Tuesday, December 23, 2008

PR advice for Goldman Sachs


The "Jack Flack" column at the New York Times Dealbook blog dispenses reputation management advice for Lloyd Blankfein, CEO of Goldman Sachs. The column notes that, while Goldman has avoided the massive writedowns taken by its i-banking bretheren, it is still guilty by association from the perspective of reputation. The very act of registering as a bank holding company raises the question of what is going on at Goldman and is the jig up.

All the counsel offered by Jack Flack to Goldman is directly applicable to hedge fund managers: tell 'em what you've learned, be careful about compensation, tell people what the future of your institution is, have honest discussions about risk and risk management.

Speaking of risk, the issue of risk for hedge funds and risk for investment banks (or whatever we're calling them now) is not the same thing. Everyone knows hedge funds are risky and their core business is taking and managing risk. What the media and the public don't fully appreciate or admit is that the level of risk, how risk is managed and investing strategy of hedge funds is shared (in non Madoff funds, at least) with investors and investors can meet with managers to have detailed discussions on risk.

Not so for the banks. In fact, the banks, like Goldman, upon becoming publicly owned, offloaded the risk to investors (who don't have the ability to discuss risk management with the instition). Goldman execs retain the lions share of the upside when the bank does well (see the bonuses for the last few years) and bear virtually none of the downside during bad years. Bonsuses, temporarily, go by the wayside, but salaries are paid. Goldman partners may frown in public, but at home they gotta be smiling for the years they spent laughing all the way to the bank. Jack Flack doesn't speak about this fact and risk to reputation. Probably because there is no way around it.

I wonder if the CDO/CDS crisis would be this large if Bear Stearns, Lehman, and the other investment banks were privately held and the risk been owned directly by the partners, instead of shareholders.

Wednesday, December 17, 2008

Massive Madoff fraud nails hedge fund reputation


Thank you sir, may I have another. That's what hedge fund managers must have thought when the news of the massive fraud perpetrated by Bernard Madoff was uncovered. The Wall Street Journal writes that the scandal is the nail in the coffin for the fund of funds business. One of the key advantages promoted by FOFs is that they do the due-diligence on hedge funds. Oops. The Journal notes that "in an industry that depends on trust and confidence, the fact that so many respected names fell short is likely to lead to yet more redemptions across the sector.

Of course the Madoff affair has set off new calls for regulation of the hedge fund industry and a former SEC official was on the Newshour last night. The official called hedge funds "unregulated" and predicted that regulation is on the way, due in part because the SEC's "international reputation is now taking a major hit." View the segment on PBS.org.

The New York Times writes that certain banks spotted "obvious" red flags when doing due diligence on Madoffs funds, but other banks weren't so lucky.

Billions in losses, mammoth fraud, Palm Beach society and non-profits left high and dry. Thank you sir, may I have another.

Monday, December 15, 2008

Activist model seen as having staying power


Several recent articles note that activist hedge funds are well positioned to weather the credit and market crisis. Opportunities in the distressed sector and the fact that activist funds tend to have longer lock ups are cited among the factors favoring activist funds. Check out the following:

Hedge fund industry outlook from Investment Dealers' Digest.

Carl Icahn is interviewed by Financial Week.

Reuters writes about changing activist strategies.

Monday, December 8, 2008

Media is a part of Kynikos' short strategy


A long profile in New York of Jim Chanos, president Kynikos Associates, a short-selling specialist illustrates the role media plays in his investment strategy. The article notes how Kynikos shares information and investment hypotheses with journalists and other asset managers. The fund will even walk reporters through the financial statements of companies it sees as overvalued.

According to the article, "In this information culture, Chanos has built valuable relationships with journalists who take his ideas seriously, promote his point of view, and ultimately help make him rich. Like Washington, Wall Street is a game that is fueled by the selective leak. The right tip can mean the difference between winning or losing millions."

Critics of short-selling call this manipulation, but they are wrong on this count, too.

The stock market is a marketplace of ideas and information. These ideas compete, and in a perfect world, the best/right ideas win out and drive stock prices up or down. The more ideas that compete the better. Shorts have just as much a right to advocate their positions as longs. Moreover, the ultimate longs are the companies themselves and they have big advantages when it comes to influencing media.

Still skeptical? Consider this: Chanos is credited with pointing Fortune to the misdeads at Enron and we all know how that turned out.


How to say we're sorry


Financial Times columnist Lucy Kellway deconstructs investor letters from hedge funds. In her sights are the recent investor letters issued by Greenlight Capital and TPG-Axon. The story brings into harsh relief a very important question: what do you say to investors when you are down 20, 30 or 40%? Using these two funds as templates, Kellway notes 8 "rules" of the investor letter, ranging from being too long to sounding upbeat about the future.

What she doesn't appreciate or mention in the article is that, in these circumstances, the letter is a formality. The more important communications with investors are happening in person and over the phone.


Friday, December 5, 2008

Greenwich Financial Services sues Countrywide and opens Pandora's Box of media scrutiny

Greenwich Financial Services has raised the hackles of Lou Dobbs and Congresswoman Maxine Waters, among others, over its decision to sue Countrywide after the bank decided to modify the terms of 400,000 troubled mortgages. Greenwich says that modifying the loans damages the financial interests of the bondholders.

William Frey who heads GFS and his attorney both appeared on a CNN interview. They deserve a lot of credit for taking a very unpopular position in a very public manner. Hopefully, their investors will appreciate the effort.

The explosiveness of the situation and risk undertaken by GFS is clear in the CNN interview when Rep. Maxine Waters refers to GFS as "greedy hedge fund operatives...looking for fast money."




The New York Times writes about the lawsuit and includes more details about the complaint.

Check out the Deal Professor's analysis of Countrywide's pooling and servicing agreements and the merits of Greenwich's claim.

Survey: 98% of hedge fund managers expect new regulation of industry


A survey by accounting firm Rothstein Kass finds that virtually all hedge fund managers expect increased regulation. Areas where new regulation is expected include: asset valuation, counterparty risk management, capital raising and transparency. 77 percent of the respondents said that the overall impact of the new administration on the hedge fund industry "will not be positive."

