Commentaries

Now raising intellectual capital

What banks can learn from hedge funds

Should the banking industry look more like the hedge fund sector? That’s the surprising suggestion made last week by two Bank of England officials.

In a fascinating paper, Piergiorgio Alessandri and Andrew Haldane explore the level of public support given to banks in the crisis and the problem of institutions that are too big too fail. Their main point is that if this issue is not addressed it will lead to new crises and even bigger bailouts in the future – a state of affairs they describe as a “doom loop”.

But the most eye-catching passage is a suggestion that banks have a lot to learn from hedge funds:

It may be coincidence that the structure of the hedge fund sector emerged in the absence of state regulation and state support. It may be coincidence that the majority of hedge funds operate as partnerships with unlimited liability. It may be coincidence that, despite their moniker of “highly-leveraged institutions”, most hedge funds today operate with leverage less than a tenth that of the largest global banks. Or perhaps it might be that the structure of this sector delivered greater systemic robustness than could be achieved through prudential regulation. If so, that is an important lesson for other parts of the financial system.

John Meriwether writes to investors (again)

This purports to come from the hedge fund investor John Meriwether but mysteriously carries a Nigerian postmark:

Dear friend,

Greeting,

Permit me to inform you of my desire of going into business relationship with you. I got your contact from the International web site directory. I prayed over it and selected your name among other names due to it’s esteeming nature and the recommendations given to me as a reputable and trust worthy person I can do business with.

So much for that de-leveraging

You would think it would take a little longer for hedge funds and other investors addicted to using borrowed funds to juice returns before they started loading up on high-yielding junk. But with short-term borrowing costs so low, I suppose it was just too hard to resist yields found in the depths of high-yield bond market.

CCC-rated bonds, the darlings of the current rally in corporate debt, have broken though another milestone , according to Martin Fridson of Fridson Investment Advisors. Its spread over Treasurys as measured by Merrill Lynch, fell to 12.18 percentage points this week, below it’s historical average. Meanwhile, higher-rated junk spreads are still much higher than their averages.

Wall Street is being judged

Photo

Capitol Hill has yet to get its act together on financial regulatory reform. But another arm of the federal government, the judiciary, is emerging as the new best friend of investors.

It started a few weeks ago when Judge Jed Rakoff refused to approve the Securities and Exchange Commission’s wimpy $33 settlement with Bank of America over the bank’s failure to come clean with shareholders about its acquisition of Merrill Lynch.

Hedge funds = households?

Data showing that American households and their spendthrift ways meant big purchases of U.S. Treasuries got a lot of traction earlier this week. Not surprising given the ongoing concerns that one day we’ll wake up and foreign central banks and other overseas investors will decide they’re no longer enamored with the growing pile of U.S. debt. Someone has to step up and it may as well be those U.S. savers.

The data in question came from the Federal Reserve’s flow of funds data. David Ader, CRT Capital’s intrepid bond analyst, decided to take a closer look to see what’s going on.

Cioffi: My investors? What investors?

Ralph Cioffi, the indicted former Bear Stearns hedge fund manager, is trying again to get an insider trading charge dismissed in advance of his upcoming criminal trial. 

And this time his lawyer’s have come up with an interesting legal argument, which essentially is that a “hedge fund manager owes no fiduciary duty to its investors.” Rather, a hedge fund manager’s “fiduciary duty runs only to the hedge fund itself.”

Mary Schapiro is no money manager

Let’s hope Securities and Exchange Commission Chairman Mary Schapiro is a better regulator than a money manager.

That’s because The Financial Industry Regulatory Authority, the last place Schapiro ran, lost $696 million last year. Almost all of FINRA’s red ink stemmed from losses on investments, including ownership stakes in hedge funds and private equity firms, stocks and bonds.

Could Goldman pinch CIT?

It appears the federal government is on the verge of walking away from CIT Group and the same can be said for Goldman Sachs–even though the investment firm is one of the mid-market lender’s biggest bankers.

On Monday, I suggested that Goldman CEO Lloyd Blankfein could turn around the public’s nasty impression of his Wall Street firm by stepping in an buying-out CIT. But I didn’t really expect it to happen. Then yesterday there was a rumor floating around that Goldman, with the tacit support of the Obama administration, was trying to put together a private-sector bailout package for CIT.

Ralph Cioffi faces the music

We’re just three months away from the criminal trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin and federal prosecutors have just produced a witness list.

Sadly, there are no big marquee names on the list of 32 people, who are scheduled to take the stand and raise their right hands in a Brooklyn, NY federal courtroom. If you were expecting to hear from former Bear CEO James Cayne, don’t adjust your work schedule to take time off.  Warren Spector, Bear’s former president, who Cayne fired a few weeks after the Bear funds collapsed in the summer of 2007, also doesn’t make the grade.

from Margaret Doyle:

COLUMN –Investors return to hedge funds: Margaret Doyle

Margaret Doyle is a Reuters columnist. The opinions expressed are her own

By Margaret Doyle

LONDON, July 10 (Reuters) – If fear and greed are the motivating forces in financial markets, then greed appears to be in the lead again. Hedge funds had a torrid 2008 - losing money, barring withdrawals, displaying abysmal due diligence and even shutting down – despite the industry’s promise of “absolute return”. However, figures released by Eurekahedge show that investors are returning to the industry.
There are plenty of reasons to stay away. There is an old joke that a hedge fund is a remuneration scheme masquerading as an asset class. One of the few things that the industry has in common, across a multiplicity of investment strategies and styles, is its proclivity for hefty fees.
The industry has always defended “two and twenty”– 2 percent management fee and 20 percent of the annual return above a certain threshold – on the grounds that supe rsmart hedgies would outperform their rivals at dull long-only fund managers. Moreover, because the industry focused on “alpha” – the industry jargon for returns that are uncorrelated to market returns (“beta”) – the idea was that hedge funds would deliver “absolute” (rather than relative) returns. They might not beat, or even meet, market returns in the good years, but they would not lose it in the bad years.
2008 put paid to that theory. Moreover investors discovered that many of the previous excess returns were derived from excess leverage rather than super smarts. Worse, when investors tried to redeem their depleted capital, many funds invoked the small print to gate their funds.
The coup de grace was (or ought to have been) the revelation that several of those who invested with the fraudster, Bernie Madoff, were funds of hedge funds which had been charging a further layer of fees, supposedly to do due diligence.
In some ways, the investing environment is getting worse: regulators around the world are bearing down on the industry in a way they never did before and credit has dried up.
This tale of woe ought, at the very least, prompt those re-investing in hedge funds to demand better terms. Some distressed hedge funds have already refunded or reduced fees. In addition to smaller fees, investors ought to be clearer on when and on what terms they can get their money out.
Unfortunately, the signs are that healthy hedge funds are making few or no concessions on fees. For example, Man Group, Britain’s biggest listed hedge fund, reported that its gross margin on private investors remained “robust” in the year to the end of march, slipping slightly to 4.33 percent, and remains strong. Yet retail inflows exceeded outflows in the quarter to the end of June.
With investors’ memories this short, perhaps it should not surprise us that fund managers hold fast to their fees.

  •