The explosion of interest in high-frequency trading has started to drag new faces to sometimes staid industry conferences. Traders who for years worked on algorithms and computer codes behind the scenes are stepping into the spotlight. They’re appearing on more and more panel discussions, feeling the need to defend their practice against the slings and arrows of politicians and regulators.

So far, they’ve managed to mix exasperation with good humor. The head of one high-frequency trading shop, speaking on a panel this week, said that if you believe everything you read in newspapers you might think the practice is “an unfair, highly profitable and socially useless trading strategy implemented by highly secretive and unregulated traders using superfast computers to compete with retail investors, manipulate markets and front run flash orders causing volatility in the financial markets and creating systemic risk.”

He argued that a more accurate definition of high-frequency trading would be, “a wide variety of highly competitive, low margin trading strategies implemented by professional market intermediaries who have invested heavily in technology that have the effect of making the markets more efficient by enhancing liquidity and transparent price discovery to the benefit of investors.”

At least 20 of the 30 biggest hedge funds boosted their positions in financial institutions in the last quarter, a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.

The push into financials indicates fund managers including Steven Cohen and John Paulson -- closely watched as barometers of risk -- have shifted from routine merger arbitrage plays to directional bets with more reward potential.

More coverage analyzing the Smart Money:

Paulson's AngloGold bet points to inflation

Betting on a takeover of CF Industries Holdings

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.

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)

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.

BNY Mellon's look at the "Hedge Fund of Tomorrow" has gained some column inches for its confirmation that wealthy Europeans have proven decidedly disloyal to the hedge funds who lined their pockets during the good times.

Rapid exits from European HNWs have apparently created an industry which is more American, and more institutional. BNY Mellon and research firm Casey Quirk expect assets to recover, and more than double within 4 years. Small beer given previous growth rates, but beggars can't be choosers.

I was most struck though by another line in the 50-page report.

Investors were asked what they would consider the greatest challenge for hedge funds going forward, and it is clear that the installation of suspended redemptions or investment gates has riled the clients something rotten.

The measures may be entirely legal, but many investors think their hedge fund managers have been 'high-handed' and 'abrupt'. (I do wonder if they expected polite advance notice of a block on redemptions to give them ample opportunity to err... pull all their cash out?)

More worryingly, clients who contributed to the report are convinced that certain hedgies are playing fast and loose:

"Some report that their hedge fund managers continue to charge fees on gated assets, or that the portfolio is actually liquid and managers are using the gate provision as a business-continuity tool rather than an investor-protection measure."

In an era when investors are no longer in thrall to stellar hedge fund returns, they are apt to vote with their feet. The BNY Mellon study reports clients are preparing to "blacklist" hedge funds who have crossed the line, conjuring up another ill wind for an industry still struggling to weather the storm.

Dan Primack is the editor of peHUB, a Thomson Reuters publication.

The New York State Pension Fund kickback scandal is making new headlines. The Wall Street Journal reported that Steven Rattner, the head of the Obama administratino’s auto task force, was one of the executives involved with payments that are under scrutiny, citing a person familiar with the matter.

On Thursday, New York State Attorney General Andrew Cuomo filed a criminal complaint against Raymond Harding, former chair of New York’s Liberal Party, for scheming with the already-indicted David Loglisci and Hank Morris. Cuomo also coaxed a guilty plea and financial remuneration out of Barrett Wissman, a crooked former hedge fund manager.

All of this got me to thinking more about the issue of raising fund capital from public pension systems, a process that often is just begging to be corrupted. Inexperienced and smaller general partners (GPs) can have real difficulty getting in front of a pension system’s investment staff, because there is rarely a transparent or streamlined process.

The result is that many of these GPs hire a “finder,” which is typically a politically-connected individual who can gain access from the top-down. Most of these finders aren’t splitting their fees with the pension system’s investment staff – a quid pro quo that allegedly occurred in New York – but even the most above-board of these relationships boils down to influence peddling from my humble perspective.

Here’s how one GP explained it: “We hire finders because there’s sometimes no other way to get our 20 minutes in front of someone from the [pension system’s] investment staff. We’re not paying the finder for the fund commitment, but just for the opportunity to make our case and then have the system or its consultant conduct due diligence on us.”