Hedge fund cowboys "fell off their horses"


The infighting has begun. In a story on Reuters, Veritas Asset Management manager Ezra Sun blames his fellow fund managers for the "tremendous" reputational damage he sees the industry having sustained. Sun accuses hedge fund "cowboys" of not properly hedging, boosting returns through unwise borrowing, charging high fees, and locking up investors once the losses started piling up.

While accurate, Sun's critique further damages the industry. Rather than finger pointing at the very visible bad apples, we should reading about seasoned managers who are weathering the storm and earning their keep for preserving, if not enhancing, their clients' assets. Investors need to hear that the good managers are surviving and that the industry will emerge from the current crisis stronger and smarter.

Wednesday, November 19, 2008

Paulson to hedge funds: "Make it work."


A major feature in the Washington Post on the recent decisions and legacy of Treasury Secretary Henry Paulson notes that he believes that it is time to begin regulating hedge funds, reversing his long-held opposition. "You should not be thinking about how to fight it [regulation] but how to make it work," Paulson is quoted telling hedge fund managers.

Paulson is reported to have said that the policy statement he crafted on hedge funds in January 2007, which stated they should not be regulated, was wrong.

The article says that Paulson is working on a proposal that would grant the federal government broad new powers to take over a wide range of financial firms (beyond banks) whose collapse could endanger the financial system. Paulson said Congress would have to define which companies meet the criteria and determine how much they would contribute to a fund that would help cover the cost of closing them in an orderly fashion if they cannot be saved.

Regulation is coming. Hedge funds need to act proactively to make sure the regulation is sensible. Part of the process is demonstrating to Congress, the media and the public the important roles they play in enforcing good governance, providing liquidity in markets, and the degree to which they are an important source of capital to an economy constrained by banks' inability to lend.

Tuesday, November 18, 2008

Governance priorities for the new administration


The banking crisis and the state of the U.S. auto industry have investors looking more closely than ever at corporate management teams and the accountability of boards of directors. Hedge funds should act opportunistically now to advocate in the media, the board room, Capitol Hill and on Main Street for improvements to corporate governance.

For starters, Nell Minow, co-founder of The Corporate Library has posted her governance to-do list at Carl Icahn's blog. Her priorities range from executive pay to board elections to regulatory reforms.

Also relatively new at The Icahn Report is Mr. Icahn's United Shareholders of America intiative which promises to "push back against board entrenchment and make it easier for shareholders to promote change in companies they own." People can "join" the campaign and receive email updates about its work.

Carl Icahn discussed corporate governance in an extended interview with the Wall Street Journal last Saturday.

Monday, November 17, 2008

Reputational risk prominent in Pershing Square investor letter


In his third quarter letter to investors in Pershing Square Capital Management, William Ackman inlcudes seven paragpahs on "reputational and regulatory risks." Citing reputation risk as a "key risk factor" in the industry, he writes about the steps the fund is taking to preserve its reputation in this volatile environment. "Our approach to assessing reputational risk is to apply the New York Times test. We ask ourselves whether we would be comfortable having our family and friends read a front page New York Times story about actions taken by Pershing Square written by a knowledgeable and intelligent reporter who has access to all of the facts. If we are comfortable with such an article being read by our close friends, our families, and the public at large, our action passes the test. If not, we reconsider our potential action."

He also writes that he has recently decided to take public positions about issues affecting the hedge fund industry (see previous posting on this blog). He writes that it is "important for the hedge fund industry to come out of the shadows and defend the importance of our work." He continues, " If we and others (that includes hedge fund investors in addition to the managers) don’t do so, the industry, in my view, is at even greater risk of further regulatory, tax, and other legal changes that will materially harm our business models and industry."

Ackman cites the short-selling ban as one example of misplaced regulation that the industry was powerless to stop.

Mr. Ackman, if more hedge fund managers follow your lead on reputation management, this blog will be out of business. Until then, we salute you.

Thursday, November 13, 2008

William Ackman interviewed by Charlie Rose


On Tuesday, William Ackman, CEO of Pershing Square Capital was interviewed on PBS' Charlie Rose program. You can view the video here. In the half-hour segment Mr. Ackman gives thoughtful analysis of the financial crisis, prescribes solutions for Freddie, Fannie and GM, and talks about the need for regulation of credit derivative swaps. When asked about the hedge fund hearings that ocurred on Capitol Hill today, he says that Congress is "looking for a scapegoat." He also says that the through the bans on short-selling the SEC has "destroyed opportunistic capital" and contributed to the crisis of confidence in the markets.

Mssrs. Ackman, Einhorn, Paulson, Griffin and other leaders in the industry need to be in front of the issues and the camera more frequently. Only then will they have the chance to head off unwarranted regulation of the hedge fund industry and influence government priorities and action in this and future financial crises.

Hedge fund leaders endure Waxman hearing




Hedge fund directors George Soros, chairman of Soros Fund Management LLC, James Simons, director of Renaissance Technologies LLC, John Alfred Paulson, president of Paulson & Co Inc, Philip Falcone, senior managing director of Harbinger Capital Partners, and Kenneth Griffin, CEO and managing director of the Citadel Investment Group testified before the US House Oversight and Government Reform Committee today.

The fund managers supported the creation of a clearning house for credit derivative swaps and cautiously open toincreasing disclosure requirements for hedge funds. Most criticised the federal response to the financial crisis. Short-selling was defended, as was treating gains from investments in hedge funds as capital gains, not ordinary income.

Read the summary of the hearing at the Wall Street Journal and its great "live blogging" from the hearing room.

The first hearing of the day, which featured testimony by academics and former financial regulators, can be viewed via C-Span here.

Wednesday, November 12, 2008

Activist campaigns gaining support


A panel at The Deal's M&A Outlook 2009 conference discussed the effectiveness of hedge funds' activist campaigns. The panel noted that "activism" applies to any shareholder that tries to improve the performance of a company. Hedge funds were noted for their ability to get companies to better communicate with investors about their strategy and performance. It was pointed out that activists are getting more "aggressive and creative" and that institutional investors who are not themselves activists do align with activists to instigate change.

