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.