financial stability."

Greenspan's message was clear: Don't look to the Fed to ride to the rescue with arms full of cheap money and implicit guarantees when hedge fund investors start rushing for the exits. We may have erred in that direction in 1998 by nudging Wall Street to prevent the collapse of Long-Term Capital Management, an early hedge fund. But this time, you're on your own.

Whether Greenspan will be able to hold to this tough line, however, will depend on exactly how these largely untested derivatives markets perform when under the stress of a big spike in long-term interest rates, or a crash of the dollar, or a rise in bond defaults or downgrades. It is one thing for wealthy hedge fund managers, their investors and their lenders to lose their capital. But a full-blown financial and banking crisis leading to a prolonged recession is another matter -- something no Fed chairman wants to have happen on his watch.

And therein lies the dilemma for Greenspan as he heads toward retirement surrounded by bubbles.

In word and deed, Greenspan has made clear that the Fed would not use monetary policy -- or even its bank regulatory powers -- to deliberately prick a bubble it sees developing on Wall Street, or in real estate, or in credit and derivatives markets where hedge funds rule. Rather, the Fed will stand ready to protect the "real economy" from the consequences of a bursting bubble, as it did by driving interest rates to historically low levels, beginning in 2001.

There is, however, an asymmetric quality to this policy. In effect, the Fed promises not to place any ceiling on how much risk investors and lenders can earn on the upside of a bubble market, while at the same time announcing that it stands ready to put a floor under how much they can lose once a bubble bursts.

Not surprisingly, Greenspan rejects this characterization. He points to his rhetorical efforts to lean against the prevailing market sentiment, be it the "irrational exuberance" speech of the late '90s or this week's warnings on hedge funds. But history shows that by the time these warnings are delivered, it's probably too late. The herd is too big and moving too fast for anyone to alter its course.

FaGal

10-06-05, 12:55

Hedge Funds Mature From Risque to Respectable: Mark Gilbert

June 10 (Bloomberg) -- Now that they have passed the $1 trillion mark, hedge funds are ossifying. They are becoming boring. Dull. Respectable, even.

Citigroup Inc.'s coup in persuading Gay Huey Evans to quit the dusty corridors of the U.K. Financial Services Authority for a seat at the U.S. bank's Tribeca Global Management LLC unit signals a turning point in the evolution of the hedge-fund industry.

It's no longer a rule-free playground for wealthy individuals. Instead, it's maturing into an edited version of the mutual-fund industry. And with maturity comes responsibility.

Citigroup has learned a thing or three about transparency and oversight in its multiple brushes with regulators in the past few years. Hiring Evans is an acknowledgment that the investors of tomorrow will demand more disclosure than the wealthy individuals who were previously the biggest providers of hedge-fund capital.

``Institutions, while they accounted for only 20 percent of hedge fund investors in 2000, will represent 80 percent of the market in 2010,'' said Tanya Styblo-Beder, chief executive officer of New York-based Tribeca, after announcing the appointment on June 2. ``Institutional investors will want to see the scale and robustness and transparency and disclosure that they require.''

As the industry matures and expands, the freewheeling approach to money management that characterized this corner of the investing community is set to disappear, along with the stratospheric returns early investors obtained.

Waning Returns

In 1995, hedge funds delivered almost 25 percent, according to an index of returns compiled by Credit Suisse Group and Tremont Capital Management Inc. In 2000, that dropped to 5 percent. So far this year, hedge funds are up just 0.2 percent.

Private investors seeing returns of 25 percent a year don't care about paperwork, dotting the i's or crossing all the t's. Institutional investors, on the other hand, care about process and form-filling and keeping their trustees informed about every move, especially when their shiny new hedge-fund investment is barely making money.

``Most of the low-hanging fruit of readily available profits has already been picked by the managers of the massive influx of hedge fund capital, leaving as a by-product much more efficient markets and normal returns,'' Federal Reserve Chairman Alan Greenspan said in a video address to the International Monetary Conference in Beijing earlier this week.

All About Fees

Hunt Taylor, director of investments at Hartz Trading Inc. in Secaucus, New Jersey, argues that as hedge funds get bigger, they depend more on fee income than generating excess returns.

A $300 million fund charging fees of 1 percent plus 20 percent of its investment gains makes $3 million for being in business, and has to deliver returns of 20 percent to make an additional $12 million, Taylor wrote in a May 24 article titled ``The Prudent Man vs. The Sophisticated Investor.''

With a $3 billion fund, the manager can charge a 2 percent fee, raking in $60 million ``just for opening the doors every day,'' Taylor wrote. Returns of just 10 percent would garner a further $60 million for the manager.

``This business was built on the principle of incentive compensation,'' Taylor wrote. ``It has reached the stage where it can now live on management fees alone. People pay what you pay them to do. Too many institutions are paying their investment staffs not to lose money, whether they recognize it or not. They in turn are now paying too many hedge funds not to lose money.''

Fear and Greed

Benchmark government bonds in the U.S. and Europe offer yields of less than 4 percent, not much more than investors can get for putting their cash in a checking account. The bar that hedge funds have to clear to deliver so-called excess returns looks much lower than it used to be.

``Somehow, we have disaggregated fear and greed,'' Taylor wrote. ``Somehow, the clients have all the fear and no upside, and the managers have all the greed and no downside. The interests are no longer aligned. Kind of like us both putting our money in a bond fund that I'm managing, except my coupon is 42 percent and yours is 6 percent.''

Stanley Fink, who heads the world's largest hedge-fund company as CEO of Man Group Plc, says ``aging and greed'' will prompt hedge-fund managers to sell shares and become publicly traded companies.

``The desire to make money and build something of lasting value will encourage them to either sell to the institutions or to list,'' Fink told Bloomberg reporter Malcolm Shearmur on June 8. Man Group has about $43 billion of funds under management.

Having to answer to pesky shareholders tends to inhibit managers, which is why publicly traded companies aren't exactly renowned for adventurousness. Hedge funds with stock-exchange listings will find their owners have less appetite for the wild swings in net asset values from month to month than their original investors were willing to stomach.

To contact the writer of this column:
Mark Gilbert in London at magilbert@bloomberg.net.

Last Updated: June 9, 2005 19:03 EDT

FaGal

10-06-05, 21:18

U.S. hedge funds gain

Thursday, June 9, 2005 Updated at 11:25 AM EDT

Associated Press

NEW YORK — Hedge funds turned in a positive performance in May, driven by strong equity markets and the expectation of an end to interest rate hikes.

The “Equity managers had their best month for the year as stocks moved on fundamentals and the Federal Reserve's comments indicating a possible end to interest-rate tightening has encouraged them to increase their net exposure,” said Charles Gradante, managing principal of Hennessee Group LLC, which advises on hedge-fund investment and produces indexes from data provided by more than 900 hedge funds.

However a small difference between short- and long-term interest rates, low volatility and a tight equity trading range — the Dow Jones Industrial Average Index has remained between about 10,000 and 10,900 since November — have continued to hurt hedge-fund performance, Mr. Gradante added.

He also said that equity managers remain concerned that a disturbance in the bond market — another surprise default or downgrade — will spill over into the equity market.

The Hennessee Global/Macro Index bounced back in May, returning 1.21 per cent after a loss of 0.71 per cent in April. International equities rose with the U.S. markets, and investors increased their risk appetite on the belief that the global marketplace would improve if interest rates stabilized, according to Hennessee.

FaGal

11-06-05, 22:32

Investors await regulator's line on hedge funds
news.ft.com - By Kate Burgess and Sundeep Tucker - June 11, 2005

Private investors looking for ways to earn double-digit returns will watch closely the Financial Services Authority's action to open up the hedge funds debate.

Once seen as dangerous, high-risk and exotic investments, hedge funds are becoming mainstream.

Increasing numbers of retail investors want to invest in these funds - unregulated investment schemes that have the freedom to switch between asset classes and are able to make money in falling markets.

This, and the fact that assets in hedge funds are increasing to more than $1,000bn worldwide, has changed perceptions. The FSA's discussion paper, expected this month, marks this sea change.

In March 2003, the financial regulator concluded there was no need to relax its restrictions on hedge funds. These kept hedge funds offshore; hampered retail investors from buying them; and prevented on-shore funds from using hedge-fund investment strategies, such as high levels of debt or shorting.

If private investors wanted to put their money into hedge funds they could buy offshore, said the FSA. Or they could buy shares in several funds of hedge funds available as investment trusts listed on the London Stock Exchange. At the time, the FSA said, there was little evidence of demand from retail investors.

Within a year, however, the regulator was forced to reconsider as demand escalated. In early 2004 it signalled a more liberal stance when it rewrote the rule book on onshore unit trusts and open-ended investment schemes and launched "qualified investor schemes". For the first time, professional investors and sophisticated retail clients were allowed access to funds that use hedge fund techniques - including gearing up, taking on high levels of debt, going short and using derivatives. The industry applauded.

But now the industry is urging the financial services regulator to go further, arguing that the relaxation of the UK's mutual fund regime should be extended. They say that while private investors have become more knowledgeable and are demanding more access to hedge funds, they remain wary of offshore products, which have tax disadvantages and suffer from poor consumer protection. Quoted investment trusts have not performed well, either.

"Investors prefer regulated onshore open-ended funds and managers are willing to deliver them," said Timothy Spangler, partner in the investment funds group at Berwin Leighton Paisner.

The UK's fund management industry is also keen to protect its position as one of the leading international fund management centres. About 70 per cent of European single-manager hedge funds are managed from London, but this pre-eminence is under threat.

Many other EU financial centres, including Germany and France, have changed their stance on hedge funds in an attempt to draw the lucrative and fast-growing hedge fund industry into the EU. This week Germany stepped back from imposing restrictions on hedge funds.

When the FSA first asked the industry in 2003 whether it should reform its rules on hedge funds, the response was muted. That has changed dramatically. Now it is clear that asset management firms will welcome any change that allows private investors easier access to them. But consumer groups will watch developments closely. They are wary of products that may put investors at risk.

FaGal

13-06-05, 19:05

State knew about hedge fund's risks, investment manager says
www.ohio.com - June 13, 2005

Workers' comp officials kept in loop, employee of firm MDL Capital says

COLUMBUS - The investment manager whose firm lost $215 million from Ohio's insurance fund for injured workers said that the state knew about the high-risk investment from the outset.

Mark Lay of Pittsburgh-based MDL Capital Management Inc. acknowledged Saturday that his company had no experience with hedge funds, which carry the chance of very high returns but also a small chance of very large losses.

He maintained that the investment was not particularly complex, however, and said his staff was prepared to handle it. Moreover, he said, MDL kept officials at the Bureau of Workers' Compensation in the loop.

Bureau staff ``knew what we were doing,'' Lay said. ``If, in fact, they were concerned, they could have terminated us at any time.''

The state moved toward ending its contract with MDL after learning last fall about the hedge fund's poor performance. Terry Gasper, the bureau's chief financial officer at the time, was forced to resign. Other bureau officials have said Gasper moved $100 million in state money into the hedge fund without their knowledge.

Jeremy Jackson, a bureau spokesman, said MDL's inexperience may have been a factor in the fund's failure.

``They were not well-versed in the world of hedge funds,'' he said.

Lay described the hedge fund as part of an ``overlay strategy'' designed to offset losses in more traditional investments. Other MDL clients lost money on the gamble, but the bureau was the only one that lost money overall because it didn't benefit from other investments with MDL, he said.

Attorney General Jim Petro announced Friday that he would sue MDL to recover the $215 million, claiming the company went beyond the scope of its contract with the bureau. Lay denied that and repeated his claim that the outcry against MDL is politically motivated.

Despite the losses, the bureau still saw an 8.5 percent return on its $14.5 billion in investments last year, above the goal of 5.65 percent, interim Director Tina Kielmeyer told Taft in a memo last week. The governor has said his staff did not inform him of the extent of the losses until last Monday.

MDL has managed money for other public agencies in Ohio and Pennsylvania, including $100 million from a bond issue passed for the Columbus public school district in 2002. District officials said Saturday they would discuss the investment at a meeting Tuesday.

FaGal

19-06-05, 22:24

Hedge fund reform mooted
news.ft.com - By Alexander Jolliffe and Rebecca Knight - June 17, 2005

Private investors in the UK could be able to put money into regulated hedge funds for the first time if discussions by the City regulator lead to reform of the rules.

The discussions at the Financial Services Authority come after the industry urged the regulator to relax its rules. Germany and Ireland have already liberalised their rules governing retail investment into hedge funds.

Under the existing regime, only professional investors and sophisticated retail clients are able to invest in funds that use hedge fund techniques – including taking on high levels of debt, using derivatives and going short (selling borrowed securities in the hope of buying them back at a lower price).

The FSA’s discussion papers analysing the risks of hedge funds and similar investments are due next week. Ros Altmann, an independent consultant, says a shake-up could enable private individuals to invest sums of, say, £20,000 – a fraction of the amounts usually required. She believes investors would be able to put money into funds of hedge funds, which attempt to place clients’ cash with the most talented managers.

If the FSA allows private investors to buy into hedge funds, investor protection will become an issue.

Timothy Spangler, a partner in the investment funds group at law firm Berwin Leighton Paisner, says there could be debate about whether investors would have recourse to the Financial Ombudsman Service, which handles complaints against regulated companies, and the Financial Services Compensation Scheme, which pays cash to investors in fund management groups that collapse.

If investors do get the chance to back regulated hedge funds, they should consider the significant risks, high charges and falling returns.

Professor Narayan Naik, director of the London Business School Centre for Hedge Fund Research, says average industry-wide returns fell from about 14 per cent a year in 1993 to 5 per cent by 2004 as increased competition drove more capital into the industry. His data comes from research into 5,926 funds and includes vehicles which have closed, an attempt to get around “survivorship bias”, whereby indices flatter performance because they exclude funds which have performed poorly and closed.

Naik says investors should watch out for costs, which could be as high as 6 per cent at funds which offer to protect capital.

Hedge funds typically charge 2 per cent a year plus performance-related fees of 20 per cent. In addition, funds of hedge funds normally require investors to pay 1 per cent annually and incentive fees of 10 per cent. But in a capital-protected fund, there would be further costs of 1.5 per cent charged by the company that provided the “insurance” against losses, says Naik. Selling the funds to retail investors could lead to further costs for complying with regulations and paying financial advisers.

Another risk is that if regulated hedge funds become required to tell investors in brochures how they are investing, competitors might arbitrage against them.

To advocates of hedge funds, some of these risks make more sense than others. Altmann accepts that returns have fallen but says there are still opportunities. She draws an analogy with international equity investment, where she says the opportunities to generate high performance from inefficient markets are more rare than they were in the 1980s – but funds still invest. She says there are capital-protected funds which are far cheaper than Naik suggests and doubts that rivals would try to arbitrage against hedge funds that published their strategies.

FaGal

19-06-05, 22:26

City regulator cracks down on hedge funds’ insider trading
business.timesonline.co.uk - Richard Fletcher - June 19, 2005

The Financial Services Authority has launched a crackdown on insider dealing by investment banks and hedge funds.

In an interview in today’s Sunday Times, Hector Sants, managing director of wholesale and institutional markets at the FSA, states that the City regulator is now proactively targeting institutions that it believes participate in market abuse.

The move represents a notable shift in strategy by the FSA, which in the past has targeted individuals — rather than institutions — who have profited from trading shares after receiving inside knowledge.

The change of emphasis follows a boom in the amount of share trading done by hedge funds and investment banks’ proprietary trading desks. The FSA believes it is people working in these areas who are mainly responsible for pushing up the price of shares in companies about to announce they are in takeover talks.

Sants said: “Institutional abuse is not widespread but there are definitely pockets of unacceptable behaviour.”

Companies that are about to declare profit warnings usually see their share prices fall ahead of the announcements. Traders who are in the know have a big price advantage. Such practices, and the regulator’s inability to do anything about it, have given the City a bad name.

Sants believes much of the abuse arises from traders buying and selling shares on information they have gleaned from trading other asset classes.

In recent weeks the FSA has visited a number of leading investment banks and hedge funds to probe a series of convertible bond issues (debt that can be converted into shares), which it believes may have been at the centre of market abuse.

The FSA is investigating whether hedge funds have profited from inside knowledge of these deals.

The $1,000 billion hedge- fund industry is a big player in the debt market and similar abuses are being investigated by authorities in France and Japan.

“We view hedge funds as an important and useful asset class but there are inherent characteristics of the hedge-fund industry that increase the risk of market abuse by the participants,” said Sants. “The growth of hedge funds has been a structural change in the market. The characteristics of the market have shifted in the past year.”

Sants’s team is also targeting investment banks’ proprietary trading desks, which he describes as “high-risk areas”. But the former high-flying investment banker warned that tackling the abuse would not be a simple task and the number of cases bought by the FSA could actually fall as the enforcement division focused on complex institutional abuse. He said: “Institutional abuse is far more complex and difficult to enforce. We have to clearly demonstrate that people have used non-public information.”

As part of the strategy the FSA is to invest £15m in a new computer system that will monitor trading for sophisticated market abuse.

Last month John Tiner, chief executive of the FSA, launched a wide-ranging probe into London’s hedge-fund industry in response to long-terms calls for the burgeoning sector to be officially regulated.

The FSA is expected to publish the results of the probe in a consultation document later this month, which will set out new reporting and regulatory procedures for the industry.

FaGal

20-06-05, 11:47

FONDI & GESTIONI

Hedge Funds, i piccoli non possono acquistarli

di ADRIANO BONAFEDE

Piatto ricco mi ci ficco. Uno degli ultimi sbarchi nel mercato italiano degli hedge funds, dedicato a investitori che dispongono di una cifra superiore a 500.000 euro, è quella del gruppo Ubs. L’Sgr speculativa nata per creare fondi hedge di diritto italiano (denominata Ubs Alternative investment Sgr) è infatti uscita in questi giorni con un "fondo di fondi hedge". Un prodotto, questo, che va molto di moda in Italia, tanto che il mercato non riesce attualmente a evadere tutte le richieste.
L’aspettativa dell’Ubs che utilizzerà per la vendita la propria rete di private banking "Ubs Italia Spa" è che il mercato cresca ancora nei prossimi anni fino a portarsi su percentuali, sul totale risparmio gestito, analoghe a quelle dei paesi più sviluppati. Oggi, infatti, in Italia meno del 2 per cento del totale mercato fa riferimento agli investimenti alternativi, mentre a livello mondiale la quota è del 5 per cento. Dal 2 al 5 per cento è una bella crescita, ed è per questo che molti operatori anche stranieri si affrettano a gettarsi su questo piatto prima che il pasto venga mangiato da altri.
Ma che cosa vogliono gli investitori in hedge funds? «Sostanzialmente vogliono ridurre il rischio del portafoglio dice Antonio Manzini, direttore investimenti di Ubs Alternative Investments Sgr e questo è anche il messaggio che lanciamo noi. Nella letteratura finanziaria, i fondi hedge sono stati paragonati a strumenti ad alta o altissima rischiosità. Invece la maggior parte dei fondi hedge, e ancora di più i fondi di fondi come quello da noi creato, sono strumenti estremamente tranquilli che si propongono di ridurre la correlazione con le azioni e le obbligazioni presenti nel proprio portafoglio».
Questo è più o meno il programma di tutti gli strumenti alternativi di diritto italiano, quasi tutti "fondi di fondi". «Il nostro, ad esempio dice Manzini pesca fra 7580 grandi fondi internazionali su 8.000 esistenti». Però, se il programma di quasi tutti è di dare un rendimento "assoluto" e non correlato con l’andamento di azioni e obbligazioni, non si capisce perché non possano utilizzare questo strumento i meno ricchi fra i risparmiatori. «E infatti in Svizzera dice ancora Manzini basta avere meno di 10 mila euro per acquistare quote di uno di questi fondi». In Italia, però, la legge istitutiva dei fondi alternativi impedisce che i semplici risparmiatori possano acquistare questi fondi. Anche se sono "tranquilli". Anche se non sono "speculativi" nel senso peggiore del termine.
http://www.repubblica.it/supplementi/af/2005/06/20/finanza/034fondores.html

gu'

22-06-05, 10:44

Gli hedge funds e l'esplosione dei derivati

Mentre nel mondo della finanza circolano stime secondo cui dal 20 al 40 per cento del capitale complessivo degli hedge funds potrebbe essere già andato in fumo, come conseguenza del taglio del rating di GM e di Ford, cominciano a venire a galla le prime ammissioni di perdite colossali da parte degli hedge funds e delle banche:
Il GLG Partners, il più grande hedge fund attivo in Europa, ha reso noto agli investitori di aver registrato a maggio una serie di perdite. Secondo il Financial Times del 14 giugno, GLG ha ammesso che Credit Fund, uno dei suoi 16 hedge funds, ha perso il 14,5% del capitale a maggio. I manager di GLG attribuiscono le perdite al "modello matematico" impiegato per fissare i prezzi dei derivati sul credito. Spiegano che il modello "non è riuscito a prevedere le oscillazioni di mercato seguite ai tagli del rating di General Motors e Ford del mese scorso". Riferita quest'affermazione, il Financial Times commentava: "L'ammissione è significativa, in quanto pare che altre banche e hedge funds abbiano usato modelli simili per il trading, e di conseguenza potrebbero aver subito perdite altrettanto grandi in contrattazioni derivate".
A proposito della situazione generale dei mercati finanziari, nel comunicato di GLG si legge: "Settori della comunità degli hedge funds e un numero considerevole di banche d'investimento hanno subito perdite notevoli nelle operazioni sul credito come conseguenza delle condizioni recentemente instauratesi nel mercato". Naturalmente GLG invita gli investitori a non ritirare i fondi (tanto saranno comunque spariti) perché nel futuro adotterà un modello matematico presumibilmente migliore. L'articolo del Financial Times conclude: "l'impatto reale che finirà per avere l'alterazione dei prezzi del credito avvenuta a maggio non è ancora venuto alla luce".
Anche sul fronte delle grandi banche appaiono i primi segni di perdite significative. Philip Purcell, presidente e amministratore delegato di Morgan Stanley, è stato costretto ad annunciare le proprie dimissioni. Questo è avvenuto non soltanto come conseguenza di scontri interni alla gestione, ma soprattutto a motivo dei dissesti provocati dalle perdite degli hedge funds sull'attività bancaria. Così, Purcell si è sottratto all'imbarazzo di dover riferire di una probabile perdita del 20% dei profitti nel secondo trimestre, direttamente dovuta al drastico aumento dei premi di rischio per le obbligazioni societarie e ad effetti collegati sui derivati sul credito.
Tre giorni più tardi, la Goldman Sachs ha riconosciuto per la prima volta in tre anni una riduzione dei profitti trimestrali. Il reddito dalle operazioni sui bonds, sulle divise e sulle merci è caduto del 22%. L'annuncio non ha destato sorpresa, giacché a Wall Street circolava già da alcuni giorni la voce che Goldman Sachs aveva seguito l'andamento delle contrattazioni degli hedge funds e di conseguenza si è trovata con la guardia scoperta quando è arrivata la botta di GM e Ford. David Viniar, dirigente finanziario di Goldman Sachs, ha cercato di smentire la voce: "Certo che Goldman non trarrà sempre attivi da ogni operazione, ma le voci sul conto di perdite trimestrali su scommesse riguardanti General Motors e Ford sono esagerate". Sempre secondo le voci, anche Deutsche Bank, UBS e JP Morgan-Chase avrebbero accumulato gravi perdite a maggio.

La BRI sul disastro dei derivati

Nell'ultima rassegna trimestrale, la Banca per i regolamenti internazionali (BRI) ammette – con la solita ovatta linguistica dei banchieri – che i mercati finanziari globali versano in una situazione disperata. Il rapporto afferma: "A cominciare dal marzo 2005 i mercati del credito e delle azioni sono caduti come conseguenza del ritiro degli investitori da investimenti ad alto rischio. I mercati del credito hanno registrato la più alta svendita dal 2002, mentre i mercati azionari hanno perso quasi tutti i guadagni fatti nel 2004 ... Situazioni specifiche, di imprese o di settore, in particolare riguardanti il problematico settore dell'auto USA, ricoprono un ruolo importante nella rinuncia ai titoli più rischiosi ... gli spreads del credito hanno continuato ad allargarsi e gli interessi sui titoli di stato a diminuire fino alla metà di maggio come conseguenza del nervosismo provocato dall'aumento del rischio. Un'insolita volatilità nei derivati sui default ha aumentato l'incertezza a maggio".
"I mercati dei derivati sul credito sono stati più problematici di quelli spot. Alcuni hedge funds avrebbero subito perdite notevoli in operazioni riguardanti la General Motors e CDS index tranches. Le conseguenze sistemiche dovute al possibile fallimento di alcune di queste operazioni con una forte leva hanno pesato sui mercati del credito nella prima metà di maggio. I mercati del credito avrebbero anche subito la pressione dei movimenti degli hedge funds verso posizioni più liquide, dove alcuni fondi avrebbero anticipato un aumento delle liquidazioni come risposta alla mediocrità dei rendimenti negli ultimi mesi ... All'inizio di giugno era ancora da chiarire se la svendita nei mercati del credito si fosse conclusa".
In un riquadro a parte, intitolato "I mercati del credito alla prova dello stress: la retrocessione di General Motors e Ford", la BRI riporta tanti dettagli tecnici per mostrare come le retrocessioni abbiano avuto effetti devastanti nei mercati dei derivati, in particolare in quelli sul credito. Poi conclude: "Mentre si accumulano le perdite su questi valori relativi di attività di arbitraggio, gli investitori riequilibrano i portafogli per le proprie coperture, per far fronte a scadenze marginali e ridurre il rischio delle proprie esposizioni. Questo a sua volta ha provocato problemi di liquidità" su altri mercati derivati. "Poiché molti investitori avevano le stesse posizioni, questa concentrazione di attività ha amplificato il processo di leva inversa. La spirale di deterioramento è simile in natura, sebbene non in ampiezza, a ciò che accadde nel 1998, a seguito dell'insolvenza della Russia e il quasi fallimento della Long-Term Capital Management".

FaGal

25-06-05, 22:35

Hedge Funds: A Discussion of risk and regulatory engagement [PDF] , Financial Services Authority, June 2005
http://www.fsa.gov.uk/pubs/discussion/dp05_04.pdf

FaGal

25-06-05, 22:36

The case for hedge fund oversight
www.sptimes.com - By JENNIFER LIBERTO, Times Staff Writer - June 23, 2005

The investigation of a Bradenton investor after his apparent suicide suggests that he wasn't the success story he claimed.

To friends and family, Howard K. Waxenberg was a proud father, a clever jokester and a successful businessman.

To the Securities and Exchange Commission, he was the mastermind of a long-running, expensive Ponzi scheme that went undetected until he shot himself in the head last month in his Bradenton condominium.

Waxenberg, 54, ran a hedge fund, a private investment firm that pools clients' dollars into accounts to invest them in a variety of ambitious ways.

Over 15 years, Waxenberg had collected more than $73.7-million from nearly 200 mostly wealthy investors scattered from Los Angeles to Boston, according to SEC records filed in federal court earlier this month.

He won their trust despite losing his job and trading privileges in the 1980s for lying and stealing from his employer, a national brokerage firm.

Investors apparently never made the connection. Neither did regulators. When the SEC froze Waxenberg's hedge fund accounts earlier this month and seized his records, 95 percent of the money he had collected from investors was gone.

Waxenberg kept few records. He fabricated quarterly reports, which arrived on investors' doorsteps with hefty checks. Investors thought they were getting their promised double-digit returns, as much as 20 percent a year. In reality, most were just getting a little of their own money back.

Four days before his death, Waxenberg sent two-sentence notes to some clients, announcing his retirement with checks presumably returning their original investment. Many of the checks bounced.

The SEC uses Waxenberg's case to illustrate why the agency wrote new rules to regulate hedge funds, which lately have skyrocketed in popularity, along with hedge fund fraud. The funds currently aren't regulated but will be in February.

That comes as no comfort to the retirees, widows, doctors, lawyers and accountants who gave Waxenberg millions.

"I knew one day it would end, perhaps with a slight detrition," said Andrew Marias, a California investor who lost much of his employee pension IRA to Waxenberg. "I never expected anything like this."

* * *

Howard Waxenberg never seemed like the type of guy who would steal millions, say SEC attorneys, investors and longtime friends.

He had married Zelda Steiman, daughter of a wealthy San Diego builder and philanthropist, Morris Steiman, who built synagogues and gave millions to community causes, according to the San Diego Union-Tribune.

Zelda Waxenberg declined, through her attorney, to speak with the St. Petersburg Times.

High school classmates who saw Waxenberg last year at their 35th reunion say he had once distinguished himself in a class of 639 at Rock Island (Ill.) High School by running a marathon around the school track - circling it 105 times.

"He was very determined, but he also just did silly little things," said Rick Miers, 54, who grew up with Waxenberg.

At the reunion, he boasted of his teenage sons, Jake and Zack, classmates say. He had put on weight but looked healthy enough, greeting middle age with a graying beard, mustache and thin-rimmed glasses.

He told his classmates self-deprecating stories of a corn-fed Jewish Midwestern boy coming of age in downtown Los Angeles. They chuckled at his notion that Rock Island, with a population of about 40,000, should shape a 2020 Olympic bid for the Quad Cities, the area that encompasses Rock Island and Moline/East Moline in Illinois, and Davenport and Bettendorf in Iowa, population 400,000.

Classmates enjoyed reading Waxenberg's post reunion e-mails, which included a quirky list of reasons to attend the 2009 reunion. "You can see what everyone looks like after your Lasik surgery," he wrote, signing off as "Wax." "You really do like going to the John Deere museum."

Waxenberg left Rock Island for the University of California at Los Angeles, where he graduated in 1973 with a psychology degree.

He bounced from job to job around Los Angeles until he landed with Jefferies & Co. Inc., the national brokerage firm, according to National Association of Securities Dealers records.

By the early 1980s, he lived in New York, where he had his first run-in with securities regulators.

In 1983, Waxenberg was trading options for both his personal account and Jefferies' account at the same time. According to NASD records, he made sure that profitable trades went to his personal account and losing trades went to his employer. He also faked paperwork for the firm's books and records to cover up the scheme, the records state.

The NASD Board of Governors decided in 1987 to make an example of Waxenberg by forever banning him from stock trading. Because of that ban, he never would have qualified for membership in the federal Commodities Futures Trading Commission, necessary to trade futures contracts - which Waxenberg later boasted to clients was the key to his big returns.

After Jefferies & Co. fired him, he moved to Southern California.

Three years after the censure, he opened a private hedge fund. He worked alone and called the firm Downing & Associates, setting up an office in Del Mar, Calif., a small seaside city north of San Diego.

Several investors said they never met "Downing"; they talked only to Waxenberg.

Waxenberg told clients that he day-traded Standard & Poor's 500 futures contracts on the Chicago Mercantile Exchange. In later years, he promised 18 percent to 20 percent annual profits. Doctors, lawyers, accountants and retirees say they believed in Waxenberg.

"The results spoke for themselves," said Nathan Greenberg, 86, of Palm Beach, a semi-retired accountant who invested $4.4-million with Waxenberg over eight years, money that now appears to be lost. "He was consistent, and he kept his word up until the very end."

Part of the reason nobody questioned Waxenberg for so long is that his hedge fund worked like any other small hedge fund. He sent investors quarterly checks and annual audits without fail. He even went to hedge fund conferences.

Over the years, he grew so popular and took on so many clients, he started changing the rules on some of his funds. Early on, he'd accept investments as small as $50,000. But in 2002, he set a minimum of $250,000, requiring investors to "faithfully represent" they were worth at least $1-million, excluding their home.

He also renamed the hedge fund after himself.

* * *

In June 2002, Zelda Waxenberg bought a $425,000 Bradenton condominium behind the secluded walls of IMG Academies, a 200-acre sports community, where son Jake could play soccer full time with the best. IMG, where Venus and Serena Williams polished their tennis games, can cost up to $70,000 a year, including tuition at the private school, which Jake attended.

Howard Waxenberg leased a tiny office in a nearby office park. He never hung a sign on his door, according to office neighbors.

In a 2002 letter to woo investor Robert Fischer of St. Louis, Waxenberg said his company was 20 years old; it was only 12. He referred to staff he didn't have. According to state records, Waxenberg never registered his hedge fund with the Florida Department of Financial Services. No state regulatory agency ever received a complaint against the company, which was registered with the Secretary of State's Office.

This spring, when Waxenberg announced his retirement, he told those who asked that the business was getting to be "too much of a strain," investor Nathan Greenberg recalled from a conversation.

People expected to at least get their money back.

"I did this with my eyes wide open," said investor Marias, who moved $225,000 worth of retirement savings from the established Oppenheimer & Co. to Waxenberg.

"With double digit returns," Marias said, "you don't really want to find anything bad."

Marias, 64, is now contemplating whether to emerge from retirement.

Investors Fischer and Henry Shaw are skeptical. They want to know if Waxenberg is really dead, or if he's living the good life in Argentina.

"We're afraid it's all gone," said Shaw, who would only acknowledge that he had a "substantial amount" at stake.

The Manatee County Sheriff's Office confirmed that Waxenberg shot himself May 15. Zelda Waxenberg found his body and called the police. She said the last time she had seen her husband alive was about 3 p.m. that day.

The SEC had been looking for Waxenberg weeks before his death, said Rod Rawlings, who runs a real estate company two doors down from Waxenberg's office.

When federal regulators searched the office, they found only a few file cabinets and crates, six computers and two suitcases. There were no formal books, records or client files.

But what little they found raised questions.

Quarterly statements mailed to investors in one fund showed gains of 10 percent during the last six months of 2004, while an audit found from a Chicago firm for the same period showed the fund lost 3.41 percent of its value.

The SEC says that, despite what he told clients, Waxenberg wasn't doing much day-trading, not since 2002. He mostly invested in low-yielding money market funds. They say he made up earnings statements each quarter.

He even created fake IRS filings that confirmed his investors' supposed annual profits, which means investors may have paid federal income taxes on money they never earned.

Waxenberg pocketed at least $1.6-million from the investment funds, according to a handful of personal bank records found by investigators. The SEC doesn't know what more he might have taken, since records were spotty.

On June 9, the SEC filed an emergency action in federal district court in Tampa, freezing the assets of HKW Trading, LLC, Howard Waxenberg Trading, LLC, and Downing & Associates Technical Analysis, and the estate of Howard Waxenberg.

While going after the companies, the SEC admits it lacks a human target. "No one's in charge; it was rudderless," said SEC attorney Christopher Martin of Miami. "It's unfortunate."

Federal investigators wouldn't confirm or deny whether any criminal charges might spring from the case.

Judge Susan C. Bucklew ordered Waxenberg's remaining investment companies and funds into receivership, overseen by Tampa attorney Burton Wiand.

Only a handful of Waxenberg investors have made claims. The SEC encourages investors to call Wiand at (813) 228-7411 if they are owed money.

The catch?

Only $3.9-million remains of the $73.7-million Waxenberg collected.

Times news researchers Cathy Wos and Carolyn Edds contributed to this report. Jennifer Liberto can be reached at 813226-3403 or liberto@sptimes.com

FaGal

27-06-05, 21:47

Limited hedge fund data hinders supervision - BOE
www.reuters.com - June 27, 2005

LONDON - Regulators run the risk of not being able to supervise hedge funds properly because data on them is limited, the Bank of England said on Monday.

The central bank's half-yearly Financial Stability Review noted the recent rapid growth in the hedge fund industry which is now estimated to number over 8,000 firms with combined assets of more than a trillion dollars.

At the moment, hedge funds are almost completely unregulated but people such as German Chancellor Gerhard Schroeder have called for international minimum standards in regulation and want the Group of Eight nations to tackle this at a summit next month.

The BoE said that given the increasing prominence of hedge funds and their significance to regular financial institutions, surveillance of the industry was important.

But the problem is there is little official data on the funds, so regulators have to rely on aggregates of data on individual outfits, collected by private companies.

"Due to statistical biases, voluntary reporting and partial coverage, hedge fund data are subject to a number of limitations which may distort actual industry returns," the report said.

"If these limitations are not widely recognised, there is the risk that surveillance will be impeded and a misleading impression formed of the hedge fund industry."

Britain's Financial Services Authority has also complained about the lack of data available on the often highly-leveraged funds.

Last Thursday, it issued a discussion paper which said that some funds are pushing the boundaries regarding insider trading and market manipulation.

And while it would like to step up supervision, it said there was not enough reliable and comparable data on which to base decisions about risk, which would be required when taking regulatory action.

stommy

28-06-05, 12:06

Secondo voi è plausibile che il 30 giugno (fra 2 giorni), quando verranno resi noti i dati del 2° trimestre, ci possa essere una fuga degli investitori a causa delle gravi perdite subite dagli hedge funds nel mese di maggio?
Se non mi sbaglio Lyndon LaRouche aveva previsto per la prima metà di luglio una fuga generalizzata dal mercato dei derivati sul credito.

Voi cosa ne pensate?

FaGal

28-06-05, 13:31

messaggi lanciati non solo dall'economista citato a me pare siano sottovalutati, specie per gli Usa

John Smith

28-06-05, 14:34

stommy

28-06-05, 15:10

messaggi lanciati non solo dall'economista citato a me pare siano sottovalutati, specie per gli Usa

Anche secondo me questi messaggi d'allarme sono sottovalutati. Ma io mi chiedevo anche se è sensato aspettarsi la "resa dei conti" fra 2 giorni o comunque al massimo nella prossima settimana? :confused: Alcuni pensano che ciò che accadrà sarà molto peggio della storia dell'LTCM nel '98.

FaGal

04-07-05, 09:45

Hedge funds brought to bookSource: www.thisismoney.co.uk, Dan Atkinson, Mail on Sunday, July 3, 2005

The £556bn hedge fund industry may be forced to open its books if Ministers meeting at a financial summit in London this year get their way.

An ultimatum to the funds to give details of their investments or be branded as cowboys is likely to be considered in September by ten leading industrialised nations at the Financial Stability Forum.

The funds - whose huge and often secretive investment positions are increasingly seen as a threat to financial stability - would be invited to sign a voluntary code of conduct committing them to much greater transparency.

Financial regulators fear that were they to try to supervise the estimated 8,000 funds fully, they could be held liable by distressed investors should a fund become insolvent.