When advocating change at an underperforming company, the investor has the high ground. A sensible business case or complaint about poor corporate governance instantly arms the investor with tools needed to a) pressure the company through direct discussions, the media and other means; and b) gain the support of other investors who would also benefit from the desired change.

Hedge funds are virtually the only institutions in our market with the sophistication and wherewithal to effectively advocate for change at corporations. The role of sheriff is important and hedge funds should embrace activism as a regular business strategy, not only to identify and create value, but also to enforce market discipline and fair play.

Tuesday, November 11, 2008

Traxis downplays risks of redemptions


Barton Biggs, director at Traxis Partners says at Fortune.com that fears about the market and possible effects of redemptions from hedge funds are overblown. He estimates that about $250 billion worldwide will be withdrawn from hedge funds by mid-2009. He notes that this is a relatively small amount and that funds have been preparing for it (the industry's net long position is said to be about 20% of equity, an all-time low).

He points out that despite well-publicized losses by the hedge fund industry this year, traditional long-only managers have done worse. This should mitigate redemptions. "So where are the redeemers going to put their money?" asks Biggs.

The industry needs more voices like Biggs advocating the, ahem, long view.

Monday, November 10, 2008

Hedge titans to testify on Capitol Hill


Leaders of the hedge fund industry, including Philip Falcone, Kenneth Griffin, John Paulson, James Simons and George Soros are scheduled to appear before the House Committee on Oversight and Government Reform on Thursday. A preview story in the Wall Street Journal notes that the Managed Funds Association and other organizations representing hedge funds are spending record amounts lobbying, according to industry insiders. The story says that having five of the best-known and wealthiest investment managers together publicly before Congress is "unprecedented." It's not going to be pretty and one can almost hear the pontification of Waxman and others now.

This blog has long argued that the hedge fund industry has done a poor job of safeguarding its reputation and defending its practices, like shorting, to the Hill, the media and others. All this lobbying by MFA sounds like too little way too late.

Waxman, it should be noted, is a grand inquisitor of all kinds of perceived high-crimes and misdemeanors. After all, he called Roger Clemens to testify about his use of steroids in Major League Baseball.

Tuesday, November 4, 2008

Jack Welsh on how to "survive a media mauling"


Jack Welsh's latest column in BusinessWeek focuses on how to manage through media crises. His advice isn't rocket science: tell the truth, tell one version of the truth, etc. He does, however, point out the need to take "media coverage into your own hands" via the Web. Welsh accurately notes that the Web is a critical defensive and offensive tool in combatting negative publicity.

The media are not the bad guys, and in Welsh's own words, "the only question is whether you have the guts to engage the media as they engage you."

Monday, October 27, 2008

Citadel holds conference call to calm bondholders

Last Friday, hedge fund giant Citadel held a conference call with bondholders to quench rumors about its losses, standing with counterparties and need to liquidate holdings. More than 1000 people tried to dial into the call. Breaking Views outlines the substance of the call while noting that it is very difficult for a financial institution to deal with rumors. At a time when former Lehman executives are under investigation for misleading investors, the market simply does not know how to interpret what banks and others are saying. As a result, it is a Catch-22 to say anything at all. The New York Times offers a play-by-play of the call.

Tuesday, October 21, 2008

Self-inflicted wounds hurt hedge fund industry


Dealbook by the New York Times reports that Andrew Lahde is closing his funds and returning money to investors. The article reprints Lahde's "farewell" letter to investors. Unfortunately, the letter is more of a "screw you" than a farewell and wanders into head-scratching territory including a defense of growing hemp and recommendations on what George Soros should do with his free time.

Lahde writes, "I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy ofthe education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

That's all the industry needs: proof that egotistical managers are pulling fast ones on naive investors.

Hopefully, people (and the media) will recognize that Lahde operated his own LA-based fund for less than two years and his opinion should be taken with a grain of salt.

A story on Bloomberg gives a little more information about Andrew Lahde.

Tuesday, October 14, 2008

Paulson comment foreshadows storm for hedge fund industry


According to an email sent to a colleague, former Lehman Brothers CEO Richard Fuld said Treasury Secretary Henry Paulson wants to "kill the bad HFnds + heavily regulate the rest." Fuld was in a very public battle with short sellers, but this sentiment held by Paulson (if accurate) should send shivers down the spine of the hedge fund industry.

With the ban on short selling, it is clear that Treasury and other regulators have view collateral limits on trading options of hedge funds simply as collateral damage the battle against the financial crisis.

More regulation seems inevitable and, the industry is not well-positioned to do much about it. For too long hedge funds have tried to fly under the radar, but it was naive to think that a $2 trillion industry would not attract outside scrutiny or regulatory interference. The industry resisted even the slightest infringement on independence, like registration. It turned a blind eye to high-profile cases of fraud and deception. It did not view challenges involving risk management, valuation, market practices and governance as risks to the entire industry.

Most important, the largest, most institutionalized funds did not band together (as was done in Europe) to create a unified front against unnecessary regulation and to serve as the voice of the industry in an increasingly shrill political and media environment.

It is ironic that Henry Paulson would want to kill the bad hedge funds and heavily regulate the rest. Isn't Goldman Sachs, after all, a giant hedge fund? However, the statement shows just how vulnerable the hedge fund industry is.


Friday, October 10, 2008

Reputation, regulation and hedge funds' consternation


The UK-based Hedge Funds Standards Board recently announced that its increased membership now represents half of the hedge funds assets in Europe. HFSB chairman Antonio Borges said in an interview with Reuters that he fears regulators could be swayed into enacting harful legislation in the wake of the credit crisis. "The reputation of the industry will drive public opinion and therefore politicians in directions which might be harmful for all of us, not just hedge funds," he said.

Hedge funds in the U.S. can almost certainly count on new regulations. Even Republican nominees McCain and Palin are calling for more oversight of financial markets. If the industry could not effectively head off the ban on short selling (Borges calls such a ban "bad for the whole market"), how can it hope to avoid more and even more onerous restrictions, now that the crisis has deepened?

Wednesday, October 8, 2008

Who is spooking whom?


