Friday, December 28, 2007

Under New Management

As checks and balances go, the internet has become the defacto 'court of public opinion' with little if any laws to reign in its growing negative affect on businesses and individuals.

Yes I am aware of the libel laws etc, but the net is an organic beast that does not tie a website owner to one specific Internet Provider for any length of time. If a site is sued then the site owner just moves his website to a Chinese provider or a Russian provider. As is the way with many cases of libel, unless you have the money to go cyber hunting for your tormentor, you have little, if any, chance of facing your accuser in court.

And this my friends is the reason that we are re-evaluating the business that we have here in Switzerland. In a Internet smear campaign that is far out of proportion to the size of our business we have been accused of everything bar the Kennedy assassination and, it appears that the only reason the CIA web site has not received a post from our nemesis is because non of us were born in 1963. We would have thought that if any of this bile was true, someone would have sued us by now, of course no one has come forward, because it is rubbish.

We think this campaign has come from our corporate finance involvement in one firm. We recommended a director who was subsequently sacked, he has, from that day forward, taken every opportunity to create anonymous and libellous statements on every site that will listen...even though we didn't have anything to do with him being sacked, only hired.... We have contacted sites only to be rebuffed claiming that US laws protects free speech etc it then turns out that the particular site we were immortalised on is owned by a Portuguese man with an ISP that changes between Canada and China to avoid being sued...

It is, for humble investment managers and corporate finance guys, all a bit much. The last straw came from a UK site which we respect immensely. We have sent the obligatory messages to have the posts removed but will see what actually happens. What we do know is that this site is going nowhere as it is an established site based in the UK and the US so finally being able to sue someone will be a welcome relief. We suspect however, that the offending posts will be removed...any sensible site would, and they seem to be that way, but if they are not we will be spending more time in court making more in damages than we will be in fees...

Anyway our company as we know it is being sold to new management some of us will stay others will go. It will not affect the operational nature of the business, just the structure. Part of that restructuring is a healthy paranoia about posting on the web, so the Asset Manager site may, or may not continue, we will see.

We may come back in the New Year having slain a few cowardly anonymous posters, if only to whip off their veil of secrecy and to post the research that we will have done on their, undoubtedly, nefarious backgrounds. To be honest though, the Internet is becoming a festering heap of bile spurted out of the keyboards of those who never got picked for the football team and who are still not over it, and we are a little sick of it.

Those of us who played in the first eleven and married the 'Prom Queen' are used to people sitting on the sidelines telling us how to play or how 'lucky' we are. The funny thing is we never encounter these people on the pitch and they would never say the things they say on the sidelines to your face. I guess nothing has changed.

Thanks for your support and we may see you in the New Year.
Thanks to all for your messages of support. I am pleased to report that the web site in question has removed all the anonymous posts in recognition of the absolute rubbish that was posted there. If only other sites were as responsible.

Tuesday, November 20, 2007

Bidders Hit The Rock

Being a shareholder in Northern Rock must be an insomnia-inducing activity these days. We did have a long and then a short but have now decided that the game is just a little too risky for our blood with bids coming in for the company well below what the market expected... well, the optomistic side of the market, should I say.

Shares in the troubled bank fell by more than 17% on Tuesday after it revealed there had been no interest in a bid for the whole firm. Northern Rock shares stood at over £12 each in February, but have now fallen to below 90 pence apiece.

The Bank of England has lent the bank more than £24bn in emergency funding, a move defended by Chancellor Alistair Darling in the Commons on Monday. Both the Conservatives and the Liberal Democrats have criticised the loans.

Mr Darling had told the Commons in a statement that the loan move was "right" to give the bank time to assess its "strategic options".

In addition, the government has pledged to guarantee the £16bn worth of savings deposits held by Northern Rock customers. Those who have so far expressed interest in Northern Rock include a consortium led by Sir Richard Branson's Virgin, and Olivant, an investment firm led by former Abbey chief executive Luqman Arnold. Private equity firms JC Flowers and Cerberus have also looked at the UK's fifth-biggest mortgage-lender.

Northern Rock, which has around 6,000 staff, has said it expects to receive further expressions of interest over the "next few days". But the company has said the proposals received so far from potential investors were "materially below" the stricken bank's share price.

Northern Rock was forced to seek emergency funding from the Bank of England in September after the jamming up of world credit markets wrecked its business model.

The government has a number of options when it comes to Northern Rock's future - it could let the bank go into receivership, seek a private buyer, or take it over itself.

Meanwhile, Northern Rock says it continues to be engaged in discussions with refinancing companies to explore refinancing "or reorganisation solutions for the company".

When the Rock bounced to 2.40 we believed that it was insane of anyone to think that a bid would be made at a higher level than that price and so shorted it, we proved to be correct. Our reasoning for this still stands and that is; although there is a business there, of that there is no doubt, the market out there is looking pretty rocky (no pun intended). Goldman Sachs has even warned of a deep recession saying that the slump in global credit markets may force banks, brokerages and hedge funds to cut lending by 2 trillion U.S. dollars and trigger a "substantial recession" in the United States, according to Jan Hatzius, chief U.S. economist at Goldman Sachs in New York.

According to Bloomberg News, he said losses related to record home foreclosures could be as high as 400 billion dollars. "The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognized," Hatzius wrote. "It is easy to see how such a shock could produce a substantial recession" or "a long period of very sluggish growth."

Goldman's forecast reduction in lending is equivalent to seven percent of total U.S. household, corporate and government debt, hurting an economy already beset by the slowing housing market.

If this is the outlook for the US economy to suggest that the UK would be immune would be a little foolhardy. Anyone in the UK knows that a very large percentage of homeowners are leveraged to the hilt. In a micro hedge fund style investment strategy many have been able to purchase property with little cash down and have remortgaged gains to buy further properties.

With rents in the over inflated 'buy-to-let' market outstripping previous ratios by an unsustainable 60% the UK housing market is lined up like a pretty display of dominoes just waiting for someone to push the first one. We think there is a a very good chance that the US woes could be just such a push.

With all this in mind, would you want to be the owner of the fifth biggest mortage lender in the UK, without having a substantial discount from the potential problems that are lurking in the bank?

We thought not...

Monday, November 12, 2007

Hedge Fund Manager Toy of The Week.

