Could Carl's silence be golden?

Our favorite billionaire blogger and corporate raider Carl Icahn is safely avoiding writer's cramp. His Icahn Report, launched to much fanfare as a hub for corporate governance  and reform, has not been updated since April 16.

Reuters caught up with Icahn this week to discuss his intervention in CIT's attempted rescue. The legendary investor threw a bomb into the lender's efforts to strike a debt swap deal with its creditors, and to stay in business through a reorganization plan, by offering a $6 billion loan. Asked about the lack of production on his blog, Icahn explained he's been fully engaged this year:

"I've been sort of busy. And right now, with the market up, there's not as much interest in corporate governance like the were was a couple of months ago.  I've been so busy, with all these positions we've got. There's a lot going on."

So we checked with Damien Park, who runs activist research group Hedge Fund Solutions LLC and has his own blog tracking activist activity.  He observed that Icahn has been seeking board seats at Enzon Pharmaceuticals, Biogen, Amylin and Lions Gate.  He was actively pestering Yahoo late last year and has remained a vocal shareholder.

"He's been livelier than most of the larger activist investors this year.  That's for sure," Park said.

More interesting, perhaps, is Icahn's point that corporate governance fades as an issue when markets rebound. He announced the blog in 2007 and finally posted his first item on June 2008, as the credit crisis worsened. Perhaps his logging off  is a good signal.

Breakingviews.com has compiled a list of unappreciated heroes of the financial crisis: “Some Good Names in a Year Gone Bad.”

Can you match up the undersung HOFers with their acts of contrarian bravery, as selected by breakingviews’ Antony Currie, Rob Cox and (formerly of Reuters) Jeffrey Goldfarb?

1. Tom Scholar

2. Jeff Kronthal

3. Harry Markopolos

4. Peter Wuffli

5. Greg Fleming

6. Jed Rakoff

A. Options trader who warned the SEC about Bernard Madoff’s Ponzi scheme

B. Merrill Lynch executive who warned his bosses about taking on too much risk

C. Former Merrill president who convinced CEO John Thain to accept an acquisition by Bank of America

D. Federal judge who challenged a settlement between the SEC and Bank of America

E. Former UBS boss who gave up a 12 million Swiss frank bonus after being ousted for, ahem, being too risk-averse

F. British civil servant who was a primary architect of the country’s life-support system for banks

I’m sure we are all comfortable within the confines of the honor system, so no Googling allowed. Read the answers — and nominate your own candidates — in the comments section.

Investing in a company in trouble is rarely for the faint-hearted, as the funds lending to Eggborough power station know.

Earlier today France's EDF, Eggborough's current owner, confirmed lenders to the coal-fired power station planned to exercise their option to buy the Yorkshire plant for about 190 million pounds.

The lenders, which include Bluebay Value Recovery Fund, took on the debt following an earlier restructuring of the company. Reports suggest that despite the low acquisition price, Eggborough may be worth as much as a billion pounds.

Other unusual results of distressed investing recently include Octavian Advisors ending up on the board of sporting goods firm Head NV, mezzanine lenders landing up in a big London restructuring court case, and Vinci buying up bits of British builder Haymills via a prepack deal.

Nycomed, the Swiss drug company, already has 4 billion euros or so of net debt and some pretty junky single-B credit ratings. But that’s not deterring the private-equity owned outfit from plotting a bid for the drugs business of Belgium’s Solvay, even in these leverage-phobic times. As I wrote earlier:

“Switzerland’s Nycomed plans to draw on buoyant junk bond markets and new cash from its private-equity owners to fund a buyout of Solvay’s drugs unit, people familiar with the matter said.

“Such a structure would allow Nycomed — which already has billions of euros of syndicated loans — to bypass the moribund leveraged loan market and would create a group with some 6 billion euros ($8.6 billion) in yearly sales.”

Nycomed has a few strong cards to play — a track record for integrating acquisitions and quickly paying down debt, owners ready to stump up a billion euros or so of fresh funds, and a solid case for being able to tap both Europe’s recently resurrected junk-bond market and its much larger U.S. counterpart.

And in preferring securities to bank debt, Nycomed is blazing a high-yield trail down a path already well-trodden by investment-grade peers such as Roche, whose buyout of Genentech was underpinned by $30 billion of bonds. Indeed some, including Reuters columnist Alex Smith, sense a “dramatic shift” underway in Europe as bonds fill a vacuum left by vanishing bank loans.

Turns out Goldman Sachs is a staunch advocate of going organic — when it comes to the money management business.

As Barclays auctioned off its Barclays Global Investors unit this year, Goldman was widely seen as a likely acquirer. That is until Blackrock In under Larry Fink emerged as the buyer with a $13.5 billion deal.