Tina Brown's new news Web site The Daily Beast asks the question: is the media spooking the market? The article offers examples ranging from Jim Cramer to the outdated story on United Airlines that each are correlated "panic" among investors. Is the media to blame? I don't think so.

Rather, the media and investors are themselves spooked by bank CEOs, the President, Bernake and Paulson, none of whom effectively have explained the roots, extent and, most important, remedy for the financial crisis. In this vacuum bad news sounds worse than it is and pessimism is unchecked. But don't blame the media.

It is this same lack of leadership and demonstrable solutions that leads to ineffective half-measures like the ban on short selling. It is questionable whether the ban fulfilled its intention, given the freefall we've seen in the markets this week. However, the real solutions were not forthcoming and regulators had plenty of political cover for sticking it to the hedge fund industry. (The industry's anemic efforts to head off the short selling ban is best discussed in a separate entry.)

For the record, as early as 2005, reporters at The Wall Street Journal were asking my clients about the state of the mortgage market, risks of subprime lending, and risk management practices in mortgage lending. The media was right, it was everyone else who had their heads in the sand.

Wednesday, October 1, 2008

CEOs, lies and tickertape


A colunn by Andrew Ross Sorkin in the New York Times examines whether financial CEOs can tell the truth about the state of their companies. He notes that Wachovia CEO Robert Steel told CNBC just two weeks ago that the bank had "a great future as an independent company." Wachovia's banking business was sold to Citigroup on Monday. Was Steel lying? Was Lehman CEO Richard Fuld lying about the prospects of that, now defunct, bank? Maybe yes, maybe no.

Clearly, financial CEOs are trying to reassure investors, who these days don't need much to head for the door. Being negative, realistic or telling the "truth" could result in the proverbial run on the bank. Truthfully.

At the same time, maybe, just maybe conditions facing banks are moving so quickly that CEOs truly don't know what the future of their institutions holds. The Wall Street Journal reports that Wachovia executives and directors bought $30 million of Wachovia stock this year. They, surely, didn't foresee selling the bank for $1 per share. Steel himself bought $16 million of stock when he was appointed CEO. Similarly, insiders at AIG and WaMu also bought shares in their companies and, presumably, lost big.

See a related Hedge Lines entry on this topic.

Tuesday, September 9, 2008

Atticus gags self


Atticus Capital, which has been denying rumors about its solvency, recently announced that it would suspend issuing mid-month reports because investors had been "leaking" them to the press. The fund will continue to issue end-of-month reports.

The decision comes at a time when hedge funds are closing, even big ones like Ospraie and speculation about future closings are generating the wrong kinds of headlines for the industry.

It raises interesting questions about how to report and communicate with investors and what can reasonably be expected to kept private in an increasingly transparent world.

Hedge funds should assume that whatever they publish could make its way into the public domain. But if a fund is down 25%, like Atticus is, the least of its problems is what may or may not appear in The Wall Street Journal.

Thursday, August 28, 2008

Are hedge funds good for the economy?


The Wall Street Journal reported yesterday on the degree to which hedge funds are providing commercial real estate loans. In a time when banks are pulling back from all forms of lending, hedge funds are stepping into the breach to keep business moving. The article notes that the interest rates on some of the deals can be high (12% is cited), but deal makers a) have no alternatives and b) can afford higher financing costs because the price of the assets have fallen.

Lending is not a new business for many hedge funds, but as banks' inability to lend perpetuates the credit crisis, the presence of hedge funds who are willing to lend becomes an important prop up for an economy that appears to be teetering.

Another Journal article yesterday says that financial institutions will have to pay off at least $787 billion in floating rate notes and other medium-term obligations before the end of 2009 and the cost of new borrowing to pay off the old borrowing is only going up. This reality means that it will be difficicult to borrow from traditional financial institutions well into 2009.

Could hedge funds really be important for the health of the US economy? Let's see who writes that story...

Tuesday, August 19, 2008

Gordon Gekko of Sweden stirs staid companies


Bloomberg profiles Christer Gardell, co-founder of Cevian Capital AB. Cevian, a $5 bn fund based in Stockholm, is a frequent target of media criticism for its activist strategies. Swedish media have called Gardell "the butcher," "the corporate pirate'' and "the bad boy of Stureplan,'' after Stockholm's financial district.

It sounds like Swedish corporate culture could use a bit of American-style activism. The article notes that in Sweden, "criticism of an individual is rare and heated debates at meetings are unusual, says Martin Lindell, a professor at the Swedish School of Economics and Business Administration in Helsinki."

Cevian, which sits on the board of Volvo AB, among other companies, recently bought a three percent stake in Munich Re and is working to end cross-shareholding, the practice of companies owning shares in one another.

"Cross-shareholdings eliminate the shareholder pressure and result in passive boards and CEOs who are running everything,'' Gardell says. "After you eliminate this, shareholders start to show up and put pressure on the boards, which become more active and take more responsibility.''

Insana folds FOF


Former CNBC anchor Ron Insana closed his fund of funds, the New York Times reports. Even access to mega funds like SAC Capital and Renaissance Technologies wasn't sufficient to sustain Insana's smallish fund. His experience is illustrative of the struggle of FOFs to demonstrate their value in this environment and managers will have a hard time convincing new investors to pay two levels of fees.

Fee structure is at the heart of much of the criticism of hedge funds and fees come into high relief when funds lose money. Unfortunately, for the industry, high water marks, which are intended to keep investors whole, don't factor in much to the discussion about hedge funds' management fees.

Ironically, Insana, who was not lured from his day job by the dotcom craze, wrote a book in 2002 entitled, "Trendwatching: Don’t be Fooled by the Next Investment Fad, Mania, or Bubble." It appears that the next big thing was just too good to resist...

Friday, August 15, 2008

Harbinger stake triggers charm offensive by Cablevision


Something is stirring at Cablevision, the cable giant and owner of the notoriously mismanaged New York Knicks. According to an article in the Wall Street Journal, CEO James Dolan "surprised" investors by announcing that Cablevision will explore options to boost its stock price. Also, top executives met with large investors for the first time in years to discuss the company's future. Most significantly, Cablevision today announced that it is paying its first quarterly dividend.

