La corsa degli hedge funds a cedere i loro assets

Hedge funds rush to sell assets
By Gillian Tett in London
Published: May 17 2005 20:21 | Last updated: May 17 2005 20:21

The cost of buying protection in European and US financial markets against corporate bond defaults has risen sharply in recent days, as hedge funds and other investors seek to offload assets after suffering losses.

This has moved the price of some credit instruments in unusual ways and caused liquidity in some corners of the financial markets to evaporate, according to bankers. While the overall scale of hedge fund selling and their losses is unclear, many observers suspect it will continue to distort the market for some time. Some fear the jitters could worsen, particularly if hedge funds' losses prompt investors to withdraw money at the end of the next financial quarter in June.
http://news.ft.com/cms/s/d4e5e9b6-c707-11d9-a700-00000e2511c8.html

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

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.

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

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

'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.

'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

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

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.

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

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.

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

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

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.

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.

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.

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

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

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.

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