Lots of other money managers are expected to be sold, as the industry consolidates and cash-strapped banks look for valuables to pawn. But Viniar told analysts Goldman’s preference is to grow the business without deals, and appeared to question the very idea of money manager deals.

“If there were an acquisition that made sense financially for us to do, we would certainly consider it,” he said, something he says every three months to calm down excitable analysts. “When we look at the prices of most of the acquisitions, we think that they haven’t made sense in that you’ve had to assume really heroic growth rates that we don’t think are realistic.” 

Jefferies Putnam Lovell recently said it counted 35 management deals in the second quarter, compared with 52 deals a year earlier. Besides the BGI takeover, Aquiline Capital Partners acquired Conning & Co,  JPMorgan Chase bought the remainder of its Highbridge Capital Management hedge fund unit and Woori Finance purchased Credit Suisse’s 30 percent interest in a joint venture.

Yet Viniar notes money management firm deals are tricky, since buyers have to pay a premium for the company and then put up more money to retain star managers. And even as billions of profits come sloshing into Goldman’s coffers, Viniar apparently doesn’t like to part ways with the firm’s cash.

“It has taken a while, but we’ve grown (the asset management business) quite successfully, almost exclusively organically.” he said. “And the high likelihood is that is the way we are going to continue to grow it in the future.”

(Photo: A customer walks past organic products in an organic food chain store in Taipei/Pichi Chuang)

Sheltering from the credit crisis in so-called defensive stocks could prove a disappointment to investors and a great opportunity for short-sellers, according to Liontrust hedge fund manager James Inglis-Jones.

Inglis-Jones, who runs a hedge fund for Liontrust and who recently took on the First Income fund after the departure of star manager Jeremy Lang, has short positions in sectors such as tobacco and pharmaceuticals and has recently added more.

"It's an interesting opportunity when something is seen as safe," he told me. "When the company delivers a disappointment the payoff can be pretty good."

In February Hedge Hub reported Crispin Odey saying defensives were becoming "interesting shorts" and that he "certainly wouldn't own them".

However, with markets having bounced so much recently -- the FTSE 100 is up by a quarter since March -- and many defensives having missed out on most of the rally, are defensives still expensive or do they offer better relative value now?

Much of that depends on whether the rally has legs or is a dead cat bounce. Barclays Wealth came out today saying it is "shifting to the tactical offensive", adding, "The big question now is whether the pick-up is temporary or the real thing. We suspect the latter." Several big names have already pointed to a new bull market, but after a 25 percent rally where do we go from here?

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.

Nickel strategies are -- rather like the contrived image of picking up nickels in front of a steamroller -- those that yield small returns most of the time with the occasional disaster.

Yan says the carry trade, merger arbitrage and convertible arbitrage fall into this category.

The problem for unwary investors, as witnessed by last year's big losses by some funds, is that these trades occasionally go wrong, especially if a lot of other funds are doing the same thing.

"Investors should be aware of the risk (of) potential large losses," Yan tells me. "It is quite possible that many individual investors are not."

'Black swan' strategies, named after best-selling author Nassim Nicholas Taleb's credit crisis hit, take years of small losses but hit the jackpot when rare events -- such as the credit crisis -- occur.

John Paulson's $3.7 billion earnings in 2007, according to Alpha Magazine, show how successful bets on events few people expect can be.

The trouble is that investors can lose patience in the meantime and pull out their money -- hardly an attractive proposition for hedge fund managers already battling outflows -- whereas they're much happier to accept the steady gains that 'nickel' strategies give you most of the time.

That suits everyone very nicely until the trade suddenly unwinds, by which time it's too late and you're under the steamroller.

It would appear that where to live is the hot topic for hedge fund managers at the moment.

Star manager Crispin Odey of Odey Asset Management is "seriously considering leaving" the UK over higher taxes, the Sunday Times reported, while Krom River moved to Zug from London for lower tax and a better lifestyle, the Financial Times reported last year.

But there is traffic into London too.

Last month Hedge Hub reported that Auckland-based 36 South's founder Jerry Haworth was moving to London to be closer to investors, who are now keen to do as much due diligence as possible in the wake of the Madoff fraud -- but are not always able to fly to New Zealand.

Now Anthony Limbrick, chairman and CIO of New Zealand's Pure Capital, tells me his firm will also be expanding its London operations and is likely to shift the balance of the company there eventually, although he will retain his New Zealand base.

Moreover, as head of an association of New Zealand hedge funds, he says other Kiwi firms are considering such a move.

It was not so long ago that the booming hedge fund industry, flush with client inflows, was going to be able to let fund managers work from all sorts of locations, just as long as they could deliver the returns.