Predictable I know. However, I am going on a trip to Canada this week and have found a Lamborghini garage where the owner is my new best friend. He is moving to Geneva soon and I aim to have him on my Christmas list as soon as possible. Not just because he is a nice chap, but also because he owns one of every model of Lamborghini ever made and that, my friend, is an awesome reason to visit his new house every weekend until I can do the same...

I give you, as the toy of the week... the Lamborghini Murcielago Roadster... you know you want one..

It howls past 60mph in less than 3.6s and goes on to a top speed of 200mph, slightly less than the coupe due to the messed-up aerodynamics of the chop top. It doesn’t need a detailed explanation of in-gear acceleration, other than to say it could scorch the skin off your face.

The Audi-sourced V12 generates 479lb/ft of torque, it’s got pace to burn and needs replacement tyres for the 18x13 inch rear wheels €1000 a pop every 7000km. If there was ever a time when this seemed like a reasonable bill, this might be it.

Driving it

Find a clear road and light the touch paper and the rear wheels spin momentarily before the car blasts down the road with all the aggression and purpose of a serial killer on the run.

The engine note hardens to one of the best sounds in motoring, the speedo races round to illegal speeds and the scenery races past the window at a bullet-train rate. Push hard on the throttle and prepare to hang on. It’s an emotional experience driving a Lamborghini in full flight and having driven one through the tunnel on Park Lane I can tell you that I didn't know whether to laugh or cry... I think I did both..

Thursday, November 08, 2007

Hedge Funds.. Sick as a Parrot?

The Business Magazine had an article today that proposes that the hedge fund industry bubble is about to burst because the funds are now investing in football clubs.

"There comes a point in the development of many industries – as there does in the lives of many individuals – where fabulous wealth starts to crowd out common sense" the magazine said.

I can understand their logic, I am a Leeds United fan after all. For all you non football followers and those of you who call it 'soccer', Leeds United are a tragic story of financial investments gone bad.

The club spent millions and millions trying to win the premier league and to gain revenue from the European Champions league. They reached the semi finals 6 six years ago and then promptly started an almost straight line down the divisions. Today they are in 'league one' two divisions below the premiership and have survived administration and bankruptcy. Following £90 million of debt.

The club had all sort of financial instruments in play to buy players that would have looked more like a hedge fund hand book than a football club trying to buy players.

When all these financing instruments started to unravel it became a nightmare scenario where players were bought for £10mn sold for £5mn and the club still had the obligations of wages and the debt... for a Leeds supporter it was a nightmare.

Does this mean that hedge funds are complete fools for investing in clubs? Like any business, it depends which club and it depends on how much money you have.

Newcastle, Southampton and other hedgies choices are hardly the glamor clubs and for them to compete with the best of Europe (the Champions league is where the money is) then they will need to spend vast amounts of money. You only have to look at Mr Abramovich who a few years ago bought Chelsea, poured £250mn in and still hasn't won the champions league... If someone with a personal wealth of £15bn and money to burn without the requirement for a return can't do it, I would be a worried investor if my fund started investing in Football clubs.

"Investing in football clubs is usually what rich men do when they’ve made their fortune. It is how they spend their money, not how they make it. If the hedge funds cannot see that, they are running out of the most precious of all commodities – common sense" I have to agree with Business Magazine on this, I love football but buying a club could very much be paralleled with Branson's comments on how to become a millionaire, he said "First become a billionaire and then buy an airline"

Replace 'airline' with 'football club' and you have some very sage advice for hedgies dabbling in this marketplace... a sign that the hedge fund market 'bubble' is about to burst.... cobblers.... just a sign that some managers may be getting a little over confident, but when has been sensible ever been applied to the hedge fund industry?

Monday, November 05, 2007

New Managers Struggle For Funds

Crikey... one doesn't know who to believe these days. We have had reports over the last few weeks suggesting that the hedge fund industry is AOK even with the recent turmoil and that we will see the industry stomping forward despite all the troubles. Today, however, Bloomberg ask "where have the hedge funds gone?" in an article discussing the troubles in start up funds.

New hedge funds, according to data from Hedge Fund Research Inc, are opening at the slowest pace since 2003 with almost all of the $164bn of new investments going to managers with proven track records. Should this be a surprise? Not really.

``People are spooked,'' said Bill Grayson, president of 21- year-old hedge-fund company Falcon Point Capital LLC in San Francisco. ``There is no doubt that a few years ago, if you popped out of brand-name firm,'' everyone wanted to give you money. ``That game is now over.

Personally I think there is a little bit of showmanship going into this statement from Mr Grayson. If I was running a large hedge fund I would be happy to keep the 'spookiness' going and declare to whomever would listen that giving money to new managers 'is over' and very dangerous!

Of course confidence in the $1.8 trillion industry has been shaken by the worst decline in non-government debt markets since Russia defaulted in 1998 and, as an investor, you may want to be a little more careful about who you give your money to. Just like when the tech bubble burst, everyone virtually abandoned the small cap market for the relative safety of blue chips it is, in our opinion, the same here. It wasn't so long ago that the stories of vast profits and huge earnings were the best to sell newspapers and bring visitors to your web site, it is now the horror stories of failure and losses that make the headlines.

``We got really burned by a startup,'' said Louis Morrell, vice president of investments at Wake Forest University in Winston Salem, North Carolina, declining to identify the manager. Wake Forest has about 18 percent of its $1.3 billion endowment in hedge funds. Morrell said he now won't invest in a fund unless it's been open for five years.

About 1,200 funds will be introduced this year, down 20 percent from 2006, Hedge Fund Research estimates. There were about 9,900 funds worldwide at the end of September. The 20 biggest managers control one-third of the industry's assets, according to data compiled by London-based research firm Hedge Fund Intelligence Inc.

This reluctance on the part of investors to deposit funds with start ups will have an affect on the industry, obviously. If you are a young gun at Goldmans and you only have the prospect of getting $20mn to start your fund you are hardly likely to leave your million dollar bonuses to start your own fund that will not attract enough to pay you more.

The point, however, from our perspective, is that the industry itself is becoming more institutionalized and civilized. The big boys have to court pension funds and others and, perhaps, do not have the need for the risk aware high net worth clients of old.

This creates a two teir market...the sophisticated high end institutional funds and those who aren't. Having this distinction is not a bad thing for the smaller managers, they will be more nimble, more free to take more risks and, ultimately be more profitable. Then the cycle will start again, everyone looking for the new hot shot manager creating spectacular returns compared to the boring big boys, who in our opinion, will struggle to give the returns required with the institutions breathing down their necks...