Why the change of course by a company that was unfazed by the "Dolan discount," or the difference in valuation between Cablevision and its peers, wich stems from the unpredictability of the company's controlling family?

Simple: Harbinger Capital Managment, an activist fund, acquired a 5% stake. Harbinger, which recently won seats on the New York Times' board, hasn't made public any demands, but its mere presence has been a boon to shareholders. Cablevision shares have been up as much as 28% this month. This demonstrates how, when it comes to improving corporate governance, hedge funds can be a force like no other.

Now if only Phil Falcone, who heads Harbiner, were a Knick fan.....

Tuesday, August 12, 2008

New York Hedge Fund Roundtable aims to improve industry conduct, avert regulation


A recently formed group, the New York Hedge Fund Roundtable, aims to improve practices in the industry and, in doing so, avert further regulation. Founded by Stanley Goldstein, the Roundtable aspires to "initiate best practices and knowledge transfer to the broader hedge fund world, allowing members to leverage peer information exchange and positively affecting both the profession and others."

Voluntary efforts by the industry to promote best practices can work, but the time is now to take real action to preempt newly-empowered regulators. The Roundtable might be a part of the solution, but a more codified approach to self regulation, like that promoted by the Hedge Fund Standards Board in the UK, would be a more effective mechanism.

See the Reuters story about the New York Hedge Fund Roundtable.

Thursday, August 7, 2008

Earnings reporting puts public hedge funds in the spotlight


Publicly-traded hedge funds and private equity firms are in the spotlight this week due to a string of losses reported for the second quarter. Listing seems to be a double-edged sword for hedge funds. On one hand, they raised new infusions of capital not subject to redemptions and gained extra flexibility to manage through market events. However, it is unlikely that any fund anticipated both the depth of the credit crisis and the potential of the US economy to fall into a prolonged period of stagnation. The long-term effect of public reporting by traded funds is unclear, but it will be interesting to monitor, particularly if they continue to struggle to produce returns in this market.

The Wall Street Journal notes that "in the case of poorly performing hedge funds, many won't be able to book performance fees again until their funds return to certain levels -- a high-water mark that for some is looking increasingly distant. And private-equity executives managing souring funds could be liable for returning performance fees they already booked, an investor-protection feature known as a claw back."

Not a pretty picture for their funds, their investors, or now their shareholders.

Here are some of the earnings coverage:

Tuesday, August 5, 2008

Analysts rising


Luminaries come and luminaries go. Right now, analysts, particularly bearish banking analysts are the darlings of media seeing no end to the financial crisis. Fortune profiles Meredith Whitney in its current issue and the New York Times just did a profile of Richard Bove. Both are lauded for their steadfast conviction that the banking crisis is going to get worse, much worse, before it gets better. Whitney and Bove, as skeptics, represent the flip side of the last luminary analyst cycle that brought us the likes of Internet stock pickers Abby Joseph Cohen and Henry Blodgett.

I am sure that most reporters don't pause to consider that outspoken hedge fund managers who have similar dark opinions about the health of banks are notorious rather than famous.

Nevertheless, the prominence of Whitney and Bove shows that if you follow your convictions and you are right you will earn respect, even from skeptical media. Einhorn, Ackman and other activists just might be the next luminaries. We'll see.

Internet takedown


The New York Times, chronicles the Internet smear campaign against the former head of Credit Suisse's private equity arm. The drama centers on a revenge campaign organized by a man whose ex-wife had an affair years ago with the CS exec. While the CS exec did not violate company policies (the woman was not affiliated with the firm in any way), the saga resulted in his leaving the firm.

This situation illustrates two realities. First, banks are completely on edge. With all the reputation risks associated with massive financial writedowns, they simply cannot withstand any other scandals or appearance of scandal. Even, John Thain, the "fixer," is under attack for misleading investors and poorly navigating Merrill Lynch's course through the credit crisis.

Second, it demonstrates that what is said on the Internet influences perception in the interconnected and information-hungry financial universe. Web sites and blogs move money and stock prices. In this case, a Web site got a guy fired.

Any hedge fund trying to affect change at a company needs to be campaigning online. This blog previously noted TCI's "Stronger CSX" site as an model of thoughtful and constructive advocacy on the Internet. William Ackman's recent restructuring plan for Fannie and Freddie is another example of using the Internet to influence opinion.

Wednesday, July 30, 2008

Hits to hedge fund reputation do not deter HNW investors: survey


A new survey by Bank of America finds that high-net worth individuals with alternative investments expressed greater satisfaction over the last 12 months with every category of alternatives, including hedge funds, venture capital, real estate and private equity, than with their more traditional investments. 57% of those surveyed expressed satisfaction with their alternative investments, compared with only 5% who are dissatisfied.

Interestingly, 44% of survey participants invested in hedge funds said that negative publicity about hedge funds has not affected their investment decisions. 20% said that hits to hedge funds' reputation did make them rethink their strategies.

While BofA surveyed individuals with more than $3 million in investable assets, the industry has to beware of creeping into the upper echelons of the retail arena. Blowups and scandals involving hedge funds, even sizeable funds, are inevitable and the media will dramatize the situation by seeking out the victims. Accounts of little old ladies, even really rich ones, who get burned will draw unwanted scrutinty to the industry.

The Wall Street Journal offers one example today - an investor in the failed Vesta Strategies.

Read the Bank of America news release on the survey here.

Tuesday, July 22, 2008

Cramer: no boo-yah for shorts


In New York Magazine, Jim Cramer gives his view on how short sellers can "assassinate" a company. He argues that the SEC needs to reinstate the uptick rule and use its power to investigage collusion and market manipulation by hedge funds shorting stocks.

Cramer, to his credit, does point out that short-sellers "simply can’t bring down an honest, well-capitalized firm; it will buy every share from you and take it right back up again in your face." Short selling, Cramer says, "doesn’t work against every firm; it just works against every financial firm that has lost credibility by insisting that it is doing well and then failing to disclose that it hasn’t been. That was Bear Stearns’ real flaw, and it is Lehman’s too."