The Bank of England, in its half-yearly Financial Stability Review, warned that after a few recent months' poor trading, investors in hedge funds could rapidly pull their money out, putting the financial system under stress.

• The Group of Seven rich nations faces chaos next year when Russia takes over the presidency of its political sister, the Group of Eight.

This would usually mean that Russia also presided over the G7, but it is not a member of the economic club.

John Smith

07-07-05, 10:48

non bastano le perdite, serve anche una data utile per la
cabala
Effettivamente il 777...

FaGal

05-08-05, 17:28

I mister miliardo degli hedge fund
Il business è cresciuto del 100% in tre anni. E gli specialisti vanno a ruba a colpi di milioni
CARRIERE & PROFESSIONI finanza usa guadagni stratosferici per gli uomini dei fondi ad alto rischio

AAA. Cercansi venditori, analisti, trader, gestori, tecnici di banche dati, esperti quantitativi. Posto di lavoro: uno degli 8 mila hedge fund operativi sul mercato. Salario di base: da un minimo di 100 mila dollari l' anno per il primo impiego all' insù, con solo il cielo per tetto. Ovvero il record di 1,02 miliardi di dollari che l' anno scorso hanno segnato i guadagni di uno dei più famosi manager americani di hedge fund, Edward Lampert. L' industria degli hedge fund, quei fondi di investimento poco regolamentati e riservati a clienti ultraricchi o istituzionali, è diventata il settore della finanza con il tasso di crescita più forte sia come patrimoni gestiti (1.200 miliardi di dollari attualmente, il doppio di tre anni fa) sia come numero di persone che ci lavorano e livello delle loro retribuzioni. E così se una volta il sogno di un giovane fresco di Mba era entrare in una investment bank a Wall Street o a Londra, ora l' obiettivo è farsi assumere in una delle società di gestione di hedge fund. Mentre cresce il numero di chi, lavorando già in una investment bank, decide di fare il salto e passare al mondo più libero e creativo, meno burocratico, degli hedge fund. Manhattan è la capitale di questa fiorente industria, con una consistente succursale a Greenwich, cittadina del Connecticut dove operano alcuni dei gestori più riservati e dove aveva sede non a caso il Long term capital management, il cui crac nel 1998 fece tremare tutte le Borse. Da allora di acqua ne è passata sotto i ponti: gli hedge fund hanno conquistato popolarità dopo lo scoppio della bolla azionaria nel 2000 grazie alla loro promessa di ottenere performance assolute, non correlate cioè all' andamento dei mercati, perché frutto di strategie di investimento molto sofisticate con largo uso di derivati (future, opzioni e così via) e tecniche come lo shorting (vendere a termine titoli che non si possiedono, scommettendo sul loro ribasso). Sono dunque finiti sempre più nei portafogli di clienti istituzionali come fondi pensione e fondazioni. Tipicamente un hedge fund fa pagare ai clienti l' 1 2% di commissione di gestione annua sul patrimonio, più il 20% dei profitti realizzati. Il che può voler dire un sacco di soldi se il gestore azzecca l' operazione. Tenuto conto che di solito anche il suo patrimonio personale è investito nel fondo. Infatti i guadagni dei top manager di hedge fund, stimati dalla rivista specializzata Institutional investor' s Alpha, superano di gran lunga i 10 milioni di dollari annui in cui consiste il compenso tipico del ceo di una delle società della lista Fortune 500. Il record con oltre 1 miliardo di dollari l' ha conquistato Lampert, il cui ultimo colpo è stato l' acquisto del gigante dei supermercati Kmart e il suo rilancio. Relativamente meno bene è andata a una delle icone del mondo degli hedge fund, George Soros, che nel 2004 si è dovuto accontentare di 305 milioni di dollari, meno della metà dei 750 milioni dell' anno prima. Una cartina di tornasole della crescita delle fortune di chi lavora in questo settore è anche il modo in cui i favolosi guadagni vengono reimpiegati. Steven Cohen, titolare di Sac capital advisors, è noto per aver speso oltre 300 milioni di dollari per la sua collezione d' arte, che comprende capolavori di Jackson Pollock, Manet, Andy Warhol e Roy Lichtenstein. James Dinan, uno dei gestori da più tempo sulla piazza (1991), è finito recentemente sulle cronache per aver acquistato con 21 milioni di dollari l' appartamento newyorkese di Dennis Kozlowski, ex ceo di Tyco. "Non c' è dubbio che i professionisti con più talento oggi lavorano negli hedge fund", sostiene Dinan, che nel team della sua società York capital management conta 14 fra gestori e analisti, quasi tutti con Mba delle più prestigiose business school americane e con un passato in primarie investment bank, da Morgan Stanley a Merrill Lynch. "Il fatto è che la domanda per i migliori cervelli ha superato di gran lunga l' offerta", fa notare Steven Diamond, cacciatore di teste specializzato in hedge fund. C' è una guerra per accaparrarsi le persone che valgono, con rilanci all' insù degli stipendi proposti". E per trattenere i cervelli in fuga, anche le maggiori banche d' affari creano hedge fund interni, come Goldman Sachs, Deutsche bank e Bear Stearns. Un giovane neolaureato di una top business school può guadagnare 105 mila dollari al primo impiego come analista; un senior con Mba può partire da 225 mila dollari, secondo Diamond. Una posizione sempre più richiesta è quella di risk manager, soprattutto in fondi che hanno importanti clienti istituzionali. Per il trading, un know how specifico del settore è la capacità di fare shorting, sconosciuta ai gestori dei normali fondi comuni. Gettonati anche gli specialisti di reddito fisso, la base di molte strategie di arbitraggio: i loro compensi totali sono saliti a una media di 750 mila dollari nel 2003 rispetto ai 595 mila dell' anno prima, secondo gli ultimi dati disponibili, elaborati dalla società di consulenza Greenwich associates. Inoltre, nonostante gli hedge fund non possano farsi pubblicità, le loro società hanno bisogno anche di personale di marketing, la cui qualità cruciale è avere buoni agganci fra gli investitori istituzionali, potenziali clienti: un venditore esperto può chiedere un salario di base di 100 mila dollari. Per avere il polso delle offerte disponibili, si possono consultare siti come www.hedgeworld.com/employment/ oppure http://jobs.efinancialcareers. com/Hedge Funds.htm.
Il Mondo 1 luglio us

FaGal

13-08-05, 14:19

A derivative here may not sell there

By Lara Wozniak

FinanceAsia.com

11 August 2005

UBS MD Philip Tsao discusses Asia's diverse market for derivative products.

Philip Tsao, UBS Investment Bank's managing director, joint head of debt capital markets and risk management, is expansive about the derivatives business. Indeed, he jokes that most of his colleagues in the segment have either cashed out or moved on.

But he says he loves the challenge. Here, he talks about his bank's derivatives business.

Tell us about UBS' derivatives business market in China?

Tsao: Now that the renminbi fluctuates, clients think twice about which currency they should use to hedge. The US dollar used to be the proxy for the renminbi.

Is it still a good proxy? Probably "yes" for the short term, especially for clients who receive renminbi revenues and want to hedge against the appreciation risk of the US dollar against other currencies.

Until derivatives denominated in renminbi become available, the US dollar will remain a good bet, as liability hedgers will have the benefit of any further renminbi appreciation against the US currency by using US dollars as the proxy. China has been a rich source of both asset and liability derivatives. Cash-rich individuals and companies have around $120 billion of deposits in the banking system and, increasingly, are seeking higher yields and diversification by converting into US dollars. Derivatives are a natural solution.

There is also approximately $210 billion of foreign currency liability outstanding in China, most of which is booked at historical cost. It is becoming more and more commonplace for clients to look for alternatives to either reduce or lock-in the cost.

But isn't the government looking into offering RMB derivatives?

Regulators in China are seeking to understand how a government can regulate the market efficiently but, at the same time, ensure a platform exists for RMB derivatives to develop further. UBS has been working closely with the Chinese authorities to develop the initiative.

What about Hong Kong? Is the Hong Kong derivatives market going to change much due to the appreciation of the yuan?

Following the revaluation of the RMB, Hong Kong is in a transition phase. In the past, some Hong Kong-based fund managers adopted the US dollar as a proxy because the US dollar interest rate is slightly higher than that for HK dollars.

This strategy may become obsolete should the Hong Kong dollar appreciate in line with the RMB. Should this occur, investors in Hong Kong are likely to refocus on Hong Kong dollar assets at the expense of assets denominated in US dollars. As a result, we would expect volumes in the Hong Kong dollar-denominated derivatives market to increase.

What about other regions?

Well starting from the north, there's Korea. Korea is kind of different because of the FSS (Financial Supervisory Service) situation. (background: The Financial Supervisory Commission announced on July 22 that the Seoul branch of Deutsche Bank and the Seoul branch of BNP Paribas would be issued a disciplinary warning for engaging in improper non-standardized OTC derivatives contracts with state-owned companies.)

We cooperate fully with the regulators and have ourselves been audited. I am happy to report that we came out with a clean bill of health. We run a tight ship and apply stringent controls to our derivatives business to ensure it remains sustainable and profitable.

Our clients are pretty much the same as those of all our competitors. And though we sell structured-products, as clients demand them, we go to great efforts to ensure our clients really understand the risks; that the products genuinely meet their requirements; and that our presentations, term sheets and other marketing material are all devised to ensure they are fully protected.

What about Japan?

Our business model in Japan is different to that of most of our competitors. Most blue-chips and government agencies in Japan are all subject to very strict government-mandated accounting disclosure reporting rules. As a result, activity is mainly confined to general hedging although we are also investigating how best to develop the commodities segment.

There is also significant potential for growth driven by medium and small corporate clients who, by and large, are not subject to the same accounting requirements. In addition, they tend to be cash rich, and - in a low yen interest-rate environment - are attracted by the potentially high yields.

Now Taiwan?

Taiwan is exciting. For the past two years, the Taiwan dollar structured-bond market has grown very quickly with around $15 billion in new issues each year. While UBS is a major player - having started the business from scratch around two years ago, we now have a market share of around one third - we do not underwrite the bonds but simply provide the structures.

Our strategic partners underwrite the bonds and find the issuers - or being the issuers themselves - sell to investors. Almost all of our competitors operate a Taiwan-dollar underwriting business, as well as a local-underwriting business. As a result, local underwriters or banks with underwriting licenses entering the business, tend to view them as competitors rather than as partners.

By contrast, UBS has made it clear from the outset that it does not underwrite the bonds and so is viewed as a genuine partner - a provider of ideas, pricing and research. However, at the end of last year, the regulators deemed that many bond funds were over laden with structured bonds and, furthermore, that most were not properly marked to market.

As a result, the sale of structured bonds to bond funds was halted and the business quickly dried up. However, asset-backed securities (ABS) are poised to fill the gap and the regulators are encouraging ABS originators to buy the structured bonds, unwind the structure and then reissue as an asset-backed security.

Alternatively, local banks have the option to offload assets, such as cash-card or credit-card receivables, to improve capital ratio and asset efficiency. We are targeting onshore assets to be packaged and sold offshore where we have a competitive strength and less potential for conflict with our local partners.

What about Southeast Asia?

In terms of revenue composition, Northeast Asia - China, Japan, Korea, Taiwan and Hong Kong - will probably make up more than 70% of the P&L annually, but Southeast Asia is catching up quickly. And revenues from India, Malaysia, Thailand, Indonesia and the Philippines have all increased on last year.

In the Philippines, political instability and the limited number of products available has driven local banks to look offshore for investment opportunities. On the other hand, Thailand has started to manage its foreign-currency borrowing risks more aggressively in the private and public sector, while Indonesia and Malaysia, are looking at ways to manage risk more aggressively on both the asset and the liability side.

FaGal

17-08-05, 10:19

Derivatives for the masses

By Lara Wozniak 17 August 2005

Source: FinanceAsia.com

ABN AMRO launches a note to retail investors in Hong Kong, offering double performance and air-bag protection.

If a hawker outside a Hong Kong mass-transit station offers you an Iron Buddha teabag - have a read of the brochure that goes with it because it may well be about ABN AMRO's latest derivative offering. Yesterday, ABN AMRO launched its "Double-UP Protect Notes" which are designed to allow investors to enjoy twice the return of the underlying stocks in a rising market with an "air-bag protection mechanism" that helps investors reduce the risk of principal loss in a falling market.

The investment bank is offering two series of notes which are linked to baskets of blue chip stocks traded on the Hong Kong Stock Exchange. Investors can choose from A notes, which comprise of HSBC and Sun Hung Kai Properties; and B notes, which comprise of HSBC and PetroChina. The notes - the first of its kind in the Hong Kong retail market - are not capital protected. They have a short maturity of one year and will likely appeal to consumers who are more bullish in their outlook.

"Investors will potentially outperform the stock market by investing in this product, which links to leading blue chip companies, and enjoys double the return of the basket," says Polly Wong, director, private investor products of ABN AMRO. Upon maturity, the notes pay a maximum of 20% for A notes and 26% for B notes, if the closing price of each share in the relevant basket is greater than or equal to its initial price, plus the notes' face value. In the meantime, the air-bag protection mechanism helps investors reduce the risk of principal loss at the protection level, which is 92% for A notes and 79% for B notes.

Here's how it works: investors may receive the physical delivery of the worst performing share if the closing price of any share of the relevant basket is equal to or lower than its protection level on any trading day during the observation period - and if the final reference price of the worst performing share at maturity is lower than its initial reference price.

Currently, the market expects the Hang Seng Index to reach 16,000 by the end of the year and reach 17,000 in the next 12 months, offering a potential upside of 6%-12%.

"The stocks we selected are leading blue chip stocks in the Hong Kong equity market. Even if the market performs poorly, resulting in a negative performance of the share prices, investors would still have the opportunity to enhance their returns through this product or alternatively, receive quality stocks," Wong added of the structure she designed. This is the latest product to be introduced to local retail investors by ABN AMRO this year. Previous offerings include last month's launch of ABN AMRO Joyous Notes (Hong Kong's first ever FX-linked equity), and ABN AMRO Opus Notes, launched in March (capital protected notes that deliver a minimum return and unlimited potential upside).

The notes do not have any initial charge or management fee, with a minimum subscription amount of HK$10,000. They are open for public subscription between 16 August and 5 September 2005. The investment bank is advertising the product through Chinese-language newspapers and magazines, on commercial radio station one (CR1), and through hawkers handing out brochures (and tea bags, but of course) on street corners near MTR stations and in big residential areas.

Just as with the Joyous Notes issue, there's an everyday element to this subscription - supermarket savings. Investors with subscriptions of HK$50,000 are eligible to receive HKD100 worth of PARKnSHOP gift coupons or its cash equivalent, as a bonus. "We want to let people know that derivatives are not such a foreign thing," says Wong.

© Copyright FinanceAsia.com 2005

FaGal

18-08-05, 13:20

Hedge fund is now a meaningless term
Source: news.ft.com, August 18, 2005

When is a hedge fund not a hedge fund? When it operates a long-only investment strategy (with no short selling to profit from falling prices.) That is precisely what is happening today, as an increasing number of hedge fund managers launch long-only funds.

This development shows that the term hedge fund has lost all meaning. There is very little difference between a long-only fund run by a hedge fund manager and an actively managed fund run by a traditional asset manager, except that the hedge fund manager is likely to be more aggressive and to charge much higher fees.

The trend also tells us something else about the hedge fund industry. As market conditions change, and the wave of money flowing into hedge funds swamps once-successful investment strategies, it is increasingly difficult to generate excess returns. In such circumstances it is tempting to seek upside from rising stocks as well as the extra kicker from smart asset selection.

For owners of these firms, it also makes sense to capitalise on the hedge fund buzz by opening their doors to investors who want long-only products.

Yet a hedge fund exposed to market risk is a contradiction in terms. From the days of Alfred Jones, who launched the first hedge fund in 1949, hedge funds have looked to generate returns other than those available from rising markets. In the jargon, they seek alpha (excess risk-adjusted return) rather than beta (risk-adjusted market return). The idea is to generate absolute returns regardless of whether the market rises or falls. Going long-only is a different strategy, with a different goal - to outperform other investors.

Take away the defining investment strategy - usually coupled with strong incentives and maximum trading flexibility - and what is left? Contrary to popular myth hedge funds are not an asset class. They are merely vehicles through which people invest in underlying assets: equities, bonds, currencies, commodities and real estate.

The time has come to stop talking about hedge funds versus non-hedge funds, and to think about asset management as comprised of active and passive investors, with hedge funds a form of ultra-active management. In time, the industry is likely to polarise between the extremes, at the expense of traditional active management.

The question is whether, as conventional active managers become more like hedge funds and vice versa, hedge funds will be able to continue to charge a huge premium for their services. That looks unlikely.

Hedge funds excel in entrepreneurialism, talent and concentrated knowledge. But their very success in attracting money suggests it will be increasingly hard to find mispriced assets in liquid public markets. Hence the shift into illiquid assets, such as real estate, private equity and emerging markets. If overall hedge fund returns fall, as seems likely, fees will have to fall too.

FaGal

30-08-05, 12:42

Trading hedge funds

Online matchmaking

Aug 4th 2005 | NEW YORK
From The Economist print edition

A new way for alternative investments to find new owners

FOR those who fancy tucking a few million dollars into a select hedge fund, classified ads in newspapers will not do. But Hedgebay, a tidy secondary market for stakes in hedge funds, just might. Hedgebay http://www.hedgebay.com/ is a website where serious investors take part in an online auction, finding and selling rare and coveted hedge funds that are closed to new investors. It began as a niche market in 1999, but its volume tripled in 2003 and now grows at an annualised rate of 20%.

Hedgebay furnishes a web-based market without precedent in the murky world of hedge funds, and thus opens an illuminating window on to it. The site lists more than 600 hedge funds—offshore only, to keep the regulators happy. Hedgebay sorts them alphabetically and by strategy, and then invites registered (and carefully scrutinised) users to post offers and bids. After buyer and seller are introduced and come to settle on a price, Hedgebay oversees their transaction, handles the tricky paperwork and takes a cut of 1% or less. The manager of the fund that is changing hands retains the power to veto any sale.

Hedgebay is, in effect, marketing liquidity. Sellers who use the site avoid the lock-up periods during which they cannot sell their shares—which can be three years or more and are enforced by redemption fees. Even the most lenient funds tie up 90% of an investor's assets for a month and the remaining 10% for much longer. Jared Herman, one of Hedgebay's founders, estimates that the site's average seller reclaims the balance of his assets two months earlier than he could ordinarily do.

Sellers may also rejoice in the fact that stakes in good closed funds tend to be worth more than their net asset value: 70% of sales on the site last month commanded a premium. Buyers are happy to spend their way into closed funds at a time when the supply of renowned managers has grown scarce. This year Hedgebay has seen about a dozen trades per month, at an average value of $3m-5m each. Most users are fund-of-hedge-fund managers and all are authorised to invest in offshore funds.

As a gauge of investor sentiment, Hedgebay's listings, updated daily, can be revealing. In July, which saw the highest volume this year, funds employing long-short strategies (owning some assets outright while betting on the price of other assets to fall) attracted the highest premiums. Convertible arbitrage strategies have landed with a thud: some $61m-worth are for sale on Hedgebay against demand for only $17m-worth. A credit-arbitrage fund, hit especially hard by the junked ratings of General Motors and Ford, has $36m in shares marked for sale, most of them at a discount. By contrast, users have posted offers for $116m-worth of European long-short equity funds, mostly at a premium, against a supply of $22m.

Hedge funds are credited with using their high-grade and locked-up investors to bring greater liquidity to remote corners of the capital markets. But the investors' own unslaked demand for liquidity makes Hedgebay an appealing market. Though such high-flying investments may look out of place on a web-based auction block, Hedgebay has every reason to expect its trade to keep growing.

http://www.economist.com/finance/displayStory.cfm?story_id=4255419

FaGal

01-09-05, 11:07

1 settembre 2005
Gli hedge fund nell'occhio del ciclone

Lo scandalo Bayou accende la polemica sulla validità delle tecniche di gestione del rischio e sui controlli

NEW YORK • Sono reduci da tre anni di straordinaria crescita che li hanno portati ad essere uno degli strumenti di investimento preferiti dai risparmiatori, ma da qualche giorno gli hedge fund si ritrovano al centro di un acceso dibattito sulla validità delle loro pratiche di gestione del rischio e sulla necessità di maggiori controlli.
A gettare una nuova luce sui fondi speculativi è l'improvvisa esplosione dello scandalo Bayou, un hedge fund con asset dichiarati per 450 milioni di dollari ma buchi nei bilanci per centinaia di milioni. Lo scandalo ha scosso la comunità finanziaria perché sul fondo di Stamford in Connecticut avevano puntato anche grandi investitori istituzionali come Stern Investment Holdings e Silver Creek Capital Management. Investitori che in teoria avrebbero dovuto disporre degli strumenti necessari per rilevare problemi nella gestione del fondo o incongruità nei documenti finanziari.
Nel dibattito è intervenuto lo stesso inventore della formula utilizzata comunemente dagli hedge fund per vantare agli occhi degli investitori alti tassi di ritorno a fronte di rischi limitati. William F. Sharpe, vincitore di un premio Nobel per l'economia nel 1990, non ha dubbi sul fatto che la formula che reca il suo nome ( la Sharpe Ratio) venga utilizzata impropriamente dagli hedge fund per attirare potenziali investitori. « È un fatto che mi disturba — ha detto il professore al Wall Street Journal — in generale la media delle esperienze passate può essere un pessimo elemento di previsione per le performance future » . Lo stesso fondo Bayou vantava un'ottima Sharpe Ratio nei suoi materiali pubblicitari ma la formula è talmente in uso che molte istituzioni la usano come un metro di paragone comune per scegliere come investire. « Il problema— spiega Sharpe— è che i fondi la possono manipolare come vogliono per far fornire una rappresentazione illusoria della loro performance » . Lo stesso Sharpe, che ora siede nel cda di un piccolo fondo di investimento, spiega di non utilizzare mai la sua stessa ratio per valutare gli hedge fund.
Ma lo scandalo Bayou ha riaperto anche le polemiche sul basso livello di regolamentazione di un settore che è cresciuto tumultuosamente nel corso di pochi anni tanto che oggi nel mondo operano circa 8mila hedge fund con asset gestiti per mille miliardi di dollari. Per gli investitori che decidono di puntare sul settore degli hedge fund iniziano intanto a circolare i primi cataloghi delle buone regole per evitare il prossimo fondo Bayou. Secondo Erin Arvedlunbd, del Wsj, la prima regola è visitare regolarmente i siti delle autorità di controllo per scoprire se vi siano indagini in corso sui fondi in cui si vuole investire. I risparmiatori possono scoprire eventuali problemi affidandosi anche ai servizi degli Sherlock Holmes del mondo finanziario: per cifre dai mille dollari in sù, è possibile comprare le analisi di società come BackTrack Reports, Kroll e Capco. Ma gli investitori dovrebbero anche chiedere alle aziende gli ultimi tre anni di bilanci rivisti ( Bayou nel 2002 indicava Grant Thornton come suo revisione sebbene la loro relazione di lavoro fosse terminata negli anni 90) e in generale incontrare almeno tre volte i gestori nel loro ufficio e attendere dai 3 ai 6 mesi prima di prendere una qualsiasi decisione.
L'inchiesta sul fondo Bayou intanto registra uno sviluppo a sorpresa.
Il procuratore generale dell'Arizona ha sequestrato 101 milioni di dollari a maggio da un'oscura finanziaria del New Jersey che potrebbero essere usciti dalle casse dell'hedge fund del Connecticut. Una notizia che ha rincuorato gli investitori che sperano di riuscire a rientrare in parte della perdita sostenuta.

il sole24ore

FaGal

04-09-05, 17:53

Bayou used marketers, brokers to get clients
www.thejournalnews.com - By KATHERINE BURTON, ROB URBAN AND ANDREW DUNN - BLOOMBERG NEWS - August 31, 2005

Bayou Management LLC, a $440 million hedge-fund company based in Stamford, Conn., is being investigated for fraud by U.S. and state regulators.

The Wall Street Journal reported Monday that Samuel Israel III, founder of Bayou Management and a resident of Westchester County, told investors in July that he would shut his funds and return their money, saying that he wanted to spend more time with his children and that he was going through a divorce.

Investors have yet to be reimbursed, triggering probes by the Federal Bureau of Investigation, the U.S. Securities and Exchange Commission and the Connecticut Department of Banking into what happened to the $440 million Bayou had under management.

Cameron Holmes, an assistant attorney general in Arizona, said yesterday that officials seized $101 million on May 19 that may have come from Bayou Management.

Arizona's attorney general froze the funds in a Wachovia account under the name of Majestic Capital Management. Officials acted after detecting what they suspected were fraudulent rapid transfers of money from Germany to London, Hong Kong and the U.S., Holmes said.

"Bayou's filings with the court indicate that it's their money — the state is pursuing proof of that," Holmes said, citing a letter Bayou submitted from Karl Johnson, named as the principal of Majestic Capital.

Calls yesterday to Israel's home and to Steven Oppenheim, a lawyer at New York-based Faust, Rabbach & Oppenheim, who's representing Bayou, weren't returned. Phones at Bayou's offices in Stamford weren't answered and voice mailboxes were full. Contact information for Johnson or Majestic Capital couldn't be obtained.

A New York lawyer representing five Bayou clients said it was "odd" that Israel, 46, promised investors their money would be returned.

"The general consensus is it wasn't a Ponzi scheme from the start," Ross Intelisano, of the firm Rich Intelisano LLP, said on CNBC. "Our clients believe maybe Mr. Israel made improper trades and lost significant funds and, instead of disclosing that to the clients, he tried to trade up or do other things to make up for that.

"If you intend to steal someone's money, based on our experience, they would have left, not spoken to the clients at all," Intelisano told the cable television network. He also said that the last two months of statements from the fund were "certainly false."

Intelisano told Bloomberg News that the hedge fund company used marketers and consultants, including Hennessee Group LLC, and its own brokers to attract investors.

"I've spoken with investors who said they were put into the fund by Hennessee," he said. Hennessee advises institutions and wealthy investors on hedge funds. Intelisano also said three of his clients were recruited by brokers at Bayou Securities LLC, a brokerage firm owned by Israel.

Bayou is the biggest hedge fund to come under scrutiny for missing funds since 2000, when hedge-fund manager Michael Berger was accused of hiding $400 million of losses over four years. The SEC has filed enforcement actions against 15 hedge funds since September.

Lee Hennessee, who founded New York-based Hennessee Group in 1997, didn't return phone calls seeking comment. The SEC declined to comment on whether Hennessee or other third parties are included in the investigation.

The Wall Street Journal reported Monday that a key piece of evidence in the investigation is a six-page letter a money manager from Seattle, Eric Dillon, found on the desk of Daniel Marino, Bayou's chief financial officer Aug. 16 when he showed up for an appointment with Marino.

The letter, which the newspaper said was turned over to Stamford police, said: "This is my suicide note and confession" and that Marino, Israel and James Marquez, a former Bayou partner, had "defrauded all these investors," the newspaper reported, citing a police sergeant.

The newspaper said Dillon let himself in the offices after nobody answered his knocks.

It's common for hedge funds to work with consultants and marketers to find investors. Bayou paid Aris Partners, Altegris Investments and Consulting Services Group as much as 3 percent of assets raised, the New York Times reported earlier today, citing documents from an investor in the fund.

Matthew Osborne, chief investment officer at Altegris in La Jolla, Calif., said he told his clients to get out of Bayou more than a year ago. He declined to comment further on the reason or if Bayou paid him fees to help attract investors.

Intelisano expects several high-profile clients were stung by Bayou. "I've had calls from big Wall Street lawyers on behalf of big investors whose names they wouldn't disclose," he said. Seattle-based Silver Creek Capital Management LLC was among the investors in the fund. Eric Dillon, one of the firm's founders, declined to comment through a spokesman.

Hedge funds — lightly regulated investment portfolios designed for wealthy investors and institutions — will have to register with the SEC beginning in February, opening them to random audits for the first time. There are about 8,000 hedge funds with about $1 trillion under management.

Lawyers said the Bayou case probably wouldn't lead to an increase in oversight.

"If what everyone fears has happened — people stole money — I don't think it is going to result in broad, intrusive regulation of hedge funds," said David Becker, a partner at Cleary Gottlieb Steen & Hamilton LLP in Washington and a former SEC general counsel.

Bayou, founded by Israel in 1996, ran four hedge funds, according to SEC filings. They were Bayou Superfund LLC, Bayou No Leverage Fund LLC, Bayou Affiliates Fund LLC and Bayou Accredited Fund LLC.

Israel pitched himself as a short-term stock trader, according to a presentation given to potential investors in 2002. He aimed to make 1 percent to 3 percent a month. About half his portfolio was long, a bet that stocks would rise, and half was short, a bet that prices would fall, the presentation said.

The presentation also noted that Israel owned Bayou Securities, which served as the funds' executing broker, "thus benefiting the funds by the way of quality execution, reduced clearing costs and shared expenses."

Marino, chief financial officer at the firm, is listed as owning 10 percent or more of Bayou Management, according to a National Futures Association filing. He is not listed as an owner of Bayou Securities. Calls to Marino's house in Westport, Conn., weren't answered.

From 1992 through June 1995, Israel worked as a trader for Leon Cooperman's Omega Advisors, a New York-based hedge fund. He attended Tulane University, according to the marketing document.

Unlike most hedge funds, Bayou charged investors no management fee, although it did take the industry standard 20 percent of investment profits, according to the marketing presentation. Investors were allowed to take their money out monthly, compared with so-called lock-ups of a year or more at many funds, and the minimum investment was $250,000, compared with $1 million or more for other funds.

Bayou's highest returns were in 1997, its first year of operation, when it climbed 32.5 percent, according to the marketing document. In 2000, the year the Nasdaq bubble burst and the Standard & Poor's 500 Index fell 9 percent, Bayou returned 19.6 percent. In 2001 it climbed 7 percent.

Since 2003, Israel has had two run-ins with regulators. In April 2003, without admitting or denying the allegations of the National Association of Securities Dealers, he paid an $8,500 fine over allegations he allowed two individuals who weren't registered as equity traders to execute trades of over-the-counter securities, according to an NASD report.

Israel paid a $7,500 fine in September 2003 to the Connecticut Department of Banking without admitting or denying the allegations that Bayou Securities' records didn't reflect the securities business transacted by the brokerage firm, according to a consent order issued by the regulator.

Connecticut officials will form a task force to look into reforming the hedge fund industry in response to the possible collapse of the hedge fund and brokerage firm, Attorney General Richard Blumenthal said yesterday.

The move could have major ramifications because Fairfield County is a national center for the largely unregulated and secretive funds that cater to the wealthy and institutions.

"I think it may be a defining moment in the hedge fund industry's development," Blumenthal said. "This instance may be simply one major alarm bell for the broader public."

Blumenthal said he and the state's banking commissioner have agreed to form the task force, which could recommend stronger state and federal oversight of the industry.

FaGal

04-09-05, 17:55

U.S. seeks $101 million from Bayou hedge fund
today.reuters.co.uk - September 2, 2005 - By Dane Hamilton

NEW YORK (Reuters) - Federal prosecutors on Thursday charged Bayou Management, the hedge fund group at the center of a multimillion-dollar missing-funds case, with multiple cases of fraud and sought $101 million (55 million pounds) in civil forfeitures against the firm, a U.S. Attorney's Office said.

Bayou and its affiliates "overstated gains, understated losses and reported gains where there were losses," the U.S. Attorney for the Southern District of New York said in bringing the charges on Thursday.

The federal civil charges could help unravel the mystery surrounding the Stamford, Connecticut-based money manager, which said it attracted more than $440 million from investors on claims that it produced outsized gains on esoteric trading strategies. But many questions remain.

Prosecutors charged that Bayou, led by Samuel Israel III, conducted a high-level fraud to attract more than $300 million from investors since 1998 and "lull existing investors into retaining their investments in Bayou," prosecutors said in a statement.

In the action, federal prosecutors laid claim to $101 million held in escrow by Arizona state prosecutors, who won a court order to seize the funds in May, claiming evidence that the money was being used to defraud banks in an elaborate "prime bank" fraud.

Bayou officials could not be reached for comment and have been mum since last month, when Connecticut authorities disclosed they were investigating investor complaints that Bayou failed to return their cash after it told them in July it was shutting down.

In Arizona on Thursday, a lawyer for Cavanaugh Law Firm, which previously represented Bayou in its efforts to lay claim to the $101 million, won permission from the Arizona Superior Court to withdraw from the case, saying it has had no recent contact with Bayou and couldn't represent it.

A representative of the New York law firm Faust, Rabbach & Oppenheim said it doesn't represent Bayou and declined comment.

"PHONY ACCOUNTING FIRM"

Federal prosecutors charged that Bayou's audited financial statements contained glaring errors and that its auditors, Richmond-Fairfield Associates, were "a phony accounting firm" that conducted no audits.

For instance, prosecutors said, one entity, Bayou Superfund, reported assets of $192 million and trading gains of $27 million at end 2003. In reality, they said the Bayou Superfund had a value of $53 million and lost $35 million.
Arizona prosecutor Cameron Holmes, who led the action to seize the $101 million, told the Arizona Superior Court on Thursday that his office is seeking federal help in resolving who has rights to the $101 million. A hearing is slated for September 21 at the Phoenix court.

"We are delighted they are finally getting something done," said Holmes in an interview, referring to the federal charges.

FaGal

04-09-05, 17:55

New York Times
September 4, 2005
Connect The Dots. Find the Fees.

TO many investors, the collapse of the Bayou Group - a hedge fund company and brokerage firm run by Samuel Israel III - may seem like just another financial mishap, and a calamity only for those who had the bad luck to invest with Mr. Israel or to be steered his way by advisers they were wrong to trust.

But actually, the mess at Bayou, which federal prosecutors are now calling a $300 million fraud, should be a clarion call for caution among the many investors who have been throwing money at hedge funds recently. This is especially true for institutions - endowments and public pension plans - that have flocked to hedge funds with the hope of increasing their returns. Because many of these institutions are having financial difficulties - low interest rates are cutting deeply into their returns - they are too often captivated by investments that seem to promise outsized gains with little risk.

"Our unique multifactor risk model acts as a road map for navigating risk and provides investors with alternative routes to reach their investment summit," Steve Henderlite, a co-founder and principal of Trail Ridge Capital L.L.C., said in a press release from October 2003. Trail Ridge Capital is a hedge fund and fund-of-funds company that had clients in Bayou. Mr. Henderlite did not return a phone call seeking comment.

Trail Ridge is also an adviser to a new investment fund, the Undiscovered Managers Spinnaker Fund, offered to wealthy individuals by the investment unit of J. P. Morgan Chase. The fund, which started last November and had $7.3 million in assets as of March 31, held $662,602 in Bayou. J. P. Morgan says it has written that investment down to zero.

Central to the Bayou story, and to almost every other financial disaster of recent years, are conflicts of interest. At Bayou, these conflicts began in its brokerage unit, which executed trades for the hedge funds. Because the brokerage unit, Bayou Securities, was wholly owned by Mr. Israel, he was able to profit personally from the rapid-fire trading conducted by the funds he oversaw.

But some Bayou investors who got into the funds on the recommendation of investment consultants were confronted with another layer of conflicts. That is, the consultants who recommended the hedge funds to their clients and the funds of funds that bought Bayou shares for their investors often received compensation from Bayou for sending assets its way.

While some investors may not find fault with such an arrangement, institutional investors who have a fiduciary duty to their beneficiaries should definitely steer clear of the deals.

"In my view, if a hedge fund manager wants to pay a particular level of fees to a marketing agent, that's their business," said Orin Kramer, chairman of the New Jersey Investment Council, the oversight board for the state's pension system. "But as a fiduciary, I would be very uncomfortable dealing with a gatekeeper who is being paid on both sides of the trade."

Unfortunately, not all fiduciaries know where these conflicts lie. They are often well hidden.

"Pension consultants frequently have undisclosed financial arrangements with hedge fund managers that create a conflict of interest," said Edward A. H. Siedle, president of Benchmark Financial Services, in Ocean Ridge, Fla., a company that works for pension funds to investigate possible wrongdoing among outside money managers.

Mr. Siedle says the nature of these deals varies. Sometimes the payments come in the form of commissions on trades steered by a hedge fund to a brokerage firm that is affiliated with the consultant; in other cases the payments are fees paid by the fund based on the assets the consultant brings in. In one case, Mr. Siedle said, he found that a pension consultant received a partnership interest in the hedge fund to which it was steering clients.

SUCH payments were a part of the picture at Bayou. According to materials provided by the fund to a prospective investor in 2003, Bayou had several outside marketers that it paid either as a percentage of assets raised or through commissions to the promoters' "designated broker/dealer."

One of the firms that Bayou listed as an external promoter at that time was the Consulting Services Group of Memphis. Bayou also gave prospective investors the name of E. Lee Giovannetti, chief executive of Consulting Services, as a reference and as an institutional investor in Bayou.

Joe Meals, a spokesman for Consulting Services, said that the firm did act as a reference for Bayou in 2003 and that it had recommended Bayou funds to clients. But, he said, "We became uncomfortable with the operations at Bayou and made recommendations to all our clients that they redeem their accounts, and they did so long before any of these issues came to light." He added that Bayou "may have executed commissions through our affiliated broker dealer at one time, but not recently."

Consulting Services did the right thing in advising its clients to exit Bayou before the debacle. Others weren't so lucky.

In coming weeks, federal and state investigators will try to sort out what happened to the money that investors entrusted to Bayou. Because Bayou's minimum-investment requirement of $250,000 was smaller than that of most hedge funds, the firm unfortunately attracted a lot of individual investors. The United States attorney in New York is seeking the forfeiture of all of Bayou's assets, including $100 million seized by authorities in Arizona last May. How much Bayou's investors ultimately get back is anybody's guess.

Larger investors, especially those who are fiduciaries, should take a lesson from the losses at Bayou. Conflicts of interest in the financial world are often hard to uncover. But refusing to do the necessary digging is downright irresponsible.

FaGal

04-09-05, 17:56

Arizona seizes $101m possibly linked to Conn. hedge fund under investigation
www.boston.com - By Bloomberg News - August 31, 2005

NEW YORK - Arizona officials have seized $101 million that may have come from Bayou Management LLC, the Stamford, Conn., hedge fund under investigation for fraud.