Friday, November 02, 2007

Hedge Fund Manager - Toy of the Week

Come on! You know you don't spend all day analysing shares and derivatives... There has to be some playtime.. and here it is... a fully kitted out racing simulator. For the cost of a couple of Monaco GP tickets you can be racing in the office while battering the CEO of a non-performing portfolio company....

The simulator's system, steering wheel and pedals come configured for your choice of Xbox 360, PlayStation 2 or PC. The simulator is customizable for a monitor of up to 42" and includes a 10" subwoofer behind your seat, three front speakers and multiple rear speakers.

"You'll have to feel it to believe it!" $5000 at

Not So Easy - Jet

It's Friday and I reserve the right to have a moan. There is a tenuous finance link if you can wade through this post but the post is more of a cathartic exercise to expel the poison brewing in recent experiences.

Air travel is the theme for today's rant. No, I am not going to go on about the security issues at airports. Like many readers here, I suspect, I go into a 'travel trance' in order to block out the aggravation at airports these days, so much so I often cannot remember the journey at all.. No my rant today is not about increased security it is about decreased service and the subject is Easyjet in Gatwick.

Before Stelios and his band of merry men reach for the 'lawyer phone' I have this to say. I love Easyjet, the in-flight staff are great, it is easy cost affective and, being based in Geneva, I can get in and out of London in a day no problem.

First a positive. Last week I was booked on the early flight out of Geneva to London Gatwick. The plane was delayed for 3 hours, with only going for the day this could have been a disaster. The staff at Geneva, however, we fantastic, they had me back through security (i was at the gate) back into the airport, switched to a flight going to Luton and I arrived in the City only 2 hours late... 5 Gold stars for Easyjet Geneva.

Yesterday however, I got to London fine, no problems,.. coming back was a different story. I was booked on the late flight, finished business early and headed for the airport. Easyjet offer a free service to switch you to an early flight if they have room, which is a great touch. Previously I have just rocked up at check in, explained the situation and been switched no problem. No such luck yesterday.

I turned up at 2.15 qued for 30 minutes with only six people in front of me only to be told that check-in doesn't handle switches. I went to the ticket desk and joined another que. Short for time I asked an Easyjet 'helper' if he could, indeed, 'help' me. Having explained the situation he said he would be 'back in a minute', this at Easjet Gatwick is obviously code for 'I can't help out and you will not see me again' because he disappeared never to resurface.

By the time I got to the desk I had this bizarre conversation.

"Hi, I am booked on the late Geneva flight and would like to switch to the early one please" I said, optimistically.

"OK, but you don't have much time to check in" I was told. "and if you miss check -in you will have to pay £35 to be booked back on the 8 O'clock flight... if we have room" she added.

"Can't you just get one of your 'helpers' to walk me to the front of a que... I have no bags" I pleaded.

"That's not their job" came the reply.

"Oh.. what do they do then?" I asked

"Not that" was the informative answer.

"OK, I'll take my chances on the switch then" I said, thinking I would be able to quickly run the 50 yards to check in and politely que jump.

"Sorry you don't have enough time now, I can't help you, sorry... next please" She ended..

Just like that I was discarded like something on the bottom of her shoe. Of course facing hours walking around Gatwick, I was livid, but what could I do?

I was left contemplating the inefficiencies in the Gatwick system compared to Geneva, which runs like clockwork. Is it because I am used to everything working in Switzerland or is it the general laziness and poor service that is prevalent in the UK these days?

As I twiddled my thumbs and seethed, I counted 12 people with fluorescent yellow t-shirts with 'Here to Help' optimistically emblazoned on them. I counted 3 Easyjet helpers wandering around, 14 check in desks and two ticket desk staff, all incapable of switching a flight and booking me in when the two desks are only 50 yards apart. In Geneva, this would have been a routine request executed with courtesy and efficiency.

I can only conclude that the Easyjet management at Gatwick are, frankly, incompetent.

I make a point of writing to companies about good service, when it is received (and I have had many oppotunities to do so about Easyjet) I do this because I appreciate good service but I also believe it qualifies me to complain when the service is sub standard.

I have written to Easyjet explaining my frustrations and expect that I will get:

a) A standard... "Sorry for your troubles, we manage a zillion passengers... 000000.1% complaints.. we will try better... blah blah" standard computer answer, or

b) "How dare you criticize our staff... you are banned" letter, or

c) Nothing, or

d) "We have looked into it, sorry a cock up... fixed the problem... thanks for pointing it out... her e is a free sandwich voucher"...

All but the last would be a standard respnse from a company over extended and creaking under the weight of its success and time, perhaps, for a short trade. The last would be a refreshingly honest satisfactory, grown up response... we shall see.

All I know is that if I was a senior guy at Easyjet, Gatwick would be on my hit list for improvement. It was, quite simply, the laziest most inefficient service I have had at any airport, ever. And I used to live in the Caribbean where good airport service is about as prevalent as unicorn droppings.

Before Gatwick Easyjet people re-route my next trip to Baghdad, I am not having a go at you. In my time wandering around the airport I saw a lot of Easyjet staff working harder than I would ever care to do, taking on individual problems with the best smile they could muster but with a lack of confidence as to what exactly they should do. This kind of lack of systems which lead to my disastrous day can only be blamed on the management of Easyjet Gatwick.

My advice, for what it is worth, would be to send the managers of Gatwick to Geneva airport for a couple of weeks. The service there is seamless... electronic check-in, informed staff, systems for when things go wrong known, and practiced by the staff in a friendly, courteous professional manner, which can only come from good leadership.

I doubt, however, that anyone really gives a monkey's which is the sign, to me, that the rot will set in sooner or later in the rest of the company.

Tuesday, October 30, 2007

Hedge Funds - Big Brother is Watching

If doubling the tax rate for carried interest was a blow to private equity funds, now it is hedge funds turn with the FSA announcing that it is launching a formal 'assessment' (code for 'investigation') into the system hedge fund managers have in place to guard against market abuse. This after an initial review showed that some managers don't have adequate controls.

This review lead the FSA to be 'disappointed' with some companies internal controls and said that market abuse training, in some cases, was 'non-existent'. This review took in smaller firms and larger firms alike and is has prompted a wider initiative by the FSA to ensure good practices are developed within hedge fund management companies.