Exactly. Opportunities for short-selling are created by the very companies that have mismanaged themselves and have misled the market for too long. Too often that is the simple fact that is missed or glossed over in most news coverage about short positions.

Bank shoots messenger (again)


BankAtlantic filed an anti-defamation suit against analyst Richard Bove of Ladenburg Thalmann. Bove had ranked BankAtlantic #10 on a list of 107 publicly-traded banks carrying a high percentage of troubled or nonperforming loans. BankAtlantic took exception to the ranking because the calculations were based on the capital base of the bank's parent company. Bove issued a clarification in a separate note, but that was not enough to mollify BankAtlantic.

At face value, this looks like another case of a bank trying to shoot the messenger. However, given the volatility of the banking sector, it certainly doesn't take much to unhinge already unsettled investors and institutions need to respond vigorously to quell rumors and misinformation. While this lawsuit might not go anywhere, it probably is the strongest signal (or bluff) that BankAtlantic can send to the market, at this time.

Friday, July 18, 2008

You want the truth? You can't handle the truth!


The Wall Street Journal blogs about a recent CNBC segment in which anchors debated the "truthiness" of what CEOs say on their very programs. Whether CEOs lie, spin or flat out don't know what they are talking about is beside the point. The fact is that CEOs take the long view and make the argument that, in the long run, they are running value-creating enterprises.

Investors have the right to hear the flip side of the argument. That's where the opinions of equity and debt analysts, bond raters, and, now, short-sellers come into the picture. Each of these parties serve an important function (in varying degrees of competence). The question for the investor is, whom do I believe most?

Mike Maiello in Forbes asks do we really want to know the truth from CEOs? It's a nuanced and important question. Hedge funds say that they need gates and other mechanisms to limit withdrawals by investors. Don't CEOs need the ability to stall for time to manage through a crisis, when the "truth" might cause the proverbial run on the bank?

Yes, they do. In a competitive market of ideas the truth is out there, and everyone, longs and shorts might be varying degrees of right at the same time.

Thursday, July 17, 2008

Hedge funds down under take swings at U.S. shorting rules


The Australian reports that funds down under are crying foul about new regulations that would curb short selling of US financial stocks.

In the article, Paul Fiani of Integrity Asset Management complains, "It seems that some financial institutions are becoming protected species, which can take on any amount of risk, reward their executives obscenely and then rely on the Government to bail them out and provide protection from short sellers."

Unfortunately, the hedge fund industry has done little to educate the media, Capitol Hill or Main Street about the true effects of shorting. Much of the media coverage gives a nod to the shorts' view, but skepticism abounds about the practice and impact of shorting. For example, the Wall Street Journal's story on Tuesday's SEC decision contained this one line of counterpoint to the general notion that shorting stocks created significant downward price pressure: "In practice, this [profiting from short positions] is extremely difficult to do with big companies whose stocks are heavily traded..." That's not much to balance the scales.

Where is any concerted response from the Managed Funds Association?

Wednesday, July 9, 2008


Reuters reports that European hedge funds are slow to sign on to the voluntary operating principles developed by the newly-formed Hedge Funds Standards Board. While it is complex to adopt the operating principles outlined by the HFSB, the industry needs to follow the lead of the original 14 signatories. European funds risk further regulation by not signing on.

The hope is that the aegis of the HFSB will promote best practices in the industry, head off unsound regulation, and help defend the industry's reputation, which in Europe is even more beleaguered than in the U.S.

Reuters notes that hedge funds are "widely mistrusted in continental Europe, where senior German politicians have branded them as "locusts", new rules may seriously constrain hedge funds' activities, perhaps limiting the stakes they can build up in firms or curbing their ability to short-sell investments."

Antonio Borges, chairman of the HFSB warns that "we should not underestimate the fact that there is in some segments, especially in the political world, a movement in favour of very tough regulation, which I think would be quite detrimental to everybody."

In such an environment, the industry needs to take visible and meaningful steps to demonstrate that it is taking the lead in promoting prudent operating standards. Building consensus on the value of the HFSB is an important part of that process.

The Wall Street Journal also chimed in on this topic.

Finding the real Brian Hunter


Fortune goes to Calgary for the first in depth interview with Brian Hunter, the infamous manager at Amaranth whose bets on natural gas resulted in $6 billion in losses. The story benefits from the talents of one of the most sophisticated financial writers in the business, Bethany McLean, who is credited with breaking the Enron story.

She humanizes Hunter, a man who has been demonized in the media for years (to the point where he refuses to be photographed). In a passage that should be read by all hedge fund reporters, McLean notes:

"Hunter is not especially arrogant or intense or brash. (He is Canadian, after all.) He's a family guy who talks more about his wife, Carrie, and his two young sons than about nights out on the town, and he's more of a math geek than a trader type. ("I'm a numbers guy," he says.) He's most enthusiastic when he's talking about the technical aspects (and are they ever technical) of trading natural gas. But he is self-aware enough to understand the perception of him. "I must be a bad guy," he says, ticking off the counts against him. Trader. Young. Rich. Hedge fund. "You couldn't ask for a more toxic mix. It's really frustrating, right?""

She also notes errors in media coverage of Hunter and disputes the common characterization that he was a "rogue trader." In addition, she casts a critical eye on the "Keystone Kops-like quality" of the market manipulation charges pending against Hunter.

Not many reporters have the talent nor the inclination to be as fair and balanced as McLean is in this important story.

Tuesday, July 8, 2008

Declawing the vultures


Last week, I noted the feature story in Conde Nast Portfolio on "vulture" funds. The story, while not directly critical of funds like Elliott Management, is far from objective. From the artwork showing a vulture preying on Africa to several obvious omissions about how funds that buy defaulted foreign debt operate, the story stereotypes hedge funds and does little to ask the nuanced questions that would be required by a serious examination of "vulture" strategies.

Fortunately, Felix Salmon, who blogs for Portfolio, rebuts the story at Portfolio.com. Too bad, though, that the important clarifications Salmon makes are much harder to find on the Web site than the original, inflammatory article.