Arizona's attorney general froze the funds in a Wachovia account under the name of Majestic Capital Management on May 19. Officials acted after detecting what they suspected were fraudulent rapid transfers of money from Germany to London, Hong Kong, and the United States, said Cameron Holmes, assistant attorney general.

''Bayou's filings with the court indicate that it's their money -- the state is pursuing proof of that," Holmes said, citing a letter Bayou submitted from Karl Johnson, named as Majestic Capital's principal.

Samuel Israel III, founder of Bayou Management, told investors in July that he would shut his funds and return the $440 million Bayou had under management, saying he wanted to spend more time with his children and was going through a divorce.

Investors have yet to be reimbursed, triggering probes by the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Connecticut Department of Banking.

Calls to Israel's home and to Steven Oppenheim, a lawyer at New York-based Faust, Rabbach & Oppenheim who's representing Bayou, were not returned. Phones at Bayou's offices in Stamford weren't answered, and voice mailboxes were full. Contact information for Johnson or Majestic Capital could not be obtained.

A New York lawyer representing five Bayou clients said it was ''odd" that Israel, 46, promised investors their money would be returned.

''The general consensus is it wasn't a Ponzi scheme from the start," Ross Intelisano, of the firm Rich Intelisano LLP, said on CNBC. ''Our clients believe maybe Mr. Israel made improper trades and lost significant funds and, instead of disclosing that to the clients, he tried to trade up or do other things to make up for that."

''If you intend to steal someone's money, based on our experience, they would have left, not spoken to the clients at all," Intelisano told the cable network.

FaGal

04-09-05, 17:57

Bayou sinks in morass of fraud allegations
www.charlotte.com - KATHERINE BURTON AND ANDREW DUNN - Bloomberg News - September 4, 2005

Firm lured investors with false statements, U.S. prosecutors say

When he started Bayou Management LLC in January 1997, Samuel Israel III told investors his hedge funds would outperform market indexes by adapting the rapid-fire techniques of day traders.

By 1998, Bayou Management was cheating clients by inflating investment returns and assets in phony financial statements. The firm kept that scam afloat until August, the U.S. attorney for the Southern District of New York alleged in a civil complaint filed Thursday.

U.S. Attorney David Kelley is seeking to freeze whatever money was left at Stamford, Conn.-based Bayou so it can be returned to investors. That includes $100 million seized in May by Arizona officials investigating suspicious bank transfers -- funds that Israel later claimed belonged to Bayou.

Kelley's complaint alleges that Bayou's financial statements and other documents from 1998 through 2005 "overstated gains, understated losses and reported gains where there were losses." The company also created a sham accounting firm, Richmond-Fairfield Associates, to certify false financial statements, prosecutors alleged.

"The effect of these false statements was to induce investors to invest in excess of $300 million," the complaint said. Criminal charges weren't filed.

A message left at Israel's home in Harrison, N.Y., wasn't returned.

"It's alarming that a hedge-fund fraud of this magnitude could go on for so long," said Ross Intelisano, a lawyer at New York-based Rich Intelisano LLP, which represents clients who invested about $12 million with Bayou. "Most schemes like this finally blow up when the trader runs out of money."

Israel, 46, said in July that he would shut the company's four hedge funds and return investors' money. That didn't happen, triggering probes by Connecticut banking regulators, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Exchange Commission and the Federal Bureau of Investigation.

Bayou's investors included wealthy individuals and institutions, including Silver Creek Capital Management LLC of Seattle. Unlike most hedge funds, Bayou charged no management fee, although it did take the industry's standard 20 percent of investment profits, according to one of its marketing presentations. Investors were allowed to take their money out monthly, compared with so-called lock-ups of a year or more at many funds, and the minimum investment was $250,000, compared with $1 million or more.

Like others, Bayou Management used marketers and consultants to attract investors. These included New York-based Hennessee Group LLC and Altegris Investments and Consulting Services Group in La Jolla, Calif. Depending on the arrangement, middlemen earn fees from investors, hedge funds or brokers who handle trading.

One example of fraud cited by federal prosecutors was the "audited" 2003 financial statement of Bayou Superfund, which showed a $27 million trading profit when the fund had in fact lost $35 million. The audit said the fund had about $192 million in assets when the true amount was $53.6 million, prosecutors said. Richmond-Fairfield Associates was phony and conducted no audits, prosecutors said.

In May, Arizona authorities seized $100 million from a Wachovia Corp. bank account on suspicions it was being used in an investment scam. Israel later claimed the money on behalf of Bayou Management.

"We first contacted the Department of Justice in May offering them this $100 million, and now they've finally taken action," said Arizona Assistant Attorney General Cameron Holmes. "I'm glad they finally got their operation together, and we're delighted to have them join us."

Holmes presented documents last week in an Arizona county court alleging that Israel and Bayou executive Lewis Malouf entered into a complex and "fanciful" investment arrangement to use the $100 million, along with debt, to buy "bank instruments" on which Israel would earn $7.1 billion over 10 years.

"I'm quite sure they were losing money and they entered into this scheme in a desperate attempt to recoup their losses," said Scott Berman, a lawyer at Friedman Kaplan Seiler & Adelman LLP in New York, who has been contacted by investors in Bayou.

The Arizona attorney general's office is trying to confirm that the money belongs to Bayou's investors. Maricopa County Court Judge Colin Campbell postponed motions last week to transfer the money to Bayou until Sept. 21.

Judge Campbell allowed Bayou's lawyers for the case in Phoenix, Jeff Smith and Scott Rose of the Cavanagh Law Firm, to quit. They didn't return phone calls.

FaGal

04-09-05, 17:58

Here's a Hedge Funds Checklist
www.theledger.com - September 4, 2005

With concerns about hedge funds blowups mounting, investors would be advised to take a page from Sherlock Holmes.

The scandal at Bayou Management, a Connecticut-based hedge-fund-management firm being investigated for alleged fraud, underscores how some basic detective work might have spared some investors. Earlier this year, Bayou told investors its funds had $440 million in assets.

Bayou had all the hallmarks of a well-positioned hedge fund -a founder with a Wall Street pedigree and at least some experience at a well-known hedge fund firm, Omega Advisors. Its straight-ahead, short-term trading strategy appealed to investors. Yet a number of missed red flags, in hindsight, might have saved them -- and their money.

Wary investors could have noted Bayou's obscure auditing firm. They could have also checked with regulators and turned up past disciplinary actions.

Hedge funds, lightly regulated investment pools that raise money from private partners, don't give out information readily, of course. That means investors have to do their own digging, and that can be an arduous task. For investors willing to do the legwork on their own, the best place to start is to check the Web sites of major market regulators -- such as the Securities and Exchange Commission, the National Association of Securities Dealers and the Commodity Futures Trading Commission -- for infractions. Checking these sites, or ones run by state regulators, would have turned up questionable information on Bayou that might have steered investors away.

There are professional services that can do the work for you. Among these are BackTrack Reports, produced by First Advantage Corp.; Intelysis Corp.; Kroll Inc., a unit of Marsh & McLennan Cos.; and Capco, a unit of Capital Markets NV of Belgium. The cost ranges anywhere from $1,000 for a basic background check and as much as tens of thousands of dollars for a multimanager search.

When checking on a hedge fund, investors should follow these general principles:

- Ask a firm for its last three years of audits. Bayou, for example, claimed Grant Thornton as its auditor in 2002, but the accounting firm had not worked for Bayou since the late 1990s.

- Verify a firm's promotional materials. Bayou founder and lead manager Samuel Israel III had worked at Omega briefly. But Omega denied that Israel was ever its head trader, as he had advertised.

- Call everyone -- including colleges and employers -- to verify the money manager's credentials, and get referrals or names of other people who have invested with them. If there are outstanding civil or criminal charges, a personal or corporate bankruptcy, litigation, a minor mistake on a resume, even a missing date or discrepancy in the manager's personal history, be wary.

- Pay a visit to the offices and speak face to face, but don't invest after a single meeting, say hedge fund lawyers and managers of funds of funds, which spread assets over a number of hedge funds. Instead, meet two or even three times in the firm's offices and ask the same questions each time. Expect the process to take at least three to six months before committing any money.

- "If any of the due diligence results are contradictory or materially inconsistent, that's sufficient reason not to proceed," says David Bailin, chief operating officer
Monitor returns before you invest. Compare performance numbers against the manager's peer group. Banks, prime brokers, fund administrators and hedge-fund databases such as Hedge Fund Research Inc. and the Tass database of Lipper, a division of Reuters Group PLC, may have data. But the problem, says Lois Peltz, president and chief executive of Infovest21, a publishing and research firm, is "none of them has to release any information, unless the hedge fund manager gives them the explicit go-ahead."

- Understand how an individual firm's securities are priced. In particular, be wary of investing with a hedge fund with its own brokerage firm -- such as was the case at Bayou. "We want to know who's entering the trades, what brokerages they use, where they settle, how the security prices are reported and priced," says Sean Laird, vice president of investment adviser research at PNC Advisors, a division of PNC Financial Services Group Inc.

- Beware of "carve-outs:" These allow a hedge fund manager to take a portion of a portfolio and put it in a separate vehicle. That lets the manager exclude the investment when reporting performance numbers. "I've never seen a carve-out of investments that are doing well," says Jane Siebels of Green Cay Asset Management, who drew up a road map for prospective hedge fund investors. Have your lawyer review the fund's offering documents.

- Beware of "side letters:" Hedge funds can sign socalled side letters, which are agreements giving particular investors preferential treatment. The existence of side letters, while not illegal, could work against you. Hedge funds might not open up about these, but if you don't ask you definitely won't get any disclosure.

Erin E. Arvedlund writes for The Wall Street Journal. Jonathan Clements is on vacation.

FaGal

04-09-05, 17:58

America's biggest hedge funds
money.cnn.co - September 1, 2005 - By Amanda Cantrell, CNN/Money staff writer

Assets invested keep growing despite a tough year for industry; keeping tabs on $743 billion.

NEW YORK - Debates about the merits of hedge funds may never end, but one fact remains undisputed: Their coffers are swelling.

In its annual survey of hedge funds with $1 billion or more in assets, the hedge fund industry publication Absolute Return magazine found 196 hedge funds in that group with a combined $743 billion under management -- the vast majority of the industry's estimated $1 trillion in assets.

Westport, Conn.-based Bridgewater Associates topped the list, with $17.7 billion in assets, followed closely by New York-based D.E. Shaw, with $17.1 billion.

Goldman Sachs took third place with $15.3 billion in assets, shattering the notion that hedge funds are strictly entrepreneurial and demonstrating how serious Wall Street's biggest investment banks and brokerage firms are about these funds. Barclays Global Investors also made the list, coming in sixth place at $12.2 billion.

Hedge funds have exploded in recent years, as investors disappointed with traditional funds started looking for new places to invest. Just last year, the hedge fund industry took in $123 billion in new capital, up from $72 billion in 2003, according to Tremont Capital Management, a hedge fund investment and advisory firm.

The growth took place while hedge funds struggled with tough market conditions. The funds this year have produced average returns of 2 to 4 percent, according to various indexes that track these funds. The S&P 500 is up 0.6 percent so far this year while the Dow industrials and Nasdaq are down.

This year also saw a big drop in returns at funds using convertible arbitrage, long considered one of the most popular and stable hedge fund strategies in which a manager buys a company's convertible bonds and bets against the company's stock. Funds employing this strategy have lost a combined $5.1 billion in assets since the beginning of the year.

Activist funds gain big

Despite the tough conditions, Absolute Return found that overall assets grew 9.3 percent since its last survey earlier this year. Several firms, including Glenview Capital, Cantillion Capital Management and Atticus Capital, landed higher up than in previous surveys on the back of strong performance this year.

And some activist hedge funds – the popular style du jour, in which managers seek to effect changes in corporate management to boost share prices – grew dramatically. Daniel Loeb, the manager famous for his scathing letters to corporate executives he feels are underperforming, saw a 52 percent gain in assets at his Third Point Management, from $2.1 billion at the start of the year to more than $3 billion.

Carl Icahn, who is new to the world of hedge funds but not to the world of activism, notched a 31 percent growth in assets in his Icahn Partners fund.

Other funds in the survey's top 10 include Farallon Capital Management, with $13.8 billion; Citadel Investment Group, with $12 billion; Och Ziff Capital, with $12 billion and Maverick Capital, with $11.5 billion.

Tough year overall

The difficult environment meant zero gains for some prominent firms, such as Amaranth and Pequot Capital Management. And it took an even worse toll on others, such as Angelo, Gordon, which saw a 30 percent drop in assets, to $8 billion. The firm had ranked No. 4 in the magazine's previous survey.

First coined by Alfred Winslow Jones in 1949, the term "hedge fund" originally referred to a portfolio of stocks with both long positions and short positions. The short positions were included to act as a hedge against losses in the long positions.

Today, the term is a more apt de*****ion of a legal structure than an investment style -- the funds are still private, and limited to a certain number of investors, each of whom must have at least $1 million in assets.

Hedge funds today employ a wide variety of styles, including long/short equity, which involves taking long positions in some stocks and selling others short, and distressed investing, which involves buying the securities of troubled companies.

Some hedge funds bet on commodity futures and trade systematically, while others, such as Eddie Lampert's ESL, buy whole companies in the hope of turning them around.

Since their inception, these funds have courted a reputation for big blowups and huge, risky bets, largely because of a small number of managers who made big news.

In 1992, hedge fund maverick George Soros bet against the British pound, a trade that earned him $1 billion and led one newspaper to declare him "The Man who broke the Bank of England."

And in 1998, hedge fund Long Term Capital Management collapsed, nearly sending the financial markets into a tailspin before a consortium of Wall Street firms, encouraged by the New York Fed, raised $3.5 and bailed the fund out.

Since then, hedge funds have dramatically scaled down the use of borrowed money to enhance returns, and a growing number of institutional investors, such as the California Public Employees Retirement System, the nation's largest public pension, have put money into hedge funds, alleviating some of the mystique surrounding these funds.

Also, investors have gotten savvier, performing background checks on managers and demanding managers disclose more information about their investment styles.

But that didn't stop some institutional investors from getting burned by Bayou, a Connecticut hedge fund that at its peak told investors it had $440 million in assets. The firm's founders are now being investigated for fraud, and officials are combing records for what's left of the fund's assets.

As of February 2006, hedge funds will be required to register as investment advisers with the Securities and Exchange Commission.

FaGal

04-09-05, 17:59

New York Times
September 4, 2005
Is a Hedge Fund Shakeout Coming Soon? This Insider Thinks So
By MARK GIMEIN

OF all the sectors of the financial universe, the hedge fund world is probably the most secretive and almost certainly the most alluring. Open only to institutions and the wealthy, hedge funds offer sophisticated models of risk, access to the best financial minds and the chance for outsized returns. According to Van Hedge Advisors, hedge fund assets have topped a trillion dollars.

The downside, unfortunately, is that occasionally the industry may be subject to catastrophic and unexpected losses. In 1998, many top hedge fund managers lost their shirts. Long Term Capital Management came close to collapse. Just last month, investors were reminded of exactly this kind of possibility with the apparent failure of a $400 million Connecticut hedge fund managed by the Bayou Group.

Andrew W. Lo, a finance professor at the Sloan School of Management at the Massachusetts Institute of Technology, has been studying hedge fund failures and risks, and he says that another hedge fund industry shakeout is likely in the near future. Mr. Lo runs a company, AlphaSimplex, that manages a $400 million hedge fund - so he is not looking for a reason to say hedge funds are in trouble. But that is exactly what he's saying, backing it up with powerful data and a couple of unexpected theories.

Mr. Lo has been working on the economics of hedge funds since the mid-1990's, but he started thinking seriously about how to measure risk across the industry in 1999, when he was first approached by backers to start his own hedge fund; it opened in 2003. He knew that sophisticated investors would want lots of data about his fund's returns and about the risk level he would assume, so he started looking carefully at the return data provided by other funds.

Traditionally, economists have thought that big up-and-down fluctuations in returns indicated risky investments, so many hedge fund investors have hoped to see a pattern of smooth and even returns. But Mr. Lo quickly saw that lots of hedge funds were posting returns that were just too smooth to be realistic. Digging deeper, he found that funds with hard-to-appraise, illiquid investments - like real estate or esoteric interest rate swaps - showed returns that were particularly even. In those cases, he concluded, managers had no way to measure their fluctuations, and simply assumed that their value was going up steadily. The problem, unfortunately, is that those are exactly the kinds of investments that can be subject to big losses in a crisis. In 1998, investors retreated en masse from such investments.

Now, in a paper to be published by the University of Chicago, Mr. Lo, working with his graduate students, has come to a disturbing conclusion: that smooth returns, far from proving that hedge funds are safe, may be a warning sign for the industry. (The paper is at web.mit.edu/alo/www/Paper...mic2.pdf.)

That doesn't necessarily hold true for every individual fund, but as Mr. Lo shows in his paper, measuring the smoothness of returns gives economists a good way to estimate the level of relatively illiquid investments in the hedge fund world. The approach lets economists measure industrywide liquidity risks without knowing the details of the investments - information that hedge funds just don't give out.

By Mr. Lo's measures, hedge fund investments are less liquid now than they have been in 20 years. His work shows that the same pattern of investing preceded the 1998 global hedge fund meltdown and the 1987 stock market crash.

But that's not the only reason for worry. He says that crises like that of 1998 may be more predictable than was previously thought - and that another crisis is likely.

The 1998 panic is generally thought to have been set off by the Russian government's default on its debt. But Mr. Lo points out that only a minuscule proportion of the world's hedge fund investments were in Russian government bonds.

In his paper, he shows that the catastrophic losses of 1998 were preceded by a noticeable series of months of mediocre performance. Mr. Lo argues that while a hedge fund crisis appears to be sudden and to be caused by unforeseen events, the breakdown is only the late stage of the problem. As more hedge funds compete for the same slice of the pie, he says, their managers feel that they have no choice but to "leverage up," juicing their returns by borrowing more money to make bigger investments.

That, in turn, makes the investments more prone to a sudden credit crisis. Hedge funds that are highly leveraged are vulnerable to having their lenders - banks and big brokerage firms - cut off credit when they think that their money may be at risk. And Mr. Lo thinks that lenders would do exactly that in an industrywide downturn. That would force hedge funds to close out their positions at the worst possible time - the kind of cycle that brought down Long Term Capital Management.

Here again, his data suggests that the current situation is serious. His research indicates that the industry may have already entered a period of lower returns that signal a prelude to crisis. He points to a downturn in April that hit virtually every category of hedge fund pursuing every kind of strategy.

"The concern that I and others have is that we're approaching the perfect financial storm where all the arrows line up in one direction," Mr. Lo said. The more money that is invested in hedge funds, he said, "the bigger the storm will be."

What might set off a crash is a matter of guesswork. Mr. Lo thinks that an oil-price increase to $100 a barrel, a level predicted by one Goldman Sachs analyst, could do it. Or , he said, a tightening of lending rules at Fannie Mae, the mortgage giant, could set off a "humongous unwinding" in credit markets. But Mr. Lo, who refers to some of his research as "measuring how strong the camel's back is and how much straw is already on it," thinks that the spark could be something much smaller.

ALREADY, his work has prompted hedge fund managers and investors to pay more attention to the hidden risks of funds that seem to be performing quite well. Clifford S. Asness, managing principal at AQR Capital Management, a large and successful hedge fund based in Greenwich, Conn., says Mr. Lo's work forces fund managers in general to confront the risks: "He demonstrates simple models that generally show a winning payoff but occasionally really die."

So what should be done? Mr. Lo sees no way to eliminate the cyclical nature of hedge fund investing, but he says we can learn from the mistakes of funds that fail. He advocates the creation of a financial equivalent of the teams at the National Transportation Safety Board that swoop in to investigate airplane crashes.

The nightmare script for Mr. Lo would be a series of collapses of highly leveraged hedge funds that bring down the major banks or brokerage firms that lend to them. That's a possibility that the entire hedge fund industry - secretive and fractious though it is - has a huge interest in avoiding.

FaGal

06-09-05, 10:49

Suicide note rang alarm bells over hedge fund millions
business.timesonline.co.uk - By James Doran - September 5, 2005

Our correspondent examines the strange story of a New England investment firm accused of a seven-year fraud

Daniel Marino sat at his desk on a hot August day, hands poised at the keyboard to type a letter to investors in Bayou Management, the hedge fund of whom he was finance director. “This is my suicide note and confession,” he began, before tapping out six pages to detail an alleged seven-year fraud that could cost investors more than $300 million (£163 million).

Bayou Management was a small hedge fund run out of a cream-coloured cottage in Stamford, Connecticut — a picturesque corner of the American northeast, where the wealthy like to sail yachts on the crystal waters of the Atlantic. Bayou promised massive returns for those with assets of more than $1 million and at least $200,000 to invest in its risky portfolio of hedge funds. And for nearly a decade it apparently did very well.

But on July 27 Bayou unexpectedly closed down. Samuel Israel III, the founder and chief executive, said that there were was nothing wrong, other than his messy divorce and the fact that he was suffering from a bad back. Because of these personal problems, he needed to close down the funds, he said, and would hand back the money invested.

Few of his clients believed him, on either count. Now authorities in the United States, including the Securities and Exchange Commission, the Justice Department, the FBI and the Connecticut Department of Banking are investigating Bayou’s collapse. Mr Marino’s suicide note is a key piece of evidence.

Mr Marino might have succeeded in taking his own life had it not been for a client who called at Bayou’s waterfront headquarters on August 16 to find out why the fund was shut down. He found Mr Marino’s office empty, apart from a jumble of papers on his desk that included the six-page suicide note.

The client called the police, who found Mr Marino at home in a “dishevelled” state, Stamford police sources said. The investor soon discovered that the remainder of the letter was as shocking as its opening line. It explained bluntly that Mr Israel, Mr Marino and James Marquez, a former Bayou partner, had “defrauded all these investors” from “about 1998 to now”.

Government prosecutors in Manhattan took his confession seriously and late last Thursday filed a lawsuit, with claims that the hedge fund was rife with fraud almost from the day that it had been launched. “All of the assets of Bayou . . . constitute proceeds of criminal activity,” the lawsuit claims.

Yet the nature of the alleged fraud still perplexes the authorities investigating it. The New York prosecutors allege that investors have paid more than $300 million into the hedge fund since 1998. Bayou, meanwhile, claimed to have $500 million under management at its peak last year and $440 million shortly before it closed down. However, rather than the impressive gains that Mr Israel boasted of, the only company books that investigators have found show a series of sizeable trading losses.

Its bank accounts reveal a series of complex and confusing cash transfers that moved more than $160 million of the firm’s money around the world several times without apparent purpose. Somebody connected to the hedge fund withdrew $161 million from five bank accounts during six days in July 2004. There are no records at this stage of the inquiry to show that there was ever any more cash in Bayou’s accounts, which would suggest that claims of coffers containing half a billion dollars were not true.

About $100 million of the $161 million was wired to accounts in Germany, and back out again. The rest is not accounted for. A sum of $101 million ended up in a Citibank account in Arizona, where it was seized last week.

The Arizona authorities believe that Mr Israel might have become embroiled in an old scam known as “prime bank instrument fraud”. They allege that the $101 million was passed from bank account to bank account, and country to country, for more than a year to give the illusion that some sort of business was taking place. If the alleged scam had been successful, the money would have disappeared eventually, but the authorities in Arizona smelt a rat.

“Whether this was an act of desperation in an attempt to recover previously misinvested funds, or an attempt to create an apparent loss . . . with a side agreement . . . to split the $100 million at a later time, is a question that will await further investigation,” the Arizona authorities wrote in a court filing last week.

Bayou Management was one of a growing number of relatively small hedge funds that have sprung up in America to cater to wealthy individuals. US hedge funds have ballooned in number to more than 8,000 with an estimated $1 trillion under management.

On August 11, Mr Israel told investors that he would return 90 per cent of the cash left in Bayou’s coffers within a week, with the rest paid by the end of the month. Now, however, he has gone to ground and his lawyers working on the Arizona case have resigned. None of the cash has been repaid.

Mr Marino never did kill himself and is understood to be barricaded in his luxury home in Westport, Connecticut. Several attempts were made to contact him, but none of the messages was returned.

Mr Israel could not be contacted, either, but he has written a note of his own. It was taped to the front door of his house in Westchester, New York State, last week, and it urged investors to be patient while assuring them that “Bayou is not insolvent”.

Charles Ramos, the New York State Justice, was stunned as the prosecutors laid out their evidence against Bayou at a court hearing last week. “You know who P. T. Barnum was?” the judge asked the court, referring to the infamous American showman, who claimed that a sucker is born every minute. “He was right.”

STORY BORN ON THE BAYOU

June 1996: Samuel Israel III founds Bayou Management

1998: Alleged fraud begins

July 8, 2004: Bayou wires $161 million from Citigroup accounts in its name to Germany

September 2004: Bayou tells investors it has $440 million under investment

July 27, 2005: Bayou closes down because Mr Israel, chief executive, is “going through a divorce and has a bad back”

July 29: Mr Israel writes to investors promising that funds will be returned in four months

August 11: Another letter is written promising that 10 per cent of cash will be returned in a week, the rest by end of August

August 16: Daniel Marino, finance director, writes a suicide note and “confesses” to a conspiracy to defraud. Authorities start to investigate

August 30: Arizona authorities find $100 million in a bank account that may belong to Bayou investors September 1: New York prosecutors sue Bayou for fraud

FaGal

06-09-05, 10:50

Hedge fund collapse: Latest lesson on caution, risks and conflicts
www.iht.com - By Gretchen Morgenson - The New York Times - September 6, 2005

NEW YORK - To many investors, the collapse of the Bayou Group, a hedge fund company and brokerage firm run by Samuel Israel 3rd, may seem like just another financial mishap and a calamity only for those who had the bad luck to invest with Israel or to be steered his way by advisers they were wrong to trust.

But actually, the mess at Bayou, which U.S. prosecutors are now calling a $300 million fraud, should be a clarion call for caution among the many investors who have been throwing money at hedge funds recently.

This is especially true for endowments and public pension plans that have flocked to hedge funds with the hope of increasing their returns. Because many of these institutions are having financial difficulties - low interest rates are cutting deeply into their returns - they are too often captivated by investments that seem to promise outsized gains with little risk.

"Our unique multifactor risk model acts as a road map for navigating risk and provides investors with alternative routes to reach their investment summit," Steve Henderlite, a co-founder and principal of Trail Ridge Capital, said in a press release in October 2003. Trail Ridge Capital is a hedge fund and fund-of-funds company that had clients in Bayou. Henderlite did not return a phone call seeking comment.

Trail Ridge is also an adviser to a new investment fund, the Undiscovered Managers Spinnaker Fund, offered to wealthy individuals by the investment unit of J.P. Morgan Chase. The fund, which started last November and had $7.3 million in assets as of March 31, held $662,602 in Bayou. J.P. Morgan says it has written that investment down to zero.

Central to the Bayou story, and to almost every other financial disaster of recent years, are conflicts of interest. At Bayou, these conflicts began in its brokerage unit, which executed trades for the hedge funds. Because the brokerage unit, Bayou Securities, was wholly owned by Israel, he was able to profit personally from the rapid-fire trading conducted by the funds he oversaw.

But some Bayou investors who got into the funds on the recommendation of investment consultants were confronted with another layer of conflicts. That is, the consultants who recommended the hedge funds to their clients and the funds of funds that bought Bayou shares for their investors often received compensation from Bayou for sending assets its way.

While some investors may not find fault with such an arrangement, institutional investors who have a fiduciary duty to their beneficiaries should definitely steer clear of the deals.

"In my view, if a hedge fund manager wants to pay a particular level of fees to a marketing agent, that's their business," said Orin Kramer, chairman of the New Jersey Investment Council, the oversight board for the state's pension system.

"But as a fiduciary, I would be very uncomfortable dealing with a gatekeeper who is being paid on both sides of the trade."

Unfortunately, not all fiduciaries know where these conflicts lie. They are often well hidden.

"Pension consultants frequently have undisclosed financial arrangements with hedge fund managers that create a conflict of interest," said Edward Siedle, president of Benchmark Financial Services, a company in Ocean Ridge, Florida, that works for pension funds to investigate possible wrongdoing among outside money managers.

Siedle says the nature of these deals varies. Sometimes the payments come in the form of commissions on trades steered by a hedge fund to a brokerage firm that is affiliated with the consultant; in other cases the payments are fees paid by the fund based on the assets the consultant brings in. In one case, Siedle said, he found that a pension consultant received a partnership interest in the hedge fund to which it was steering clients.

Such payments were a part of the picture at Bayou. According to materials provided by the fund to a prospective investor in 2003, Bayou had several outside marketers that it paid either as a percentage of assets raised or through commissions to the promoters' "designated broker/dealer."

One of the firms that Bayou listed as an external promoter at that time was the Consulting Services Group of Memphis. Bayou also gave prospective investors the name of E. Lee Giovannetti, chief executive of Consulting Services, as a reference and as an institutional investor in Bayou.

Joe Meals, a spokesman for Consulting Services, said that the firm did act as a reference for Bayou in 2003 and that it had recommended Bayou funds to clients. But, he said, "we became uncomfortable with the operations at Bayou and made recommendations to all our clients that they redeem their accounts, and they did so long before any of these issues came to light."

Meals added that Bayou "may have executed commissions through our affiliated broker dealer at one time, but not recently."

Consulting Services did the right thing in advising its clients to exit Bayou before the debacle. Others were not so lucky.

In coming weeks, federal and state investigators will try to sort out what happened to the money that investors entrusted to Bayou.

Because Bayou's minimum-investment requirement of $250,000 was smaller than that of most hedge funds, the firm unfortunately attracted a lot of individual investors. The U.S. attorney in Manhattan is seeking the forfeiture of all of Bayou's assets, including $100 million seized by the authorities in Arizona last May. How much Bayou's investors ultimately get back is uncertain.

Larger investors, especially those who are fiduciaries, should take a lesson from the losses at Bayou. Conflicts of interest in the financial world are often hard to uncover. But refusing to do the necessary digging is downright irresponsible.

fcoa

06-09-05, 10:57

fabio,ma in italia,esistono hedge fund?è possible trovare un elenco?
mi sembra ci sia solo quello di kairos..

FaGal

06-09-05, 11:44

vai nella sezione apposita del forum, c/c fondi, metti hedge funds italia nel motore di ricerca discussioni
saluti

lovercraft

06-09-05, 12:03

ma insomma, in poche parole cosa stà accadendo agli hedge funds americani?

FaGal

06-09-05, 12:13

discorso di elusione normativa, in modo specifico Usa. Per essere di poche parole

fcoa

06-09-05, 14:18

grazzziiieeee

FaGal

06-09-05, 15:37

pubblicherò un intervento specifico, SE INTERESSA, sulle tecniche di elusione normativa in Usa, sui correttivi apportati, degli Hedge funds...ma esprimete interesse

FaGal

09-09-05, 01:10

Per iniziamo dalla svizzera
http://masterfinance.splinder.com

FaGal

09-09-05, 01:11

More hedge fund blow-ups likely
today.reuters.co.uk - September 8, 2005 - By Herbert Lash

NEW YORK (Reuters) - Any way you slice or dice it, there will be more hedge fund blow-ups, said Mario Gabelli, one of Wall Street's biggest names.

Despite the attraction of the brightest and smartest to an industry whose annual compensation has reached $1 billion (540 million pounds) for the very best, failure in the hedge fund industry is inevitable, Gabelli said on Wednesday at the Reuters Hedge Funds Summit. Gabelli is chairman of asset management firm GAMCO Investors.

A likely cause for a blowup will be a fund manager's efforts to catch up after a year of losing money, he said at the summit, held at Reuters U.S. headquarters in New York. Under performance-based contracts using a so-called high-water mark, hedge fund managers only are paid after they make up ground that was lost during a past period over which returns are measured.

"Even if they work hard and are honest, they're going to lose money the old-fashioned way. And to the degree that they're leveraged, and to the degree that there's something called the high-water mark, that's the prescription for a blowup," he said.

Fear of blowups in the hedge fund industry have come to the fore in recent weeks after U.S. prosecutors last week charged Bayou Management, a hedge fund group at the center of a multimillion-dollar missing-funds case, with fraud.

Efforts to make up for performance during years of poor returns have happened in the past, and will repeat itself, Gabelli said. Managers will take additional risks in a bid to make up lost ground and will pay for it, he said.

Some will fail because of a convergence of factors that no one ever foresees, whether it be too much leverage or rising stock prices, "it will happen," Gabelli said.

"You cannot take a bottle of pills, pass them around this table and make us all smart, that allows us to go in and be a successful hedge fund," he said. "You're going to lose money."

'Three yards and a cloud of dust'
news.ft.com - By Richard Beales - September 8, 2005

Next week, the Federal Reserve Bank of New York will host an unusual gathering of 14 investment banks and their regulators. Timothy Geithner, president of the New York Fed, summoned the banks for a discussion of "important" issues in the fast-growing credit derivatives market.

The New York Fed speaks often with the banks it regulates, but the last such visible meeting occurred in 1998 - amid near-panic in the financial markets - as regulators scrambled to avert the collapse of Long-Term Capital Management, the US hedge fund.

Nobody is suggesting a meltdown is imminent this time. Brad Hintz, a securities industry analyst at Sanford Bernstein, said the move was a "natural response" by the New York Fed to market developments.

"With credit derivatives trading volumes doubling annually for the past five years, the infrastructure that settles those trades has been taxed and needs attention. This is merely a case of the Fed doing its job," he said.

Nonetheless, any pointers from the September 15 meeting will be watched by banks around the world. For example, the New York Fed could push credit derivatives dealers to standardise trading documentation and invest more in technology.

That would echo a report published in July by a financial industry group led by Gerald Corrigan, a former president of the New York Fed who is now a managing director at Goldman Sachs.

"We expressed some sense of genuine urgency," Mr Corrigan told the Financial Times. "It's a classic example of a situation in which the official community and the private sector should be and are working together."

Banks face two broad challenges, says Mr Corrigan. First, they have to deal with existing backlogs. Then, they have to ensure future trades are processed automatically so a backlog does not build up again.

The first of these efforts demands what he called a "three yards and a cloud of dust" approach, referring to a gritty, unglamorous American football strategy. Dealer banks and their clients simply have to comb through records to ensure their systems are up to date.

That sounds straightforward, and banks and industry bodies insist they are making progress. "The average time [to settle] credit derivatives reduced significantly from 17.8 [days] at end 2003 to 13.3 at the end of 2004," said Robert Pickel, chief executive of the International Swaps and Derivatives Association, suggesting the proportion of delayed trades was shrinking. But the speed of market growth makes it hard to keep up with existing orders, let alone deal with the backlog as well. "Some banks say they almost wish that the market could be closed for a month, just so they could catch up," said one international finance official.

Getting up to date with historical trades is only one part of the battle. For new trades, the goal is full automation - or "straight-through processing". That objective has spawned a rash of technological initiatives.

For example, the Depository Trust and Clearing Corporation - which settles most stock and bond transactions in the US - recently expanded its credit derivatives capability. A new start-up, T Zero, aims to improve the electronic transfer of trade information between systems. Meanwhile, MarketAxess and TradeWeb, rival electronic bond trading businesses, both said they planned to launch credit default swaps trading in the coming weeks.

"Automation of confirmation generation also improved significantly [between 2003 and 2004] from 24 per cent to 40 per cent," said Mr Pickel at ISDA. For several years, the organisation has been developing standardised documentation for derivatives trades - a prerequisite for automation.

The next challenge, which ISDA calls its "No.1 one priority", is to standardise assignments of credit derivatives trades. A bank and a customer may initially agree a trade. But later, the customer could decide to sell a position to a different bank. Such an assignment requires all three parties to agree - inviting delays and errors.

ISDA is working on a protocol to simplify assignments. Unusually, it is consulting fund manager groups as well as banks in an effort to satisfy all market participants. The move reflects the significance of hedge funds in the credit derivatives markets - and the fact that their requirements sometimes differ from those of the big Wall Street dealers.

That protocol should be released before next week's meeting at the New York Fed, and Mr Corrigan thinks a commitment to adopt it could be one outcome.

"I would imagine one of the things discussed at some length is [likely to be] a reasonable timescale to implement the new ISDA protocol to govern assignments," he said.

fcoa

09-09-05, 10:40

io ti seguo.

FaGal

09-09-05, 10:46

un po' poco, ma grazie :)

FaGal

11-09-05, 21:22

Jewish Charity Says It Was Bayou Fund Victim
www.thestreet.com - By Matthew Goldstein - Senior Writer - September 6, 2005

Think the well-publicized travails of the Bayou hedge fund only matter to a bunch of jet-setters who should've known better? Think again.

The Jewish Federation of Metropolitan Chicago, a major Chicago-area philanthropic organization, claims in a lawsuit that it lost $4 million on an investment it made last year in the onetime $400 million Connecticut-based hedge fund.

The Jewish organization, in a lawsuit filed Friday in federal court in Connecticut, accuses Bayou and hedge fund manager Samuel Israel III of crafting a scheme to "fraudulently convert and misappropriate'' its money. Bayou is currently being investigated for fraud by state and federal authorities.

The lawsuit is believed to be the first filed by a not-for-profit investor against Bayou, which claimed to have about 100 investors.

"The Jewish Federation wanted to take all appropriate steps to recover the significant investment it had in the funds,'' says William Prickett, the attorney for the organization.

The list of investors in Bayou includes a number of well-known so-called fund-of-funds managers including Hennessee Group, which reportedly had tens of millions of dollars in client assets in the hedge fund. Other past and present investors included Silver Creek Capital Management, a Seattle-based investment firm, and Sterling Stamos, the $2 billion investment fund founded by New York Mets owner Fred Wilpon. TheStreet.com previously reported that Sterling Stamos redeemed its investment in Bayou in February.

Last week, federal prosecutors in New York filed a civil forfeiture suit against Bayou, seeking to lay claim to $100 million of the hedge fund's money that was seized earlier this year by Arizona regulators. Arizona officials seized the money after detecting a series of suspicious bank transfers by Bayou and other parties.

The $100 million, which currently sits in a Wachovia bank account in a Pennsylvania branch office, is believed to be all the money that remains in the Bayou hedge fund.