"We will be following up with the firms visited and are also launching a program of visits to a wider cross section of (hedge fund managers) over the coming months to formally assess their market abuse systems and controls," the FSA wrote in its markets division's monthly newsletter.

The FSA has wide reaching powers which can included sanctions on firms, expulsion or even legal action.

The review comes after the FSA found that nearly one-quarter of U.K. takeover deals were preceded by possible insider trading in 2005, the most-recent period studied, though there is little to suggest that hedge fund managers are more likely to engage in insider trading than any other market participant.

"Some (hedge fund managers) had a high level of awareness and appropriate controls in place, whilst others were less aware, had fewer controls and demonstrated a complacent attitude to the risks," the FSA said.

This latest initiative by the FSA is due to a growing belief by regulators that insider trading is rife in the markets present both in the UK and US.

In March, the SEC caught a 14-person insider-trading ring that netted more than $15 million in profits and included a UBS research executive, a Morgan Stanley compliance lawyer, a Bear Stearns stockbroker, three hedge funds and a day-trading firm. In May, the SEC froze brokerage accounts owned by a Hong Kong couple it accused of turning an $8 million profit on Dow Jones & Co. shares after allegedly receiving insider information on News Corp.'s $5 billion offer for the group.

To catch rogue traders, regulators and banks increasingly are employing technology, such as complex event processing (CEP) and remote-control software, to monitor insider trading.

Investment banker Hafiz Naseem's last move before boarding a plane from Pakistan back to his Madison Square Park office in New York was to take out his Blackberry and, just like millions of users worldwide, add a telephone number to his contact list. What Naseem didn't know was that the move, like every single keystroke on his mobile device and laptop, was being monitored and logged in real time by an FBI agent back in the U.S.

When the 37-year-old banker landed in New York, he was arrested on insider trading charges in what proved to be the culmination of four months of investigation harnessing both traditional methods and new technology.

We have said it before on this blog, the regulators are getting tough and are probably being backed by a political will to catch the big guys. Someone's scalp will be on the mantle of an ambitious politician soon, we are sure of it.

What of the algorithmic traders? Although a technological Bermuda Triangle myself, others in the industry are not so unskilled. Looking at charts and market movements in securities with the benefit of hindsight, it is fairly easy to spot inside trading patterns, but what of those computer trading programs that search out these anomalies and benefit from that trading pattern. In other words computer programs that are specifically geared to spot insider action and trade on it? Is that market abuse?

I understand that it is. Spies on your Blackberry, keystroke finders on your laptop and computer systems seeking out computers systems... It is all getting a bit 1984 for me.. and I don't mean the dodgy hair do's and the fluorescent socks, more an Orwellian nightmare.

Monday, October 29, 2007

Every Cloud........

When I traded commodities an old boss used to harp on about how volatility is 'our friend' and flat markets 'the enemy'. He also said that in volatile markets 'don't cry for the losers, short them'.

This has been good advice and in the last few months, some of the losers are big names in the industry but they have been royally battered by others. One of those doing the battering is Michael Burry, head of the $621mn fund Scion Capital, he has informed investors that their massive short of the subprime market is being unwound after generating a four-fold return.

"The opportunity in 2005 and 2006 to short subprime mortgages was an historic one," Burry wrote in a letter to investors. "With continued hard work and a bit of luck, we will latch onto another opportunity like the subprime short. But I am not counting on it happening anytime soon."

Scion Capital held $1.7 billion worth of short positions on parts of subprime mortgage securities, but by mid-October, those short positions had been whittled down to $479 million, according to a letter that Burry sent to investors this month.

Having being unwinding the positions from July through October the bet has so far generated four times the original value of the trade giving investors between 78% and 85% gains in the first nine months of the year.

Since their inception in late 2000, the funds have surged more than 300%. During that time, the Standard & Poor's 500 Index gained less than 10%.

Scion's Burry said in his October letter that it was time to "reset expectations," noting that the firm's returns have been "clearly outsized and far from normal."

"Twenty percent annual returns are my rough goal, and I feel that is a properly lofty goal," he wrote. "That is, it is not so high as to encourage excessive risk-taking."
Some of that caution may reflect lessons Burry learned in 2006.

That year, Scion's global strategy funds, the firm's main investment portfolio, lost more than 16%. Burry had placed an early bet that the credit markets would deteriorate, but his strategy was too early in the view of some of his investors, and he was forced to withdraw their money well before the subprime debacle took shape.

"The pain was certainly intolerable for some of our investors, and some that were very close to me capitulated at the very bottom," Burry recalled.

I suspect those that stayed in have forgiven Mr Burry and put him firmly back on thier Christmas card list...

Monday, October 22, 2007

CGT 'Tax Paradise'

We recently posted an article about Switzerland being the 'Pied Piper' of the financial markets with their attempt to lull fund managers over to the shores of Lake Geneva. It looks like the Times has picked up on the potential for the Swiss to clean up in the high stakes game of 'Tax Musical Chairs'.

As we have said previously the mobile nature of funds and their managers makes a quick skip over the channel an easy issue to deal with and the latest 80% affective tax hike on capital gains in the UK has the Swiss licking their lips.

Switzerland has, over the years, lost out to other jurisdictions and has become less of a tax friendly center than many believe. The 'forfeiture' tax (where tax is calculated on the monthly rental value of your property and timesed by 5) is really only affective for the super wealthy, as someone under this tax structure is forbidden to work in Switzerland.

However, times they are a changin. On personal capital gains in Switzerland there is no tax at all, so you can happily invest in stocks, hedge funds and whatever you want, safe in the knowledge that your capital gains are all yours. The problem occurs when it is not a 'private gain'. Basically 'carried interest' in funds are taxed as income and will hit you in the wallet but Mr Derobert of the Geneva Private Bankers Association is optimistic that an agreement to change this rule will be made and describes Switzerland as 'Capital Gains Tax paradise'. In our opinion, if this happens then it would make sense for fund managers to set up home here.

The consequences of the latest tax hike for the Tax Reich in the UK has also affected the 90 day rule. Whereas before, the day of arrival and departure was not included for the 90 day rule, it now is, at least from next April. This is seen as a direct attack on groups such as the 'Monaco Boys' so called because of their routine of living in Monaco, paying no tax but working in the UK for most of the week. Under the previous rule a work week of Monday to Thursday would have only counted as two days for tax purposes, it now counts as 4.

