Money managers under the microscope
David Einhorn again sent markets scurrying last week when he told investors he was shorting Moody’s Corp, but the Greenlight Capital manager’s latest thumbs down packed a weaker punch than his past, celebrated broadsides.
To be fair, Einhorn had a tough act to follow. A year ago, he boldly said Lehman Brothers was in much worse shape than its management would admit. Four months later — the bank went bankrupt and the shares were wiped out. It took more than six years, but his warnings about business lender Allied Capital also proved accurate and ultimately very profitable.
Last week, the soft-spoken Einhorn turned his sights on the parent of credit rating agency Moody’s Investors Service. Investors dutifully followed Einhorn’s lead and sent Moody’s shares down as much as 8 percent before they closed at $26.89.
Yet in the three trading days since, Moody’s stock has recovered its Einhorn losses and more. The shares traded at $28.66 a share Tuesday.
Hedge funds wishing to demonstrate their honesty to a sceptical world can now pay for a risk assessment to show they have a low risk of fraud.
For $15,000-$20,000 Protean Fraud Risk Appraisal will use its database of every such financial crime since 1997 to see if a fund shows any suspicious characteristics.
A year ago in its final results Man Group – the world’s biggest listed hedge fund firm — was able to report assets under management of $78.5 billion and a 60 percent rise in profits.
The firm’s shares took a pounding this morning, although have since made up some ground, after the firm revealed assets are now down to $44 billion, while profits almost halved.
Some investors may not be fully aware of the risks they face as career-conscious hedge fund managers plump for strategies that build a convincing-looking track record but occasionally backfire badly.
According to a paper by Yale academic Hongjun Yan, hedge fund managers are far more likely to choose so-called ‘nickel’ strategies than ‘black swan’ strategies, even if returns are ultimately lower and they risk the occasional huge loss.
Big-hitters Crispin Odey and Anthony Bolton may have pointed to the start of a new bull market, but not all hedge fund managers are convinced.
A report from Credit Suisse/Tremont, published today, says many managers played it safe in April, meaning funds made an average gain of just 1.68 percent, compared with a 9.57 percent rally in the S&P 500.
Plenty has happened since the UK brought in its temporary ban on short-selling financial stocks last year — Madoff, Weavering, hedge fund outflows, the EC’s controversial plans for hedge fund rules, and even a few hedge funds making money.
However, behind the scenes, the debate on how to handle this controversial practice rumbles on, and today the Investment Management Association published its response to the FSA’s discussion paper, now that the period for responses has closed.
So Odey Asset Management isn’t going to be leaving the UK after all.
Nevertheless, the Sunday Times interview with Crispin Odey reflects the frustration many in the hedge fund industry feel from a combination of higher taxes and what they perceive as the UK’s failure to protect them from tougher EU rules, driven by the French and Germans.
City workers may dream of relocating out of London to somewhere a bit more laid back, particularly at rush hour, but one hedge fund manager is going the other way and is swapping the peace, quiet and good weather of New Zealand for the Big Smoke.
Jerry Haworth, founder of Auckland-based hedge fund firm 36 South, is moving to London’s West End in a bid to be closer to clients and to attract more assets.
The fund of hedge funds concept took a serious knock last year with Bernard Madoff’s $65 billion fraud, leading high net worth investors to pull out money over concerns that the due diligence hadn’t been quite as diligent as one would hope.
Even managers who weren’t exposed to Madoff had to calm client fears. This has prompted the bigger, more institutional groups to seek ways of gaining more control over assets that the underlying managers are running.
The war of words is hotting up in the days leading up to next week’s draft EC directive on hedge funds and private equity.