FaGal

11-09-05, 21:22

Lawyers look for Bayou liability
news.ft.com - By Deborah Brewsterin New York - September 6, 2005

The law firm representing investors in the collapsed Bayou hedge fund is focusing on third-party liability as it becomes increasingly clear the investors have lost at least half of their money.

Bayou, whose principals have gone to ground after failing to return investors' money in mid-August as promised, had been masking heavy losses by faking its returns from as early as 1998, according to lawyers and regulators investigating the fund. The US attorney's office last week filed a court claim to seize the group's assets, including $101m held by Arizona authorities.

Ross Intelisano, whose Rich Intelisano firm represents eight investors who have collectively lost about $14m in the fund, said: "We are extremely pleased because this means they will freeze Bayou's assets, and also focus on finding any assets that are floating around."

However, he did not expect that much more money would turn up. "It seems there were up to $200m in trading losses which they disguised," he said. "There might be a few million more found, but I don't get any sense there is another $100m in a secret bank account somewhere."

Mr Intelisano said the firm's main legal strategy was to look for any third- party liability. "We are also looking at whether anyone was put into the funds by consultants." The law firm is talking to about 30 Bayou clients.

The Hennessee group, which advised individual and institutional investors on hedge fund investment, had several clients invested in Bayou, which reported $440m in assets. Last Thursday Hennessee wrote to its clients outlining how it discovered the collapse of the fund after an August 11 letter from the principals, Samuel Israel and Daniel Marino, saying they would return investors' money.

Hennessee said that, after being unable to contact Mr Israel, the group reported the matter to regulators including the Securities and Exchange Commission and the National Association of Securities Dealers, as well as the Federal Bureau of Investigation.

FaGal

11-09-05, 21:23

Want a Hedge Fund? Here's Your Homework
www.nytimes.com - By GERALDINE FABRIKANT - September 11, 2005

If you're thinking about investing in a hedge fund, how can you steer clear of the likes of the Bayou Group, the recently imploded hedge fund company and brokerage firm run by Samuel Israel III?

Unfortunately, getting information about individual hedge funds isn't easy.

While hedge funds have generally had positive returns, experts point out that some of them can be big money losers - and that this makes the decision to invest in any single fund a very risky business. A variety of databases provide information about hedge funds, but they are by no means infallible, and in any case many of them are often unavailable to the average investor.

The collapse of Bayou is a case in point. Federal prosecutors in Manhattan sued Bayou on Sept. 1, saying the company had defrauded investors since 1998 by misrepresenting the fund's performance. The complaint said that Bayou had misstated its assets and that its books, which it had claimed were evaluated by independent auditors, were certified by a bogus accounting firm whose registered agent, Daniel Marino, was also the chief financial officer of Bayou.

The case against Bayou began to develop in May, when Arizona authorities seized $101 million held by a man to whom Mr. Israel had turned it over in a seemingly desperate effort to make some fast money to cover his fund's losses.

For hedge fund investors determined to avoid such debacles, there are some free Web sites that offer data on legal and financial developments, including the sites of the Securities and Exchange Commission (www.sec.gov) and the National Association of Securities Dealers (www.nasd.com). While such sites contain a wealth of information, the often do not include the most telling signs of trouble in a hedge fund.

Randy Shain, the co-founder of BackTrack Reports, which researches hedge funds for institutions and some wealthy individuals, says that in the Bayou case, several red flags - including questions about Mr. Israel's character - would not have been evident to people contemplating an investment in the fund. For example, it would have been difficult to learn from publicly available data that Mr. Israel had exaggerated his position at one hedge fund, had been charged with drunken driving and had been accused in a lawsuit by a former employee of violating securities regulations.

A litany of problems like this is hardly typical of hedge fund managers, but it does underscore how difficult it is to vet a fund, said Charles Stevenson, a veteran hedge fund manager who now runs the Navigator Diversified Strategies fund, which is a fund of hedge funds. (A fund of funds is a group of individual hedge funds that has been assembled by a third party, an arrangement that provides diversification and, perhaps, a margin of safety.)

"If a manager's character is not reliable enough for you to trust them with your wallet," Mr. Stevenson said, "then the returns will be less relevant than whether they actually return any of your money."

In promotional material for the Bayou funds, Mr. Israel told investors that he had worked as the head trader at Omega Advisors, a hedge fund run by Leon Cooperman, a former Goldman Sachs partner. But Mr. Israel had misrepresented the length of his employment at Omega as well as his position there, Mr. Cooperman said in an interview. Mr. Israel had worked there as a trader for 18 months, but had not been there for four years as the head trader as he had claimed, Mr. Cooperman said.

Many hedge funds do not have a public relations operation geared toward answering such questions raised by outsiders. Would Mr. Cooperman have taken a call about Mr. Israel's credentials from a prospective investor in the Bayou funds? "I can't answer that," Mr. Cooperman said. "If somebody calls me for a reference check, I will respond factually and appropriately. But certain firms are very cautious about talking about former employees."

Another cautionary piece of news for Bayou investors should have been that while Omega oversees two funds of hedge funds that invest money with 25 different managers, Mr. Israel's group wasn't among them. "We never invested in Sam Israel's hedge fund nor did one trade with his securities company," Mr. Cooperman said.

Promotional materials also stated that Mr. Israel began his career at F. J. Graber & Company, a money management firm geared "toward high-velocity trading" and run by its founder, Fredric Graber. One person who knew both men, but requested anonymity, recalled that Mr. Israel had worked for Mr. Graber as a summer intern, a position arranged through a family friend, but added that Mr. Israel "never had a leadership role" at the firm. Mr. Graber, who closed his firm some years ago, could not be reached for comment.

Potential investors might also have been concerned if they had learned other information. Mr. Israel had been arrested in New York State in 1999 and accused of "driving under the influence" and charged with criminal possession of a "controlled substance," Mr. Shain of BackTrack Reports said; the case was discontinued a year later. That case was reported without elaboration on LexisNexis, a subscription data base, where Mr. Shain's firm found it while researching Bayou for a potential investor. In order to get details about the case, Mr. Shain had to send a researcher to State Supreme Court in Manhattan.

Sometimes red flags are more immediately visible. The documents that Bayou made available to its investors say that Richmond-Fairfield Associates was Bayou's accounting firm. Charles Levenberg, a private investigator who researches hedge funds, said that lack of information about the accounting firm was a warning sign. "If they are not using somebody you have heard of, that is a big red flag," he said. "You have to wonder why." The government has contended that Richmond-Fairfield was controlled by Bayou.

Evidence of possible problems can sometimes be uncovered in news reports. James R. Hedges IV, a partner at the Imperium Partners Group, a hedge fund based in New York, recalled that in 2002 his firm was looking into an investment in the Lancer Group, a hedge fund based in Manhattan. But Mr. Hedges said he had seen a news report about a lawsuit filed in Federal District Court in Miami that same year in which the S.E.C. had accused Bruce Cowen, a managing director of the Lancer Group, of participating in a conspiracy to divert funds from Lancer investors and, ultimately, funnel some of it to his own pocket.

That information "told us to stay away" from the Lancer Group, Mr. Hedges said.

A year later, the S.E.C. accused the Lancer Group of inflating the net asset values of its funds in an effort to mislead auditors and attract investors. The agency continues to seek fines, permanent injunctions against the group and penalties.

For investors who are intent on picking hedge funds themselves, despite the risks, experts say that it may pay to subscribe to services that track lawsuits. For example, an investor can subscribe to Pacer, an online index to federal civil, criminal and bankruptcy cases nationwide.

A Pacer subscriber could have found that a suit was filed against Bayou in 2003 in Federal District Court for the Eastern District of Louisiana by a former employee, Paul T. Westervelt Jr., and his son. The plaintiffs contended that Bayou had failed to provide them with necessary business documents and that Mr. Westervelt discovered "possible violations of the S.E.C. regulations governing the operating of hedge funds."

The case has moved from federal court to arbitration. Lawyers on both sides did not return phone calls seeking comment.

In 2004, Mr. Israel wrote to investors telling them of the suit. But an earlier warning of a former employee's decision to sue the company might have been helpful to investors.

The problem for individual investors is that many of them "have made a lot of money doing something else," Mr. Shain said. "They have a false sense of security about their own sophistication in analyzing financials," he added.

To winnow out potential problems, investors may want to look for some common-sense warning signs. In addition to checking for evidence of possible deception or illegality, some analysts say they try to check whether the manager is in the midst of a difficult divorce, as Mr. Israel was, which can add psychological and financial pressures.

One basic metric is the manager's employment record. Michael Steinhardt, a manager who ran his own fund for 29 years and is now starting a group of exchange-traded funds, said, "A long track record is the best endorsement."

In 1997, a fund run by Barbara Doran, who had previously been an institutional equity sales executive at First Boston and then a senior vice president at Lehman Brothers, shut its doors after losing 80 percent of its value. Ms. Doran had started the fund just three years earlier. At its height it was worth only $35 million. Ms. Doran declined to comment last week.

Of course, big financial institutions have made bad bets on hedge funds, too. Through a fund offered by an investment unit, J. P. Morgan had $662,602 in Bayou as of March 31, which it has written down to zero. A spokeswoman for J. P. Morgan said that as a result of the investigation, the firm was no longer marketing the fund to investors.

But over all, the odds favor big institutions.

"They have a better chance of weeding out the problem funds," Mr. Shain said.

FaGal

13-09-05, 10:48

High End Con Job: How Bayou Fund LLC Stole from the Rich and Sophisticated
www.canyon-news.com - By William P. McGowan, Ph. D. - September 11, 2005

Like MTV reality shows for teenagers, my guilty pleasure is watching the rich and famous get burned in financial scams. Watching perfectly intelligent people, often reputed to be “brilliant” and “giants in their field,” get completely swindled is fun because it proves that it can happen to anyone. More importantly, it serves to remind us that once again, Mom was right: “you shouldn’t do something just because other people are doing it.”

Such is the case with the rapidly unfolding tale of Bayou Fund, LLC. Once a well-regarded Stamford, Connecticut hedge fund operated by the grandson of a successful New Orleans coffee broker, Bayou is suddenly drawing the attention of two state attorneys general, as well as numerous lawsuits brought by private individuals seeking recovery of millions in loans and investments. The business press smells scandal, and it seems to be a fun story to follow.

What makes this such a harmless, guilty pleasure is that most of the people reading this have no where near the kind of money one needed to be even considered a “mark.” At Bayou Fund, the “marks” were required to have minimum personal net worth exceeding $10 million before they could invest. Hedge funds are essentially large sums of money that are given over to someone called a “fund manager” (read: head gambler), who then invests the money in vehicles that will produce larger than normal returns by placing short term bets with big time money. The goal is produce returns of 15%-20% a year. Like ENRON, no one can really explain how these funds produce such high returns, but as long as they do, they remain the new (and largely unregulated) darling of Wall Street.

Samuel Israel III offered such high gains, and he seemingly had the right connections. Selling himself as a trader by blood, Israel played up the success of his grandfather, Samuel I, who built up a successful coffee trading outfit in New Orleans. Eventually diversifying into commodities, Sam I sold out in the 1970s to financial powerhouse Donaldson, Lufkin, Jenrette, which gave his grandson entre into New York’s high-end financial community. In the 1980s, Sam III became a trader at Prudential Bache and other trading houses through the next decade, always working for outfits or close to other traders who did big things. Somewhere along the line, Sam started claiming these exploits as his own, and in 1997, boasting of his role in grand dad’s company, started Bayou. Promising high returns, Sam delivered, announcing substantial paper gains in the fund’s first two years. Rich friends told other rich friends, and pretty soon, old Sam had a big pile of money to “trade.” By the end of 2004, Bayou Fund, LLC claimed it had turned its client’s initial investment of $80 million into almost $420 million. Investors did not understand how Sam III did it, but they really didn’t care either.

Then the wheels started coming off.

In April, a private investor asked for his money back, principal plus interest, valued at somewhere in the neighborhood of $3.5 million. Israel stalled by saying first he had to “unwind” some investments to get the cash. He then announced further delays by closing the fund entirely, promising investors all their money. In retrospect, this may have been a ploy to buy time to hide the fund’s actual trading losses. In August, Connecticut authorities found a “suicide note” of Bayou’s CFO, who listed all of Bayou’s financial improprieties in a single-spaced, six page letter. Though the CFO did not kill ultimately himself, he did admit to the bottom line: Bayou never made money, and depended on positive word of mouth—not actual results---to keep new money flowing in. Of the $400 million Israel claimed at the beginning of 2005, by mid-August authorities could only find $110 million. And even that was missing.

Authorities in Arizona finally found it a week later, after someone associated with Mr. Israel tried depositing most of it in a series of Phoenix-area banks. Tipped off that a guy with $100 million wanted to open a new account so that the money could be “invested” with people known to law enforcement as scam artists, that state’s attorney general seized the funds. Either Israel was desparately trying to make up for past losses with a new scheme to turn a 7000% return—which looked to law enforcement an awful lot like a ponzi scheme—or he was creating an excuse to explain the fund’s sudden collapse.

In either case, it doesn’t look good.

Mr. Israel no longer has any legal representation, and hasn’t been seen by anyone in more than a month. His attorneys were allowed off the case by a Federal judge last week, when they disclosed that they could neither contact their client, nor had they been paid for a substantial amount of legal work already performed on his behalf. Bayou is asset-less, and thus unable to pay. Another Bayou investor is seeking the fund manager for the $3 million he loaned him in March.

Just where this all leads, no one knows. But it sure is fun to watch.

FaGal

13-09-05, 10:50

Hedge fund meltdowns seen as inevitable by some
today.reuters.co.uk - September 9, 2005 - By Martha Graybow

NEW YORK - Thousands of hedge funds are popping up with young, often inexperienced managers at the helm, spurring new questions about whether risks are looming of a major blowup in the fast-growing industry.

Hedge funds are experiencing explosive growth and attracting new investors, but the near catastrophe sparked by the implosion of hedge fund Long Term Capital Management in 1998 is still weighing on the industry. Last week, U.S. prosecutors accused hedge fund group Bayou Management of fraud in connection with millions of dollars in missing assets, raising fresh concerns about hedge funds' risks.

The industry also has posted only meager results lately after several years of outsized returns, prompting worries that managers could take inappropriately large gambles as a way to juice up performance.

It's only a matter of time before another fund collapses, some hedge fund players say.

Others, though, think that the risks have been overstated and that increased government oversight of these loosely regulated asset pools has made them safer.

"I see a lot of risk for another Long Term Capital, but it won't be the way Long Term Capital happened," Jane Buchan, chief executive of Pacific Alternative Asset Management Co., said at the Reuters Hedge Funds Summit on Thursday.

"One of the things the industry is really good at is looking at what happened, and making sure those mistakes won't happen again," said Buchan, whose firm invests $7.5 billion (4.1 billion pounds) in hedge fund assets for pension funds and other clients.

Long Term Capital's collapse spurred a $3.6 billion private sector rescue package coordinated by the Federal Reserve. The fund had about $129 billion in assets at the end of 1997 -- about 30 times the amount of capital it owned -- according to a 1999 government report.

Buchan said hedge funds have not borrowed as much as they did in the late 1990s, making the U.S. financial system much less vulnerable to a hedge fund meltdown spurred by overleverage.

Instead, she said, the financial markets today are much more vulnerable to a possible bursting of the mortgage market in a hot real estate locale like California. She said it's unclear which financial institutions hold the bulk of the high-risk mortgages that banks have lent to homeowners, but hedge funds probably don't have too much exposure there.

There are an estimated 7,000 hedge funds today, compared with only a handful 20 years ago. Many young business school graduates are rushing to start funds, attracted by the relative freedom -- and heftier paychecks -- than what the more tightly regulated mutual fund industry can provide.

Veteran investor Mario Gabelli, another speaker at the Reuters summit this week, said some funds likely will experience meltdown, especially because launching a hedge fund has become "the flavor of the month" in the investing world.

"You cannot take a bottle of pills and pass them around this table and make us all smart," said Gabelli, chairman of asset management firm GAMCO Investors.

Some managers "will lose money the old-fashioned way" while others may be hit by unforeseen factors, such as stocks going up when a fund manager had bet they would fall, he said.

Others, though, say they do not see much risk. In fact, during the market downturn a few years ago, traditional mutual funds proved to be more risky and cumulatively lost billions in investor assets, said hedge fund investor Mark Yusko, president and chief investment officer of Morgan Creek Capital Management.

Hedge fund advisers also are well aware of spreading bets around to various funds, instead of putting an investor's eggs all in one basket, said Kirk Strawn, director of intermediary sales at Man Investments, the North American unit of Man Group, a publicly traded hedge fund group that manages $43.5 billion.

"Even though those risks are out there, many managers and the entities that fund those managers are much more aware of the risks," he said.

FaGal

13-09-05, 10:51

Secret City - Funds that watch the other funds have found a niche of their own
business.timesonline.co.uk - By Patrick Hosking - September 10, 2005

Our correspondent looks at HFR, which makes a living out of keeping an eye on the hedge fund industry

For investors in hedge funds, picking the right ones has never seemed so important. Charlatans, incompetents and crooks flourish in this industry, as in any corner of the financial world.

Yet because information is thin and regulation non-existent, the risks can seem especially acute. Add the temptation posed by the large chunks of money involved, and the obfuscatory jargon that the industry spews out, and you have a recipe for disappointment.

Investors can be badly burnt. Last month one anxious client turned up at the New England office of one hedge fund, Bayou Management, to find nothing but a jumble of papers and a suicide note. Investigators — including the FBI and the Securities and Exchange Commission (SEC) — believe that wealthy individuals, each with more than $200,000 (£108,000) to invest, paid around $500 million (£272 million) into the fund over seven years. Most of the money is unaccounted for.

Even where there is no malpractice, hedge funds can go wrong — or “blow up”, in the parlance of this most secretive of industries.

Bailey Coates is a classic example of a once highly regarded manager deserted by its golden touch. The London fund, which at one point had $1.3 billion under management, closed down this year after losing its investors almost a quarter of their money.

Sorting the hedge fund wheat from the chaff is the job of so-called “fund of funds” managers — a breed that has mushroomed in the past five years. They assemble portfolios of hedge funds on behalf of institutional and private investors.

One of the longest- established and best-informed is HFR, which typically has money invested in about 100 individual hedge funds at any one time. “We’ve never had a blow-up or a fraud,” John Godden, its UK chief, says.

He emphasises that setbacks are comparatively rare. Even so, the SEC has taken action in 51 hedge fund fraud cases costing investors $1.1 billion since 2000. Every month dozens of hedge funds close, unable to produce decent returns for their investors. About 1,250 funds have closed since 2000, according to HFR, and the mortality rate is picking up.

The Chicago-based HFR began in 1993, gathering performance information on hedge funds and later using that rich data to expand into funds management.

Simply keeping tabs on the mushrooming number of small secretive hedge funds is a big job. When Joseph Nicholas, a Chicago lawyer, founded the business, there were only 400 hedge funds — today there are between 8,000 and 10,000, depending on definitions.

Hedge funds are a broad church, encompassing just about any investment vehicle that does not invest “long only” in equities or bonds.

Godden, who runs HFR in London, is a cheerleader for the benefits of fund of funds investments, which he markets to the big institutional investors. Fund of funds enable institutions to get some exposure to hedge funds without the huge expenditure necessary to build an in-house team.

A diversified portfolio of funds pursuing different strategies can produce “not just low correlation with traditional asset classes like shares and bonds, but anti-correlation”. This can cushion pension funds from shocks such as the runaway oil price, for example.

With the pension funds of rail workers, British Telecom staff and BBC employees all starting to make serious hedge fund commitments in recent months, Godden seems to be pushing at an open door.

Institutional investment, rather than wealthy individuals, have fuelled the fund of funds boom in the past few years, creating giants such as Man Group and GAM, which was bought this week by the Swiss private bank Julius Baer.

HFR drills down into the information provided by hedge funds to keep strict tabs on them and to ensure that the managers are pursuing their stated strategies.

Hedge funds can stray into new fields if the returns from existing areas dry up. It is known, in hedge fund parlance, as “style drift”. Areas such as merger arbitrage and convertible arbitrage, which once provided rich pickings, have disappointed money chases a finite number of opportunities.

Godden points to Bailey Coates to illustrate his point: “They drifted. They weren’t getting the returns they expected, so they widened their skill set and started playing in other markets.” Cue a blow-up, says Godden, who designed complex investments for BNP Paribas and Barclays Capital before joining HFR in 2001.

The firm, which has grown to more than $4 billion under management, was one of the pioneers of the technique of insisting to see every trade made by funds that it invests in. “We take it to extremes,” Godden says. “We see every position that every manager takes every day. It’s the only sure-fire way of understanding what the managers are doing.”

It was also one of the frontrunners in pushing for the safeguard of having custodial control of hedge fund assets to guard against fraud. “We were castigated in the late 1990s for it,” says Godden. “Now it has become the norm.”

THE TWO-YEAR HITCH

Hedge fund managers begin to lose their edge after two years, HFR has found, after crunching the numbers in its database.

A portfolio of hedge fund managers with less than two years’ track record will outperform a portfolio of more established hedge funds by 6 per cent a year.

Newly established fund managers are hungrier, John Godden says. “They need to establish a track record to attract more money. The old guys don’t.”

The huge fees generated by successful managers mean that they never have to work again after a good year. That may cause some to underperform.

Yet investing only in new funds is hard because of the high penalties for early leavers. HFR is considering creating a new fund that would focus on newer funds. “It would be stupid not to,” Godden argues.

FaGal

13-09-05, 10:51

Bad news no bar to hedge fund growth
today.reuters.co.uk - September 12, 2005

NEW YORK - The hedge fund industry has suffered its share of black eyes in recent years, from wrenching sagas of vanished assets to hastily organized multibillion dollar bailouts amid fears of global financial meltdown.

But fund managers attending the Reuters Hedge Funds Summit last week agreed on one thing: the industry's stratospheric growth isn't set to stop, reflecting an increasingly held view from Wall Street to Main Street that hedging strategies work.

"If you take all the losses from hedge funds, they would not add up to as much as Enron," said Mark Yusko, founder of Morgan Creek Capital, a $1.2 billion (660 million pound) hedge fund. "The perception from the press is that hedge funds are more risky, but by every measure you can come up with, hedge funds are less risky than long-only funds," he said, speaking at the summit held at Reuters U.S. headquarters in New York.

Hedge funds -- which seek to mitigate market risk by balancing long and short holdings -- are typically described as risky partnerships accessible only to wealthy individuals and institutions. But Yusko points out that stock markets and mutual funds have wiped out billions of dollars of small investor capital in recent years and that real estate may soon face a similar fate.

Still, speakers cautioned that hedge funds are no panacea to market volatility and still carry risk, particularly for an industry that ballooned from an estimated 530 funds in 1990 to more than 8,000 today, managing more than $1 trillion in assets.

And while all but the smallest will be required to file as registered financial advisors with the U.S. Securities and Exchange Commission next February, that won't be enough to offset the need for more stringent and extensive investor due diligence as the industry grows, experts said.

Such due diligence could have prompted investors to avoid such apparent recent frauds at Bayou Management, which federal prosecutors accused of fleecing investors of $300 million, and KL Financial, which claimed $250 million in assets but which prosecutors described as a "Ponzi scheme."

"There is no protection against fraud in registration," said Jane Buchan, chief executive of Pacific Alternative Asset Management Co., a $7.5 billion fund that has invested some 65 hedge funds. But she said Bayou had obvious "red flags," including using an unknown audit firm that prosecutors later described as "phony."

Still, she said SEC registration carries some benefits in that fund managers are less likely to perpetuate fraud "if they know the SEC can come in and check all their pricing data" without a court order.

SEC registration, which faced some industry resistance, is aimed at adding a layer of investor protection as more public and private pension funds look to hedge funds to meet investment return goals that can't be achieved in stocks and bonds.

But as the industry offers up an ever-growing array of new strategies, investors should be even more aware of the risks and look for organizations with depth, history and checks and balances, experts said.

"Given where the industry is right now, hedge funds, like any tool, need to be understood and placed correctly," said Kirk Strawn, director of intermediate sales for Man Investments, the U.S. unit of Man Group, a $43.5 billion hedge fund manager.

Strawn, like other experts, said he expects the industry to double to $2 trillion in assets managed by 2010, but said portfolio managers must be ever vigilant in diversifying, since offering documents typically allow hedge fund managers to pursue virtually any trading strategy they want.

Such caution becomes ever more crucial as small investors look to break into an industry that now largely precludes anyone with less than $1 million in liquid assets.

And some fund managers argue that small investors shouldn't be barred from the benefits of hedging strategies, arguing that they can be less risky than stocks and bonds.

"It makes no sense to preclude access to the most talented managers just because you're not wealthy," said Morgan Creek's Yusko, who trained under one of the hedge fund world's masters, Julian Robertson. "It's akin to saying the Mayo Clinic is off limits to poor patients."

FaGal

13-09-05, 10:52

How a formula ignited a market that burned investors

Monday, September 12, 2005

By Mark Whitehouse,

Source: The Wall Street Journal

Pittsburgh, Pa.

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

All this traces back, in a sense, to a day eight years ago when a Chinese-born New York banker got to musing about love and death -- specifically, how people tend to die soon after their spouses do. Therein lies a tale of how a statistician unknown outside a small coterie of finance theorists helped change the world of investing.

The banker, David Li, came up with a computerized financial model to weigh the likelihood that a given set of corporations would default on their bond debt in quick succession. Think of it as a produce scale that not only weighs a bag of apples but estimates the chance that they'll all be rotten in a week.

The model fueled explosive growth in a market for what are known as credit derivatives: investment vehicles that are based on corporate bonds and give their owners protection against a default. This is a market that barely existed in the mid-1990s. Now it is both so gigantic -- measured in the trillions of dollars -- and so murky that it has drawn expressions of concern from several market watchers. The Federal Reserve Bank of New York has asked 14 big banks to meet with it this week about practices in the surging market.

The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day.

"David Li deserves recognition," says Darrell Duffie, a Stanford University professor who consults for banks. He "brought that innovation into the markets (and) it has facilitated dramatic growth of the credit-derivatives markets."

The problem: The scale's calibration isn't foolproof. "The most dangerous part," Mr. Li himself says of the model, "is when people believe everything coming out of it." Investors who put too much trust in it or don't understand all its subtleties may think they've eliminated their risks when they haven't.

The story of Mr. Li and the model illustrates both the promise and peril of today's increasingly sophisticated investment world. That world extends far beyond its visible tip of stocks and bonds and their reactions to earnings or economic news. In the largely invisible realm of derivatives -- investment contracts structured so their value depends on the behavior of some other thing or event -- credit derivatives play a significant and growing role. Endless trading in them makes markets more efficient and eases the flow of money into companies that can use it to grow, create jobs and perhaps spread prosperity.

But investors who use credit derivatives without fully appreciating the risks can cause much trouble for themselves and potentially also for others, by triggering a cascade of losses. The GM episode proved relatively minor, but some experts say it could have been worse. "I think this is a baby financial mania," says David Hinman, a portfolio manager at Los Angeles investment firm Ares Management LLC, referring to credit derivatives. "Like a lot of financial manias, it tends to end with some casualties."

Mr. Li, 42 years old, began his journey to this frontier of capitalist innovation three decades ago in rural China. His father, a police official, had moved the family to the countryside to escape the purges of Mao's Cultural Revolution. Most children at the young Mr. Li's school didn't go past the 10th grade, but he made it into China's university system and then on to Canada, where he collected two master's degrees and a doctorate in statistics.

In 1997 he landed on the New York trading floor of Canadian Imperial Bank of Commerce, a pioneer in the then-small market for credit derivatives. Investment banks were toying with the concept of pooling corporate bonds and selling off pieces of the pool, just as they had done with mortgages. Banks called these bond pools collateralized debt obligations.

They made bond investing less risky through diversification. Invest in one company's bonds and you could lose all. But invest in the bonds of 100 to 300 companies and one loss won't hurt so much.

The pools, however, didn't just offer diversification. They also enabled sophisticated investors to boost their potential returns by taking on a large portion of the pool's risk. Banks cut the pools into several slices, called tranches, including one that bore the bulk of the risk and several more that were progressively less risky.

Say a pool holds 100 bonds. An investor can buy the riskiest tranche. It offers by far the highest return, but also bears the first 3 percent of any losses the pool suffers from any defaults among its 100 bonds. The investor who buys this is betting there won't be any such losses, in return for a shot at double-digit returns.

Alternatively, an investor could buy a conservative slice, which wouldn't pay as high a return but also wouldn't face any losses unless many more of the pool's bonds default.

Investment banks, in order to figure out the rates of return at which to offer each slice of the pool, first had to estimate the likelihood that all the companies in it would go bust at once. Their fates might be tightly intertwined. For instance, if the companies were all in closely related industries, such as auto-parts suppliers, they might fall like dominoes after a catastrophic event. In that case, the riskiest slice of the pool wouldn't offer a return much different from the conservative slices, since anything that would sink two or three companies would probably sink many of them. Such a pool would have a "high default correlation."

But if a pool had a low default correlation -- a low chance of all its companies stumbling at once -- then the price gap between the riskiest slice and the less-risky slices would be wide.

This is where Mr. Li made his crucial contribution. In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.

"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician.

Mr. Li, who had moved over to a J.P. Morgan Chase & Co. unit (he has since joined Barclays Capital PLC), published his idea in March 2000 in the Journal of Fixed Income. The model, known by traders as the Gaussian copula, was born.

"David Li's paper was kind of a watershed in this area," says Greg Gupton, senior director of research at Moody's KMV, a subsidiary of the credit-ratings firm. "It garnered a lot of attention. People saw copulas as the new thing that might illuminate a lot of the questions people had at the time."

To figure out the likelihood of defaults in a bond pool, the model uses information about the way investors are treating each bond -- how risky they're perceiving its issuer to be. The market's assessment of the default likelihood for each company, for each of the next 10 years, is encapsulated in what's called a credit curve. Banks and traders take the credit curves of all 100 companies in a pool and plug them into the model.

The model runs the data through the copula function and spits out a default correlation for the pool -- the likelihood of all of its companies defaulting on their debt at once. The correlation would be high if all the credit curves looked the same, lower if they didn't. By knowing the pool's default correlation, banks and traders can agree with one another on how much more the riskiest slice of the bond pool ought to yield than the the most conservative slice.

"That's the beauty of it," says Lisa Watkinson, who manages structured credit products at Morgan Stanley in New York. "It's the simplicity."

It's also the risk, because the model, by making it easier to create and trade collateralized debt obligations, or CDOs, has helped bring forth a slew of new products whose behavior it can predict only somewhat, not with precision. (The model is readily available to investors from investment banks.)

The biggest of these new products is something known as a synthetic CDO. It supercharges both the returns and the risks of a regular CDO. It does so by replacing the pool's bonds with credit derivatives -- specifically, with a type called credit-default swaps.

The swaps are like insurance policies. They insure against a bond default. Owners of bonds can buy credit-default swaps on their bonds to protect themselves. If the bond defaults, whoever sold the credit-default swap is in the same position as an insurer -- he has to pay up.

The price of this protection naturally varies, costing more as the perceived likelihood of default grows.

Some people buy credit-default swaps even though they don't own any bonds. They buy just because they think the swaps may rise in value. Their value will rise if the issuer of the underlying bonds starts to look shakier.

Say somebody wants default protection on $10 million of GM bonds. That investor might pay $500,000 a year to someone else for a promise to repay the bonds' face value if GM defaults. If GM later starts to look more likely to default than before, that first investor might be able to resell that one-year protection for $600,000, pocketing a $100,000 profit.

Just as investment banks pool bonds into CDOs and sell off riskier and less-risky slices, banks pool batches of credit-default swaps into synthetic CDOs and sell slices of those. Because the synthetic CDOs don't contain any actual bonds, banks can create them without going to the trouble of purchasing bonds. And the more synthetic CDOs they create, the more money the banks can earn by selling and trading them.

Synthetic CDOs have made the world of corporate credit very sexy -- a place of high risk but of high potential return with little money tied up.

Someone who invests in a synthetic CDO's riskiest slice -- agreeing to protect the pool against its first $10 million in default losses -- might receive an immediate payment of $5 million up front, plus $500,000 a year, for taking on this risk. He would get this $5 million without investing a dime, just for his pledge to pay in case of a default, much like what an insurance company does. Some investors, to prove they can pay if there is a default, might have to put up some collateral, but even then it would be only 15 percent or so of the amount they're on the hook for, or $1.5 million in this example.

This setup makes such an investment very tempting for many hedge-fund managers. "If you're a new hedge fund starting out, selling protection on the (riskiest) tranche and getting a huge payment up front is certainly something that's going to attract your attention," says Mr. Hinman of Ares Management. It's especially tempting given that a hedge fund's manager typically gets to keep 20 percent of the fund's winnings each year.

Synthetic CDOs are booming, and largely displacing the old-fashioned kind. Whereas four years ago, synthetic CDOs insured less than the equivalent of $400 billion face amount of U.S. corporate bonds, they will cover $2 trillion by the end of this year, J.P. Morgan Chase estimates. The whole U.S. corporate-bond market is $4.9 trillion.

Some banks are deeply involved. J.P. Morgan Chase, as of March 31, had bought or sold protection on the equivalent of $1.3 trillion of bonds, including both synthetic CDOs and individual credit-default swaps. Bank of America Corp. had bought or sold about $850 billion worth and Citigroup Inc. more than $700 billion, according to the Office of the Comptroller of the Currency. Deutsche Bank AG, whose activity the comptroller doesn't track, is another big player.

Much of that money is riding on Mr. Li's idea, which he freely concedes has important flaws. For one, it merely relies on a snapshot of current credit curves, rather than taking into account the way they move. The result: Actual prices in the market often differ from what the model indicates they should be.

Investment banks try to compensate for the shortcomings of the model by cobbling copula models together with other, proprietary methods. At J.P. Morgan, "We're not stupid enough to believe (the model) is omniscient," said Andrew Threadgold, head of market risk management. "All risk metrics are flawed in some way, so the trick is to use a lot of different metrics." Bank of America and Citigroup representatives said they use various models to assess risk and are constantly working to improve them. Deutsche Bank had no comment.

As with any model, forecasts investors make by using the model are only as good as the inputs. Someone asking the model to indicate how CDO prices will act in the future, for example, must first offer a guess about what will happen to the underlying credit curves -- that is, to the market's perception of the riskiness of individual bonds over several years. Trouble awaits those who blindly trust the model's output instead of recognizing that they are making a bet based partly on what they told the model they think will happen. Mr. Li worries that "very few people understand the essence of the model."

Consider the trade that tripped up some hedge funds during May's turmoil in GM securities. It involved selling insurance on the riskiest slice of a synthetic CDO and then looking to the model for a way to hedge the danger that the default risk would increase. Using the model, investors calculated that they could offset that danger by buying a double dose of insurance on a more conservative slice.

It looked like a great deal. For selling protection on the riskiest slice -- agreeing to pay as much as $10 million to cover the pool's first default losses -- an investor would collect a $3.5 million upfront payment and an additional $500,000 yearly. Hedging the risk would cost the investor a mere $415,000 annually, the price to buy protection on a $20 million conservative piece.

But the model's hedge assumed only one possible future: one in which the prices of all the credit-default swaps in the synthetic CDO moved in sync. They didn't. On May 5, while the outlook for most bond issuers stayed about the same, two got slammed: GM and Ford Motor Co., both of which Standard & Poor's downgraded to below investment grade. That event caused a jump in the price of protection on GM and Ford bonds. Within two weeks, the premium payment on the riskiest slice of the CDO, the one most exposed to defaults, leapt to about $6.5 million upfront.

Result: An investor who had sold protection on the riskiest slice for $3.5 million had a paper loss of nearly $3 million. That's because if the investor wanted to get out of the investment, he would have to buy a like amount of insurance from somebody else for $6.5 million, or $3 million more than he was getting.

The simultaneous investment in the conservative slice proved an inadequate hedge. Because only GM and Ford saw their default risk soar, not the rest of the bond world, the pricing of the more conservative slices of the pool didn't rise nearly as much as the riskiest slice. So there wasn't much of an offsetting profit to be made there by reselling that insurance.

This wasn't really the fault of the model, which was designed mainly to help price the tranches, not to make predictions. True, the model had assumed the various credit curves would move in sync. But it also allowed for investors to adjust this assumption -- an option that some, wittingly or not, ignored.

Because numerous hedge funds had made the same credit-derivatives bet, the turmoil they faced spilled over into stock and bond markets. Many investors worried that some hedge funds might have to dump assets to cover their losses, so they sold, too. (Some hedge funds also suffered from a separate bad bet, which relied on GM's bond and stock prices moving in tandem; it went wrong when GM shares rallied suddenly as investor Kirk Kerkorian said he would bid for GM shares.)

GLG Credit Fund told its investors it lost about 14.5 percent in the month of May, much of that on synthetic CDO bets. Writing to investors, fund manager Jean-Michel Hannoun called the market reaction to the GM and Ford credit downgrades too improbable an event for the hedge fund's risk model to capture. A GLG spokesman declines to comment.

The credit-derivatives market has since bounced back. Some say this shows that the proliferation of hedge funds and of complex derivatives has made markets more resilient, by spreading risk.

Others are less sanguine. "The events of spring 2005 might not be a true reflection of how these markets would function under stress," says the annual report of the Bank for International Settlements, an organization that coordinates central banks' efforts to ensure financial stability. To Stanford's Mr. Duffie, "The question is, has the market adopted the model wholesale in a way that has overreached its appropriate use? I think it has."

Mr. Li says that "it's not the perfect model." But, he adds: "There's not a better one yet."

FaGal

02-10-05, 13:45

FaGal

02-10-05, 13:46

FaGal

02-10-05, 13:46

Two hedge fund executives plead guilty to conspiracy and fraud
www.canada.com - Jim Fitzgerald - Canadian Press - September 29, 2005

WHITE PLAINS, N.Y. (AP) - The founder and the chief financial officer of a beleaguered hedge fund each pleaded guilty to conspiracy and fraud charges Thursday for their roles in a scandal that allegedly cost investors about $450 million US.

Samuel Israel III, the founder, and Daniel Marino, the CFO of the Stamford, Conn.-based Bayou hedge fund, pleaded guilty in U.S. federal court.

