Unstructured Finance

John Paulson’s lost advantage

By Matthew Goldstein

Hedge fund titan John Paulson has a shrinkage problem.

The billionaire manager’s flagship Paulson Advantage funds are quickly losing altitude after peaking with $19.1 billion in assets under management in March. As of the other day, the combined AUM of the Paulson Advantage and Advantage Plus funds had fallen to $15.7 billion, according to investor sources.

The Advantage funds account for roughly 44 percent of the $35. 2 billon in assets under management at Paulson. The two so-called event driven funds  long have been the manager’s largest.

And the July performance numbers for the Advantage funds should be ugly. A source tells us the Advantage Plus fund, which is a leveraged version of the plain vanilla flagship fund, was down 4.63 percent in July. With that decline, the Advantage Plus fund is down a little over 21.6 percent for the year. The plain vanilla Advantage fund is believed to be down around 15 percent for the year.

The rapid shrinkage of the Advantage funds is largely the result of a series of bad bets and missteps by a trader who has taken on almost God-like status in the $2 trillion hedge fund industry. A good chunk of the $3.4 billion decline in AUM is due to the $482 million loss the Advantage funds incurred when Paulson unloaded shares of Sino- Forest–a Chinese forestry company accused of overstating its timber production and results. His big bets on financial stocks like Bank of America, Citigroup and CIT Group also are causing havoc for his portfolio.

Right now investors are putting in redemption notices to pull money out of the Advantage funds at the end of September. It’s not clear yet how much money investors will seek to redeem, but that no doubt could further impact the size of the flagship funds.

Lightsquared loans suffer from interference

By Matthew Goldstein

It looks like the problems that Phil Falcone’s upstart wireless network may cause with some airline navigation systems may be impacting the price of the more than $1 billion in high-yield debt LightSquared has sold to hedge funds and mutual funds.

Over the past two weeks, the prevailing market price of LightSquared”s four-year term “junk” loans has slumped to about 95 cents on the dollar. That’s still a solid price for the high-yield offering that carries a 12 percent coupon. But it’s down considerably from late May, when the loans were fetching as much as 102 cents on the dollar.

LightSquared’s loans soared in the spring amid optimism that the prospects were looking good for the planned high-speed wireless network backed by Falcone and his Harbinger Capital Partners hedge fund. The optimism was fed by talk of a LightSquared initial public offering later this year, an infrastructure sharing agreement with telecom giant Sprint and a perceived increase in the value of its spectrum holdings.

UK universities eye and keep an eye on new hedge fund punts

Pension schemes are moving away from the usual equity/bond/real estate mix to put their eggs in as many baskets as possible. No wonder then that the USS — the 31.6 billion pounds UK universities pension fund — is putting an extra 1.5 percent of its assets, or about 474 million pounds, into hedge funds, as its CIO Roger Gray tells Reuters.

If you are rushing to the phone to pitch business with Mr Gray, however, STOP a minute fund manager: be prepared, the USS is not only eyeing alpha, it is going to ask a few questions about how alpha is distributed and how investors are protected.

“Is the board of the hedge fund constituted in a way which gives us assurance that they are actually acting in the interest of the limited partners rather than in the pocket of the managers?” he said.

SEBI nod not needed for ULIPs: Would you invest now?

The finance ministry on Saturday said life insurers could sell unit-linked insurance plans without seeking a nod from the Securities and Exchange Board of India (SEBI).

A stockbroker uses his terminal to trade at a brokerage firm in Mumbai September 30, 2008. REUTERS/Punit Paranjpe/Files

This ends a spat between regulators over the much sought after product. Under the law, such orders issued when parliament is not in session must be confirmed by lawmakers in their next sitting.

The news would come as a relief to insurance firms and people who invest in such products.

Would you buy a ULIP? Share your views

It was not the perfect weekend for investors of unit-linked insurance products (ULIP) after market regulator SEBI barred 14 insurance firms from issuing or promoting such plans, which are a favourite among investors.

But Finance Minister Pranab Mukherjee said on Monday SEBI and insurance regulator IRDA have agreed to maintain status quo on ULIPs and also jointly seek a binding legal mandate from an appropriate board.

Such products, which offer a combination of insurance and investment, were introduced in 2001 and Mukherjee’s statement came as a relief for people who invest in ULIPs to ride the stock market and also save on taxes.

Tutting investors force F&C to ditch deal

UK fund firm F&C has received a slap on the wrist from its largest shareholders over plans to acquire an Austrian fund manager.

Investors want F&C to cement its recent turnaround in investment performance which resulted in net inflows at the start of 2010, rather than have the distraction of an acquisition. The company today said it was ditching plans to acquire Vienna-based quant specialist C-Quadrat just three  days after submitting offer documents.

Shareholders in F&C can hardly be blamed for demanding the company focus on improving share value – F&C shares are only a few pence over their 52-week lows, at about 60 pence — but the move underlines the growing impatience among institutional investors with company boards over issues such as strategy and pay.

High-frequency trading: useless and manipulative?

Floor tradersThe 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.”

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