So let me make a modest proposal: Public pension systems should participate in a modified version of M&A deal-flow circuits. For the uninitiated, deal-flow circuits are structured networking events (often featured as part of industry conferences) in which a group of buyers (bankers, PE investors, etc.) get introduced to a group of sellers (CEOs, PE pros with portfolio companies to shop, etc.). Each buyer typically sits at his/her own table, and the sellers sit with them for pre-determined periods of time, before rotating to the next buyer. Kind of like financial speed-dating.

The same format could be applied to the GP/LP dynamic. Rent out a ballroom for two days, and invite senior staff from lots of public pension systems (and some private LPs too, if they’d like to participate). They would be the buyers, and would each get their own table. Then invite GPs who are actively looking to raise fund capital, with some sort of pre-qualification process to screen out the nutjobs. Then let the GPs make their 15 or 20-minute elevator pitches to the LPs. Not in order to get an immediate commitment, but just to get the face-time. Then the LPs can reflect on their meeting sheets, and determine which opportunities are worthy of further due diligence.

Most GPs can accept striking out with a particular LP. What frustrates them is when they don’t even get an at-bat.

A fund-raising circuit could assuage that frustration, and remove some of temptation to use politically-connected finders (and thus reduce both actual corruption and the appearance of corruption). It wouldn’t be a total panacea, but it would be a start.

Yesterday I optimistically predicted hedge funds would learn a lot more about their regulatory fate as the G20 drew to a close.

That wasn't exactly incorrect -- the industry did find out for example that regulation and oversight will be extended to "systemically important hedge funds".

But, as with many political statements, the devil is in the detail -- or in this case, the lack of it.

"The G20 communiqué is unclear as to whether their aim is to have further regulation and oversight of the funds themselves or of the managers who manage the funds," says Robert Mellor, UK hedge fund leader at PricewaterhouseCoopers.

"The communiqué also does not make it clear what regulation means in this context. If indeed they are pointing to more regulatory capital, who would be required to have the additional capital? The hedge fund manager or the offshore fund?"

Such a lack of clarity means it's hard to gauge whether the G20 agreement will mean a big step-change in how hedge funds behave and are monitored or a set of rules which UK hedge fund firms already partially comply with and with which U.S. firms may do soon.

The Alternative Investment Management Association immediately put out a statement pointing to research that hedge funds played only a "marginal" role in the crisis and to the Turner review, which said hedge funds generally had much less leverage than banks.

But given the number of politicians who yesterday mentioned "hedge funds" and "regulation" in the same breath, the industry did learn once and for all that more rules are coming.

Hedge funds may be sniffing around the growing mountain of troubled European companies, picking out those they see as most likely candidates to undertake bond exchanges as a way to make money, according to market talk.

Debt-laden Dutch NXP Semiconductors NXP this week managed to cut its debt by about $465 million in an example of a debt-swap restructuring deal that has been more common in the United States up until now.

This type of deal is expected to become more prevalent in Europe now, however, as a way to salvage firms with good business models but which have been saddled with too much debt.

Hedge funds can make significant returns by buying bonds that have fallen to low double-digit prices in companies where a possible debt exchange would give them a better recovery rate on their investment.

The trick is knowing what part of the capital structure the debt exchange will be aimed at.

"You would have to play it pretty carefully," said one fund manager. "It's a specialised area."

There has been no shortage of calls from continental European leaders such as Angela Merkel and Nicolas Sarkozy for regulation of the hedge fund industry to limit potential systemic risks to the global financial system.

But it's little surprise that some executives in London, where the vast majority of European hedge funds are actually based, have privately suggested the calls stem from motives rather more mixed than simply wanting better regulation.

These, they say, can be anything from these leaders wanting to hide their own political problems, to them feeling some ownership because many hedge fund investors are based in continental Europe, to a simple feeling jealousy of an industry that in Europe at least is mostly British.

Whatever the motives, the hedge fund industry has chosen to focus on the many benefits it believes it brings -- to Britain.

In a pamphlet entitled "A British success story", which has been sent to all members of parliament and leading civil servants, the Alternative Investment Management Association talks about how much UK hedge fund firms run, how many people in Britain it employs, and its benefits to the British pensions and savings industries.

As industry bodies such as AIMA strive to head off stringent regulation for the industry, UK managers will be watching and waiting -- and wishing them 'best of British'.