Prosecutor Margery Feinzig said Bayou issued fictitious weekly, quarterly and annual reports that inflated its profits to attract new investors and lull existing investors into keeping their money in the fund.

Israel, 46, admitted sending out false financial information to current and prospective investors "which made it appear that Bayou was doing better than it really was."

Israel pleaded guilty to three counts: conspiracy to commit investment adviser fraud and mail fraud; investment adviser fraud; and mail fraud.

Marino, who is also 46, pleaded guilty to mail fraud, wire fraud, investment adviser fraud, and conspiracy to commit investment adviser fraud.

The maximum sentence for the investment fraud counts are five years each; for mail fraud and wire fraud, the maximum is 20 years. Sentencing guidelines, however, are likely to call for considerably lower sentences.

Sentencing for both executives was set for Jan. 9.

Authorities began investigating Bayou after investors received a July 27 letter from Israel announcing that Bayou would return their money and shut its doors. Investors say they have not received refunds, and the government estimates the losses at $450 million.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns. Hedge funds typically are active traders and can use techniques off limits to mutual funds.

Bayou investors filed several lawsuits alleging that Bayou executives hid massive investment losses by raising new money to pay withdrawing investors and to pay themselves fees and commissions they had not earned. One lawsuit referred to Bayou as a classic Ponzi scheme.

Ross Intelisano, a lawyer who represents some of the investors, said his clients invested between $250,000 and $1.5 million in Bayou. Some clients invested their retirement funds, he said.

One investor, the Jewish Federation of Metropolitan Chicago seeking more than $4 million.

The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets.

In the last five years, the U.S. Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion. According to the agency, there are now about 7,000 hedge funds managing $870 billion in assets, a 260 per cent jump over five years ago.

FaGal

02-10-05, 13:47

Bayou Investors Seek to Recover More Than $100 Mln
www.bloomberg.com - September 30, 2005

Investors in Bayou Group, the collapsed hedge fund company, are hoping to recover more than $100 million following guilty pleas yesterday by principals Samuel Israel III and Daniel Marino.

U.S. regulators are hunting for millions of dollars in Bayou funds that they allege Israel and Marino siphoned off to invest in private companies. They have already targeted for seizure $100 million that was intercepted in May by the Arizona attorney general; Marino's $2.9 million home in Westport, Connecticut; and other personal accounts and property.

``Investors are hoping there is going to be a large amount of money to recover that were the fruits of the Bayou fraud,'' said Ross Intelisano, a lawyer with Rich Intelisano LLP in New York, who's representing Bayou investors.

U.S. Attorney Michael Garcia said yesterday that Stamford, Connecticut-based Bayou took in $450 million since July 1996. The Securities and Exchange Commission has asked a court to appoint a receiver to track down assets that can be used to repay investors. Bayou ``grossly exagerrated'' its performance to make it appear the funds were profitable, the SEC said.

Israel and Marino, both 46, pleaded guilty yesterday in federal court in White Plains, New York, to mail fraud, investment adviser fraud and conspiracy to commit those crimes. Marino also pleaded guilty to wire fraud, and faces a maximum 50 years in prison. Israel may be sentenced to as many as 30 years.

Bayou is the biggest hedge fund to come under scrutiny for missing money since 2000, when Michael Berger was accused of hiding $400 million of losses at his Manhattan Investment Fund. The Bayou case has prompted regulators to call for stricter oversight of the industry, which caters to wealthy investors and institutions, and whose assets doubled to more than $1 trillion during the past five years.

Isle of Man

Israel, Bayou's founder and principal trader, and Marino, its chief financial officer, began investing in private companies in Europe and the U.S. in 2003 through partnerships including IM Partners and IMG LLC, a change they didn't disclose to investors, according to court documents filed by Garcia and the SEC. Investigators don't know how much of that money may be recovered.

One of Israel and Marino's early private investments was a startup called Kycos Ltd. IM Partners invested more than $10 million in the company, which opened in October 2003, said John Bourbon, a former financial regulator in the Isle of Man and the Cayman Islands who was Kycos's chief executive officer. The company marketed services to help offshore financial institutions meet anti-money laundering and anti-terrorist regulations.

Financing Movies

Kycos eventually opened offices in the Isle of Man and the Cayman Islands, employing more than 30 people. IM Partners took over management of Kycos in December and it closed in July, said Chris Corlett, CEO of the Isle of Man's Ministry of Industry and Trade.

IM Partners also was involved in financing movies. The partnership agreed to provide $2.7 million in funding for a film called ``Yellow,'' according to documents filed in Nevada. It's not clear if the financing deal was consummated.

In 2004, Israel stopped trading for the hedge funds, the SEC said. He began ``searching for high-payout, short-term investments and made the assets of the funds vulnerable to theft and fraudulent investment scams,'' the agency said. He wired $150 million of Bayou funds in and out of a series of bank accounts. Arizona officials suspected the transfers were part of an investment scam and the state froze $100 million in account.

Arizona officials allege a former Bayou executive entered into a complex and ``fanciful'' investment arrangement with Israel to use the $100 million, along with debt, to buy ``bank instruments'' on which Israel would earn $7.1 billion over 10 years.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net.

Firm to keep going after Bayou blowup
today.reuters.com - September 30, 2005 - By Svea Herbst-Bayliss

BOSTON (Reuters) - A prominent consulting firm that sent clients into the collapsed Bayou hedge fund said it was blinded by the managers' bold lies, but pledged to stay in business after reviewing how it evaluates funds for clients.

"We have to do an objective assessment of what went on here," said Charles Gradante, who runs the Hennessee Group with his wife and business partner, Lee Hennessee, about how the firm fell for a multiyear fraud that was only interrupted this summer when clients noticed $450 million were missing.

To help overhaul the process, Hennessee hired law firm Kirkpatrick & Lockhart Nicholson Graham LLP to review how the New York-based consultants select hedge funds for clients like DePauw University, Gradante told Reuters on Friday.

"This was not sloppy work by us," Gradante said, in his first interview since the hedge fund managers turned themselves in this week, after hiding from authorities for weeks.

"We used the same kind of due diligence here that kept us from investing in Beacon Hill, the KL Group and other hedge fund frauds," he said, adding that "we are not a bunch of idiots here.

"We had a perfect track record that was stopped by Bayou and we are humbled by that."

Gradante also said the firm has not been sued by anyone and that its clients were supportive.

Lawyers said that hiring a law firm to review the process might offer added insurance in the case of future lawsuits because the information would be privileged.

NO TROUBLE ... UNTIL NOW

For 18 years, Gradante and Hennessee said they avoided all of the industry's collapses because they had long histories on Wall Street and relied on a broad network of independent contacts, including some of the industry's elder statesmen like Julian Robertson and George Soros, to steer clear of danger.

But now they are squarely in the middle of the fast-growing $1 trillion hedge fund industry's latest blowup, having been closely linked to Bayou founders Samuel Israel III and Daniel Marino, who pleaded guilty on Thursday to investment adviser fraud, mail fraud and conspiracy.

Other investors, including Seattle, Washington-based fund of funds firm Silver Creek, also put money into Bayou before it became clear that the founders told their clients they were making money while in fact they were losing millions of dollars.

For weeks, speculation mounted that the Hennessee Group may not survive this debacle because it missed red flags that appear to be glaring oversights in hindsight.

Bayou traded through Bayou Securities, a broker-dealer that was regulated by the NASD, and it did not pick a top-flight auditing firm. The fund created a bogus accounting firm.

Gradante said he talked to the fund about changing auditors and was told that was planned. Many new hedge funds cannot afford to hire the best accounting firms immediately and there was no reason to question the audited financial statements, Gradante explained.

"We thought we were dealing with good and honest people," Gradante said, recalling that his contacts had checked the pair out and that Samuel Israel, who comes from a prominent family in Louisiana, had a reputation as a "pretty good trader."

Hennessee also had no reason to suspect the returns were bogus because the pair was careful not to put down anything to attract too much attention.

"Returns were in line. Nothing stood out," Gradante said.

As Gradante and Hennessee dash from meeting to meeting to assure their clients nothing is amiss with other investments, the firm said it has not been sued by anyone.

"Our clients are behind us and so are the managers," Gradante said, describing e-mails telling the husband-and-wife team to "hang in there."

Still talk is circulating on Wall Street the firm won't be able to retain clients or sign up new ones as outsiders try to determine whether Hennessee made an honest mistake or overlooked glaring errors.

"Our competitors want to destroy us," Gradante said. "I understand it is Wall Street and it is a mean city and everyone is puking on us. But we are taking it."

FaGal

02-10-05, 13:49

City firm faces £100m rogue trader action
www.guardian.co.uk - Nils Pratley - October 1, 2005 - The Guardian

Man Group challenges US court papers over hidden offshore losses

Man Group, the hedge fund manager regarded as the heart of London's new financial establishment, has been accused of trying to conceal a "rogue trader" style scandal involving one of its senior employees.

Documents filed in a Pennsylvania court this week accuse Man, the company that sponsors the Booker literary prize, of allowing losses of $175m (£100m) to be hidden from investors in a third-party hedge fund. The mechanism is claimed to be a secret and unauthorised account in the Cayman Islands known as the "50 account".

The allegations are made by the receiver to the collapsed fund. Man Financial, a Man subsidiary, acted as broker to the fund and the receiver's claims are, in effect, a direct challenge to the London group's reputation for financial probity.

Man is led by some of the City's wealthiest individuals, who have amassed multi-million fortunes as they have built the business into a FTSE 100 company. The chief executive, Stanley Fink, has shares worth £70m and last year was paid £3.8m. In a statement, Man said it was cooperating fully with the receiver and regulatory bodies, but would not comment on the receiver's claims "other than to say that there are a number of areas where we do not agree with his interpretation of information obtained during his investigation".

The allegations relate to the collapse of Philadelphia Alternative Asset Management Company, a hedge fund set up by Paul Eustace, a former star performer in the world of hedge funds. The fund last year raised about $300m from international investors and collapsed in June this year. Man Financial is accused by the receiver of helping Mr Eustace disguise his true investment performance by supposedly using a secret account to hide losses. Thomas Gilmartin, a senior vice-president at Man Financial in New York, is named in the documents as Mr Eustace's chief point of contact.

Only the statistics for the "10 account", it is alleged, were presented to investors and Swiss bank UBS, which also acted as broker, as official performance figures.

It is said a separate, unauthorised "50 account" was being used "as an artifice to hide losing transactions and thereby mask the true financial results of the investments."

The receiver alleges "suspicious trades between accounts, the unusual transfers between accounts and the back-dating of transactions that occurred at Man Financial". A motion to find Man Financial in contempt of a court order in the Eastern District of Pennsylvania states: "As of 23 June 2005, Man Financial reported a deficit of $175m in the 50 Account in the name of the Offshore Fund.

Despite the staggering losses incurred in the '50 account' and the extreme deficit balance in that account, the documents produced to date suggest that Man Financial only provided the information relating to the '10 account' to UBS and to the investors."

The receiver to the collapsed fund, Clark Hodgson, further alleges that Man is refusing to cooperate with his inquiries.

Man said it was "surprised and disappointed by the receiver's actions" and added: "We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has - an offer that has to date been ignored."

Man Group faces rap over £100m fund crash
www.timesonline.co.uk - Louise Armitstead - October 2, 2005

Man Group, the world’s biggest listed fund manager, will this week scramble to defend itself against accusations that it tried to cover up its involvement in the £100m collapse of an American hedge fund.

Documents filed in a Pennsylvania court last week show that the receiver of Philadelphia Alternative Asset Management is claiming that Man’s broking arm tried to hide crucial evidence about its relationship with the fund.

Philadelphia, a hedge fund set up last year by star manager Paul Eustace, was shut down in June and had its assets seized by the Commodity Futures Trading Commission amid allegations of fraud.

Man Financial, the group’s broking arm, is alleged to have set up secret and unauthorised accounts in the Cayman Islands that allowed the fund to hide its losses from investors.

Thomas Gilmartin, a senior vice-president at Man Financial in New York, is named as one of Eustace’s main contacts.

The receiver alleged “suspicious trades between accounts, the unusual transfers between accounts and the back-dating of transactions that occurred at Man Financial”.

A motion has been filed to find Man in contempt of court.

Man Financial, which said it had been co-operating fully with the investigation, said it was “surprised and disappointed” by the receiver’s actions and that “there were a number of areas where we do not agree with his claims”.

Meanwhile, in its pre-close statement issued on Friday, Man said private clients in its investment division had redeemed assets of $900m (£510m) in the second quarter.

FaGal

08-10-05, 08:46

SEC seeks freeze of Bayou assets and appointment of receiver
www.hedgeweek.com - October 7, 2005

The Securities and Exchange Commission has filed a civil injunctive action against Samuel Israel III and Daniel E.Marino, managers of the Bayou Funds.

The SEC's complaint alleges that, between 1996 and the present, Samuel Israel III of New York and Daniel E. Marino of Connecticut defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use.

The SEC is seeking permanent injunctions for violations of the anti-fraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Stamford, Connecticut-based Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management.

Additionally, the SEC has requested that the court freeze the defendants' assets and appoint a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants have consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval.

On 29 September 29, the United States Attorney for the Southern District of New York announced that it had filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct.

Linda Chatman Thomsen, Director of the Division of Enforcement, said: "The action filed by the SEC today, together with the parallel criminal proceedings instituted by the United States Attorney and the action brought by the CFTC, demonstrate that hedge fund managers who defraud their investors can expect a comprehensive and vigorous enforcement response."

Antonia Chion, an Associate Director of Enforcement, added: "As our action demonstrates, we not only seek to hold the defendants accountable, but we will work to recover and return assets to harmed investors."

The SEC alleges in its complaint that from 1996 through 2005, investors deposited over USD 450 million into the Bayou Funds and a predecessor fund. During that period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds' performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit.

The SEC's complaint further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds' investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. Among other things, the complaint alleges that:

• Israel, Marino, and Bayou Management overstated the Funds' 2003 performance by claiming a USD 43 million profit in the four hedge funds, while trading records show that the Funds actually lost USD 49 million;

• In 1999, Marino created a sham accounting firm, "Richmond-Fairfield Associates," that he used to fabricate annual "independent" audits of the Funds and attest to the fake results that he and Israel had assigned to the Funds;

• Israel and Marino stole investor funds by annually withdrawing from the Funds "incentive fees" that they were not entitled to receive because the Funds never returned a year-end profit;

• By mid-2004, Israel and Marino had largely suspended trading securities on behalf of the Funds and transferred all remaining Fund assets, consisting of approximately USD 150 million, to Israel and other non-Bayou-related entities, for investment in fraudulent prime bank note trading programs and venture capital investments in non-public startup companies; and

• Despite having abandoned their hedge fund strategy in 2004, Bayou Management continued to send periodic statements and financial statements to investors describing purportedly profitable hedge fund trading activities through mid-2005.

In addition to injunctions against all of the defendants, the SEC also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management. The SEC's investigation continues.

FaGal

08-10-05, 08:48

A Modest Proposal to Prevent Hedge Fund Fraud
www.nytimes.com - By JENNY ANDERSON - October 7, 2005

The collapse of the Bayou Group, the $450 million hedge fund in Connecticut, has prompted a predictable round of calls for increased regulation of hedge funds.

Many in the industry understandably cringed at the notion of ham-handed regulation being quickly adopted in response.

So here's an alternative proposal: The Securities and Exchange Commission could require hedge funds to disclose two additional pieces of information that could make all the difference.

Under current regulations, the commission, starting in February, will require hedge fund advisers, the legal entities that own and manage the hedge funds, to register by submitting a document called Form ADV (as in "adviser"). That form will indicate the adviser's address, the hedge fund manager's professional history and any disciplinary history. Advisers will be subject to random S.E.C. audits.

The commission should ask for two other pieces of information: the name of the accountant responsible for auditing the fund and the name of the broker-dealer through which the hedge fund trades - including whether that broker-dealer is affiliated with the hedge fund. Such a requirement would be a surefire way for the hedge fund business to protect itself from politicians who may be inclined to impose greater regulation on hedge funds.

These issues were critical red flags in the fraud at Bayou. Its auditor, Richmond-Fairfield Associates, was a fake accounting firm created to produce false audits of Bayou. Bayou Securities was the broker-dealer through which trades were made to create real commissions for Bayou's principals, who used them as compensation on top of 20 percent incentive fee they made on their fraudulent returns.

A call for additional information may, however, run into resistance. As innocuous as the current requirement seems, many in the hedge fund business have dismissed registration as being costly and a potential threat to innovation.

Since the advisers will be required to maintain documents and e-mail - which could be used in an audit - there is some justification for complaints about additional costs. But one would be hard-pressed to come up with a reasonable argument that having a chief compliance officer would thwart hedge fund traders from picking winning stocks or making big bets in credit derivatives.

When William H. Donaldson was chairman of the S.E.C., he argued that registration of hedge funds was needed to get a handle on what has become the fastest-growing sector in financial services. A number of reasonable minds in hedge funds - many of whom have already taken the step and registered - agreed with Mr. Donaldson. His successor, Christopher Cox, has indicated that he has no plans to challenge the requirement for hedge funds.

But from a regulatory standpoint, the registration requirement is a potential quagmire.

The commission is not adequately staffed or technologically equipped to effectively regulate the markets today. Adding 5,000 hedge funds to its to-do list is a dangerous undertaking. While it is desirable to have a watchdog, there is no way the staff of the S.E.C. can do it well - which sets them up for attacks from state regulators, who tend to uncover fraud and then wonder, loudly and publicly, what picnic the S.E.C. was enjoying while investors were swindled. Does the name of Eliot Spitzer, the New York attorney general, spring to mind?

If the S.E.C. has any hope of stopping securities fraud it needs more than a phone directory of hedge funds.

Regulators need to know where the money goes (the broker-dealer) and who is checking on it (the accountant).

One of the more compelling arguments against registration, made by one of the S.E.C.'s commissioners, Paul S. Atkins, was that the commission did not have the resources to police the mutual fund industry - one chock-full of small investors - so taking on the hedge fund industry was an exercise in futility. Perhaps if the registration process required useful information, the S.E.C. could at least try to be an effective deterrent against fraud.

As it stands, it is simply caught rubber-stamping an industry full of talented managers as well as some renegade fraudsters.

Imagine if Bayou had been registered: elected officials would be calling not just for more regulation, but for a functioning S.E.C. as well.

FaGal

08-10-05, 08:48

http://masterfinance.splinder.com

analisi della normativa interna

FaGal

08-10-05, 08:50

Buttonwood

Time for a trim
Oct 4th 2005
From The Economist Global Agenda

Hedge funds are headed for a lot more transparency, and not before time

FORGET the leadership squabbles at the Labour and Conservative party conferences. The best story in the British press this weekend was of a deal-happy hedge-fund manager who spent £36,000 ($64,000) in a London bar in a single evening, including a £3,000 tip for the bemused waitress. It’s not the amount spent that leaves people amazed, eye-catching though it was. It’s that he was apparently so nice.

What is it about hedge funds? If lawyers hadn’t already taken all the worst jokes, hedge-fund folk would certainly be contenders. The high-paid managers of these lightly regulated investment pools are blamed for everything from the high price of oil to the crumbling of corporate governance. Yet they are looking anything but omnipotent these days, as rumbling scandals combine with so-so performance to turn many traditional investors off hedge funds before newer institutional fans are firmly committed to them.

Advertisement
The long-running financial soap opera that is Bayou Funds finally hit peak ratings last week, as the group's founder and finance director pleaded guilty in a New York court to persistently cooking the books. Investors are still whistling for most of the $300m-plus they put in. Though the Bayou case is the biggest hedge-fund investigation to come before the Securities and Exchange Commission (SEC) in five years, it was never more than a years-long fraud perpetrated by a well-connected Louisiana wide-boy. It matters to the world at large mainly because various experts who should have known better (J.P. Morgan, for example, whose Spinnaker Fund was invested in Bayou) apparently did not.

Potentially more worrying, though no wrongdoing has been proven, are allegations about two other fund groups, Man Group and Gamco Investors, for these sit at the heart of the fund-management establishment. Man Group is tussling with the receiver of a collapsed hedge-fund firm, Philadelphia Alternative Asset Management Company (PAAM). The receiver alleges in a contempt motion filed last week that Man was not helpful in shedding light on the activities of a senior employee at its futures brokerage, Man Financial, who might have helped PAAM to hide some $175m in losses. Man says it has been co-operating with inquiries.

As for Gamco Investors, the man who masterminds the publicly quoted fund-management group, Mario Gabelli, is being sued by two of his original backers who own stakes in the private company that controls Gamco. Unhappy because they have not ended up with marketable shares in a public company whose share price has trebled since 1999, they allege that Mr Gabelli and the private firm’s other directors are “guilty of looting the assets of the company, breaching their fiduciary duties to its shareholders and oppressing its minority shareholders”. Mr Gabelli says that they have treated everyone fairly. As far as the suit is concerned, he says: “The dogs bark and the caravan moves on.”

But these brouhahas in the heart of hedgeland are the least of its problems. In a universe of perhaps 8,000 funds, it is not unusual to find a handful of bad apples and another, bigger bunch whose procedures are not all they should be. More worryingly and more generally, growth is slowing sharply. In Europe, hedge-fund assets increased by only 9% in the six months to June 2005 (to $279 billion), according to EuroHedge, a trade publication, after growing by about 50% in all of 2004. In America, according to a related publication, Absolute Return, the hedge funds with more than $1 billion in assets under management also grew by only 9% in the first half of this year.

That is neither surprising nor necessarily a bad thing. Hedge-fund assets have doubled in little more than four years and a lot of over-eager new players have come into the market. But lately performance has been poor. Hedge-fund returns, net of fees, were 4.2% in the year to August, according to CSFB/Tremont’s measure—less than brilliant compared not only with what they were in the 1990s but with total returns on European shares (though returns on the stagnant S&P 500 were even worse).

What seems to be happening in Europe, anyway, is that the rich private clients who for years have been practically coterminous with hedge funds are losing enthusiasm for the genre. Man, for one, reports that its private clients redeemed more than they invested in the three months to September. GAM, which runs funds of hedge funds, saw net redemptions in the quarter to June.

Meanwhile, the investing institutions that were expected to come rushing in for higher yields have yet to do so in bulk. New research from Greenwich Associates, a research firm, shows that, despite all the talk, pension funds’ allocation to hedge funds has stayed flat. The proportion of European institutions that say they are planning to start using hedge funds has dropped from 19% in 2004 to 8% this year.

More may be at work here than undistinguished returns. After all, protection of capital in bad markets and good—not stratospheric returns—is a large part of what hedge funds are supposed to be about. They are prized for adding stability to portfolios, for being uncorrelated with mainstream markets and for minimising risk through diversification. There are increasing doubts these days as to how much most hedge funds are really doing that—about whether, in short, hedge funds are hedging.

Several relatively recent studies* reach disturbing conclusions. The first is that hedge funds overall—even those that define themselves as “market-neutral”—are more correlated with equity markets than used to be thought, and that different strategies are also more correlated with each other than they look. So much for diversification. Another conclusion is that because many hedge-fund investments are relatively illiquid, the way in which they are periodically priced tends to “smooth” returns and hence make funds appear less risky than they are. So much for fancy risk-reward measures such as Sharpe ratios. A final conclusion is that hedge funds are now big enough and intertwined enough with banks to be a new source of risk to the financial system as a whole.

The New York Federal Reserve would undoubtedly agree, though perhaps for different reasons. In the Fed’s attempt to eliminate a huge back-office backlog in the fast-growing credit-derivatives market, hedge funds have emerged as even badder boys than the investment banks that deal with them. While trades are unconfirmed, or if one party (usually a hedge fund) unilaterally assigns a trade to a third party, it is unclear what risks lie where. The banks are expected to present a recovery plan to the Fed this week requiring hedge-fund customers to adopt standardised trading procedures and to settle trades electronically through the Depository Trust and Clearing Corporation.

As investors and supervisors are beginning to ask tougher questions, a little more transparency is about to hit this famously murky corner of the financial world. Just as mutual funds, the investment growth story of the 1980s, were eventually forced to divulge more information, hedge funds will be too. The old argument for exempting them from disclosure—that they dealt only with knowledgeable investors—holds less and less true, as more middle-income investors buy their way in through funds of funds and the like, and ordinary workers’ pension funds commit their future wellbeing to hedge funds. Nor is what most hedge-fund managers do beyond the wit of man to comprehend: equity long/short strategies are the biggest investment style these days.

Most hedge-fund investment advisers will be required to register with the SEC by next February, though they will not be reporting anything like the information that mutual funds provide. The most useful sort of disclosure will emerge from the market itself: Morningstar and Lipper are among those interested in rating individual hedge funds, though the difficulties are considerable. One wonders how they will rate the fund that Richard Breeden, former head of the SEC itself, is rumoured to be starting.

http://www.economist.com/finance/displayStory.cfm?story_id=4482438

FaGal

10-10-05, 19:06

Hedge funds likely to pose a risk to retail investors

Our Bureaus / Mumbai October 7, 2005

Hedge funds do not pose a systemic risk to the world’s financial system, but there is a need to look into the way in which they are sold to smaller investors, according to Malcolm D Knight, general manager, the Bank for International Settlements (BIS).

Asked by reporters at a banking conference in Mumbai, organised by Federation of Indian Chambers of Commerce and Industry (Ficci), whether there is a need to regulate global hedge funds, Knight said, the hedge funds are regulated the least.

“All hedge funds have trillion dollar assets and have a heterogeneous group of investors. They also have different strategies. So, I do not think they pose a systemic risk to the world’s financial system,” he said.

Knight’s comment on hedge funds assumes special significance in the context of the rising influence of hedge funds on the Indian bourses.

The recent market rally has been aided by the liquidity induced in the system by foreign hedge funds that have registered as foreign institutional investors in the recent past.

There have been apprehensions about hedge funds being market drivers, as they are known for buying big and selling big, with no strings attached.

Hedge funds have been alleged to be responsible for destabilising the financial systems, as experienced in the East Asian crisis. Some of the countries have, in fact, changed their regulatory norms on these funds.

A black mark was first impressed on the activities of hedge funds when the Emerging Markets Committee pointed to the role played by some of the hedge funds as one of the causes for the East Asian crisis. Some market analysts have expressed fears that if these funds decide to shed the bulk they have bought, the market would crash badly.

There is a big risk, as there can be many triggers that can induce a change in these funds’ approach to the market - anything from a geopolitical issue to a mere global trend.

The Basel-based BIS, a forum for the world’s central bankers, had called for more transparency in hedge funds earlier this year, saying that banks’ exposure to them was rising.

Authorities around the world are becoming increasingly nervous about this lack of transparency in hedge funds, which use a wider range of financial instruments than traditional funds and also carry more risks.

“At the same time, these (hedge funds) are vehicles that are appropriate for investment by the sophisticated investor, and it is important that some concern is reflected... to look into the marketing to smaller asset holders,” Knight said.

Until recently, hedge funds had been available only to very wealthy investors but are now able to attract smaller investors after lowering the minimum investment requirements.

Global hedge funds risk to be investigated
www.business-standard.com - Barney Jopson & Peter Thal Larsen / Frankfurt/ London - October 7, 2005

International securities regulators have launched an investigation into the growing influence of hedge funds in an attempt to assess the risks investors could face from their exposure to the fast-growing asset class.

The study, announced yesterday by the International Organisation of Securities Commissions (Iosco), a global body for financial market regulators, will take a different direction from other work by regulators, which have examined the systemic and market risks posed by hedge funds’ blistering growth.

Michel Prada, chairman of Iosco’s technical committee and head of the Autorite des Marches Financiers, France’s stock market watchdog, said: “Hedge funds are developing and being commercialised to individual investors. Therefore, securities regulators have to step in and make sure they have sound systems, rules and practices, in terms of their administration, risk management and fund valuations.”

Iosco’s investigation goes further than existing moves by national regulators, which have generally argued that they should not attempt to protect investors in hedge funds and that any moves towards heavy-handed regulation would merely drive the funds to offshore centres, where they would face even less scrutiny.

In the past year, the US Securities and Exchange Commission has launched a drive to register hedge funds. The UK’s Financial Services Authority has published a discussion paper that highlighted the role hedge funds play in the financial system and suggested closer monitoring of the largest London-based funds.

Following an investor revolt at Deutsche Borse, Gerhard Schroder, the German Chancellor, also expressed concern about the rise of hedge funds, though he subsequently backed away from any action. There are an estimated 8,000 hedge funds, controlling assets of about $1,000 billion.

Some investment management groups have begun to offer watered-down versions of hedge fund products to retail investors as the funds grow in number and status, though most funds are only accessible to institutional investors and the very wealthy.

Cantor

12-10-05, 17:57

up, per essere aggiornato di eventuali interventi di Fabio Galletti

Bel 3d anche se ostico da masticare (per me ovviamente)

Saluti
Cantor

FaGal

14-10-05, 10:31

son solo casi di fallimenti/frodi con hedge in Usa. A breve metterò su www.masterfinance.splinder.com dell'utente tegio un intervento in italiano sulla normativa Usa degli hedge funds

FaGal

16-10-05, 11:35

news su Man group

Man Group says has supported U.S. hedge fund probe
today.reuters.co.uk - October 3, 2005 - By Pratima Desai

LONDON - Man Group said on Monday it had cooperated with the receiver of a collapsed U.S. hedge fund firm and that it was surprised by his motion for the London-listed financial company to be held in contempt of court.

Man's brokerage unit, Man Financial, was broker to one of the funds of Philadelphia Alternative Asset Management. The U.S. Commodities Futures Trading Commission in June filed a lawsuit alleging fraud against Paul Eustace, founder of the U.S. firm.

Clark Hodgson, appointed to recover money for investors in the firm's funds, filed a motion last week alleging that the British company had hindered the investigation by refusing to turn over relevant documents.

Man said it had provided more than 4,200 pages of documentation to the receiver.

"Man Financial is surprised and disappointed by the actions of the receiver to Philadelphia Alternative Asset Management (PAAM.L: Quote, Profile, Research)," said the world's largest listed hedge fund firm with $44 billion under management.

"We ... have offered to meet him (the receiver) to discuss any further requirements that he has, an offer that has to date been ignored."

Man said Hodgson's motion against it was at odds with his previous public statements to the effect that he had received a "high degree of cooperation from most parties involved, and no one has yet refused to provide documents requested".

According to UK newpapers reports, however, Thomas Gilmartin, a senior vice-president at Man Financial, was a shareholder in the hedge fund firm, and the company has sent him on leave while it investigates claims he conspired to hide losses.

Traders said they marked Man's shares down because of potential unexpected costs in the case, but analysts said it was too soon to know.

"I don't think there is any justification for marking down Man's share price at the moment," said Martin Cross, an analyst at Teather & Greenwood.

Analysts say there is a tendency in North America to look around for those seen as having deep pockets.

UK financial group suspends broker linked to Cayman losses
caymannetnews.com - October 6, 2005

LONDON, England – Man Group has suspended Thomas Gilmartin, one of its senior brokers named in court papers in the US as a main point of contact for Paul Eustace, manager of a Cayman Islands hedge fund that collapsed in June amid allegations of fraud.

The suspension represents an intensification of an affair in which a US court-appointed receiver claims Man Financial, the London group’s broking division, helped to hide “staggering” losses of $175m (£100m) at a fund run by Mr Eustace’s Philadelphia Alternative Asset Management (PAAM).

The receiver to PAAM, Clark Hodgson, claimed last week that Man Financial helped to establish and operate a secret and unauthorised account for PAAM known as the “50 account”. Mr Hodgson also alleges that Man Financial is hindering his inquiries by refusing to disclose relevant documents. He issued a motion last week to hold the firm in contempt of court. Man says it has cooperated fully with the inquiry and continues to do so.

Mr Gilmartin is a senior vice-president of Man Financial in New York and is in his early 40s. It is understood he was put on “administrative leave” last week.

Man is also understood to have ordered a full internal inquiry by its compliance department into the allegations, which are, in effect, a challenge to its reputation for financial probity.

SEC Probes Man Group Over Hedge Fund Collapse, People Say
www.bloomberg.com - October 7, 2005

The U.S. Securities and Exchange Commission is investigating whether Man Group Plc, the world's largest publicly traded hedge fund company, helped another hedge fund hide $175 million in losses, said people with direct knowledge of the probe.

The SEC is conducting an ``informal inquiry of Philadelphia Alternative Asset Management Ltd., a company to which'' Man Financial Inc. provided brokerage services, Man Group said today in an e-mailed statement. ``We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review.''

Philadelphia Alternative and its founder, Paul Eustace, were sued in June by the Commodities Futures Trading Commission, which accused them of fraud. A court-appointed receiver in the case said in a Sept. 27 legal filing that Man Financial, the U.S. brokerage unit of London-based Man Group, set up an unauthorized, secret account that Eustace used to conceal losses equal to two- thirds of the $230 million that he had raised.

``This is very serious for Man because the SEC has complete power over broker-dealers here in the U.S., and can impose remedies that go right up to pulling the plug on their license,'' said Thomas Newkirk, a former SEC enforcement official now in private practice at Jenner & Block in Washington. ``My former colleagues are going to want to know whether this was a one-off case of the firm helping a hedge fund mislead investors or whether it may be something that's more systemic.''

Man Group, led by Chief Executive Officer Stanley Fink, manages about $44 billion of assets. Its brokerage unit, based in Chicago, processes futures, options and other derivates trades for institutional investors including hedge funds.

Heightened Scrutiny

The SEC has ratcheted up its scrutiny of hedge funds, lightly regulated private investment partnerships that cater to wealthy individual and institutions, such as pension funds. Many hedge funds bet on falling as well as rising markets, and borrow money to boost returns.

Worldwide, hedge-fund assets climbed to $1.03 trillion in the second quarter from $490 billion in 2000, according to Chicago-based Hedge Fund Research Inc.

John Nester, an SEC spokesman in Washington, declined to comment

SEC opens inquiry into Man's $175m hedge fund losses
www.guardian.co.uk - Nils Pratley - October 10, 2005 - The Guardian

The United States' securities and exchange commission, the world's most powerful financial regulator, has launched its own investigation into allegations that Man Group helped to hide losses of $175m (£100m) from investors in a Cayman Islands hedge fund.

The SEC is thought to have begun its inquiry within the past week into the collapse of Philadelphia Alternative Asset Management (PAAM), a hedge fund for which Man Financial, Man's brokerage business, transacted trades. It comes as investors have started behind-the-scenes discussions to determine whether to launch multi-million pound claims for compensation against Man.

The SEC's involvement follows serious charges made by the receiver to PAAM a fortnight ago. Clark Hodgson alleged in a motion to hold Man Financial in contempt of court that the firm opened and operated an unauthorised bank account for Paul Eustace, manager of the PAAM funds, through which losing bets on the commodity markets were dumped.
Man Financial, Mr Hodgson claims, kept this account secret from investors and the fund's administrator, the Swiss bank UBS, even when losses reached a "staggering"$175m. In a statement, Man said: "We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review."

The Financial Services Authority, the UK's chief financial watchdog, has declined to comment on the allegations against Man, a FTSE 100 company worth £5bn and with $44bn under management.

Man last week suspended Thomas Gilmartin, a senior broker in its New York office who was named by Mr Hodgson as a "main contact" for Mr Eustace. It also ordered its compliance department to conduct an internal investigation and maintains: "There are a number of areas where we do not agree with the receiver's interpretation of information obtained during his investigation."

Mr Gilmartin was an investor in PAAM, the receiver alleges in his court motion. Such an arrangement between prime broker and client - if proved - would be unusual, according to hedge fund experts.

Man is also accused by Mr Hodgson in his motion of refusing to disclose documents relevant to his inquiry and his efforts to recover money for investors, namely "correspondence, notes, email, memos, computer files, audio tape or other records from the files of Thomas Gilmartin".

Man says it has cooperated fully with Mr Hodgson's investigation. "We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has - an offer that has to date been ignored."

Man has not been charged with any offence. Legal action by the commodities futures trading commission, the US regulatory body that launched its investigation in June, has been confined to charges of fraud against Mr Eustace and PAAM.

That has not stopped PAAM investors discussing the possibility of litigation against Man. Stanley Pantowich, a founder of $4bn New York money manager TAG Associates, which invested with Mr Eustace, told the Bloomberg news service last week: "Either they [Man Financial] were complicit or stupid, and in either case they should owe the investors."

Such openness is unusual in the world of hedge funds and reflects the furore the affair has caused within the industry. Reasons include the size of the apparent trading losses and the speed with which they seem to have been incurred - between February and May this year.

Backstory

Thomas Gilmartin, the Man Financial broker at the heart of the inquiries, may have known Paul Eustace for about 20 years. Mr Eustace, head of the collapsed Cayman Islands fund, and Mr Gilmartin attended Wharton business school at the University of Pennsylvania in the 1980s. Mr Gilmartin gained a Bachelors of Business Administration in 1988. Mr Eustace received a BSc in economics the previous year.

OSC probes failed fund PAAM
www.theglobeandmail.com - By PAUL WALDIE - October 9, 2005

The Ontario Securities Commission has launched an investigation into an Ontario hedge fund manager who faces fraud allegations in the United States.

The OSC is the latest regulator to become involved in the widening scandal surrounding the collapse of Philadelphia Alternative Asset Management Co., a hedge fund company run by Paul Eustace from his home in Oakville, Ont. The $230-million (U.S.) fund, known as PAAM, was based in Philadelphia and specialized in a complex type of commodity trading.

The U.S. Securities and Exchange Commission has also begun an informal inquiry into allegations that the U.S. brokerage arm of Man Group PLC, one of the world's largest hedge fund companies, helped PAAM hide $175-million in losses. Man Group's subsidiary, Man Financial Inc., has denied any wrongdoing and said it will co-operate fully with the SEC.

The U.S. Commodity Futures Trading Commission, or CFTC, has alleged in court documents that Mr. Eustace defrauded investors.

The CFTC alleges he did this by telling investors his commodity trading pool was increasing in value when, in fact, it had lost more than $140-million from February, 2005, to May. The CFTC alleged the fraud dates back to 2001 and that Mr. Eustace enticed clients to invest in one fund that did not exist by showing them fictitious monthly trading statements. He also allegedly co-mingled client money with his own accounts.