I assume that someone in the UK Tax Reich thought that if they changed this rule everyone would come scampering home and make peace with the Tax Man and take it as a slap on the wrist from the Nanny State.. They obviously do not realise what they are up against.

I only go to London when I have to. Under the old regime I may have stayed three days at a time, spending money in hotels restaurants and bars while I work my stay, bringing revenue to the capital, as many other people do. They and I will now just get the earliest flight in and the latest flight out and get what I need to have done in a day, the rest I will do on the phone, if necessary.

John Carver, a tax partner at KPMG Switzerland, says that 'There are thousands of people who commute from Zurich to London on Monday morning and return Friday evening. Banks may decide it is cheaper to keep those departments in Zurich than pay the tax for their executives".

It will only take one straw to break the camel's back of the daily nightmare that is London. The transport is atrocious the airports are a nightmare and the crime is ridiculous, maybe the tax hike is just enough to kill people's love of the City. I left the City 4 years ago, for me the red tape, stealth taxes and general feeling that I wasn't getting my money's worth for the tax I paid, eventually lead me to packing my bags. I have to say, I do not regret it for a moment. I suspect that many will be following...

If you would like to get a taste of the community in Switzerland, there are tons of expat site...I like the look of a new one that has started...check it out here.....

Blogrush -The Next Big Thing? - We Think Not.

I am always interested in new technologies or ideas that pop up on the web and have tried a few out on the web site here. I am not a techy genius so it is always a useful benchmark for whether something is user friendly or not... Basically, if I can fathom the installation of the widget or script then it must be easy.

One of the areas that we have been manically scouring for a decent investment is the Internet advertising sector. Many people think that Google, Yahoo etc have wrapped this area up but we believe that there is still room for a player to come into the market and make an impact.

One of the areas that can easily be confused is the 'traffic' networks. Not necessarily advertising but, if you like, a social network of interlinked sites via a widget on your web site.

We recently had 'Blogrush' on our site which purports to be a quality network of blogs swapping traffic. The problem, however, is that this network does not do what it says it does... ie, provide traffic. We trailed it on our site for the last few months and received 1 hit... Not exactly a Blog-Rush more of a Blog-Drip. The owner of the site has made a huge deal about new features and reports that will make the system a lot better and they have started viewing each individual site for 'quality'.

Unfortunately, we here at 'Asset Manager' do not appear to meet the Blogrush quality guidelines. We received an email saying '..your blog did not pass our Quality Review criteria.."

Considering we are syndicated on other sites, have been a regular 'related blogs' site at the Wall Street Journal and appear in the top pages of Google for pretty much anything 'hedge fund' I wonder what their 'quality guidelines' are.

We spent quite a bit of time 'cleaning up' any sites that could appear in our widget, taking out the 'get rich quick' schemes and the illegal HYIPS (High Yield Investment Programs) but got a little bored with adding new sites everyday as we saw them appearing on our site.

This maybe the problem, not so much that we do not meet the 'quality' of BlogRush, sorry BlogDrip, but do not meet the 'quantity' issue. The system will only work if there are a zillion sites allowed to appear anywhere on other sites and those, like ours, that screen for quality are not welcome.

I am afraid then, that BlogRush is just another banner traffic network that will be passed around the low quality sites and, inevitably, will not provide much traffic to anyone... Another one bites the dust.

It brings us back to our point about advertising networks, somewhere out there, there is a giant waiting in the wings. It is a frustrating situation knowing this and not being able to invest, however, we are still searching. After all, you have to kiss many frogs to find a Prince and for us BlogRush is a just a frog.

Blogrush Further Comment:

Wednesday, October 17, 2007

Regulators Can't Have Their Cake and Eat It

There has been a lot of press recently reporting the call from regulators and politicians for hedge funds to have greater disclosure. It has been flavour of the month recently because of the 'threat' (as some see it) of the lightly regulated nature of these investment vehicles.

The real question is; Can hedge funds survive if they have to disclose their inner most workings?

I think not. At least not in their current manifestation.

Mutual funds investing the pension money for little old ladies and the masses should be accountable and heavily regulated considering the social impact of a failure of a large fund. Pensioners will still need their pensions despite such a failure, and this won't go away, so the tax payer would eventually pick up a portion of the bill. In this instance regulation is very good indeed.

The problem I have with the regulators on the hedge fund point is that you can't have your cake and eat it. You cannot, on the one hand, restrict who can invest in the funds and stop funds advertising and on then on the other ask the funds to give their inner most trading secrets to regulators via disclosure rules.

The issue, in my opinion, is not that regulators are worried about rich people losing money, it is the fact that pension funds do invest in some hedge funds and they are becoming more institutional vehicles. For accepting pension fund money, certain companies only have themselves to blame for the interest that regulators are showing. Another issue is that the big funds do have an affect on the markets, we all know that, but if a 'club' of rich people got together and started investing their money as hedge funds do would they be required to disclose? Look at it this way, where does it end?

The markets are held up as the crux of the 'free' economy. Regulators, however, are seeking to uncover the trading methods of people who are successful at playing that market and thus restrict their ability to do business.

Does Microsoft have to give there source code? Does Coca Cola have to give up their secret ingredient, do journalists have to give up their sources for stories and do politicians declare everything they should?

The argument that hedge funds are a 'threat' to the stability of the markets is, frankly, a little old school. Look at what we have just witnessed in August, the potential was for BIG trouble and yet the speculative funds were buyers of troubled debt, troubled companies and troubled banks, that, my friend, is an efficient market in operation..

I have been involved with small companies previously and there used to be huge criticism of brokerage companies that operate in that sector, it is risky yes, but it also provides speculative liquidity to the marketplace. If there were not companies and clients willing to invest in that area of the market, there would be no AIM or Plus markets for example. On a scale a thousand times larger, hedge funds provide this speculative liquidity to the markets.

If you over regulate these players and take that speculative liquidity from the markets who will be left to catch the Dow or the Footsie in the next market 'correction'? Mutual Funds? Pension funds? Central Banks? Politicians?

Somehow, I don't think so......

Monday, October 15, 2007

Hedge Fund Manager Toy of The Week..

Reading the FT at the weekend I was inspired to add a new feature to the blog. "Hedge Fund Manager Toy of the week."

For our inaugural award this goes to the Javelin Mark 10. Yes! Your own executive fighter aircraft. Being an ex-RAF engineer and married to a pilot, I am a bit of an aircraft geek so this was a shoe-in for this weeks award..