The rebuttal includes the following facts, none of which were part of the print story:
- The difference between the moneys awarded by the courts and what is actually collected is vast
- Going to court is often the last step in a process that includes direct negotiation with governments for payment
- Collecting any payments involves a lot of time and resources, meaning that profits can be slim, without even accounting for the tremendous uncertainty involved

One would have hoped that two writers for the same publication could have collaborated on this topic. The reult would have been a more balanced and insightful piece. Fact is, though, that rarely happens, particularly when the topic involves hedge funds.

Another defense of "vulture" funds by Salmon can be found here.

Wednesday, July 2, 2008

Media exterminators are in the dark about hedge funds


A shrill frontpage article in today's Wall Street Journal compares hedge funds to roach motels. The story, an expose about Ritchie Capital and its use of gates to preserve itself, employs the roach motel metaphor to irresponsibly illustrate how investors cannot easily withdraw their money from hedge funds. In the 1980s, Black Flag famously marketed the Roach Motel with the slogan, "Roaches check in. They don't check out."

This misguided representation is further indication of media bias agains the hedge fund industry and illustrates the work the industry needs to do to enhance and defend its repuation.

The Journal would better serve its readers by more thoughtful analysis of the important issues that hedge fund investors face, like practices core to valuation, transparency and governance. By doing so it would help the process of getting funds on the fringe raise the way they do business to the level achieved by those who set the bar in the industry.

Monday, June 30, 2008

Hunting season on "vulture" funds


The new issue of Conde Nast Portfolio writes about Elliott Management and other "vulture" funds. The story illustrates how Elliott buys foreign debt at deep discounts and then uses the courts to win payments from governments like Congo and Zambia. The practice has drawn the ire of activists who want to advance debt forgiveness as part of economic development in the Third World.

Note: A posting onPortfolio.com makes important clarifications to the print story and sets the record straight about "vulture" funds.

Wednesday, June 25, 2008

TCI's activist Web site


CSX shareholders vote today on a slate of directors nominated by The Children's Investment Fund and 3G Capital Partners. The CSX-TCI battle is a marathon, not a sprint, though, and CSX says that it could take weeks to certify the election. Despite everything that CSX has thrown at it, the TCI freight train cannot be slowed. First, CSX sued TCI over disclosure requirements and the use of swaps to amass its position. That case resulted in a draw. Next, CSX played the jingoist card and enlisted Lou Dobbs to say that an asset crtitical to national security was in danger of falling into foreign hands. TCI is based in London. The red coats are coming!

That's the old media stuff. The new media stuff and what catches this blog's attention is TCI's activist Web site, "Moving Toward a Stronger CSX." The site explains TCI's view of the value of CSX and offers several documents related to its engagement with CSX. A white paper on the site details governance and perfomance issues at CSX that TCI wants to see improved. It also gives investors instructions on how to vote their shares and gives them the ability to vote by phone, mail, and Internet.

The site is a great resource for investors, institutional managers, other hedge funds and the media. Activist Web sites will become another arrow in activists' quiver as the industry catches on.

People are buying into TCI's argument. Hedge funds hold at least a third of CSX shares and the stock is up 42% this year, outperforming the Dow Jones Wilshire Rail Index, which is up 24%. Imagine, if TCI did a YouTube video? Just kidding...kind of.

Tuesday, June 24, 2008

Defending the shorts


Even when they are right short-sellers get no respect. Lehman Brothers just reported a $2.8 billion loss, announced a plan to raise $6 billion in new capital, and replaced its CFO amid a long-standing and very public "dialog" with famous (or is it infamous) short-seller David Einhorn of Greenlight Capital.

Trouble is that people and many in the media still don't know quite what to make of him and his breed. Even other hedge fund managers won't endorse his practices.

It's never been popular to say that the emperor has no clothes. Fortunately some, like Einhorn, say it anyway.

That even Einhorn, who is renowned for forensic dissection of balance sheets and earnings reports to uncover hidden truths or at least very tough questions for management, faces criticism of his strategy illustrates how much work he and the hedge fund industry needs to do to educate the media and everyday investors about the facts of short selling.

A starting point is stressing that shorts have more skin in the game than long investors. First, they must keep collateral and pay fees to borrow stock. Then they must return shares bought on the open market to the lender. Profit arises when they are able to repay the lender with shares worth less than the ones borrowed. Thus, shorts are as on the hook and economically vested as long investors. This fact gives them equal moral authority to advocate their position and engage in public debate about the merits of a company.

Second, as noted by UConn law professor Steven Davidoff in the New York Times' DealBook blog, it is not illegal to "talk your book."

The opinions of equity analysts are considered part of the way the game is played on Wall Street. But doesn't a downgrade send the same message to the market as a short position? Just today, analysts at Goldman Sachs urged investors to "underweight" U.S. financials. It should be realized that short-sellers signal the market in similar ways, except they put their money where their mouth is.

As we witness the depth of the credit crisis and await action from the Fed and the SEC on the future of financial services regulation, what we need is more debate in the market, particulalry when it comes to accounting, reporting and governance issues, not less.

The industry is catching on. Today, the Financial Times reported that Bill Hwang, founder of Tiger Asia Asset Management noted that companies with major corporate governance issues are "a big red flag for short-selling for us."

New York magazine recently profiled Einhorn and his stance on Lehman.

Fortune reviewed Einhorn's new book, Fooling Some of the People All of the Time, which recounts his battle with Allied Capital.

Thursday, June 19, 2008

Carl Icahn launches blog


Carl Icahn today launched his blog, The Icahn Report. His first posts highlight "absurdities" in corporate governance and include "The Absurdity of Corporate Board Elections," "The Absurdity of the Staggered Board," and "The Absurdity of the Poison Pill."

Wednesday, June 18, 2008

Former CFO speaks on IR


Here's rare communications insight from a company that has a serious communications problem -- Lehman Bros. Floyd Norris of the New York Times interviewed Erin Callan (coincidentally, right before she was replaced as CFO at Lehman) and she was unusually candid about the challenge a CFO faces in communicating with investors and media. “Trying to strike the right tone, to tell what really happened, what are the facts, and trying to give some confidence to your stakeholders, is a difficult process,” she said. “You don’t always get it right.”...“People are telling us they want to know more. They are not comfortable with what they know,” Ms. Callan said. “It’s a hard thing to figure out what that line is. How can we give a requisite amount of information that is satisfactory?”