Mr. Eustace, 40, was not available for comment. His lawyers in the U.S. and Canada said he will defend himself against the allegations and that he is co-operating with the CFTC.

Mr. Eustace recently filed for personal bankruptcy in Ontario. In documents filed in court as part of the bankruptcy, Mr. Eustace included in his list of assets $5.3-million (Canadian) in securities, nearly $40,000 in cash and a $54,000 Porsche. His liabilities consisted of $5,000 owed to BMO MasterCard and $28.6-million owed to a group of American investors in a PAAM fund called the Option Capital Fund.

Last week, an Ontario court ordered the trustee administering the bankruptcy to turn over more than a dozen of Mr. Eustace's computers to the OSC. “We have an interest in the computers,” said OSC enforcement director Michael Watson. Mr. Watson declined further comment. Sources close to the commission confirmed the OSC has launched an investigation into the hedge fund company.

Mr. Eustace is believed to be Canadian and while most of his clients were Americans, several Canadians also sank money into PAAM.

The hedge fund company has been put into receivership in the U.S., and the receiver, Clark Hodgson, is trying to track down assets on behalf of investors.

In a recent court filing in the U.S., Mr. Hodgson alleged that another key player in the scandal is Thomas Gilmartin, a senior vice-president at Man Financial. Mr. Hodgson alleged that Mr. Gilmartin, who worked in New York, handled trades for Mr. Eustace and was a part owner of PAAM.

He also alleged Mr. Gilmartin doctored some trading records in order to boost the returns of some of PAAM's funds and that he covered up huge losses. Mr. Gilmartin was recently placed on administrative leave by Man Financial.

Mr. Hodgson has filed a contempt motion against Man Financial alleging the company has violated an earlier court order by withholding key documents.

“Despite the suspicious trades between accounts, the unusual transfers between accounts and the back-dating of transactions that occurred at Man Financial, Man Financial has produced no records justifying why these trades, transfers and back-dated transactions took place,” he alleged in a court filing. “The documents produced to date suggest that Man Financial had knowledge of the conduct described [by the receiver] and consented to and assisted in that conduct.”

In a statement, Man Financial said it was “surprised and disappointed” by the receiver's actions. “We have provided more than 4,200 pages of documentation at the request of the receiver, and have offered to meet him to discuss any further requirements that he has — an offer that has to date been ignored. The receiver's actions are at odds with public statements he has made to the effect that he has received a ‘high degree of co-operation from most parties involved and no one has yet refused to provide documents requested,'” the company said. Last week, Man Group said it has been told by the SEC the commission is conducting an informal inquiry into PAAM, “a company to which Man Financial provided clearing and execution brokerage services.”

“We have an excellent record of regulatory engagement and compliance, and will co-operate fully with the SEC in connection with this review,” Man Group said.

Man Group Recommended by Merrill; No Link to Refco
www.bloomberg.com - October 14, 2005

Man Group Plc, the world's largest hedge fund company, was added to a list of favored European stocks by Merrill Lynch & Co., which said a slide in its shares spurred by a financial crisis at U.S. futures broker Refco Inc. was unjustified.

Man Group, which is based in London and also acts as a futures broker, was added to Merrill's ``Europe 1'' list by analysts Philip Middleton and Nathan Wong in a note to clients today. They have a ``buy'' recommendation on the stock, which has fallen 6 percent this week as news emerged that Refco's chief executive officer hid unpaid debts.

``It appears as if the goings-on at Refco lie at the root of Man's recent weakness,'' the Merrill analysts wrote. ``In our view, this is a very poor reason to sell Man, as there is no linkage at all.''

Shares of Man Group today rose as much as 36 pence, or 2.4 percent, to 1,545 pence, headed for the stock's biggest percentage gain since Aug. 10. The shares were at 1,543 pence as of 12:20 p.m. in London. Merrill's price target for Man is 2,200 pence.

Man Group executives had been considering whether to spin off its brokerage unit into a separate business, encouraged by the stock market listing of Refco earlier this year.

``The board hasn't taken a decision on this,'' Man's CEO, Stanley Fink, said on Sept. 30, when the group announced its second- quarter earnings. ``We are committed to reviewing the structure of our business. We saw the incredible success of Refco.''

Refco Plunge

Refco this week has lost customers and its stock market value has plummeted 72 percent after Refco CEO and Chairman Phillip R. Bennett, who took the company public two months ago, resigned and was arrested on charges of securities fraud after an internal review found he hid $430 million in unpaid debts dating back to 1998.

Refco stock plunged to $7.90 a share yesterday, from $28.56 at the end of last week. The company yesterday blocked client withdrawals from Refco Capital Markets Ltd., a currency-trading unit. Its regulated futures brokerage, Refco LLC, is unaffected and was said by the New York Mercantile Exchange yesterday to be ``in good standing'' for its oil-trading obligations.

``Man group's brokerage business competes with Refco's brokerage business but has limited overlap with its Capital Markets business, which is focused on the area of foreign exchange and Treasury repos,'' a note from Credit Suisse First Boston analysts said today.

Separate Investigation

In a separate matter more than a week before Refco's disclosure, court documents showed Man Group's U.S. brokerage unit, Man Financial Inc., helped a now-defunct trading firm hide $175 million in losses before regulators froze the accounts because of fraud claims

A special trading account was set up by Man Financial for Paul Eustace, founder of hedge fund Philadelphia Alternative Asset Management Ltd., or PAAM, to absorb losses, according to papers filed in federal court on Sept. 27 by a court-appointed receiver, Clark Hodgson.

Neither the account nor the losses were disclosed to investors, the papers said. Hodgson is seeking a contempt of court order against Chicago-based Man Financial.

The U.S. Securities and Exchange Commission is conducting an ``informal inquiry'' into PAAM, which processed its trades through Man Financial Inc., Man Group said Oct. 7 in a statement. ``We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review.''

No Accusation

The Merrill Lynch report said Man is one of a number of brokers that dealt with PAAM and that, to date, it has not been accused of anything by a regulator.

Even so, ``the PAAM saga cannot logically be actively good for Man's share price, because the best outcome for them is that Man Financial is exonerated, in which case its value is exactly what it was before,'' the Merrill note said.

A spokesman at Man Group's outside public relations company said he wasn't immediately able to comment.

Merrill Lynch is a passive, minority shareholder in Bloomberg LP, which owns Bloomberg News.

FaGal

16-10-05, 11:37

news su Bayou Management LLC

SEC seeks freeze of Bayou assets and appointment of receiver
www.hedgeweek.com - October 7, 2005

The Securities and Exchange Commission has filed a civil injunctive action against Samuel Israel III and Daniel E.Marino, managers of the Bayou Funds.

The SEC's complaint alleges that, between 1996 and the present, Samuel Israel III of New York and Daniel E. Marino of Connecticut defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use.

The SEC is seeking permanent injunctions for violations of the anti-fraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Stamford, Connecticut-based Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management.

Additionally, the SEC has requested that the court freeze the defendants' assets and appoint a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants have consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval.

On 29 September 29, the United States Attorney for the Southern District of New York announced that it had filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct.

Linda Chatman Thomsen, Director of the Division of Enforcement, said: "The action filed by the SEC today, together with the parallel criminal proceedings instituted by the United States Attorney and the action brought by the CFTC, demonstrate that hedge fund managers who defraud their investors can expect a comprehensive and vigorous enforcement response."

Antonia Chion, an Associate Director of Enforcement, added: "As our action demonstrates, we not only seek to hold the defendants accountable, but we will work to recover and return assets to harmed investors."

The SEC alleges in its complaint that from 1996 through 2005, investors deposited over USD 450 million into the Bayou Funds and a predecessor fund. During that period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds' performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit.

The SEC's complaint further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds' investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. Among other things, the complaint alleges that:

• Israel, Marino, and Bayou Management overstated the Funds' 2003 performance by claiming a USD 43 million profit in the four hedge funds, while trading records show that the Funds actually lost USD 49 million;

• In 1999, Marino created a sham accounting firm, "Richmond-Fairfield Associates," that he used to fabricate annual "independent" audits of the Funds and attest to the fake results that he and Israel had assigned to the Funds;

• Israel and Marino stole investor funds by annually withdrawing from the Funds "incentive fees" that they were not entitled to receive because the Funds never returned a year-end profit;

• By mid-2004, Israel and Marino had largely suspended trading securities on behalf of the Funds and transferred all remaining Fund assets, consisting of approximately USD 150 million, to Israel and other non-Bayou-related entities, for investment in fraudulent prime bank note trading programs and venture capital investments in non-public startup companies; and

• Despite having abandoned their hedge fund strategy in 2004, Bayou Management continued to send periodic statements and financial statements to investors describing purportedly profitable hedge fund trading activities through mid-2005.

In addition to injunctions against all of the defendants, the SEC also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management. The SEC's investigation continues.

Guilty Of Massive Fraud
www.courant.com - October 13, 2005

Stamford-based Bayou Management offers a cautionary tale for investors in the $1.3 trillion hedge fund industry.

The recent guilty pleas by Bayou's two principals to criminal fraud charges exposed a massive swindle in which the firm collected $450 million from trusting investors and lost most of it. Chief executive Samuel Israel III, 46, and former chief financial officer Daniel Marino, 45, admitted to investment adviser fraud, mail fraud and conspiracy. Each deserves a long prison term at their sentencing on Jan. 9.

Hedge funds - many of them based in Fairfield County - are typically investment opportunities for wealthy individuals and institutions. The funds make money through rapid in-and-out trades and greater risk-taking.

But the funds operate with little regulation. The Bayou experience shows why greater state and federal oversight is needed.

Bayou Management was launched in 1997. Almost immediately it started losing money and lying to investors. Bayou even created a fictitious auditing firm to trick investors into believing it was making money, while it was losing millions. The deception worked so well that one Bayou fund took in $90 million in new investments two years ago, but lost $35 million through trading.

Mr. Israel told a judge, "I knew what I was doing was wrong and fraudulent."

Of the $450 million that investors had entrusted to Bayou, only $150 million remained by last year. Desperate to make money, Mr. Israel tried to pour money into a crazy scheme that promised to turn a $100 million investment into $7.1 billion in 10 years.

Finally, suspicious clients started demanding their money back. Mr. Israel held them off until the fund collapsed just months ago. Meanwhile, he and Mr. Marino collected millions in management fees and lived in extravagant luxury.

Investigators have a duty to determine what happened to all the money.

Arizona has seized $100 million in bank funds that may be linked to Bayou, but little is known about what happened to the rest of the money. Investors deserve a full accounting of how the fraud developed without detection.

For now, hedge fund investors would do well to start asking more questions and monitoring hedge fund returns.

Investor sues Hennessee over Bayou investment
today.reuters.com - October 14, 2005

BOSTON - A prominent hedge fund consulting group was sued by one of its clients this week for having suggested putting $3.25 million into Bayou Group, a hedge fund that collapsed last month, court papers show.

DePauw University filed a lawsuit in U.S. District Court in the Southern District of Indiana on Wednesday alleging the Hennessee Group and its principals, Lee Hennessee and Charles Gradante, failed to conduct the kind of due diligence they had promised their clients.

Relying on the consultants' recommendation, DePauw said it invested $3.25 million in Bayou in 2004.

The Hennessee Group failed to notice that Bayou's founder, Samuel Israel, and chief financial officer, Daniel Marino, had falsified performance data and fabricated auditor's reports.

The consultants also failed to identify discrepancies on Israel's resume after having told DePauw they conducted a thorough background check, the university said.

DePauw is demanding that Hennessee pay back all of the losses the university suffered plus interest of 8 percent and attorney's fees.

The Bayou collapse, which may have cost investors $450 million, is among the latest blowups in the fast growing $1 trillion hedge fund industry.

fever7

30-10-05, 22:24

molte cose interessanti;)

aston

01-11-05, 12:41

"If you have been following financial press in last few months, you will be aware of a couple of recent stories relating to fraud in hedge funds. It's easy to see why such incidents make newsworthy headlines, not only are the amounts of money involved significant but they let the public into the secretive world of hedge funds. A casual observer of the hedge fund industry would almost certainly think that such occurences were pandemic to the industry.
This would be incorrect as hedge funds are not exposed to any more fraud risk than other types of industry. Based on a creude calculation, ther are estimated to be 8.000 funds globally among which I am aware of only three episodes of fraud this year. That represents a rate of 0.00375 percent per anum (assuming there are no further problems in the remainder of this year). Even if the number has been understimated by a factor of ten, this still does not represent a fraud level greater than experienced in other industries..."

Stan Chaudhry
Thames River Capital

FaGal

08-11-05, 16:02

London firm 'was link in US banking fraud case'
www.telegraph.co.uk - By James Moore, Financial Correspondent - September 27, 2005

A City-based securities broker run by a direct descendent of the Duke of Wellington has been named as the company used as the London link in an alleged $101m banking fraud involving collapsed hedge fund Bayou.

Court papers filed by the Arizona Attorney General Office say $101m of funds in the name of Majestic Capital Management were deposited with London-based ODL Securities, run by Graham Wellesley, who holds the title Viscount Dangan, before they were sent on to US bank Wachovia from where they were seized on May 19.
In the papers, the attorney-general said US courts had "probable cause that the seized funds were in the process of being used in a fraud on various financial institutions".

The decision to seize the funds was opposed by lawyers representing Bayou, which is being sued by the US Government.

The US authorities allege that the hedge fund was involved in a "massive fraud" since 1998, barely a year after opening for business.

The State of Arizona said it had not yet confirmed that the $101m came from Bayou but is currently investigating their origin.

However, the statement said that the US Attorney for the Eastern District of New York believed that the funds were from Bayou and that the funds could soon be transferred to the US District Court.

Mr Wellesley yesterday said that ODL had been concerned about the funds as soon as it received them. He also that said the money was from Bayou.

He said: "Bayou opened an account with ODL and deposited $101m. They requested to do two different bond transactions both of which we refused to do. We reported suspicious activity to the Financial Services Authority."

Mr Wellesley also said that the company had not released the funds for transfer to Wachovia until it had received approval from the US authorities.

He added: "We blew the whistle on this. I think that this reflects well on our compliance procedures. ODL should be seen in a very good light in relation to Bayou."

Mr Wellesley said the company had sent a statement to its clients to inform them that it had raised its concerns about the Bayou funds with UK regulators.

ODL was founded in 1994 and specialises in derivatives trading and stockbroking. Mr Wellesley joined ODL, where he is executive chairman, in 2003 after leaving IFX Group, the spread betting company he founded. IFX was formerly the football pools operator Zetters.

Cameron Holmes, chief counsel for the financial remedies section of the Arizona Attorney General, said they had been alerted that the money had been placed in an account with a bank in the state by a US financial institution.

Mr Holmes would not comment on the identity of the institution.

A number of financial companies are under investigation by the Arizona District Attorney's office, but it is understood that ODL is not one of them.

Bayou, based in the state of Connecticut, is accused of attracting more than $440m from investors through bogus claims which also "lulled existing investors into retaining their investments in Bayou".

US authorities have called for tighter regulation of the hedge fund industry as a result of the scandal

Bayou Chief Is Expected to Turn Himself In
www.nytimes.com - By JENNY ANDERSON and WILLIAM K. RASHBAUM - September 29, 2005

Samuel Israel III, the founder and chief executive of the Bayou Group, the Connecticut hedge fund that seemingly disappeared overnight in what federal prosecutors have described as a $300 million fraud, is expected to surrender to federal authorities today, a law enforcement official who has been briefed on the case said last night.

The fund's chief financial officer, Daniel E. Marino, also is expected to surrender.

Both men are expected to enter guilty pleas to fraud charges in federal court as soon as this week.

Their surrender will cap the extraordinary rise and fall of Bayou, a Stamford-based hedge fund that at one point claimed to have more than $400 million under management.

Neither Mr. Israel's lawyer, Lawrence S. Bader, nor Mr. Marino's lawyer, Andrew B. Bowman, returned calls seeking comment.

A spokesman for the United States attorney's office for the Southern District could not be reached.

The two men have not been seen publicly since state and federal officials began investigating Bayou last month after investors complained that they were unable to reach anyone at the fund. Among the many questions that had been surrounding the collapse of Bayou was why no arrests had been made.

On Sept. 1, the United States attorney's office for the Southern District of New York sued to freeze $100 million of funds that were seized in Arizona as part of a separate fraud investigation.

According to that complaint, Bayou began defrauding investors in 1998, just a year after it opened its doors. The fraud extended through August, the complaint said, and included the overstatement of investment gains, the understatement of losses and the reporting of gains to investors when, in fact, losses should have been recorded.

One of Bayou's questionable transactions involved the $100 million that Arizona authorities seized in May.

At the time, Arizona authorities were investigating an unrelated financial fraud and became suspicious when they found money that had been zipping around accounts, moving from London to the Wachovia bank and then to Wachovia's Hong Kong unit.

They had stumbled onto what may be this year's most spectacular hedge fund fraud. Bayou's involvement emerged after lawyers for Mr. Israel sought to claim the money. That $100 million may be all that is left of Bayou, prosecutors have said.

Mr. Israel founded Bayou in 1996 as a day-trading shop that would make significant but not outlandish returns on lots of small bets. In his first year, he lost money, say people who invested with him, and he later changed the firm's documents to indicate the firm had started in 1997.

Mr. Israel leveraged his relationships to attract money, embellishing his r�sum� along the way. Having once worked at Omega Advisors, a hedge fund run by Leon Cooperman, he told people that he was a "head trader" when in fact it seems he was more of an order taker.

Things started to unravel quickly at Bayou. According to a note left by Mr. Marino that was intended to be a suicide note, and which was later obtained by state and local authorities, by the end of 1998 the fund had performed badly and Mr. Israel, Mr. Marino and another associate decided to create a fake accounting firm to fudge the numbers.

That charade went on for six years, Mr. Marino said in his note, the contents of which were confirmed by two people who had read the letter.

While Mr. Israel and Mr. Marino were duping investors about the fund's true performance, they were living well. In 2003, Mr. Israel moved into a 10-bedroom estate that was built for the ketchup magnate H. J. Heinz. Mr. Marino, who had been living in Staten Island, moved into a multimillion-dollar home in Westport and started driving a Bentley.

Red flags abounded at the fund, including a lawsuit filed by a trader who was hired and quit months later and then sued Mr. Israel, Mr. Marino and the fund, accusing them of engaging in fraud. That lawsuit was moved to arbitration and later dismissed, but its contents suggested that Mr. Israel and Mr. Marino would not share critical information about the operations of the fund, including $7 million that the suit said disappeared without explanation.

In December 2004, Mr. Israel and Mr. Marino transferred $100 million into Mr. Israel's name. He then invested in a fanciful scheme intended to convert $100 million to $7.1 billion. When Arizona authorities saw that $100 million being moved around the world, they became suspicious.

Mr. Israel, meanwhile, recently left the former Heinz mansion, which he rented from Donald J. Trump for $32,000 a month, after falling behind on his payments.

"He owes two months' rent," Mr. Trump said yesterday. "We said, 'Pay the rent and hit the road.' "

Bayou's Samuel Israel, Dan Marino to Plead Guilty, Person Says
www.bloomberg.com - September 29, 2005

Bayou Group founder Samuel Israel III and Chief Financial Officer Daniel Marino plan to plead guilty to fraud charges from an investigation of their hedge fund, a person familiar with their case said.

Bayou, a Stamford, Connecticut-based hedge fund with more than $300 million in assets collapsed in July. Earlier this month, the U.S. attorney's office in New York claimed in a civil lawsuit the fund lied about investment profits and created a sham accounting firm to certify false financial statements.

Israel and Marino, both 46, plan to plead guilty to the charges at a federal court in New York City or White Plains, New York, as early as today, said the person, who requested anonymity so as not to affect the plea plans. Prosecutors are seeking to freeze whatever money was left at Bayou, including $100 million seized in May by Arizona officials, so it can be returned to investors.

``By pleading guilty, you can get the number and nature of possible charges reduced,'' said Richard Phillips, a lawyer at Kirkpatrick & Lockhart Nicholson Graham LLP in San Francisco who isn't involved in the case. ``There's an awful lot you can gain by plea bargaining.''

Israel's lawyer, Lawrence Bader, and Marino's attorney, Andrew Bowman, didn't immediately return calls seeking comment. Herb Hadad, a spokesman for the U.S. attorney in New York, Michael Garcia, declined to comment.

SEC Investigation

Israel, who rents a Tudor house with enclosed grounds in Westchester County, north of New York City, said in July that he would shut Bayou's four hedge funds, which he managed, and return investors' money in August. That didn't happen, triggering investigations by Connecticut banking regulators, the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation.

Marino wrote a six-page suicide note with details of the alleged fraud that was recovered by police at Bayou's office in Stamford, Connecticut, police said. Marino, who didn't take his life, grew up in Staten Island, New York, before relocating to Westport, Connecticut. He earned a Certified Public Accountant's license in 1990, according to New York records.

The confession in the suicide note may have made a defense by Marino and Israel difficult had they gone to trial.

The civil lawsuit filed this month by the U.S. attorney's office in New York claims Bayou's financial statements and other documents from 1998 through 2005 ``overstated gains, understated losses and reported gains where there were losses.''

`Sham Accounting Firm'

The company also created a sham accounting firm, Richmond- Fairfield Associates, to certify false financial statements, prosecutors claimed in the suit.

Israel pitched himself as a short-term stock trader, with turnover of about 200 percent per month, according to a presentation given to potential investors in 2002. He aimed to make 1 percent to 3 percent a month and positioned his portfolio with 50 percent of assets wagering on falling stocks and the other half on shares he expected to rise, the presentation said.

Before founding Bayou, Israel worked as a trader for Leon Cooperman's Omega Advisors hedge fund from January 1993 to June 1995.

Bayou is the biggest hedge fund to come under scrutiny for missing funds since 2000, when money manager Michael Berger was accused of hiding $400 million of losses over four years.

Managers of hedge funds -- lightly regulated investment portfolios designed for wealthy investors and institutions -- will have to register with the Securities and Exchange Commission beginning in February, opening them to random audits for the first time. There are about 8,000 hedge funds with about $1 trillion under management.

Wealthy Individuals

Bayou's investors included wealthy individuals and institutions, including Silver Creek Capital Management LLC of Seattle. Unlike most hedge funds, Bayou charged no management fee. It did take the industry's standard 20 percent of investment profits, according to one of its marketing presentations.

Investors were allowed to take their money out monthly, compared with so-called lock-ups of a year or more at many funds. The minimum investment was $250,000, compared with $1 million or more for other funds.

To contact the reporter on this story: Christopher Mumma in State Supreme Court in New York at (1) cmumma@bloomberg.net

FaGal

08-11-05, 16:03

Hedge Fund Exec Pleads Guilty to Fraud
www.washingtonpost.com - By JIM FITZGERALD - The Associated Press - September 29, 2005

WHITE PLAINS, N.Y. - An executive for a beleaguered hedge fund pleaded guilty to fraud charges Thursday for his role in a scandal that allegedly cost investors millions of dollars.

Daniel Marino, 46, the chief financial officer at the Stamford, Conn.-based Bayou hedge fund, pleaded guilty in federal court in White Plains to charges that included mail fraud, wire fraud, investment adviser fraud, and conspiracy to commit investment adviser fraud.

Prosecutor Margery Feinzig said Marino helped make it appear that Bayou was earning profits on trading when it was not, and created "fictitious" quarterly and annual reports. Prosecutors say the fraud occurred from 1996 to 2005.

"At the end of '98, we all agreed to set up an accounting firm that would give the appearance of an independent auditor," Marino admitted in court.

The conspiracy and investment fraud counts each carry a maximum of five years in prison. The maximum punishment for the mail and wire fraud is 20 years, but Marino would serve considerably less time under federal sentencing guidelines.

Sentencing is Jan. 9. Marino also was ordered to surrender about $100 million in an account now under the control of the Arizona state treasurer, a house in Connecticut, and interest in various business partnerships.

Authorities began investigating Bayou after investors received a July 27 letter from Samuel Israel III, the fund's founder, announcing that Bayou would return their money and shut its doors.

Investors say they have not received refunds.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns. Hedge funds typically are active traders and can use techniques off limits to mutual funds.

Bayou investors filed several lawsuits alleging that Bayou executives hid massive investment losses by raising new money to pay withdrawing investors and to pay themselves fees and commissions they had not earned. One lawsuit referred to Bayou as a classic Ponzi scheme.

Ross Intelisano, an attorney who represents some of the investors, said his clients invested between $250,000 and $1.5 million in Bayou. Some clients invested their retirement funds, he said.

One investor, the Jewish Federation of Metropolitan Chicago seeking more than $4 million.

The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets.

In the last five years, the U.S. Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion. According to the agency, there are now about 7,000 hedge funds managing $870 billion in assets, a 260 percent jump over five years ago.

Two hedge fund executives plead guilty to conspiracy and fraud
www.canada.com - Jim Fitzgerald - Canadian Press - September 29, 2005

WHITE PLAINS, N.Y. (AP) - The founder and the chief financial officer of a beleaguered hedge fund each pleaded guilty to conspiracy and fraud charges Thursday for their roles in a scandal that allegedly cost investors about $450 million US.

Samuel Israel III, the founder, and Daniel Marino, the CFO of the Stamford, Conn.-based Bayou hedge fund, pleaded guilty in U.S. federal court.

Prosecutor Margery Feinzig said Bayou issued fictitious weekly, quarterly and annual reports that inflated its profits to attract new investors and lull existing investors into keeping their money in the fund.

Israel, 46, admitted sending out false financial information to current and prospective investors "which made it appear that Bayou was doing better than it really was."

Israel pleaded guilty to three counts: conspiracy to commit investment adviser fraud and mail fraud; investment adviser fraud; and mail fraud.

Marino, who is also 46, pleaded guilty to mail fraud, wire fraud, investment adviser fraud, and conspiracy to commit investment adviser fraud.

The maximum sentence for the investment fraud counts are five years each; for mail fraud and wire fraud, the maximum is 20 years. Sentencing guidelines, however, are likely to call for considerably lower sentences.

Sentencing for both executives was set for Jan. 9.

Authorities began investigating Bayou after investors received a July 27 letter from Israel announcing that Bayou would return their money and shut its doors. Investors say they have not received refunds, and the government estimates the losses at $450 million.

Bayou is the latest in what regulators say is a growing number of frauds involving hedge funds, which are largely unregulated and traditionally serve institutions and wealthy investors. Hedge funds profit by using unconventional techniques, such as short-selling, or betting on falling markets to make a profit during market downturns. Hedge funds typically are active traders and can use techniques off limits to mutual funds.

Bayou investors filed several lawsuits alleging that Bayou executives hid massive investment losses by raising new money to pay withdrawing investors and to pay themselves fees and commissions they had not earned. One lawsuit referred to Bayou as a classic Ponzi scheme.

Ross Intelisano, a lawyer who represents some of the investors, said his clients invested between $250,000 and $1.5 million in Bayou. Some clients invested their retirement funds, he said.

One investor, the Jewish Federation of Metropolitan Chicago seeking more than $4 million.

The firm earlier this year reported to investors that it had assets of $440 million. Last year, it told investors that it had more than $500 million in assets.

In the last five years, the U.S. Securities and Exchange Commission brought 51 cases charging hedge fund advisers with defrauding investors of more than $1 billion. According to the agency, there are now about 7,000 hedge funds managing $870 billion in assets, a 260 per cent jump over five years ago.

Bayou Investors Seek to Recover More Than $100 Mln
www.bloomberg.com - September 30, 2005

Investors in Bayou Group, the collapsed hedge fund company, are hoping to recover more than $100 million following guilty pleas yesterday by principals Samuel Israel III and Daniel Marino.

U.S. regulators are hunting for millions of dollars in Bayou funds that they allege Israel and Marino siphoned off to invest in private companies. They have already targeted for seizure $100 million that was intercepted in May by the Arizona attorney general; Marino's $2.9 million home in Westport, Connecticut; and other personal accounts and property.

``Investors are hoping there is going to be a large amount of money to recover that were the fruits of the Bayou fraud,'' said Ross Intelisano, a lawyer with Rich Intelisano LLP in New York, who's representing Bayou investors.

U.S. Attorney Michael Garcia said yesterday that Stamford, Connecticut-based Bayou took in $450 million since July 1996. The Securities and Exchange Commission has asked a court to appoint a receiver to track down assets that can be used to repay investors. Bayou ``grossly exagerrated'' its performance to make it appear the funds were profitable, the SEC said.

Israel and Marino, both 46, pleaded guilty yesterday in federal court in White Plains, New York, to mail fraud, investment adviser fraud and conspiracy to commit those crimes. Marino also pleaded guilty to wire fraud, and faces a maximum 50 years in prison. Israel may be sentenced to as many as 30 years.

Bayou is the biggest hedge fund to come under scrutiny for missing money since 2000, when Michael Berger was accused of hiding $400 million of losses at his Manhattan Investment Fund. The Bayou case has prompted regulators to call for stricter oversight of the industry, which caters to wealthy investors and institutions, and whose assets doubled to more than $1 trillion during the past five years.

Isle of Man

Israel, Bayou's founder and principal trader, and Marino, its chief financial officer, began investing in private companies in Europe and the U.S. in 2003 through partnerships including IM Partners and IMG LLC, a change they didn't disclose to investors, according to court documents filed by Garcia and the SEC. Investigators don't know how much of that money may be recovered.

One of Israel and Marino's early private investments was a startup called Kycos Ltd. IM Partners invested more than $10 million in the company, which opened in October 2003, said John Bourbon, a former financial regulator in the Isle of Man and the Cayman Islands who was Kycos's chief executive officer. The company marketed services to help offshore financial institutions meet anti-money laundering and anti-terrorist regulations.

Financing Movies

Kycos eventually opened offices in the Isle of Man and the Cayman Islands, employing more than 30 people. IM Partners took over management of Kycos in December and it closed in July, said Chris Corlett, CEO of the Isle of Man's Ministry of Industry and Trade.

IM Partners also was involved in financing movies. The partnership agreed to provide $2.7 million in funding for a film called ``Yellow,'' according to documents filed in Nevada. It's not clear if the financing deal was consummated.

In 2004, Israel stopped trading for the hedge funds, the SEC said. He began ``searching for high-payout, short-term investments and made the assets of the funds vulnerable to theft and fraudulent investment scams,'' the agency said. He wired $150 million of Bayou funds in and out of a series of bank accounts. Arizona officials suspected the transfers were part of an investment scam and the state froze $100 million in account.

Arizona officials allege a former Bayou executive entered into a complex and ``fanciful'' investment arrangement with Israel to use the $100 million, along with debt, to buy ``bank instruments'' on which Israel would earn $7.1 billion over 10 years.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net.

FaGal

08-11-05, 16:04

Firm to keep going after Bayou blowup
today.reuters.com - September 30, 2005 - By Svea Herbst-Bayliss

BOSTON (Reuters) - A prominent consulting firm that sent clients into the collapsed Bayou hedge fund said it was blinded by the managers' bold lies, but pledged to stay in business after reviewing how it evaluates funds for clients.

"We have to do an objective assessment of what went on here," said Charles Gradante, who runs the Hennessee Group with his wife and business partner, Lee Hennessee, about how the firm fell for a multiyear fraud that was only interrupted this summer when clients noticed $450 million were missing.

To help overhaul the process, Hennessee hired law firm Kirkpatrick & Lockhart Nicholson Graham LLP to review how the New York-based consultants select hedge funds for clients like DePauw University, Gradante told Reuters on Friday.

"This was not sloppy work by us," Gradante said, in his first interview since the hedge fund managers turned themselves in this week, after hiding from authorities for weeks.

"We used the same kind of due diligence here that kept us from investing in Beacon Hill, the KL Group and other hedge fund frauds," he said, adding that "we are not a bunch of idiots here.

"We had a perfect track record that was stopped by Bayou and we are humbled by that."

Gradante also said the firm has not been sued by anyone and that its clients were supportive.

Lawyers said that hiring a law firm to review the process might offer added insurance in the case of future lawsuits because the information would be privileged.

NO TROUBLE ... UNTIL NOW

For 18 years, Gradante and Hennessee said they avoided all of the industry's collapses because they had long histories on Wall Street and relied on a broad network of independent contacts, including some of the industry's elder statesmen like Julian Robertson and George Soros, to steer clear of danger.

But now they are squarely in the middle of the fast-growing $1 trillion hedge fund industry's latest blowup, having been closely linked to Bayou founders Samuel Israel III and Daniel Marino, who pleaded guilty on Thursday to investment adviser fraud, mail fraud and conspiracy.

Other investors, including Seattle, Washington-based fund of funds firm Silver Creek, also put money into Bayou before it became clear that the founders told their clients they were making money while in fact they were losing millions of dollars.

For weeks, speculation mounted that the Hennessee Group may not survive this debacle because it missed red flags that appear to be glaring oversights in hindsight.

Bayou traded through Bayou Securities, a broker-dealer that was regulated by the NASD, and it did not pick a top-flight auditing firm. The fund created a bogus accounting firm.

Gradante said he talked to the fund about changing auditors and was told that was planned. Many new hedge funds cannot afford to hire the best accounting firms immediately and there was no reason to question the audited financial statements, Gradante explained.

"We thought we were dealing with good and honest people," Gradante said, recalling that his contacts had checked the pair out and that Samuel Israel, who comes from a prominent family in Louisiana, had a reputation as a "pretty good trader."

Hennessee also had no reason to suspect the returns were bogus because the pair was careful not to put down anything to attract too much attention.

"Returns were in line. Nothing stood out," Gradante said.

As Gradante and Hennessee dash from meeting to meeting to assure their clients nothing is amiss with other investments, the firm said it has not been sued by anyone.

"Our clients are behind us and so are the managers," Gradante said, describing e-mails telling the husband-and-wife team to "hang in there."

Still talk is circulating on Wall Street the firm won't be able to retain clients or sign up new ones as outsiders try to determine whether Hennessee made an honest mistake or overlooked glaring errors.

"Our competitors want to destroy us," Gradante said. "I understand it is Wall Street and it is a mean city and everyone is puking on us. But we are taking it."

SEC seeks freeze of Bayou assets and appointment of receiver
www.hedgeweek.com - October 7, 2005

The Securities and Exchange Commission has filed a civil injunctive action against Samuel Israel III and Daniel E.Marino, managers of the Bayou Funds.

The SEC's complaint alleges that, between 1996 and the present, Samuel Israel III of New York and Daniel E. Marino of Connecticut defrauded investors in the Funds and misappropriated millions of dollars in investor funds for their personal use.

The SEC is seeking permanent injunctions for violations of the anti-fraud provisions of the federal securities laws against Israel, the founder of and investment adviser to the Stamford, Connecticut-based Funds; Bayou Management, the investment adviser to the funds; and Marino, the chief financial officer of Bayou Management.

Additionally, the SEC has requested that the court freeze the defendants' assets and appoint a receiver to marshal any remaining assets for the benefit of defrauded hedge fund investors. All of the defendants have consented to the freeze of assets and appointment of a receiver. The requested relief is subject to court approval.

On 29 September 29, the United States Attorney for the Southern District of New York announced that it had filed criminal fraud charges against Israel and Marino. The Commodity Futures Trading Commission (CFTC) has also announced that it has filed an action arising from the same conduct.

Linda Chatman Thomsen, Director of the Division of Enforcement, said: "The action filed by the SEC today, together with the parallel criminal proceedings instituted by the United States Attorney and the action brought by the CFTC, demonstrate that hedge fund managers who defraud their investors can expect a comprehensive and vigorous enforcement response."

Antonia Chion, an Associate Director of Enforcement, added: "As our action demonstrates, we not only seek to hold the defendants accountable, but we will work to recover and return assets to harmed investors."

The SEC alleges in its complaint that from 1996 through 2005, investors deposited over USD 450 million into the Bayou Funds and a predecessor fund. During that period, Israel and Marino defrauded current investors, and attracted new investors, by grossly exaggerating the Funds' performance to make it appear that the Funds were profitable and attractive investments, when in fact, the Funds had never posted a year-end profit.

The SEC's complaint further alleges that, in furtherance of their fraud, Israel and Marino concocted and disseminated to the Funds' investors periodic account statements and performance summaries containing fictitious profit and loss figures and forged audited financial statements in order to hide multimillion dollar trading losses from investors. Among other things, the complaint alleges that:

� Israel, Marino, and Bayou Management overstated the Funds' 2003 performance by claiming a USD 43 million profit in the four hedge funds, while trading records show that the Funds actually lost USD 49 million;

� In 1999, Marino created a sham accounting firm, "Richmond-Fairfield Associates," that he used to fabricate annual "independent" audits of the Funds and attest to the fake results that he and Israel had assigned to the Funds;

� Israel and Marino stole investor funds by annually withdrawing from the Funds "incentive fees" that they were not entitled to receive because the Funds never returned a year-end profit;

� By mid-2004, Israel and Marino had largely suspended trading securities on behalf of the Funds and transferred all remaining Fund assets, consisting of approximately USD 150 million, to Israel and other non-Bayou-related entities, for investment in fraudulent prime bank note trading programs and venture capital investments in non-public startup companies; and

� Despite having abandoned their hedge fund strategy in 2004, Bayou Management continued to send periodic statements and financial statements to investors describing purportedly profitable hedge fund trading activities through mid-2005.

In addition to injunctions against all of the defendants, the SEC also seeks disgorgement of ill-gotten gains, prejudgment interest, and civil money penalties from Israel, Marino, and Bayou Management. The SEC's investigation continues.

FaGal

08-11-05, 16:05

Guilty Of Massive Fraud
www.courant.com - October 13, 2005

Stamford-based Bayou Management offers a cautionary tale for investors in the $1.3 trillion hedge fund industry.

The recent guilty pleas by Bayou's two principals to criminal fraud charges exposed a massive swindle in which the firm collected $450 million from trusting investors and lost most of it. Chief executive Samuel Israel III, 46, and former chief financial officer Daniel Marino, 45, admitted to investment adviser fraud, mail fraud and conspiracy. Each deserves a long prison term at their sentencing on Jan. 9.

Hedge funds - many of them based in Fairfield County - are typically investment opportunities for wealthy individuals and institutions. The funds make money through rapid in-and-out trades and greater risk-taking.