The jet is an executive jet for one + pilot, of course. It can fly at just under the speed of sound, uses state of the art avionics and has a range of 1,000 miles. A light, quick, fixed wing aircraft, it is powered by two 1,750 lbs thrust turbo fan Williams FJ-33 engines.

It has been designed for wealthy pilots who want the 'fighter jet' experience but also for the business executive who wants to get places alone and in a hurry...

There are, however, no weapons systems and no ejector seat so playing the theme tune from Top Gun while whizzing to a meeting may be a thrill but if 'bogies appear at 12 o'clock' you are on your own..

The accommodation for the business traveller is good.. for a jet fighter. The rear seat is 39in wide at console level and 40in at the shoulders. There is no need for a helmet, G-trousers, side arm, oxygen mask, flame resistant undies or boots, so the Armani suit will not become too creased.

And the price.. £1.5mn.

I can't make up my mind between....

"Dear God

I have tried to be a good man all my life. Thank you for the blessings you have given me and the wonderful family that I have. I thank you for my health and your grace in giving me a career... but, if you are not too busy, could I just ask one small favour...."


"Dear Investors

In an effort to make the process of meeting you all more efficient....."


"My beautiful wife
Understanding your love of flying I have gone the extra mile for your Christmas present, however, we may need to take our son out of school and sell the house..and the car, but for you, my love, no sacrifice is too great..."

Whitewash at Northern Rock?

15th October

As of writing troubled Northern Rock was falling like the proverbial stone, down 23% on news that the bank are in preliminary talks with bidders. The problem however, is that it appears potential bidders are talking about buying the bank under the 'whitewash provisions' of the UK takeover rules.

Under the Panel of Takeovers and Merger rules any bidder who gains over 30% of the issued capital of a company is obliged to make a full bid for the remaining shares in the company. A bidder and the company can apply to the panel for a waiver of these rules, generally because it is a 'rescue deal'.

Of course any stabilisation of the company at present would be good news indeed for the shareholders. However, there maybe an outflow of money from the shares because it is likely that any bidder would seek to buy holdings from large holders and could end up controlling the business with only 30% of the shares. There have been well publicised purchases of blocks of shares in the company at levels significantly lower than the price as of Friday which may lead speculators to think that this is a done deal with some of the institutions who bought into the company at those levels.

Most speculators have bought into the company on the basis that a takeover would be a full bid for the entire company and not a 'partial' takeover under the whitewash provisions. One would imagine that a full bid would be the most acceptable to shareholders.

With the hyper sensitive nature of trading in this company at the moment, one would imagine that the company will aim to qualify what is a poorly thought out statement. I understand the need to keep the market informed and this announcement of a possible whitewash is good disclosure, however one would have thought that it warranted further clarification. More volatility in the price is going to make a deal harder to do..

One thing is for certain, with the potential of a whitewash thrown into the mix, speculating in NRK is not for the faint hearted....

Thursday, October 11, 2007

Private Equity CGT Doubles Under the UK Tax Reich

Private equity and advisory firms have expressed their 'disappointment' at the latest tax bonanza announced by the new Chancellor of the Tax Reich, Herr Darling, after he announced that business taper relief on capital gains will be abolished and replaced with a flat capital gains tax rate of 18 per cent from April 2008.

It is a reduction from the previous top rate of 25 per cent but the move abolished the previous 10 per cent reduced rate for investments held more than two years.

The Chancellor's 'initiative' was prompted by a surge of political testosterone on both sides of the Atlantic over the ability of private equity firm partners to have carried interest profits from their funds taxed at favourable rates of capital gains tax rather than as income, at a rate of up to 40 per cent.

Herr Darling announced to Parliament in his Pre-Budget Report: 'I can tell ze house ze changes I propose to capital gains tax, taken togezer with ze tax loopholes zat I am closing, will ensure zat zose working in private equity pay a fairer share.' Clicking his heels he then went on to start on non-domicile taxation, but that I shall save for another day.

Simon Walker, chief executive designate of the the British Private Equity & Venture Capital Association (the 'British Resistance'), says: 'The BVCA notes that the chancellor has placed emphasis on innovation, enterprise and the need to maintain the UK's competitive position.

'However, we are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate, no matter how long they have been held.

'This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18 per cent means capital gains tax is higher in Britain than France (16 per cent), Italy (12.5 per cent) or the US (15 per cent), let alone countries like Switzerland which have no CGT.

'The British private equity industry - which accounts for 60 per cent of the European market - is core to maintaining London as the world's financial capital. We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognised for the contribution it makes to pension funds and the wider economy. Above all, private equity and venture capital need certainty and stability.'

Anneli Collins, head of private equity tax for KPMG in the UK, says: 'PE bosses will indeed now pay the same tax rate as their cleaners. But entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement will find that unless they can do it before next April, they will pay eight per cent more tax than they were expecting to.

'True, the changes mean a single rate will be in force, but the playing field has not been levelled at all. UK private equity will be taxed at 18 per cent, while non-UK domiciled private equity will be subject to a flat tax of £30,000 per year - and then only after seven years.'

It is obvious that there will now be a stampede of business sales before April 6th next year as business owners seek to avoid the tax, for those suffering the problems of the credit crunch this will just exacerbate the situation.

According to Grant Thornton corporate tax partner Stephen Quest, the increase in capital gains tax represents in effect an 80 per cent rise from what is currently paid. It may act as a major disincentive for private equity executives to take the risks they were currently taking, and is likely to impact negatively the industry's recruitment and retention rates.

In a cock up of Biblical proportions Herr Darling may have given the industry the kick up the backside it needs to leave the UK. The next 12 months are already set to be extremely difficult for buy-out firms, who reported their most negative forward-looking expectations ever in a survey carried out by Grant Thornton Corporate Finance last week, with 63 per cent of private equity executives predicting a downturn in deal values.

Reassessing business models will be the order of the day for private equity firms and it is plain that the competitiveness of the UK will diminish when this comes in. I believe that Herr Chancellor just made a massive error and may go back on this tax hike.

The Chancellor obviously sat down with his, equally as dim, lieutenants and decided that rich private equity Barons were taking the proverbial out of the tax man and so came up with a half baked scheme that now encompasses people who have worked all their lives to create a business and nearly doubled their tax rate.

Gordon Brown has never been one of my favourite politicians as I believe he is a 'Pinko Commy' willing to suck the life out of the UK through stealth taxes. In his time in the cabinet he has made over 85 tax hikes which has equated to £2.3 Billion per week more in tax in the UK than in 1997.

