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.