Commentaries

Galleon’s edge

The arrest of hedge fund millionaire Raj Rajaratnam on charges that he and his $7 billion Galleon Group hedge fund profited from illegal insider trading will no doubt feed suspicion in some corners about the way hedge funds generate fat profits.

But for anyone to assume that all hedge fund managers owe their success to getting information on the sly is unfair and wrong. The overwhelming majority of hedge funds are only as good as the quality of the research performed by their analysts and traders.

And the truth is the vast majority of hedge funds are rather ordinary. If the majority of hedge funds managers were so crafty, not so many funds would have gone bust last year–or lost bundles of money for their wealthy investors.

The true standouts in the industry are a real minority. Anyone can put together an offering statement, call themselves a hedge fund manager and go out and raise money. That’s one reason why wealthy people and pension funds who throw money blindly at hedge funds without doing adequate due diligence are being plain foolish.

Still, the charges against Rajaratnam and five co-defendants are disturbing. Hubris and greed are powerful motivators. And some hedge funds will stretch, even break the rules to get an edge–even if it’s to book just another $20 million for a fund with nearly $7 billion in assets.

Indeed, it’s worth noting that this isn’t the first time Galleon has been accused of skirting the rules to get an edge.

In 2005, Galleon paid an $800,000 fine to the SEC to settle a civil investigation into allegations it improperly profited from shorting 17 stocks. The SEC alleged the hedge fund violated securities rules by using shares obtained in a secondary offering to cover, or close out, a pre-existing short position on a stock. Regulators claimed that impermissible strategy called “collapsing the box” essentially was a risk-less one and generated $1 million in trading profits for Galleon.

Stella Artois becomes real hedge fund investor

It seems like a gutsy time to be advertising a hedge fund in newspapers and across billboards in London.

Until you realise at second glance that the adverts are a spoof by InBev-owned lager brand Stella Artois which is trying to boost its green and recycling credentials with some whacky marketing.

With slogans such as “An Investor measures the growth of his hedge fund” and “Once upon a time a hedge fund was just that”, the ads initially catch the eye of those of us interested in financial services.

The question is whether they’ll get people buying and drinking more Stella Artois beer. The beermaker is hoping to boost its sales by promising to work with The Tree Council to plant hedgerows across Britain — to help wildlife and soak up CO2 — if you buy a special pack of its lager.

The marketing industry response so far looks promising.

But the real test of whether people are spurred into drinking more Stella Artois out of a sense of environmental responsibility will be in the British countryside.

Look out for miles of hedgerows with “Sponsored by Stella Artois” signs.

Stones and glass houses, offshore tax haven edition

One of the week’s more amusing stories takes us to the sun-kissed shores of the Cayman Islands, scuba diver’s paradise, magnet for hedge funds and – until very recently – world-beating tax haven.

The financial crisis has not been kind to the Caymans. Hundreds of hedge funds have collapsed and global banks have slashed jobs. As if this was not enough, President Barack Obama in the spring launched a crackdown on tax havens that forced a number of Caribbean islands, including the Caymans, to embrace greater transparency – after a fashion.

Things are so bad that the government of the Cayman Islands is facing a $82m revenue shortfall in the budget. Local officials say they need a big loan or the government risks bankruptcy.

However, the British government – which oversees the islands – last week vetoed the loan. Chris Bryant, the British Foreign Office Minister, said he would not approve any new lending until he was convinced the Caymans had their house in order. He even suggested the islands might have to introduce – horror of horrors – income taxes in order to make ends meet.

Bryant continued:

It would be unwise, I suspect, to rely too heavily on a rapid improvement in trust fund income or to expect that the Cayman Islands’ prosperity can presume on an off-shore tax haven status.

Bryant would appear to have a point. But the island’s financial authorities think the British have other, baser, motives. As Anthony Travers, head of the Cayman’s financial services authority CIFSA, told Reuters’ Lorraine Turner:

Eddie and the losers

Why are there financiers who think that they — and they alone — can run businesses where nearly everyone else who has tried has failed? There is Guy Hands with EMI and Cerberus Capital Mangement with Chrysler, but Exhibit A has to be hedge fund manager Eddie Lampert’s nearly four-year adventure with Sears.

One can admire the financiers’ ambition, the sheer audacity in going against conventional wisdom. Yet something obvious has been lacking in all their bold calculations: How to persuade consumers to buy their offerings. These have been companies that need leaders who are more like the late Billy Mays than financial wizards.

That was underscored today by Sears Holdings Corp.’s embarrassing second-quarter loss. Sales at both Sears and Kmart stores open at least a year fell 8.6 percent from the quarter a year ago. Revenue declined 10.3 percent. It’s a tough market, to be sure, and the weak housing market has dampened demand for core items like appliances. But recent results from retailers like Home Depot show that Sears’ shoppers are simply going elsewhere.

“Ouch,” begins Morgan Stanley’s note to investors on the results. The Credit Suisse report is titled “Put a Fork in It.”

But the Lampert experiment with Sears, for better or worse — and it may very well worse — will be running for some time now. That is a wider window than what other financiers had in their relatively brief forays into troubled busineses like recorded music, autos or newspapers. This is a hedge fund manager who has some time to still turn things around. In part, that’s because Sears has $1.3 billion in cash, down from $1.5 billion in the quarter a year ago, but up from $1.2 billion in the first quarter.

And Sears could do still more cost-cutting, which has been Lampert’s main focus in attempting a turnaournd. The retailer has announced the closings of just 28 stores; analysts estimate that there are hundreds of stores that are unprofitable and should be closed.

That’s not enough, as the Morgan Stanley analysts note: “Acess to liquidity and costs cuts do not address the core issues of declining relevance and underinvestment.”

Insana the pitchman

Ron Insana once was one of the better journalists/personalities on CNBC, but then he decided to go into the hedge fund business and failed miserably. Now Dealbreaker.com reports he’s teamed up with TheStreet.com to produce a product that let’s you trade along with the former cable anchor and “make more money in the markets.”

Now, Wall Street is big on stories of people reinventing themselves. But this one just seems a bit too much. Insana’s offer is one investors clearly can refuse.