This latest Brown inspired - Darling delivered cock up is by far the most badly timed, ill thought out political vomit to come out of the Tax Reich that I can remember.

Grant Thornton said 'This is the most negative forecast we have ever seen from the private equity sector and a huge drop in confidence from just three months ago. With the capital gains tax increase announced today, it seems the light at the end of the tunnel is an oncoming train.'

In conclusion, there is one thing I would like to highlight from the above post that you really should pay attention to ".....countries like Switzerland which have no CGT."

Will the last person to leave the City turn the lights out please and I will meet you at Geneva airport.

If you would like to get a taste of the community in Switzerland, there are tons of expat site...I like the look of a new one that has started...check it out here.....

Wednesday, October 10, 2007

Regulators - The Blind Leading The Blind?

It's always amusing to poke fun at the regulators but it is twice as much fun when industry 'experts' add to the cock up.

I have always been told that the definition of an expert is 'ex' as in 'has been' and 'spurt' as in a 'drip' under pressure. This may be a little harsh but when the lunatics are taking over the asylum it's time to get concerned

On Tuesday October 10th, Europe’s second-largest hedge fund mistakenly exposed its large-scale shorting of shares in Northern Rock, the troubled bank, after a miscommunication with the Takeover Panel.

GLG Partners, a $19 billion (£9 billion) fund manager, told the London Stock Exchange that it had failed to make trading disclosures between September 26 and October 5.

The hedge fund manager blamed “human error” for its lapse and disclosed that it held short positions on more than 3 per cent of Northern Rock stock via contracts for difference. It is thought that up to 50 per cent of Rock’s stock is currently being shorted. In a farcical series of events, it is understood that GLG told the Takeover Panel of its activities on Monday night and that the Panel told it to 'alert the market as soon as possible'.

I completely understand the Panel's involvement in the Rock but I can't understand why GLG thought they needed to declare. Forgive me, but the clue is in the name 'The Panel of TAKEOVERS and Mergers'. How a short position could be seen as a takeover move is a stretch.

I am aware of reporting rules when certain holding thresholds are reached and reports of holdings over 1% are being submitted regarding the Rock, but on a short? Effectively the position is netted off with a short being offset by the necessity to buy the shares back. So how could this possible come under the remit of the Panel?

This cock-up is made all the more amusing as Sir Howard Davies, the former Financial Services Authority chairman is on GLG's advisory board....

The problem is regulators have been jumpy about trading in bank shares during recent market turmoil, amid fears of insider dealing. Philip Richards, co-founder of RAB Capital and the biggest shareholder in Rock, last month attacked some rival hedge funds for fomenting panic about Rock and accused the Financial Services Authority (FSA) of failing to regulate trading in its shares.

The FSA has taken just one notable disciplinary action against market abuse. In August 2006 it fined GLG and Philippe Jabre, the former managing partner, £750,000. GLG has also been fined by French and American regulators in the past 14 months.

This reporting farce does highlight, however, that the PTM have some fools working for them who don't even know their own rules and GLG need to hire guys that have actually taken some corporate finance exams...

Guys, I will help you out for a few shekels....

Monday, October 08, 2007

Funds - What's In a Name?

I am sure we are all guilty of using industry buzz words. I am not so bad after years away from the front lines of broking where even potential lady friends were, in moments of extreme male chauvinism, classed as 'long' or 'bid only'. My favourite industry jargon of the moment however is "Recovery Funds". The phrase is, obviously, a nice way of saying that the fund takes advantage of other people's problems in selling whatever it is that the fund invests in.

For example Société Générale Asset Management is launching the SGAM Invest Bonds Recovery 2007, a fund aimed at sophisticated investors that seeks to take advantage of the 'attractive' pricing levels on the European securitisation and credit markets.

SGAM Invest Bonds Recovery 2007 is a French-registered mutual fund with a minimum investment level of EUR1m. It looks to take advantage of the opportunities arising in the wake of the liquidity crisis in credit markets by focusing on the attractive pricing levels of securities and seeking to capture the liquidity premium.

The portfolio is mainly invested in securitisation vehicles, chiefly asset-backed securities issued in the eurozone, and bonds issued by European companies and banks. Supported by SGAM's expertise in credit analysis, the management team pays particular attention to selecting securities with high credit quality that have strong upside potential.

There are a few funds that tell it like it is such as my particular favourite 'Pirate Capital'. Journalist have had a field day with a Bloomberg article introduction saying "Tom Hudson and his pirates had a blunt message for Canadian ski-resort owner Intrawest Corp.: ``Surrender the Booty.'' Pirate Capital was the largest shareholder and felt that this fact made it this boss and when the company was valued at a level below what Pirate Capital thought it should be Bloomberg says "they spied treasure".

They have funds called 'The Jolly Roger Activist Fund' and flaunt their 'booty' motto on baseball caps. Some see it as a bit spivvy, personal I like least you know what you are getting when they invest in your firm.. The 41 old Hudson started his particular line of thought in his hedge fund 'Blackbeard'.

Perhaps then, some funds could be more aptly named. SocGen could have called theirs "The SocGen Bottom Feeder Bond Fund" or "The Credit Crisis Bond Fund" these would have been much more appropriate names and a lot more fun.

UBS could learn from this. The 'UBS (Lux) Key Selection Sicav - US Equities 130/30 B' could have been "The UBS Wizzo New 130/30 US Equities Investment Fund".

Instead of looking through lists and lists of funds with names that look like they are from some sc-fi movie or maths geek fantasy list, wouldn't it be much easier if more people told it like it is?

Looking for an aggressive activist hedge fund? Invest in "The Global Corporate Board Bully Fund" or you maybe after a quant fund, perhaps I could interest you in "The Computer Traded Equity Fund". Maybe you are more interested in a less aggressive mutual fund "The Boring and Not Great Performance But You Can Sleep At Night Fund"..I am sure this would be a lot easier.

Anyway, that's enough for today, I need to get back to "The Invest In Euro PIPE Individual Swiss Account Facility" that we operate. OK, I can see the downside of this particular naming solution....

Thursday, October 04, 2007

Hedge Funds - Phew! Its not so bad after all..

Having served in the military I learned to 'about turn' with the best of them however, sometimes our square bashing did not go according to plan. One such memorable moment was at my 'passing out parade'. My family were there and all eyes were upon us.

