Reuters Investigates

The shell games continue

Laurence Fletcher and a team of reporters from Canberra to the small town of Apache Junction in Arizona have a special report today that is the latest in our series “Shell Games,” exploring the extent and impact of corporate secrecy in the United States and beyond.

“The bonds that turned to dust” tracks the fate of $500 million of highly illiquid paper purportedly issued by a company in a trailer-park suburb of Phoenix, on behalf of a small Australian commodities firm — and backed by the proceeds from $10 billion of diesel from the tiny autonomous Russian republic of Bashkortostan.

The bonds proved to be impossible to sell, and a Cayman Island-based fund, DD Growth Premium, that bought them went into liquidation in the spring of 2009. The fund’s implosion left behind a band of irate investors and an enduring riddle as to what exactly happened.

Read the story in multimedia PDF format here: http://link.reuters.com/sut23s

We kicked off the series at the end of June with “A little house of secrets on the Great Plains.” The story focused on a house in Cheyenne, Wyoming, that is home to more than 2,000 companies. The state is already cracking down, as we reported last week.

The second story “China’s shortcut to Wall Street” examined how shell companies have been used to bring Chinese companies to the U.S. market.

Watch this space for more in the series.

Hedge fund investors flex their muscles

By Emily Chasan

Bernie Madoff, didn’t technically run a hedge fund, but his effects on the industry are still being felt today. 

Hedge fund investors learned the hard way that they wanted to invest in hedge funds with a more institutional feel, and pushed successfully over the past few years for reforms to hedge fund redemption policies, transparency, use of outside fund administrators and even lower fee structures.

Neil Chelo, director of research for $1.8 billion fund of hedge funds Benchmark Plus in Tacoma, Washington, is applying the techniques he and Harry Markopolos used to sleuth out Madoff to the industry today — asking portfolio managers to justify their positions on the spot, and reverse engineering a hedge fund’s return expectations to make sure a manager is actually delivering value.     

The result is that the world’s biggest hedge funds look much more like mutual funds, which makes big investors like pension funds feel safer about investing in the $1.9 trillion industry. 

But it is an ironic twist for the hedge fund industry. Over the past two decades many hedge fund managers left the mutual fund industry to avoid such hefty disclosures and  launch a lightly regulated hedge fund. For many of them, the increased transparency requirements of investors and the new round of regulation stemming from recent financial reforms means they have come full circle.

For more, read our special report “How investors turned the table on Hedge Funds”

Dan Loeb learns email is forever

By Matthew Goldstein

The trouble with email is that even once you hit the delete button a message often is never really gone.

Long forgotten emails often lie buried in the deep recesses of a computer’s hard drive. That is until some  enterprising lawyer with a subpoena comes around and gets a techie to retrieve it. And all too often, those old emails can come back to haunt a person — especially in litigation.

And that’s the predicament hedge fund manager Dan Loeb now finds himself in as some especially graphic emails he wrote years ago about Fairfax Financial are starting to come to light. Reuters wrote about those emails and how Fairfax’s five-year-old litigation against Loeb and other prominent hedge funds managers could start causing some public relations headaches for $1.9 trillion hedge fund industry.

If deposition testimony of Loeb, Steven Cohen and James Chanos gets unsealed by the New Jersey judge overseeing the Fairfax lawsuit, the public could get unusual insight into how top fund managers operate when they don’t think anyone is looking.

For more on Loeb’s emails read our special report: “OMG! Dan Loeb said what?”

Steve Cohen and the law of big numbers

By Matthew Goldstein

All too often the bigger an investment fund gets, the more difficult it is to continue to generate blowout returns.

Maybe the best example of a fund getting so popular and ultimately unwieldy is Fidelity’s Magellan fund.  One has to wonder if on a smaller scale, the same phenomena is happening to Steven Cohen’s SAC Capital Advisors.

As the below chart shows, Cohen’s now $13 billion hedge fund posted it most eye-popping performance numbers during its first decade of existence. Back then, SAC Capital had a fraction of the assets under management it has today and was considerably more nimble. It was back in those days when Cohen earned the reputation as the best trader of his generation.

However, more recently, as assets at SAC Capital have swelled, the returns churned out by Cohen & Co. have started to come back down earth. Overall, Cohen’s fund is still exceeding the industry standard. But the numbers SAC Capital is now putting up pale compared to Cohen’s track record.

There are, of course, good reasons for returns at SAC Capital to have come back some. Cohen is taking less risk in the wake of the financial crisis, which limits his ability to “kill it” as they say on Wall Street. Also,  the fees he deducts are far higher than most other managers. So in some ways, you can argue the 16 percent return SAC Capital generated in 2010 is better than a fund posting similar return after deducting a more modest fee.

But remember, this is Steve Cohen, who for years has been a performance leader—not just another manager.

For hedge fund titans, the long and the short of it

Our latest special report profiles one of the more colorful figures in the hedge fund world — William Ackman. Wall Street Investigations editor Matthew Goldstein teamed up with funds correspondent Svea Herbst-Bayliss, who was in New York this week for the Value Investing Conference.

Here’s what Matt has to say about Ackman and one of his rivals.

“Hedge fund managers William Ackman (left) and David Einhorn (right) are fairly good friends and sometimes they find themselves on the same side of a debate over a stock.

But Ackman and Einhorn, who were both featured speakers at this week’s Value Investing Conference in New York, appear to be at odds when it comes to finding opportunities from shorting, or betting against, stocks. Ackman says he doesn’t see many short opportunities in the market, while Einhorn is making a lot of noise with news his Greenlight Capital Management is shorting shares of real estate property developer St. Joe Co.

Einhorn, who gained a lot fame and riches from shorting Lehman Brothers stock, used the conference to explain his rationale for why he thinks St. Joe’s stock is overpriced. Shares of St. Joe are down roughly 20 percent since Einhorn unveiled his short attack.

Ackman’s Pershing Square Capital Management, meanwhile, is going in an entirely different direction by sinking well over $1 billion in shares of retailer J.C. Penney’s and consumer goods manufacturer Fortune Brands. Ackman is sticking with his activist roots and believes both companies are undervalued and could rise if management takes steps to overhaul their businesses.