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 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.