But the funds operate with little regulation. The Bayou experience shows why greater state and federal oversight is needed.

Bayou Management was launched in 1997. Almost immediately it started losing money and lying to investors. Bayou even created a fictitious auditing firm to trick investors into believing it was making money, while it was losing millions. The deception worked so well that one Bayou fund took in $90 million in new investments two years ago, but lost $35 million through trading.

Mr. Israel told a judge, "I knew what I was doing was wrong and fraudulent."

Of the $450 million that investors had entrusted to Bayou, only $150 million remained by last year. Desperate to make money, Mr. Israel tried to pour money into a crazy scheme that promised to turn a $100 million investment into $7.1 billion in 10 years.

Finally, suspicious clients started demanding their money back. Mr. Israel held them off until the fund collapsed just months ago. Meanwhile, he and Mr. Marino collected millions in management fees and lived in extravagant luxury.

Investigators have a duty to determine what happened to all the money.

Arizona has seized $100 million in bank funds that may be linked to Bayou, but little is known about what happened to the rest of the money. Investors deserve a full accounting of how the fraud developed without detection.

For now, hedge fund investors would do well to start asking more questions and monitoring hedge fund returns.

FaGal

08-11-05, 16:05

Investor sues Hennessee over Bayou investment
today.reuters.com - October 14, 2005

BOSTON - A prominent hedge fund consulting group was sued by one of its clients this week for having suggested putting $3.25 million into Bayou Group, a hedge fund that collapsed last month, court papers show.

DePauw University filed a lawsuit in U.S. District Court in the Southern District of Indiana on Wednesday alleging the Hennessee Group and its principals, Lee Hennessee and Charles Gradante, failed to conduct the kind of due diligence they had promised their clients.

Relying on the consultants' recommendation, DePauw said it invested $3.25 million in Bayou in 2004.

The Hennessee Group failed to notice that Bayou's founder, Samuel Israel, and chief financial officer, Daniel Marino, had falsified performance data and fabricated auditor's reports.

The consultants also failed to identify discrepancies on Israel's resume after having told DePauw they conducted a thorough background check, the university said.

DePauw is demanding that Hennessee pay back all of the losses the university suffered plus interest of 8 percent and attorney's fees.

The Bayou collapse, which may have cost investors $450 million, is among the latest blowups in the fast growing $1 trillion hedge fund industry.

FaGal

08-11-05, 16:07

Bayou Fraud Exposes Tale of Lies, Drugs, Violence
quote.bloomberg.com - October 27, 2005

On the afternoon of Aug. 16, police sergeant Gary Perna responded to a code 642 -- possible suicide - - at the offices of Bayou Management LLC, in Stamford, Connecticut.

Nowhere in the deserted, shorefront cottage was Bayou founder Samuel Israel III, the trading whiz behind the market- beating investment returns that the hedge fund had reported since 1997. Also missing was Daniel Marino, the man accounting for the $450 million that investors had entrusted to the firm.

As Perna arrived on the scene he expected to find Marino dead -- perhaps bobbing in the nearby Long Island Sound, he says. Perna had reason to fear the worst: A Bayou client had called 911 after arriving that Tuesday to find Bayou's offices empty, an ominous, six-page letter atop Marino's desk.

``My name is Dan Marino and this is a combined confession and suicide letter,'' the typed note begins. ``For the past seven years, I have committed a fraud of a great magnitude.''

The letter goes on to explain how Israel, scion of a prominent New Orleans family, and Marino, an accountant from Staten Island, New York, had pulled off one of the biggest scams ever perpetrated in the $1 trillion hedge fund industry.

At the heart of the story is the stormy relationship between the two men, an odd pair of misfits who met by chance 15 years ago and, at Bayou, never made any money at all. Authorities have only just begun to unravel the web of failed investments that Israel and Marino spun.

Sudden Collapse

Bayou seemed to disappear almost overnight. Just weeks before the police arrived, Israel had abruptly told clients he was closing his fund and returning their money. Then -- nothing. No checks. No explanations. No one at Bayou answered the phones. Messages choked the firm's voice-mail system.

Israel, whose father and grandfather had made their fortunes trading commodities, repaired to a Tudor mansion in Mount Kisco, New York, which he rented from Donald Trump for $32,000 a month. He refused to speak to clients or reporters. Marino, a 250-pound (113-kilogram) man with a severe hearing disability and, by his own account, a volatile temper, holed up in his $2.9 million McMansion in Westport, Connecticut, his blue 2004 Bentley in the garage.

Marino didn't follow through with his suicide threat that August day, and on Sept. 29, he and Israel finally came clean about what really had happened at Bayou. It was even worse than investors had feared.

Sham Audits

Israel and Marino had duped investors almost from the start, the men confessed. They had used sham audits to hide trading losses, inflate reported returns and pocket tens of millions of dollars in fees on phantom profits. In the federal courthouse in White Plains, New York, Israel and Marino, both 46, pleaded guilty to conspiracy to commit fraud, mail fraud and investment adviser fraud. Released on $500,000 bail apiece, pending sentencing on Jan. 9, each faces as much as 20 years in federal prison. Neither they nor their lawyers responded to telephone calls requesting interviews for this story.

Marino's letter, along with hundreds of pages of other court documents, police records and interviews with former colleagues and clients, tells a tale of lies, drugs and violence. During his years at Bayou, Israel had become addicted to painkillers, Marino wrote. At times, Israel would beat Marino, and at one point, he even threatened him with a gun.

On many days, Israel never showed up at Bayou's offices, leaving Marino to terrorize the staff, according to two people who worked for Bayou and asked to remain anonymous, saying they feared being drawn into the scandal.

Soccer Coach

When Israel did appear, he would often recline on the floor to soothe his bad back or hunch before an array of computer screens, including one showing streaming video from NASA's Kennedy Space Center in Florida. He rarely, if ever, turned a profit on his trades.

The revelations have shocked people who know Israel. He grew up in a house overlooking the Westchester Country Club in affluent Rye, New York; coached his daughter's soccer team; and boasted that trading was in his blood.

Israel came across as a charming and affable jokester whose only interest seemed to be investing, says Jack O'Halloran, an ex-prizefighter and former Hollywood actor who ran a company on the Isle of Man that Israel and Marino invested in. ``Sam's a nice guy,'' O'Halloran says. Jeffrey Fotta, a former hedge fund manager who did research for Bayou, summed up Israel this way: ``To know Sam was to love Sam.''

As Israel and Marino confront prison, Bayou clients face their own harsh reality: Most of their money may be gone. In mid- October, the U.S. Securities and Exchange Commission was in the process of appointing a receiver who will try to figure out how much money clients might recover.

Assets Seized

The state of Arizona has seized $100 million of Bayou's assets, leaving more than $300 million as yet unaccounted for. Much of that fortune was lost long ago as Israel tried to trade his way out of bad bets on the markets, according to Marino's letter, a copy of which was obtained by Bloomberg News.

Whatever money is left may not be easy to find. The assets seized by Arizona authorities had already been whisked through bank accounts in Germany, the U.K. and Hong Kong. As much as $40 million may have disappeared into a second investment firm called IM Partners, according to two people who helped Israel and Marino make the investments. IM Partners -- IM, as in Israel-Marino -- sank money into small, private companies ranging from Vectrix Corp., a Newport, Rhode Island-based maker of electric scooters, to CiteVision, a cable television company based in Amiens, France. IM also invested in a film production in Puerto Rico as well as companies incorporated on the Isle of Man and Cayman Islands, both offshore tax havens. The wrangling over Bayou's remains has only just begun.

Red Flags

Lulled by financial statements showing annual returns of as much as 33 percent, many investors missed red flags at Bayou. Rather than use a separate brokerage to execute trades, for example, Bayou established its own in-house broker-dealer, Bayou Securities, to skim commissions for Bayou Management.

Rather than employ a reputable accounting firm, Israel and Marino told investors that a firm called Richmond-Fairfield Associates was auditing the hedge fund. According to registration documents on file with the state of New York, Richmond- Fairfield's sole accountant was none other than Marino, Bayou's chief financial officer. His fake accounting firm produced false audits.

Israel and Marino seduced not only wealthy individuals, who invested a minimum of $250,000 in the hedge fund, but also money managers such as Seattle-based Silver Creek Capital Management LLC; New York-based Multi-Dimension Fund LP; 168-year-old DePauw University in Greencastle, Indiana; and the Jewish Federation of Metropolitan Chicago.

Lawsuits

Multi-Dimension and the Jewish charity have sued Israel and Marino, saying the men defrauded them. Silver Creek partner Eric Dillon, who discovered Marino's suicide letter in August, declined to discuss the fiasco.

Bayou didn't lure investors all by itself. Israel and Marino also used hedge fund consultants, such as New York-based Hennessee Group LLC and Memphis, Tennessee-based Consulting Services Group LLC, to drum up business. Such firms advise clients on where to make hedge fund investments and get paid for steering money into funds, either by their clients, the funds or both.

Consulting Services began recommending Bayou to investors in 2001, according to a due-diligence document Bayou circulated to potential investors. By then, Bayou had been ripping off investors for four years. Consulting Services told investors in 2004 to pull their money out, says Joe Meals, that company's compliance officer. Meals declines to say why or to comment further.

`I Will Drag Everyone Down'

At least two Bayou employees suspected years ago that something was wrong. One, Paul Westervelt, told Israel in 2003 that he thought the firm might have violated securities regulations, according to a breach of contract lawsuit Westervelt filed against Bayou, in which he said he was misled when he was recruited. Another, Greg Lopak, called Bayou in 2002 and threatened to blow the whistle on Israel.

``I will fucking crucify him,'' Lopak warned a Bayou employee, according to an incident report filed with the Stamford Police Department on Feb. 1 of that year. ``I will drag everyone down and call the feds.'' Lopak never followed through with his threat. Neither he nor Westervelt could be reached for comment.

From the start, Israel and Marino made an unlikely duo. They were born within three months of each other, in 1959, into different worlds.

Southern Money

Israel came from Southern money. His grandfather and father ran a century-old commodities trading firm, originally called Leon Israel & Bros., in New Orleans. In the Crescent City, the Israels were people to know and generous patrons of charitable and civic causes. Sam's father, Lawrence, served on the President's Council of his alma mater, Tulane University, near the city's Audubon Zoo. The campus is home to the Merryl and Sam Israel Jr. Environmental Sciences Building, named for Israel's grandparents.

Like his father, young Sam attended Tulane. Unlike his dad, he never graduated. Israel dropped out a few months shy of commencement, he told U.S. Magistrate Judge George Yanthis on Sept. 29. If Israel had hopes of inheriting the family business, he was soon disappointed. The Israels sold their firm to Donaldson Lufkin & Jenrette Inc. for $44 million in 1981. A year later, the family patriarch, Samuel Israel Jr., Sam's grandfather and namesake, died at the age of 72. The New Orleans Times- Picayune newspaper ran the obituary on the front page.

``I always tried to think of the `other fellow,''' Samuel Israel Jr. wrote in a letter he left to his family that was quoted in the Times-Picayune.

Staten Island

Dan Marino didn't come from money. He grew up on Staten Island, home to New York's 2,200-acre (890-hectare) Fresh Kills garbage dump. His Manhattan-born father, Elias, practiced law out of the family's two-story brick home on Whitaker Place. He was a member of the local Italian-American club.

Dan's mother, a Greek immigrant and one-time flamenco dancer named Daisy, attended City College of New York, founded in 1847 to provide higher education to the children of the city's working class. Daisy worked as an assistant in Elias's office.

The Marinos wanted to send young Dan, who was born partially deaf and has difficulty speaking, to a school for the hearing impaired, Marino once told a colleague. Dan, the second of four children, refused to go. Growing up, Dan and his three siblings, Marcus, Elizabeth and Matthew, came across as quiet and studious, says a neighbor, Susan Somma. The kids often did chores around the house, she says.

Tragedy Struck

The Marinos' hard work paid off. Marcus, now 48, became an architect; Elizabeth, 44, a doctor; and Matthew, 42, a lawyer. And Dan became an accountant. In 1981, he graduated from Wagner College, about two miles from his home. That year, tragedy struck the Marino household: Elias Marino died of a heart attack at the age of 55.

When Daisy Marino died in 2000, at the age of 73, Dan's older brother, Marcus, eulogized her in an obituary published in the Staten Island Advance.

``She was a devoted parent who stressed honesty and being a good citizen to her children,'' Marcus Marino said. ``She always tried to encourage us to read as much as possible and learn as much about the world as possible and to treat every single person equally.''

As Israel and Marino celebrated their 22nd birthdays in 1981 -- Israel on July 20 and Marino on Sept. 7 -- they embarked on the careers that would eventually draw them together.

Coopers & Lybrand

Marino put his college degree to work as an auditor at New York-based Coopers & Lybrand LLP, then one of the Big Eight U.S. accounting firms, according to Bayou marketing documents. Israel headed for Wall Street. In 1982, he joined F.J. Graber & Co., where his father kept an office, according to a former Graber associate.

Israel executed trades at Graber. It was there that he met James Marquez, who would later introduce Israel to Marino and, according to Marino's letter, help hatch the scheme at Bayou. Stanley Twardy, a partner at law firm Day, Berry & Howard LLP, who is representing Marquez, declined to comment other than to say that his client has discussed Bayou with the U.S. Attorney's Office in New York.

Israel left Graber in late 1988 and spent the next two years bouncing from one small firm to the next. First, he joined Midwood Securities Inc., then Gerard Klauer Mattison & Co. and finally Gruntal & Co. He soon ran into trouble at Gruntal. After making a trade that resulted in a ``substantial loss,'' Israel stopped showing up for work, according to his employment record on file with the National Association of Securities Dealers. Israel left Gruntal in March 1991.

Patchy Resume

By now, Israel had spent almost a decade on Wall Street and had little more than a patchy resume to show for it. Marino's career had stalled too. He left Coopers and joined Spicer & Oppenheim, a smaller firm, according to Bayou marketing documents. In April 1991, Israel hooked up with Marquez, his acquaintance from the Graber office, who had opened a hedge fund firm called JGM Management Co. on Park Avenue. Marino eventually landed there, too, as JGM's chief financial officer.

JGM turned out to be a disaster. In 1992, a year in which the Standard & Poor's 500 Index rose 4.46 percent, JGM hemorrhaged 40 percent of its assets, according to a person with knowledge of the fund's performance. The next year, the fund plunged 25 percent.

As the losses mounted, Marino often flew into fits of rage, firing people and rehiring them the next day, according to a former JGM employee who later invested in Bayou. Marino's former colleague asked to remain anonymous because he says he withdrew his money before Bayou collapsed and fears the fund's other investors might lay claim to his money.

Israel Bailed

Israel soon bailed and joined Omega Advisors Inc., the New York money management firm run by Leon Cooperman. Marino eventually quit, too, and Marquez shut JGM Management in 1995.

At Omega, Israel was an order taker, Cooperman says. ``Israel was not a fundamental stock picker, and he had no trading authority at Omega,'' Cooperman says. Israel left in 1995, according to his NASD employment record, and, according to a former colleague, spent the next few months trying to develop computer trading models.

When that project sputtered, Israel moved on once more. In March 1996, he opened his own hedge fund in Stamford, Connecticut. The name he chose harkened back to his roots in New Orleans: Bayou. To help him, he recruited his old colleagues from the failed JGM, Marino and Marquez.

Like JGM, Bayou stumbled from the beginning. Israel managed to cobble together just $1.2 million for his fund from friends and former colleagues. Even as the U.S. stock market ignited, sending the S&P 500 soaring 20 percent in 1996 and then 31 percent in 1997, Bayou lost money. The firm's first audit, conducted by Chicago-based Grant Thornton LLP, shows a 12 percent loss for the first year.

Sleight of Hand

With a debut like that, Bayou would never lure new investors. So Israel tried some sleight of hand. He changed the date of inception of his fund, effectively erasing his debut losses, according to Bayou marketing documents.

Israel also had a plan to generate fat fees for his newly christened fund. Hedge funds typically charge customers an annual management fee of about 2 percent and take a 20 percent cut of any profits. In Bayou's marketing documents, Israel said his fund would beat the market with rapid-fire day trading. He waived the standard 2 percent management fee and established an affiliate, Bayou Securities, to execute his trades. The more Israel traded, the more Bayou would pocket in trading commissions. It wouldn't matter if the trades were profitable or not.

Fatal Flaw

Israel, however, had a fatal flaw for a money manager. He couldn't make money investing. As stocks soared in 1997, Bayou lost money and hid the damage by steering Bayou Securities' trading commissions back to Israel's fund. Marino says in his letter that he convinced Grant Thornton not to disclose that arrangement in detail. Grant Thornton spokesman John Vita declines to comment.

Marino's relationship with Israel and Marquez began to fray, according to Marino's version of the events. Israel tried to trade his way out of trouble, but it was no use: his losses kept mounting. Israel and Marquez, however, kept telling Bayou investors that the fund was making money, Marino wrote. ``They were lying to their clients all year long,'' his letter says.

On the last trading day of December 1998, Israel summoned Marquez and Marino and told them the situation was desperate.

The Russian government had defaulted on $40 billion of debt that August, roiling world markets. Long-Term Capital Management LP, the hedge fund firm run by John Meriwether in nearby Greenwich, Connecticut, had collapsed.

Bogus Audit

Marino says in his letter that Israel and Marquez suggested that he concoct a bogus audit to hide Bayou's losses. The charade would buy time to make new, profitable trades, the men argued. Bayou Securities, meantime, would keep generating trading commissions. And Bayou would persuade new investors to pump money into the ailing fund.

Marino faked the audit. To cover his tracks, he sent the audit letters to investors on stationery bearing the name Richmond-Fairfield Associates. The name reflected his daily commute from Staten Island, in Richmond County, New York, to Stamford, in Fairfield County, Connecticut. Bayou investors had no idea that he worked for the hedge fund, Marino wrote.

Not even the phony audit was enough to rescue Bayou. The hedge fund kept losing money. Marino wrote he was diagnosed with Hodgkin's disease in 1999 and spent much of that year caring for himself and his ailing mother in Staten Island. Tempers flared. ``The arguments among Jim, Sam and I were constant,'' Marino wrote. ``When I think back now, it's all a daze.''

Out of Control

In late 2000, Israel decided that Marquez had to go so Bayou could raise money from still newer investors. Marquez left in mid-2001, Marino wrote. ``I wondered whether Sam could truly trade and handle the pressure himself,'' he wrote.

continua

FaGal

08-11-05, 16:08

Soon, Bayou began to spiral out of control. Israel became addicted to the painkillers he was taking for back pain, and the hedge fund sank deeper into the red, Marino wrote. Israel started abusing Marino verbally and sometimes physically. ``He would slap me around at night at my apartment,'' Marino wrote. Once, Israel even brandished a gun, according to Marino's account.

Israel started skipping work. Left on his own, Marino bullied Bayou's staff, former colleagues say. Marino himself wrote that he ``browbeat'' the employees. In 2003, Israel's wife, Janice, filed for divorce.

Hedge Fund Marketers

By mid-2003, Israel and Marino were in dire straits. To help maintain its charade, Bayou had reached out to consultants and hedge fund marketers such as Hennessee, run by husband and wife team Charles Gradante and Lee Hennessee. Hennessee began recommending Bayou to investors in 2003 and never suspected anything was wrong.

``We've never had a situation like this in our history,'' Lee Hennessee says. ``We did an outside background check and spoke to former employers and employees who worked alongside Sam.'' DePauw University sued Hennessee Group in federal court in the Southern District of Indiana earlier this month for breaching its fiduciary duty by allegedly failing to conduct thorough due diligence.

Another firm, Altegris Investments, based in La Jolla, California, also steered investors to Bayou. Altegris Chief Investment Officer Matthew Osborne says his firm told investors to quit the fund in 2004. He declines to say why.

Bayou's plan worked, at least for a while. The firm raked in $125 million of fresh cash in 2003, according to a civil complaint the SEC filed against Israel and Marino on Sept. 29. That was enough to temporarily paper over Bayou's losses.

Didn't Fool Everyone

Israel and Marino didn't fool everyone. J. Ira Harris, a former partner at Lazard Freres & Co., says that when he read the marketing documents that Bayou was circulating, which included a resume for Israel, he called Cooperman at Omega. Israel had claimed he was a general partner at Cooperman's firm.

Cooperman told Harris that everyone at the firm was a partner. ``He told me Israel had no trading authority,'' says Harris, 67, and now chairman of J.I. Harris & Associates, a consulting firm based in Palm Beach, Florida. Harris says he didn't invest in Bayou. Cooperman, 62, says he didn't either.

As Bayou melted down, Israel and Marino were living large. The firm had collected $23.3 million in bogus fees on the phantom profits it reported from 2000 to 2004, according to a suit filed against Bayou, Richmond-Fairfield, Israel and Marino by the U.S. Commodities Futures Trading Commission. His marriage on the rocks, Israel rented Trump's house in Mount Kisco. Marino bought a six-bedroom home with a pool on Bayberry Lane in Westport. He then surrounded it with a 4-foot (1.2-meter) stone wall topped with a white-picket fence.

`The House of Mystery'

``Around here, we call it the house of mystery,'' says Stan Englebardt, who lives across the street. Until news of the fraud broke, Englebardt says he thought his neighbor was the Miami Dolphins quarterback named Dan Marino. Marino also bought three cars -- a Bentley, a Ferrari and an Audi -- which together cost more than $350,000, according to town tax records.

It was about this time that Israel and Marino began hunting for places to invest their ill-gotten gains. They established their separate firm, IM Partners, to buy stakes in companies in the U.S. and Europe. Among their first investments was a startup called Kycos Ltd., which was based on the Isle of Man and had offices in the Caymans. The company, which helped offshore banks comply with anti-money-laundering laws, was co-founded by John Bourbon, formerly head of supervision at the Isle of Man's Financial Services Authority and an ex-managing director of the Cayman Islands Monetary Authority.

Bourbon says he met Marino and Israel several times at Bayou's Connecticut office. ``We didn't see much of Israel,'' Bourbon, 49, says. ``He was usually behind his desk with lots of screens, doing all his trading.'' IM Partners eventually invested $10 million in Kycos.

`King Kong'

To scope out Kycos, Marino flew to the Isle of Man in October 2003. There, he met the former boxer, O'Halloran, who is 62 and lives on the island. O'Halloran's acting credits include supporting roles in the 1976 remake of ``King Kong,'' with Jessica Lange, and ``Superman II,'' the 1980 movie starring the late Christopher Reeve.

O'Halloran says he suggested IM Partners consider another startup, Debit Direct Ltd., which planned to provide money transfer services to offshore financial institutions. IM Partners sank $2 million into that company.

Kycos has since gone into liquidation. IM Partners sued Debit Direct in October 2004, claiming Debit Direct and its officers used its $2 million investment to benefit other companies controlled by its officers and directors.

O'Halloran says Marino had a short fuse. ``Marino used to rage at meetings,`` O'Halloran says. ``Marino was a $35,000 accountant who suddenly started wearing silk ties and Armani suits and driving sports cars.''

Offshore Misadventures

At this point, Israel and Marino's offshore misadventures get even stranger. O'Halloran says that in 2004, he introduced Israel to Robert Nichols, a self-described weapons expert who played a bit part in the 1992 action flick ``Under Siege,'' which stars Steven Seagal.

Israel returned to Connecticut and told Marino that Nichols was a former secret agent --- and that he had told Israel of a clandestine government investment program capable of generating returns of 100 percent a week, according to Marino's letter. Nichols, who testified in a 1993 civil lawsuit that he had worked for the CIA for almost 20 years, couldn't be reached for comment.

``I found this to be all insane, but Sam wanted to pursue it,'' Marino wrote. Israel said that if they invested $100 million in this secret scheme, Bayou's troubles would be over.

Last Big Trade

And so Israel and Marino embarked on their last big trade. In April 2004, they wired Bayou's remaining assets -- about $150 million -- to a U.S. account at Citibank Inc., according to the SEC's Sept. 29 complaint. From there, Israel wired the money to Deutsche PostBank, in Saarbruecken, Germany. After winging through another German bank and a London brokerage firm, the money landed in a Wachovia Bank account in Hong Kong in April 2005.

Finally, $100 million, the last remnants of Bayou, turned up in an account at a Wachovia Bank branch in Avondale, Pennsylvania, under the name of Karl Johnson and Majestic Capital Management. Johnson, who works out of his home in Flemington, New Jersey, says Bayou hired him to manage the money. He declines to comment further.

The barrage of bank transfers aroused suspicion at the Arizona Attorney General's Office, which froze the Wachovia account in May. The game was over.

`Disappearing Act'

Arizona Assistant Attorney General Cameron Holmes says he has two theories about Israel's secret government investment scheme. The first is that Israel had fallen for some sort of bank fraud. The second: ``He was creating a disappearing act with the money.''

As he'd always done, Israel tried to charm his way out of trouble. He borrowed $3 million on June 14 from Steven Starker, a former Goldman, Sachs & Co. partner, purportedly to settle his divorce.

It's unclear how the men knew each other; Starker, 40, didn't return telephone calls seeing comment. E-mails that Israel sent to Starker, disclosed in a lawsuit that Starker filed against Israel on Sept. 8, show Bayou's founder lying to the very end.

``I hope my credibility has not suffered too much as I am sure it has, but you did me a major favor and I would never screw you nor anyone else for that matter,`` Israel wrote to Starker on July 23. ``I have had a situation that can only be described as disastrous occur,'' Israel wrote him on Aug. 6.

On Aug. 12, four days before Marino's suicide note was discovered at Bayou, Israel himself delivered two personal checks to Starker at his home in Rye. One was for $3 million; the other, for $150,000. Both were decorated with characters from the television cartoon SpongeBob SquarePants, a freewheeling, undersea adventure full of surreal twists.

The checks bounced.

To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net.

FaGal

08-11-05, 16:09

Firm that pitched Bayou facing questions
money.cnn.com - November 7, 2005 - By Amanda Cantrell, CNN/Money staff writer

After hedge fund blowup, advisory firm says it might have acted differently; others also under fire.

NEW YORK - Hedge fund advisor Hennessee Group recommended Bayou to its clients. Now it's being sued. The firm says it regrets steering clients to Bayou but had reason to think at the time the hedge fund was legitimate.

Bayou's founder and CFO pleaded guilty nearly six weeks ago to charges that they raised more than $450 million from investors, lied about the fund's returns and formed a phony accounting firm to audit the firm's results.

Hennessee Group admits it should have done a better job of spotting red flags at Bayou, including the fact that Bayou wasn't using a well-known auditor. Hennessee recently spoke out about Bayou, acknowledging that the firm didn't catch the fraud, but defended its review process nonetheless.

"I can see why, in hindsight, it might seem like this was all very obvious, but it's important to realize how it appears when you are going through it real time," Leeana Piscopo, senior vice president and chief compliance officer at Hennessee, said in an interview.

Like other marketing and consulting firms in the investment world, Hennessee recommends hedge funds to clients for a fee. New York-based Hennessee also runs a widely quoted hedge fund database that has been cited by numerous news outlets, including CNN/Money.

Piscopo and other Hennessee officials stress this was the first time the firm has been hit by fraud and note that Hennessee, once it learned of the problems at Bayou, worked with regulators to get the fund's remaining assets frozen, and filed its own lawsuit against Bayou.

Piscopo acknowledges that when Hennessee reviewed Bayou "the relative size and reputation" of its bogus auditor was "in question." But because Hennessee knew Dan Marino, Bayou's CFO, and had been informed Bayou was using a well-known accounting firm to review Bayou's broker-dealer, Hennessee officials felt comfortable.

"There were no flags raised" at that point in Hennessee's review process, she said. "Internally, their books and records were being performed by an industry professional (Marino) and an independent external review was being conducted."

Authorities first learned of the extent of the fraud at Bayou from a would-be suicide note that Marino left on his desk, in which he admitted to years of fraud, according to published accounts.

Piscopo added that as part of Hennessee's review "we always request at least the last three years of audited financial statements" which were provided by Bayou.

A handful of other firms that match hedge funds with investors had also recommended Bayou to clients, including Consulting Services Group and Altegris Investments. But unlike Hennessee Group, these firms advised their clients to take their money out well before the scandal came to light.

Joe Meals, executive vice president and chief compliance officer at Memphis, Tenn.-based Consulting Services Group, refused to comment on why he advised clients to pull their money out of Bayou, saying that he does not discuss client matters with the press. Matthew Osborne, vice president and chief investment officer for Altegris, said "there was no one specific thing" that happened at Bayou to cause Altegris to advise its clients to get out, but that the firm became increasingly uncomfortable with what it felt was a lack of transparency from Bayou regarding its activities. Osborne would not comment further on Bayou.

Investor sues

One investor, Indiana's DePauw University, has sued Hennessee over the Bayou debacle. The Greencastle, Indiana-based liberal arts college said it hired Hennessee to help it choose hedge fund investments for the school's $403 million endowment and put $3.25 million into Bayou at Hennessee's suggestion. The school is charging Hennessee with misrepresenting facts about Bayou.

DePauw's complaint charged that Hennessee said in its marketing material that the hedge funds it recommends "undergo extensive analysis" including reviews of personnel, management, investment philosophy, risk management, performance and other factors. The university is charging Hennessee with breaching its fiduciary duty by advising it to invest in Bayou.

Ken Owen, a spokesperson for DePauw, referred CNN/Money to the school's complaint, saying only, "The lawsuit speaks volumes about our disappointment" with the Bayou situation.

Piscopo would not comment on the details of DePauw's suit, except to say it contained statements that are "not accurate" and that Hennessee's attorneys will respond. In the mean time, the firm is reviewing its review process and has hired a law firm, Kirkpatrick & Lockhart, to help.

Regulators concerned

Now, it will be up to judges to decide whether firms that recommended Bayou must reimburse clients who lost money.

Ron Geffner, a partner in the financial services practice at New York-based law firm Sadis & Goldberg, said consultants who recommend funds to their clients can be held liable if a fund goes bad, even if there was no fraud, if it wasn't a "suitable investment."

"If they fail to comply with their fiduciary obligations or fully disclose any conflicts of interest, they may incur liability related to the loss of investments," he said. "It doesn't even have to be fraud."

The issue of how these fund marketers operate has landed the business on regulators' radar.

"The consultants are limited in their access to data and thus, their predictions may not be much better than the rest of us," SEC Commissioner Roel Campos said at a hedge fund conference earlier this year. "Yet, Hennessee Group, Aris Partners and Altegris and Consulting Services Group, for example, raised tens of millions of dollars for Bayou Group."

For its part, Hennessee said that unlike third party marketers that raise money for hedge funds and are paid by hedge fund managers, it works solely for investors.

FaGal

08-11-05, 16:09

Hedge fund fraud less likely in Europe than U.S
today.reuters.co.uk - November 4, 2005 - By Pratima Desai

LONDON - The risk that hedge funds will defraud investors is lower in Europe than in the United States, because most European hedge funds turn to independent administrators to value their books, hedge fund analysts said.

A lack of independent valuations contributed to the high-profile failure earlier this year of the U.S.-based Bayou Group hedge fund. Its founder and chief executive pleaded guilty to fraud by misrepresenting the value of assets, in a scheme prosecutors said cost investors $450 million.

"You should be wary of self-administered funds ... That's where the danger is," said Derek Stewart, a director of Mellon Global Alternative Investments.

In Europe there have been no major failures in recent years, because hedge funds normally use independent administrators, even though it is not a legal requirement. Over the years it has become a standard industry practice, which investors have come to expect.

"Hedge funds outside the United States without independent fund administrators are unlikely to have any serious investors," said Joe Seet, senior partner at Sigma Partnership, a specialist hedge fund advisory firm.

"Most hedge funds that collapse do not have fund administrators that are truly independent," he added.

The reputation of an independent administrator is also important, and that means being registered with a local regulator.

In Dublin, for example, analysts estimate there are close to 40 fund administrators and that all are registered with Ireland's central bank.

Hedge funds based in Asia have in the main taken their cue from Europe and use independent administrators to value their books, analysts say.

STARTING TO CHANGE

In the United States, new SEC rules requiring most hedge funds to be registered by February 2006 mean that funds are starting to change the way their books are valued and that more are turning to independent administrators.

But many U.S. independent administrators do not yet have the specialist resources to properly value complex derivatives in hedge fund portfolios.

"Most of the really big hedge funds are still U.S.-based, and they are becoming more sensitive to issues about independent (valuations) ... independent fund directors and corporate governance," Seet said.

Investors in hedge funds that trade liquid markets such as listed securities, government bonds or foreign exchange have less cause for worry.

Examples include managed futures funds that trade exchange-traded futures and equity funds that buy and sell stocks on major stock markets in London, New York or Tokyo, where prices are transparent and easily available.

Problems normally arise in less liquid instruments for which prices can be more easily manipulated, which include over-the-counter derivatives such as options, convertible bonds, private equity investments or loans.

"Valuation becomes more important with funds who have illiquid assets," said Doug Fulton, a principal at Westhall Capital. "If there is any reliance upon the fund manager for valuations or on (one) mainstream market source (bank or broker), then it's opaque."

FaGal

08-11-05, 16:11

Panel declares war on secret derivative dealings in takeover talks
www.telegraph.co.uk - By James Moore - November 7, 2005

The Takeover Panel will tomorrow force hedge funds to come clean on their dealing activities during takeovers and mergers.

The panel, which polices deals, will introduce new rules that will force hedge funds to declare if they hold more than 1pc of a company through derivatives during takeovers.

The secretive funds - and some private investors - have been able to exert considerable influence over companies during takeovers without having to disclose their interest.

They do this by using derivatives such as contracts for difference (CFDs) to gain exposure to companies' shares.

Just last week it emerged that Polygon, a London hedge fund, had secretly built up a 13.9pc stake in retailer Peacock Group, which is in the throes of a management buy out. The stake only came to light after Polygon converted its CFDs into voting shares.

Investment banks which provide CFDs usually buy the underlying shares on which the CFD's are based and often agree to vote them at the direction of hedge funds which buy the CFD in "sweetheart deals". This enables funds to exert huge influence on takeovers without other investors' knowledge.

The panel's new rules will force funds - and anyone else - to declare their dealings in companies during takeover situations if they hold more than 1pc through both derivatives and/or shares under the Takeover Code's rule 8. Under the rules Poly-gon would have had to declare its CFD interest as soon as it reached more than 1pc of Peacock.

It would have had to declare all further dealings in Peacock after that point. The new information will be supplied over the London Stock Exchange's Regulatory News Service and can be viewed on its website.

Takeover Panel director general Richard Murley said that the rules were designed to "improve transparency" in the City and should cover any derivative that gives an investor exposure to a company's shares now or in the future.

He said: "The rules have been framed so that they are based on principles rather than technicalities and so we hope that they cover any derivative now or that might be developed in the future.

"People may try to come up with products that fall outside the rules but we have tried hard to make sure they will be covered. It is about improving transparency."

FaGal

11-11-05, 09:42

Credit Suisse gets subpoenas over Refco
www.washingtonpost.com - Reuters - November 9, 2005

NEW YORK (Reuters) - Credit Suisse Group Inc., one of three underwriters for Refco Inc.'s initial public offering, on Tuesday said it received regulatory subpoenas regarding the commodities and futures broker, which sought bankruptcy protection in October.

Switzerland's second largest bank said its Credit Suisse First Boston LLC unit and affiliates received subpoenas and information requests from various regulators, including the U.S. Securities and Exchange Commission, regarding Refco. The company said it is cooperating.

Credit Suisse disclosed the subpoenas in a quarterly report filed with the SEC. It did not immediately return calls seeking further comment.

The subpoenas show that investigations concerning Refco's collapse are expanding. Credit Suisse underwrote Refco's $583 million IPO in August with the U.S. investment banking units of Bank of America Corp. <BAC.N> and Goldman Sachs Group Inc.

Brad Hintz, a Sanford C. Bernstein & Co. analyst, last month said Refco's bankers might face up to $188.7 million of costs from their former client's collapse.

Refco also sold $600 million of junk bonds, in a sale handled by Bank of America, Credit Suisse and Deutsche Bank AG.

Refco filed for protection from creditors on October 17, a week after ousting chief executive Phillip Bennett and accusing him of hiding $430 million of debt. Prosecutors on October 12 charged Bennett with securities fraud.

Five groups have submitted offers to buy all or part of Refco. An auction is set for Wednesday.

FaGal

11-11-05, 09:43

Bank faces demand for files on Refco
business.timesonline.co.uk - By James Doran, Wall Street Correspondent - November 10, 2005

Goldman Sachs, the American bank, was last night set to receive a legal demand from the US Securities and Exchange Commission (SEC) to hand over documents relating to Refco, as the US market watchdog stepped up its investigation into the alleged fraud at the bankrupt commodities firm.

The SEC was finalising details of a subpoena to be sent to Goldman, which acted as one of three lead underwriters in Refco’s $538 million stock market listing eight weeks before the firm collapsed into bankruptcy last month.

Goldman declined to comment when asked about the subpoena last night.

A source at the SEC said, however, that the American bank would be subpoenaed to force it to hand over all documents relating to the Refco flotation.

“Even if Goldman decides to be nice and hand everything over voluntarily, we will still subpoena them,” the source said.

Bank of America and Credit Suisse First Boston, the other two lead underwriters in the Refco initial public offering, confirmed that they had been subpoenaed by the SEC.

The investigation intensified as four rival firms, understood to have entered bids in excess of $1 billion (£573 million), waited to learn which of them had won the auction for Refco’s futures business.

Interactive Brokerage Group and JC Flowers, both US companies, were said by insiders to be front-runners last night, as both were prepared to pay $1.2 billion or more for the unit. But a consortium led by the Government of Dubai was said by some insiders to have the deepest pockets of the four remaining bidders.

Man Group, the London-based hedge fund, was not thought to be one of the highest bidders although insiders said that regulatory concerns may lead to the sellers looking more favourably upon the British firm’s bid.

The winning bid was due to be announced by midnight in New York.

Alaron, a Chicago-based firm that submitted a bid for part of the Refco futures business, had its bid rejected yesterday.

FaGal

11-11-05, 09:43

British in $1bn Refco bid
www.thisismoney.co.uk - Jake Lloyd-Smith, Evening Standard - November 10, 2005

Lawyers for crippled US brokerage Refco will today wrap up an intense bidding battle for control of the assets of its prized futures arm in an auction that may garner close to $1bn (£537m).