Now it seems the opposite is true. In a post-Madoff world hedge funds could well increasingly find themselves having to group into hubs -- New York, London, Connecticut, California, possible Geneva -- where investors can more easily see what they're doing.

One of the more striking aspects about the Madoff affair is the large number of people who appear to have been 'hooked' on Madoff products.

Money managers were drawn by Madoff's air of mystique, his stellar reputation as a market timer, the apparently steady returns with rock bottom volatility and the absence of fees, which some collected from clients anyway.

Those wanting more could simply have increased allocations but some chose to create new investment vehicles instead. Behind the banks and asset managers which lost money, some names appear again and again.

Take the circle of managers revolving around Sandra Manzke, founder of Tremont, whose Rye unit lost substantially all of its roughly $3 billion in assets.

Tremont and Bermuda-based Kingate Management also set up Kingate Global, a Madoff feeder which lost $2.7 billion, and Manzke was on the board of the fund, the Financial Times reported earlier this year.

Manzke's presence at the founding of Kingate was confirmed by a source close to Kingate who asked not to be named.

In 2006 Manzke left Tremont to found Maxam Capital, a Madoff feeder widely reported to have lost $280 million.

Returning to Kingate, there were other less well-known names who were also caught out by the Madoff bug. One was Christopher Wetherhill, president and director of Kingate Management and a director of Kingate Global and of another Madoff feeder, Kingate Euro.

Wetherhill was also founder and, until 2000, chief executive of Hemisphere Management Ltd, once reputedly the third-largest hedge funds administrator in the world, overseeing assets of over $51 billion, including those of the Kingate funds.

Thus Wetherhill could know how and where Kingate money was invested, as well as what happened to the commissions the company took in over the years.

Former Kingate clients are anxious to locate these commissions, one lawyer acting for them has told Reuters. He estimated they could total as much as $500 million.

The bulk of Kingate's assets were sourced through its consultant, FIM Advisers, a London-based asset manager founded by Carlo Grosso and Federico Ceretti.

FIM has played down its relationship with Kingate but two sources familar with the situation have told Reuters that Grosso and Ceretti were synonymous with Kingate and had been present at its founding.

When Wetherhill left the helm of Hemisphere, he was replaced by Tom Healy, who later became chief operating officer and a board member of FIM.

Wetherhill is also the named by Madoff Trustee Irving Picard as the contact point for Whitechapel Management Ltd, a Bermuda-based firm which appears on Picard's long list of Madoff clients.

Another ubiquitous presence in the FIM-Kingate-Tremont triangle is New York lawyer Michael Tannenbaum, a founding partner of the law firm Tannenbaum Helpern Syracuse and Hirschtritt LLP.

Kingate’s fund offering documents say Tannenbaum, an outside director of the manager since 2000, is a senior partner of a law firm that advises both funds, the manager (Kingate) and the consultant (FIM), a potential conflict of interests.

Tannenbaum's firm is also legal counsel for affiliates of Tremont and Rye.

Perhaps understandably, none of those named is keen to revisit their Madoff experience, nor their links with each other.

Wetherhill offered a no comment, as did a spokesman for Manzke. Calls and emails to Tannenbaum went unanswered.

Numerous calls to FIM have not been returned, and questions on the relationship between Kingate, FIM and Hemisphere emailed to the company's general counsel Philip Niel remain unanswered.

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.

Goldman Sachs Asset Management (GSAM) is currently building out its separate account platform with the aims of improving hedge fund transparency and ensuring that hedge fund managers' interests are properly aligned with those of their clients. "It gives you much greater leeway to shape the investment guidelines and terms," says Charles Baillie, co-head of alternative investments and manager selection at GSAM, who oversees some $19 billion in hedge fund assets.

Separate or managed accounts are usually separate vehicles specifically set up for a larger investor. They give the investor more scope in setting the liquidity parameters, and control over the underlying assets. Baillie says more fund of hedge fund managers had started looking at this model but that the higher costs and back office requirements have discouraged many from pursuing it.

"Under this structure you can see your assets and choose your own custodian," Baillie says. GSAM is also trying to ensure that its managers have a lot of their own money invested in their funds, and where the investment horizon is longer, is looking to extend the period over which carried interest is paid.

This means that managers would only be able to pay themselves profit participation fees when profits have actually been booked, rather than paying them every year on the notional value of the assets.

Baillie says his team is now looking at opportunities to restructure the fees and liquidity terms of credit hedge funds - amongst others - on the platform, following large outflows from such funds last year. "We are currently in discussions with a number of funds both in the US and Europe," he confirms. 

If the separate account approach gains momentum it is likely to support the further institutionalisation of the hedge funds business, as investors seek ways to sleep better at night.