That last question is hard to answer for any bank, right now. However, Lehman is in an extraordinarily difficult position, reputationally, as a result of its refusal to take the writedowns its peers have, become more transparent about the quality of its balance sheet, and become more proactive in its investor relations. Maybe the CFO and COO won't be the only members of the c-suite to pay the price.


Reputation management = risk management

The Financial Times today reports that in the rarified air of private banking reputation management has become as important as risk management. It's a valid point, particularly at a time when the world and well-heeled clients are focused on risk. The story goes on to point out that the biggest problems come when clients incur losses on products that they do not understand. "The problem is more losses or products that have been sold to private clients that, actually, the clients have not understood." While I don't think we are going to see product suitability issues on a grand scale (like subprime mortgages) at the high end of the market, banks need to carefully review their sales and risk disclosure practices.

Crises of confidence are difficult to contain in the banking industry. Even typically "sticky" money, like retail deposits and assets at private banks can quickly become unglued. Banks need to re-audit their products and practices to safeguard against operational issues that escalate into reputation damaging events. A lot can be learned from the experience of E*Trade, which lost $2bn in assets in just one day. Fortune chronicles the de facto run on the bank and it is interesting to look back and see the interrelation between risk management, operations and reputation management.

Wednesday, June 11, 2008

She said, he said


It shows you how rough things are in the banking sector when even good news hurts your stock price. Meredith Whitney, analyst at Oppenheimer, wrote this morning that Bank of America would not cut its dividend in the near future. The bank then denied making that claim and, in effect, reserved the right cut its dividend (BAC has a dividend yield over 8%). BofA might now be joining the list of banks grumbling about Ms. Whitney's calls. Well, she got it right on Citi and being bold and being right earns you credibility.

But this is not about an analyst's opinion. This is about Bank of America's failure to communicate effectively to the market on a number of important business issues. It's about not giving sufficient guidance on how its retail bank is going to perform as the health of the consumer fails (the retail bank delivers about 50% of BofA's profits). It's about Bank of America making deep cuts in its investment banking business and selling its prime brokerage. It's about Bank of America's inability to convince anyone that buying Countrywide was a good idea, much less that Countrywide has long-term strategic value, despite its short-term liability. It's about BofA's credibility and that's why BAC was down 1.4% today.

Post script: A Reuters story from a long interview with BofA CEO Ken Lewis is here.

Tuesday, June 10, 2008

Playing the don't pass line


The New York Times' Deal Professor blog features an examination of the legal issues related to vocalism (I won't call it activism) by short sellers. Of course, the case study is Einhorn v. Lehman Bros. The writer, a law professor at UConn, draws the important distinction between "talking your book" and manipulating the market and doesn't suggest that Einhorn is engaged in the latter. Comparing the strategy of Einhorn to playing the don't pass line is a pretty good analogy. He may not be popular, but he is playing with the best odds.

This blog will compare the "moral authority" of activism by long- and short investors in the next week.

Monday, June 9, 2008

Buffet bets against hedge fund industry



Fortune reports that Warren Buffet has bet Protege Partners, a New York-based fund of funds that five funds selected by Protege will not outperform the S&P 500 over the next 10 years. The $1 million bet is looking at performance net of all fees, costs, and expenses. Buffet, to quote the article, feels that it is the high cost structure of most hedge funds that makes them "onerous and to be avoided."

In making this bet, Buffet appears to agree with the findings of a Merrill Lynch research report dated February 22, 2008, that makes the case that hedge funds' returns are becoming more correlated with the broader market. Quoting the report: "Our analysis continues to show that 2000’s non-correlated asset classes are now often highly correlated to the S&P 500, and their diversification benefits now seem to be greatly reduced, if not completely eliminated."

High fees and the perception that risk and return for fund managers is uncoupled, because managers don't share losses equally with investors when the fund loses money, drove media scrutiny and animosity when the industry expanded so rapidly from 2004-2006. Going forward, the fee structure could continue to raise media, not to mention investors' eyebrows, particularly, if funds find it difficult to match historical returns in the current market.

The bet itself is overseen by the Long Now Foundation of San Francisco, which exists to encourage long-term thinking. The organization operates a betting mechanism for long-term bets and wagers include whether commercial air travel will be pilotless by 2030.

It's pretty hard to bet against Buffet, but Protege has shown keen foresight in the past. For example, they invested in Paulson & Co.'s funds, which were among the few to reap rewards from the subprime and real estate crises.

When the going gets tough, the tough might have to get more active


Jeffrey Sachs, in the current issue of Fortune, writes that he sees many disturbing parallels between today's U.S. and global economic picture and the economic downturn of the 1970s. Indeed, striking similarities exist: rapid increase in the price of oil and other commodities, the U.S. fighting a costly and unpopular war, a weak dollar, among others. The result, back then, was 15 years of slower global growth. Should the scenario recur, it certainly will hurt retail investors looking (nervously) at retirement, but it also will make things harder for hedge funds and mutual funds seeking growth in a stagnant, albeit probably volatile, market.

In low-growth or stagflation the business-as-usual mindset of corporations, clearly, won't cut it. Hedge funds might have to increasingly turn to activist tactics to convince companies to unlock value and pursue unconventional growth strategies.

Sunday, June 8, 2008

Lehman Bumps Up Earnings Call


Lehman Brothers might release earnings this week -- earlier than its regular schedule -- in an attempt to stem the tide of speculation about the quality of its balance sheet. Lehman officials spent much of last week publicly quantifying its cash and liquid reserves in hopes of calming investors and trading partners. Even if investors aren't going to like the news about earnings and the need to raise capital, it's about time Lehman gave the market more insight into the scope of writedowns and its plan to catch up to other banks in writing down assets. The decision to release early leads me to believe that Lehman realizes that Bear Stearns was prepared to announce strong earnings two days after it was bailed out by JP Morgan.