Results of the fire-sale - which could be won by a British-based group - will be ratified by the US bankruptcy court that is handling the implosion of what was once the largest independent futures and commodities brokerage.

Details of the winning bid are expected to come as Refco's founder - Briton Phillip Bennett - is also scheduled to appear in court today for a procedural hearing on the unfolding scandal.

Bennett has been accused of concealing more than $400m in debts when the company was listed in August. He has denied any wrongdoing, and is currently free on $50m bail.

Bennett was charged with securities fraud last month, puncturing clients' faith in the once high-flying business and triggering a mass defection of those who used its services.

Refco and its affiliate businesses filed for bankruptcy on 17 October. The auction for the assets of the futures business - regarded as the jewel in Refco's tarnished crown - was being conducted overnight at offices of Refco's New York lawyers, Skadden, Arps, Slate, Meagher & Flom. No list of confirmed, final bidders has been released, but reports suggest at least a five-way struggle.

Britain's Man Financial and Londonbased Marathon Asset Management are competing against a group led by the investment arm of the Dubai government and two US contenders, Interactive Brokers and Yucaipa Companies.

Interactive Brokers, a US brokerdealer, is believed to have offered a preliminary bid of $858m for the futures assets and business, suggesting that an extended auction could push the eventual price closer toward the $1 billion mark.

Man Financial, the brokerage arm of hedge fund business Man Group, confirmed its place in the race earlier this week. Marathon Asset Management, headquartered in Upper Saint Martin's Lane, has been linked with the sale process since the deadline for would-be bidders closed last Friday.

The deal for the futures unit, known as Refco LLC, should be structured as an asset sale rather than a corporate acquisition as this is expected to smooth the transfer of existing business to the auction's eventual winner.

The sale came as investigators probing the collapse extended their examination of its listing, issuing subpoenas to at least two of the three lead underwriters, Credit Suisse First Boston and Bank of America.

Goldman Sachs, the third firm, has declined to comment.

FaGal

11-11-05, 09:44

Rogers Funds, Refco Creditors Ask Court to Block Asset Sale
www.bloomberg.com - November 10, 2005

Refco Inc., the bankrupt futures broker that's auctioning off its assets and may decide on a buyer as soon as today, faces a potential obstacle from creditors who say they'll be hurt by a sale.

Funds controlled by Jim Rogers that claim they're owed $362 million by Refco Inc. asked a court yesterday to reject any agreement the company reaches with a bidder. Creditors including Rogers, a former partner of hedge fund pioneer George Soros, said the proposed terms of a sale would block them from collecting from accounts that remain frozen.

Refco Inc., based in New York, is trying to raise money to pay off debts after filing the 14th-largest bankruptcy in U.S. history on Oct. 17. The auction, which began yesterday morning, continued late last night, said Refco spokesman Jim Craig.

``To relegate all potentially injured parties to look solely to the sale proceeds for restitution and damages of what may amount to one of the largest U.S. corporate scandals and otherwise absolve potential defendants of any liability is unconscionable and must not be sanctioned by this court,'' the Rogers Funds said in a court filing yesterday. The U.S. Bankruptcy Court in New York should block the Refco sale ``in its entirety,'' the filing said.

Craig said late last night that Refco's lawyers were at the auction and couldn't immediately comment on the objections filed by customers and creditors.

Five Bidders

Refco said last week that five groups submitted bids to participate in the auction.

Man Group Plc, the world's biggest publicly traded hedge fund manager, Interactive Brokers Group LLC and a group led by the Dubai government said they submitted bids for Refco assets. New York buyout firm J.C. Flowers & Co. also submitted a bid, according to court documents.

Refco yesterday disqualified Alaron Trading Corp., a Chicago-based futures trader specializing in individual accounts, from bidding. The auction may result in a bid of as much as $1 billion, said Alaron Managing Partner Gary Weber.

Customers and creditors that also filed objections to Refco's auction include Leuthold Funds Inc., Leuthold Industrial Metals Fund LP, Inter Financial Services Ltd. Refco's Chicago landlord, West Loop Equities LLC, argued that a transaction shouldn't be approved until the landlord learns the fate of its $6 million annual rent for office space on West Jackson Avenue.

Rogers Funds

If the sale goes forward, the court should freeze the proceeds until it determines the status of the Rogers Funds' assets, the funds argued.

The Rogers Raw Materials Fund and the smaller Rogers International Raw Materials Fund LP together are owed $362 million by Refco, according to court filings. Rogers Raw Materials Fund is listed in court papers as the fourth-biggest holder of unsecured Refco claims, with $287 million, and the other fund ranks No. 13, with $75 million.

Federal prosecutors have until today to charge Refco Chief Executive Phillip Bennett, 57, unless he agrees to postpone the deadline. Bennett was arrested Oct. 12 by U.S. authorities and charged with securities fraud, prompting a customer exodus and the shutdown of several units, including Refco Capital Markets Ltd. He may face life in prison if he's convicted.

The bankruptcy case is In re Refco Inc., No. 05-60006, in U.S. Bankruptcy Court, Southern District of New York.

To contact the reporter on this story: Tom Becker in New York at tbecker5@bloomberg.net

FaGal

11-11-05, 09:44

Man Group Wins Auction for Assets of Bankrupt Refco
www.bloomberg.com - November 10, 2005

Man Group Plc, the world's biggest publicly traded hedge fund company, won an auction for parts of bankrupt futures broker Refco Inc., outbidding at least three competitors.

Man Group said in a statement that it will buy customer accounts and assets of Refco's regulated futures business for $323 million. Refco creditors, including money manager Jim Rogers, plan to challenge the sale at a hearing in Manhattan scheduled for later today in U.S. bankruptcy court. Judge Robert Drain must approve the deal. The creditors argue that some of the assets that Refco is selling belong to them.

The acquisition would give London-based Man Group control of what was the fourth-largest broker in the U.S. futures market, where $2.5 trillion of contracts trade each day. Man Group beat Interactive Brokers Group LLC, the Dubai government and U.S. buyout firm J.C. Flowers & Co. in the bidding for New York-based Refco.

``As an existing market participant, they'll be able to quickly integrate the customer base,'' said Dennis Dutterer, former chief executive officer of Chicago-based Clearing Corp., which guarantees futures transactions at exchanges.

Man Financial Inc., Man Group's Chicago-based U.S. brokerage unit, ranks as the ninth-largest U.S. futures broker, data compiled by the Commodity Futures Trading Commission on Sept. 30 show. Profit at Man Financial rose 21 percent last year to $145 million.

From Sugar, Rum

Man Group Chief Executive Officer Stanley Fink said in today's statement that the purchase of the Refco assets will be ``value enhancing.'' Shares of Man Group rose 2.6 percent to 1,690 pence ($29.51) in London trading.

The agreement with Man Group excludes the $746 million of regulatory capital that Refco put aside to guarantee trades. Interactive's $858 million bid included regulatory capital, and would amount to $112 million if stripping those funds. The regulatory capital will remain with Refco under Man Group's offer and will be used to pay creditors.

Founded in 1783, Man Group traces its roots to James Man, a sugar broker who provided sailors in the Royal Navy with rum. The company grew into one of the world's largest sugar and cocoa traders, and then expanded into trading financial futures. Man Group also oversees about $44 billion of hedge fund assets, more than any competing company.

Hidden Debts

Refco's auction follows an Oct. 17 bankruptcy filing caused by the disclosure that former CEO Phillip Bennett hid $430 million of debt. Federal prosecutors have until today to charge Bennett, 57, formally in an indictment, unless he agrees to postpone the deadline. Bennett was arrested Oct. 11 by U.S. authorities and charged the next day with securities fraud. He may face life in prison if he's convicted.

Refco owes creditors about $16.8 billion. Several customers, including Rogers, who used to work with billionaire George Soros, filed objections to selling Refco before the judge assures them that their assets held by the company are protected and not sold.

Drain, the bankruptcy judge, said at a hearing this morning that he has reviewed the objections and he plans to give objectors ``some advance warning of what I'm thinking'' in ruling on the matter. Drain said he hadn't yet reviewed the proposed asset sale agreement.

`Matter of Days'

Rogers Raw Materials Fund LP and Rogers International Raw Materials LP have sued to recover $362 million in accounts held at Refco Capital Markets Ltd. Nine customers have filed lawsuits seeking the return of more than $840 million.

Bawag P.S.K, an Austrian bank that's owed $234 million, along with AQR Absolute Return Master Account LP, Currenex Inc. and more than 40 other creditors, objected to the sale on similar terms, court documents show.

``We believe that a sale of these businesses under the terms of Man's bid is in the best interests of Refco's employees, brokers, customers and creditors,'' said William Sexton, Refco's chief executive officer, in a statement. ``Our goal is to close on this sale transaction in a matter of days.''

Refco lawyer J. Gregory Milmoe of Skadden, Arps, Slate, Meagher & Flom said last week that customer accounts are unsecured debt, not client property. If the bankruptcy judge determines that those accounts are Refco's debt, the group including Rogers will be treated as unsecured creditors. In large bankruptcy cases, unsecured creditors typically receive about 40 cents on the dollar for their claims.

Bond Price

Refco's 9 percent notes maturing in 2012 fell 2.75 cents on the dollar to 74.75 cents, up from 40 cents on Oct. 13, as bondholders bet Refco will be able to raise enough money in the auction to make good on their debts. Before the fraud probe, Refco's bonds traded at 109 cents and yielded 7 percent, according to Trace, the bond price reporting system of the NASD.

Interactive last month offered the largest publicly disclosed bid. The government of Dubai and California billionaire Ronald Burkle, 52, together offered $828 million. J.C. Flowers also submitted a bid.

The sale of Refco is ``good for the industry, good for the customers, and good for the employees because it adds certainty to where there is uncertainty now,'' said Gary DeWaal, Chicago- based general counsel for Fimat USA, the futures brokerage unit of Societe Generale SA.

Refco puts together buyers and sellers of exchange-traded derivatives such as interest-rate futures, and arranges contracts bought and sold over-the-counter, according to its Web site. The company had more than 200,000 accounts before it filed for bankruptcy last month.

The case is In re Refco Inc., 05-60006, U.S. Bankruptcy Court, Southern District of New York.

To contact the reporters on this story: Tom Becker in U.S. Bankruptcy Court at New York tbecker5@bloomberg.net

FaGal

11-11-05, 09:46

business.timesonline.co.u...88,00.html

Ex-Refco chief is indicted for fraud

From James Doran, Wall Street Correspondent

PHILLIP BENNETT could face up to 75 years in jail after the British former Refco chief was last night indicted on charges of conspiracy to commit securities fraud, wire fraud and making false statements.

The indictment, filed in New York, came just hours after Man Financial, the London based brokerage, bought Refco’s futures trading business for $323 million (£186 million), beating the closest competition in the auction by more than $100 million.

Mr Bennett, who denies the charges, was arrested last month as it was alleged that he had hidden $430 million of Refco debt using a private company under his control called RGHI.

The indictment claims that the debt was concealed using a series of multimillion-dollar loans in a conspiracy with at least one of Refco’s clients.

On February 20, 2004, Refco Capital Markets, a Bermuda- based firm, loaned $720 million to a Refco client, it is alleged. The client then loaned the money to RGHI, charging 75 basis points of interest to make a profit along the way.

Mr Bennett wrote a letter of guarantee to the client, who was not identified in the indictment, claiming that if RGHI defaulted on repaying the loan, Refco would pay it back. RGHI then loaned the money to Refco to plug a hole in its accounts accrued years earlier when a handful of clients lost hundreds of millions of dollars trading on account during the Asian financial crisis. The indictment does not explain why Refco and Mr Bennett decided to take on those client debts into Refco’s books. A number of other similar loan schemes for $345 million, $450 million and $420 million are also listed in the indictment.

Separately, Man Group was declared the victor in the complex auction of the most valuable Refco assets after a heated process that dragged on until 7.30 yesterday morning in New York.

The company paid $282 million in cash while taking on liabilities and other considerations of a further $41 million. But Man could yet reduce the price it pays for the Refco assets depending on how many customers remain at the futures trading business once the deal is finalised.

Cerberus Capital Management, the giant hedge fund controlled by Steve Feinberg, and Man Group, the world’s biggest publicly traded hedge fund, were the last two left at the negotiating table yesterday morning. It is understood that Cerberus was willing to pay around $200 million for the Refco assets, compared with Man’s total $323 million.

On Wednesday evening the Refco futures arm, Refco LLC, filed for Chapter 7 bankruptcy protection in New York, lowering the price dramatically. Until then the four main bidders at the table had been expected to pay between $1 billion and $1.2 billion for the business. But $745 million of that sum was to account for funds Refco LLC was required to hold in its coffers to meet regulatory requirements. The regulatory funds were taken out of the equation after the bankruptcy filing.

FaGal

12-11-05, 14:45

Judge agrees to modify ex-Refco CEO's bail terms
www.nzherald.co.uk - November 11, 2005

A judge in New York today agreed to loosen the terms of ex-Refco chief executive Phillip Bennett's bail, citing Bennett's inability to find anyone outside of his immediate family to co-sign a US$50 million ($74 million) bond.

US Magistrate Judge Frank Maas said in a written ruling that the bond need only be co-signed by Bennett's wife, son and daughter. A different judge last month said six financially responsible people were required to sign the bond.

In his ruling, the judge also said that while the government's investigation is continuing in the case, "there is no suggestion that any additional charges are imminent."

Bennett was arrested on October 11 and charged by Manhattan federal prosecutors with securities fraud over hundreds of millions of dollars in transactions owed to Refco, a commodities and futures broker, by an entity he controlled. He has denied any wrongdoing.

After Bennett's arrest, Magistrate Judge Douglas Eaton set the US$50 million bond for his release, to be secured by a house in New Jersey, a Park Avenue apartment and US$5 million in cash. A bond modification hearing was held on October 27.

Bennett, a British citizen, has lived in the United States since 1978. He joined Refco in 1981 from Chase Manhattan Bank. While on bail, he is subject to home detention, electronic monitoring and was ordered to surrender his passport.

FaGal

12-11-05, 14:46

Austrian bank BAWAG probed over Refco loans
today.reuters.com - November 11, 2005 - By Boris Groendahl

VIENNA - Austrian banking watchdog FMA has deepened its probe into Austrian bank BAWAG P.S.K. regarding loans to collapsed U.S. futures trader Refco Inc and to its former chief executive, FMA said on Friday.

FMA launched an official investigation, which can result in the suspension of bank executives, after it received a report from Austria's central bank of an on-site review of BAWAG's loan files.

Under Austrian banking law, it must start such an official investigation if it has evidence leading it to suspect that the law was broken in granting the loans.

"FMA initiated an official investigation today after a thorough review of the Austrian central bank's report about the on-site review of the Bennett-Refco loans," FMA said in a statement. "The bank has now the legal right to comment."

A BAWAG spokesman said the bank had received the report and was confident that the investigation would be concluded quickly. He referred to the bank's earlier statements saying that all legal and internal banking rules were observed.

BAWAG, Austria's fourth-biggest bank, is listed as one of Refco's top creditors in the bankruptcy filings after it lent 350 million euros ($410 million) to a company controlled by former Refco CEO Phillip Bennett and 75 million to Refco itself.

Bennett asked the bank, owned by Austria's trade unions, for a loan of 350 million euros on Oct. 5, saying he needed to cancel out an intercompany loan. He offered his 34 percent stake in Refco -- now nearly worthless -- as collateral.

BAWAG Chief Executive Johann Zwettler and two other board members approved the loan on Oct. 9, a Sunday, and paid it out on Monday. When they learned a few hours later that Bennett had been suspended from his post, they tried to stop the payment, but it was to late, the bank said.

On Oct. 10, Bennett was arrested for securities fraud.

BAWAG's supervisory board said last month it did not find the managers had violated banking laws in granting the loan but reprimanded them for not having consulted the credit committee and said it was now awaiting the conclusion of the FMA probe.

BAWAG is in the process of selling parts of its exposure to Refco on the secondary loan market. It is also preparing lawsuits against several parties, it has said.

FaGal

14-11-05, 19:31

BAWAG board to discuss Refco loan probe
today.reuters.com - November 14, 2005

VIENNA - The supervisory board of BAWAG P.S.K., a top creditor of collapsed futures trader Refco, will revisit on Thursday why the Austrian bank approved a loan to Refco's former head last month just before his arrest.

BAWAG, owned by Austria's trade union federation, paid a 350 million euro loan to Refco's then chief executive, Phillip Bennett, on October 10, a day before he was arrested for securities fraud and shortly before Refco filed for insolvency.

Austrian banking watchdog FMA launched an in-depth investigation into the loan approval on Friday following an on-site probe by officials from the country's central bank. The investigation means it suspects the banking law was broken.

The central bank's report and the FMA investigation will be discussed at BAWAG's regular supervisory board meeting on Thursday, a spokesman for the trade union federation said on Monday. All but one board member are union officials.

The FMA can order bank officials to resign if the investigation confirms its suspicion that they broke the banking law. In past cases in Austria, banking officials often resigned before the FMA demanded that they be suspended.

At an emergency meeting last month, the supervisory board meeting concluded the loan was granted properly and declined to let executive heads roll until the FMA had finished its report.

Supervisory board head Guenter Weninger said at the time that BAWAG Chief Executive Johann Zwettler had argued the bank had had a long and beneficial business relationship with Bennett and Refco, in which BAWAG held a stake until last year.

Bennett had told the bank he planned to pay back the loan after one year and that he would fund it with proceeds from selling more of his 34 percent stake in Refco, BAWAG said separately.

Bennett, who had pledged the shares -- now nearly worthless -- as collateral, had said he needed the money to pay off an inter-company loan at Refco Inc., the bank said.

The spokesman declined to comment on a report in Austrian newspaper Der Standard that the net profit the bank would have made on the loan was 10 million euros, which would imply it secured a substantial risk premium for the loan.

BAWAG last week sued Bennett in Vienna for fraud, the spokesman said. It will also file lawsuits in the United States this week.

FaGal

14-11-05, 19:31

Man Group Recommended by Merrill; No Link to Refco
www.bloomberg.com - October 14, 2005

Man Group Plc, the world's largest hedge fund company, was added to a list of favored European stocks by Merrill Lynch & Co., which said a slide in its shares spurred by a financial crisis at U.S. futures broker Refco Inc. was unjustified.

Man Group, which is based in London and also acts as a futures broker, was added to Merrill's ``Europe 1'' list by analysts Philip Middleton and Nathan Wong in a note to clients today. They have a ``buy'' recommendation on the stock, which has fallen 6 percent this week as news emerged that Refco's chief executive officer hid unpaid debts.

``It appears as if the goings-on at Refco lie at the root of Man's recent weakness,'' the Merrill analysts wrote. ``In our view, this is a very poor reason to sell Man, as there is no linkage at all.''

Shares of Man Group today rose as much as 36 pence, or 2.4 percent, to 1,545 pence, headed for the stock's biggest percentage gain since Aug. 10. The shares were at 1,543 pence as of 12:20 p.m. in London. Merrill's price target for Man is 2,200 pence.

Man Group executives had been considering whether to spin off its brokerage unit into a separate business, encouraged by the stock market listing of Refco earlier this year.

``The board hasn't taken a decision on this,'' Man's CEO, Stanley Fink, said on Sept. 30, when the group announced its second- quarter earnings. ``We are committed to reviewing the structure of our business. We saw the incredible success of Refco.''

Refco Plunge

Refco this week has lost customers and its stock market value has plummeted 72 percent after Refco CEO and Chairman Phillip R. Bennett, who took the company public two months ago, resigned and was arrested on charges of securities fraud after an internal review found he hid $430 million in unpaid debts dating back to 1998.

Refco stock plunged to $7.90 a share yesterday, from $28.56 at the end of last week. The company yesterday blocked client withdrawals from Refco Capital Markets Ltd., a currency-trading unit. Its regulated futures brokerage, Refco LLC, is unaffected and was said by the New York Mercantile Exchange yesterday to be ``in good standing'' for its oil-trading obligations.

``Man group's brokerage business competes with Refco's brokerage business but has limited overlap with its Capital Markets business, which is focused on the area of foreign exchange and Treasury repos,'' a note from Credit Suisse First Boston analysts said today.

Separate Investigation

In a separate matter more than a week before Refco's disclosure, court documents showed Man Group's U.S. brokerage unit, Man Financial Inc., helped a now-defunct trading firm hide $175 million in losses before regulators froze the accounts because of fraud claims

A special trading account was set up by Man Financial for Paul Eustace, founder of hedge fund Philadelphia Alternative Asset Management Ltd., or PAAM, to absorb losses, according to papers filed in federal court on Sept. 27 by a court-appointed receiver, Clark Hodgson.

Neither the account nor the losses were disclosed to investors, the papers said. Hodgson is seeking a contempt of court order against Chicago-based Man Financial.

The U.S. Securities and Exchange Commission is conducting an ``informal inquiry'' into PAAM, which processed its trades through Man Financial Inc., Man Group said Oct. 7 in a statement. ``We have an excellent record of regulatory engagement and compliance, and will cooperate fully with the SEC in connection with this review.''

No Accusation

The Merrill Lynch report said Man is one of a number of brokers that dealt with PAAM and that, to date, it has not been accused of anything by a regulator.

Even so, ``the PAAM saga cannot logically be actively good for Man's share price, because the best outcome for them is that Man Financial is exonerated, in which case its value is exactly what it was before,'' the Merrill note said.

A spokesman at Man Group's outside public relations company said he wasn't immediately able to comment.

Merrill Lynch is a passive, minority shareholder in Bloomberg LP, which owns Bloomberg News.

FaGal

14-11-05, 19:34

Man Group attacked for 'specious' refusal to supply evidence
money.guardian.co.uk - Nils Pratley - November 14, 2005 - The Guardian

Man Group has been accused of using "disingenuous" and "specious" legal arguments to try to prevent discovery of potentially damaging information about its role at a hedge fund charged with fraud.

The latest comments by Clark Hodgson, the court-appointed receiver to Philadelphia Alternative Asset Management (PAAM), will escalate his acrimonious dispute with Man Financial, the brokerage division of the FTSE 100 hedge fund. Mr Hodgson alleges that losses of $179m (£100m) were hidden by PAAM in a secret account at Man Financial, its main broker.

Man denies the allegations and last month accused Mr Hodgson of "a baseless fishing expedition" in seeking documents relating to Thomas Gilmartin, one of its senior brokers, who was the main contact at Man for PAAM's manager, Paul Eustace. Mr Gilmartin, who is thought to have known Mr Eustace since their college days, has been suspended by Man.

The receiver wants emails, computer records, correspondence and audio tapes and says Man has already supplied most of the documents to the regulatory body that has charged PAAM and Mr Eustace with fraud. Mr Hodgson said Man's condemnation of his request for evidence as "unreasonable, overly broad and unduly burdensome"was "specious at best".

He said: "Man Financial's interest in self-preservation cannot be countenanced given the importance of the receiver's investigation and the recovery the receiver seeks for investors."

FaGal

16-11-05, 12:36

Refco Collapse May Force Austria's Bawag to Tighten Loan Rules
www.bloomberg.com - November 16, 2005

Refco Inc.'s bankruptcy may prompt financial regulators in Austria to clamp down on management and lending practices at Bawag P.S.K. Bank, owned by trade unions that represent artists, construction workers and soccer players.

The Financial Markets Authority on Nov. 11 started an investigation into why Bawag, Austria's fourth-biggest bank, loaned 350 million euros ($410 million) to Refco Chief Executive Officer Phillip Bennett hours before the U.S. futures broker started to collapse. Bawag spokesman Thomas Heimhofer said the Vienna-based company wants the inquiry to be wrapped up as quickly as possible.

``Bawag may need to tighten its lending procedures,'' said Hannes Androsch, 67, a former finance minister and ex-CEO of Creditanstalt-Bankverein AG, which merged with Bank Austria AG in 1997 to form the country's biggest bank.

The investigation probably will result in Bawag, one of more than 50 companies trying to reclaim a total $16.8 billion from Refco, losing income from high-yield loans used to pay dividends, said Klaus Poier, a political scientist at the University of Graz in southern Austria. The FMA also can recommend that banks remove managers when they find that banking laws were breached and turn cases over to state prosecutors.

Bawag CEO Johann Zwettler, who approved the loan to Bennett, declined to comment about the investigation. The bank has scheduled a supervisory board meeting for tomorrow.

The FMA conducts about 50 investigations a year. About 20 percent are caused by ``unusual events'' such as the Bawag loan, said FMA spokesman Klaus Grubelnik. The agency was set up in 2002 to help regulate banks and insurers.

`Somewhat Opaque'

Austrian banks have attracted foreign investments because of banking secrecy laws that withstood calls from the European Union for more transparency. More than a third of the industry's assets, or 234 billion euros, originated from foreign clients, according to Austria's central bank. That compares with about 20 percent in Germany.

``Austria has always been somewhat opaque,'' said Ingo Walter, a professor at New York University's Stern School of Business and the author of ``Global Banking'' published in 2003 by Oxford University Press. In Austria, ``personal relationships play an important role.''

For Bawag, ``it's very awkward to give such a large credit in the U.S. and there are certainly personal issues and relationships involved,'' said Matthias Bank, professor of finance and banking at the University of Innsbruck in western Austria.

Zwettler, Bawag's 64-year-old CEO, approved the loan to Refco on Oct. 9 with management board members Peter Nakowitz and Christian Buettner, said people familiar with the decision, who declined to be identified because of confidentiality agreements. The money was shifted to Bennett's account the next day.

Bennett Loan

Within hours, New York-based Refco removed Bennett, who was indicted Nov. 10 on charges of securities fraud by U.S. prosecutors, after an internal review found he owed the company $430 million. Zwettler said on Oct. 20 that bank officials tried to stop the transfer before Bennett received the money.

``My predecessor knew Bennett so I knew him too and we met at least once or twice a year,'' Zwettler said on Oct. 19. ``I was in New York several times and Bennett was in Vienna several times as well.''

Bawag Supervisory Board Chairman Guenter Weninger criticized Zwettler for the way the bank approved the loan. The bank's credit committee should have been informed of the loan, Weninger said on Oct. 20, without being more specific. Zwettler, who has been CEO since 2003, told the board that he ``couldn't have suspected any falsification of financial statements'' when the loan was granted, Weninger said.

Sale to Man Group

The bank said in an Oct. 18 statement that it will write off ``what is necessary'' and has ``enough funds'' to cover the losses. Bawag has 3.9 billion euros of equity capital.

Refco won court approval on Nov. 10 to sell its biggest futures business to London-based Man Group Plc. Man Group, the world's largest publicly traded hedge fund company, agreed to pay $323 million for the assets, including the U.S. futures business. After the sale, Refco will have liquid assets valued at about $1.25 billion, including cash to guarantee trades, the company said on Nov. 11.

Bawag's net income rose 1.2 percent to 138 million euros in 2004, according to the bank's most recent earnings report. The company had 29 billion euros of outstanding loans to customers, including 6 billion euros to private individuals, at the end of last year, according to its Web site. The bank earlier advanced a 75 million-euro loan to Refco, which it's also trying to recover.

Flottl Family

Bawag first established a link with Refco under Walter Flottl, who ran the Austrian bank from 1972 to 1995. During the 1990s, Flottl used Bawag funds to support his son Wolfgang's venture to establish a Bermuda-based hedge fund, said people close to Bawag, who declined to be identified because the investments were never made public.

Wolfgang Flottl, then in his early 30s and a Harvard Business School graduate, used the funds to bet on U.S. bonds, takeovers and the movement of currencies through Refco.

Austria's national bank announced an investigation in 1994 following press reports of the money transfers to Wolfgang Flottl. It found that Walter Flottl never informed Bawag's supervisory board about the $2 billion in investments with his son's firm, said people close to the investigation who declined to be identified, citing confidentiality agreements.

The probe, whose results were never publicly disclosed, didn't find anything illegal, Bawag said in a statement the following year.

European Exchanges

Wolfgang Flottl said in an Oct. 18 interview that he returned all of Bawag's money ``with a profit.'' He also denied leaving Refco with any unpaid debts stemming from trading losses. Many hedge funds lost money in 1994 when the bond market fell after the Federal Reserve raised interest rates.

Following the probe, Walter Flottl, now 81, retired and his successor Helmut Elsner, now 70, continued Bawag's relationship with Refco.

Elsner and Bennett set up a joint venture in October 1998 to provide clearing services for futures and options traded at European exchanges. Bawag got access to Refco's clients, including 20,000 financial institutions, and Refco profited from widening its product base and a business in Europe. The following year, Bawag bought a 10 percent stake in Refco.

Zwettler, who took over as Bawag CEO from Elsner, sold the stake last year, saying the bank wanted to use the money to expand its operations in Eastern Europe. The Refco stake was sold for about $220 million, according to Austrian daily newspaper Die Presse.

Refco Stake

Elsner declined requests to be interviewed. Walter Flottl couldn't be reached through Bawag for comment, and messages left for him at his house weren't returned.

Bennett gave the bank his 34 percent holding in Refco as collateral for the 350 million-euro loan. Refco's shares traded at $28 to $29 when the loan was granted. Now, they're at $1, valuing the stake at about $50 million.

Bawag, officially known as the Bank fuer Arbeit und Wirtschaft, was founded in 1922 by Karl Renner, a socialist and Austria's first chancellor after World War I. The bank merged with Postsparkasse AG on Oct. 1, combining Bawag's 157 outlets with P.S.K.'s 1,300 branches, according to the bank's Web site. Bawag has 1.2 million customers who hold 18.5 billion euros in savings accounts.

The bank paid its shareholders, the federation of 13 trade unions for industries ranging from metal and agriculture to art and sports teams, a dividend of 71 million euros in 2004, according to the company's annual report. All but two of Bawag's 10 supervisory board members are trade union representatives.

Gone Sour

Regulators ultimately may decide that the matter is an example of a once-productive relationship gone sour, said Wolfgang Ulrich, CEO of Bank Burgenland, an Austrian regional lender.

``Sometimes, there are customers whom you've trusted for 20 years and then it turns out that you had a wrong picture of that person for the entire period,'' said Ulrich, who has known Zwettler since the early 1970s.

Bawag and the Austrian regulator may need to do more to restore confidence, said Androsch, the former finance minister who's now an investor in Vienna-based online gambling firm Betandwin.com Interactive Entertainment AG.

``In a critical situation, a bank should publish all the information that is necessary to ensure confidence,'' he said.

FaGal

17-11-05, 13:51

Austria's BAWAG sues Refco, former CEO in U.S.
today.reuters.com - November 17, 2005

VIENNA - BAWAG P.S.K., a top creditor of collapsed futures trader Refco, said on Thursday it was suing Refco's former head and 28 Refco units in the United States for fraud over a 350 million-euro ($407.9 million) loan.

BAWAG, owned by Austria's trade union federation, made the loan to Refco's then chief executive, Phillip Bennett, on Oct. 10, a day before he was arrested for securities fraud and shortly before Refco filed for insolvency.

BAWAG said Refco was "fully aware" of Bennett's efforts to obtain the loan and intended to deceive BAWAG until it received the money.

"Refco acted deliberately and with the intent to deceive, defraud and mislead BAWAG as to the true state of affairs until Refco had received 350 million euros," BAWAG said, summarising the contents of the complaint.

"Refco deliberately delayed issuance of its Oct. 10 press release announcing the suspension of Mr. Bennett and the restatement of its financials until it had received the loan amount payable by BAWAG to Refco," BAWAG added.

BAWAG said in a statement that it had filed the lawsuit in an insolvency court in the Southern District of New York, adding that it was not clear which Refco units the loan money had flowed to most recently.

BAWAG last week sued Bennett in Vienna for fraud, a spokesman for the trade union federation said on Monday, adding that it would also file lawsuits in the United States this week.

Bennett had told the bank he planned to pay back the loan after one year and that he would fund it with proceeds from selling more of his 34 percent stake in Refco, BAWAG has said.

Bennett, who had pledged the shares -- now nearly worthless -- as collateral, had said he needed the money to pay off an inter-company loan at Refco Inc., according to BAWAG.

The Austrian bank said it reserved the right to extend the lawsuit to other people or firms.

FaGal

21-11-05, 21:01

CDO Evolution Creates New World of Risk

Published in GARP Risk Review Nov / Dec 03 Issue 15
by Janet Tavakoli

The CDO market has grown rapidly in recent times. In a wide-ranging, analytical story, Janet Tavakoli explores the rise of synthetic CDOs and explains the challenges tied to cashflow economics. Along the way, she also provides tips for CDO investors and examines risks taken by CDO structuring banks.

Credit derivatives technology has propelled recent rapid growth in the Collateralized Debt Obligation (“CDO”) market. In 1997, the $64 billion rated CDO market consisted chiefly of securitizations of cash assets. By the end of September 2003, outstanding global CDO visible issuance YTD 2003 issuance was estimated at around $370 billion, 37% higher than the total issuance in 2002. Furthermore, the majority of CDO collateral consisted of derivatives, not cash assets. Synthetic CDOs - or securitizations incorporating credit derivatives technology to transfer asset risks and cash flows - now make up more than 75% of the global CDO market.

In the CDO market, there is an inherent conflict of interest between CDO structurers –protection buyers who hedge by selling protection in the market – and CDO investors – protection sellers. The conflict is centered on the negotiation of credit default swap language, and can only be cured with full disclosure and investor education about the potential language risks.

In several instances, structurers have taken advantage of the “cheapest to deliver option” by buying protection from synthetic CDO investors using the broadest possible language for allowable deliverables in the event of default. Meanwhile, they hedge their position by selling protection using the narrowest possible language. They book the value of the ‘cheapest to deliver’ option as profit. The investor receives none of the reward, but takes the extra risk. Investors should negotiate for the narrowest possible definitions of a credit event and the narrowest possible language for the discount and maturity of deliverable obligations.

Cash Flow Challenges

Cash flow economics present other challenges for investors. There is no such thing as a CDO arbitrage. An arbitrage is a money pump. A true arbitrage guarantees a positive payoff in some scenario, with no possibility of a negative payoff and with no net investment. The opportunity to borrow and lend - at no cost - at two different fixed rates of interest is an arbitrage. The ability to simultaneously buy and sell the same security in different marketplaces, and earn a profit at no cost and with no risk, is another example of an arbitrage.

Financial institutions that structure CDOs come closest to approaching an arbitrage when they buy the collateral, tranche the exact risk represented by the collateral, and sell every tranche of the collateral through their distribution network. Time elapses between the accumulation of collateral, especially in a cash asset based deal, and the closing of the transaction. There is further delay before the deal is entirely “sold”. Financial institutions make a secondary market in the CDO tranches, and occasionally have portions of CDOs in inventory that must be hedged. Still, most of the risk of the transaction has been distributed, and reserves are held as a cushion for the residual risk of ongoing trading and risk management. The financial institutions that use this business model have the cleanest type of transaction management from the arbitrage point of view, but it is still not strictly an arbitrage. Within this model there is room for passing on inappropriate risk to investors or for taking inappropriate risk in the trading book depending on the deal structure.

Equity Structures

All equity tranches are not created equal. Besides portfolio selection, the largest variability among deals stems from the structure of the equity cash flows. Portfolios can be either actively managed, have limited right of substitution, or be completely static. Equity can be either rated or unrated. The investment in equity can be either funded or unfunded. There is also a wide variety of ways that cash flow is made available to the equity investor and to the senior tranches.

Losses are allocated first to the equity investor. That isn’t the whole story, however. CDOs vary in terms of how much of the stream of residual cash flow the equity investor can claim. Another key issue is the amount of loss that can be allocated to the residual cash flow stream above and beyond the initial equity investment. The equity investor determines whether or not he is getting the best deal possible for the risk he takes, based on these structural features. The more cash flow the equity investor gets, the less someone else gets.

Misleading Promises

Most of the initial static synthetic CDOs, promised to pay a fixed coupon on the remaining equity balance. The equity was unrated. As losses occurred, the equity investor’s balance amortized down and fixed income was paid only on the lower remaining balance. Usually equity investors expect to have a claim on excess cash flows unless they are captured in a reserve account, but in this structure, any cash flows in excess of the amount needed to make the liability payments for the CDO benefit the only bank arranger.

The cash flows as constructed above, don’t give the equity investor the best possible deal. Most equity investors were unaware of this fact, because the equity was often combined with a zero coupon instrument in a principal protected structure.

The cure is to look at the performance of the equity cash flows in isolation. Often a simple and straightforward technique serves us best. It’s very effective to look at the survival rate of tranches for a given number of discrete defaults, not fractional defaults expressed by rating agency annual default rate data. Reference obligors don’t default in fractions; they either default or they don’t.

The charts below shows the effect of losses on the remaining equity balance for a Euro 500 million deal in which the equity makes up 4% of the deal for two assumed recovery rates: 50% and 40%.

In the context of actual recoveries experienced in the period from 1999-2002, a recovery rate of 50% seems ridiculously high. Even 40% was too high for many obligors. Simple tables like this show the sensitivity to any assumed recovery rate to any assumed number of discrete defaults. Further IRR calculations can now be done based on these results.

Effect of Default Rate on Equity

Recovery Rate is 50%; Equity Tranche is 4% of deal
Euro 500 Million Portfolio. Each Obligor is Euro 10 million
Defaults to experience
first EUR loss (50%) Recovery Defaults to experience
full principal loss (50%) Recovery
Grade Tranche Size % of Portfolio Tranche Size % of Portfolio
Class Subordination (%) # Defaults Cum Default Rate # Defaults Cum Default Rate

SS 16% 16 32% 50 100%
A1 11% 11 22% 16 32%
A2 8% 8 16% 11 22%
B1 4% 4 8% 8 16%
E NA NA NA% 4 8%

This CDO is structured so that the equity investor earns a stated coupon on the remaining initial investment less accumulated losses, if any. Accumulated losses for this calculation cannot exceed the amount of the initial equity investment.

©Collateralized Debt Obligations and Structured Finance, John Wiley & Sons, 2003 by Janet Tavakoli

Conflict of Interest

If a deal manager has a claim on the equity cash flows, there may be a conflict of interest between the manager and senior noteholders. Investors should be particularly wary of deals in which four structural conditions are met, which can tempt managers to behave against the interest of the noteholders. The first