Just as a formation of Jet Provosts went over head our newly promoted Flight Lieutenant announced 'eyes halt' when of course it should have been 'eyes right'. There were a few stumbles, but we believe that the jets over head were enough of a distraction for us to get through it..My mother never noticed.

Unfortunately for Trimtabs and Barclays, the moment where all eyes were upon them did not have such a distraction and they have come out with a little egg on their faces on their particular 'about turn'

Having reported that there would be $32 billion leaving hedge funds in July the converse was true with $39 billion flowing in. The July outflows that were estimated by TrimTabs and Barclay Group in early September seemed to confirm concerns that there was trouble ahead. At the time, TrimTabs said de-leveraging and risk reduction by funds of hedge funds was a major cause of the turbulence in credit and equity markets in July and August.

On Wednesday the firms said the the report had been 'miscalculated' and the problems were not as bad as reported.

"We apologize for the incorrect hedge fund flow estimates for July," said TrimTabs Chief Executive Officer Charles Biderman. "The monthly hedge fund flow data is a new service and the changes we made to our methodology will ensure that our current and future estimates are as accurate as possible."

It appears that the problems highlighted in the data were incorrect for a couple of reasons. Firstly adjustments were not made for the reporting of funds of hedge funds, which tend to report flows with a significant lag because they have to consolidate returns from their underlying managers first. Secondly, funds were included in the estimate that updated their performance but not their assets under management.

As a result, those funds that posted positive returns were incorrectly reported as posting outflows equal to their asset growth from performance, TrimTabs and Barclay Group said.

All is not lost for our friends, however, as the impact of credit market turmoil this summer on hedge funds was evident in August data compiled by the firms. The $8.9 billion August inflow was the lowest since $7 billion flowed into hedge funds in January, they estimated. Fixed-income hedge funds posted the biggest outflow in August, losing an estimated $1.7 billion, they noted.

"Many investors were probably nervous about putting fresh cash to work until they could assess the fallout from the sub prime mortgage mess," said TrimTabs President Conrad Gann.

OK guys, we will let you off this time (mainly becuase we reported it too..). Lets call it 'telling the truth in advance'....

Wednesday, October 03, 2007

Hedge Funds and the UK Property Crash

One of the quirky things about the UK economy of recent years has been the inexorable rise in the property market. In 1998 I lived in a 2 bedroom riverside apartment in a converted Victorian hotel. The views were fantastic and for a young man with a plan it was the perfect location. The walls were paper thin and the whole building needed some work, but all in all it was a great bachelor pad. So I decided to buy it.

The lady who owned it wanted £180,000. I explained to her that there was zero chance it was worth anywhere near that and offered £160,000, she declined. That very same flat is on the market today for £450,000, the building still needs work doing and the walls are still paper thin..

This is not even in London, where the story is even more crazy. What a lot of people have forgot, however, was the early nineties property crash when you could not give property away. The rumour is that hedge funds think that this state is on its way once again..

According to the Sunday Telegraph, Hedge funds are aggressively short-selling shares in U.K. home builders, developers and landlord companies in anticipation of a drop in Britain’s housing market. Big bets have been placed on shares of Persimmon Plc, the U.K.’s biggest home builder and Grainger Plc, the nation’s biggest quoted investor in residential property. Data Explorers research shows that 13% of Grainger’s shares have been sold short, nearly four times the average short for companies on the London stock market. Short-selling of Persimmon’s stock has grown from 2.5% to 8%.

“Investors have significantly increased their short positions on property stocks across Europe,” William Duff Gordon of Data Explorers is quoted as saying. “Residential property stocks are now some of the most heavily shorted shares in the market. This reflects an increasingly gloomy outlook for the residential property market among some investors.” According to property investors who spotted the short-selling, the hedge funds seem to be taking positions on the basis of sentiment about the wider residential property market rather than the individual companies.

The chart certainly doesn't look good, but if there was an unravelling of the UK housing market, what would be the factors?

Firstly, Northern Rock were one of the biggest lenders in the UK to people of low credit. They will lend up to six times earnings and have a product that gives a 125% mortgage..still, believe it or not.

I can only imagine that whomever takes the company over will be reviewing those particular situations very carefully and if you take products such a these out of the market it starts to look bad for first time buyers. If first time buyers are squeezed out of the market there will, obviously, be trouble.

Also the market in the UK has been fuelled by 'buy to let' mortgages where people were buying everything that came onto the market to rent out. I would imagine that a lot of people will be looking at these properties and wanting to consolidate their portfolios. According to Bank of America's Matthew Sharratt, buy-to-let property prices relative to rents have surged to an unsustainable 60% above their long-term average.

With UK property being so expensive and therefore purchasers having to extend themselves to the limit in order to afford property, then any interest rate hike could be a killer for these property speculators and it looks as if we are in a period of interest hikes.

The bottom line is that property prices have been outstripping earnings for many years and a correction is well overdue, with the credit crunch starting to bite, interest rates moving up and sentiment changing to one of caution by buyers then a price fall is inevitable. We have already seen a slowdown and in some parts of the country even a fall in prices.

There are, of course, mitigating factors such as higher immigration and high demand etc but the question is; will these factors be enough to avert a crash or just enough to give the 'correction' a soft landing?

This BBC report is good additional information:

Or for a more amusing take... those of you in the UK will recognise the ever positive people on a certain housing program.

Tuesday, October 02, 2007

The Hedge Fund Historian

I enjoyed this article at Forbes

LONDON - "The devastating nuclear exchange of August 2007 represented not only the failure of diplomacy, it marked the end of the oil age. Some even said it marked the twilight of the West."

It may read like bad science-fiction, but the above scenario came from the pen of from Harvard professor and historian Niall Ferguson, whose prediction of a chaotic, war-torn future, published in the London Telegraph in 2006, has struck a chord with, of all places, British hedge fund GLG Partners.

As a result the firm appointed the controversial Ferguson as a consultant, in the hopes that he will help them better navigate today's turbulent financial markets. No doubt GLG believes his deep expertise regarding past eras of strife--like 19th-century imperialism and both world wars--will help guide them through today's roiling, if not yet apocalyptic, markets.

GLG Partners, which manages some $21 billion in assets, hired the 43-year-old Scottish historian as a consultant in July, when trouble in the credit markets first began to affect notable private equity deals, such as Kohlberg Kravis Roberts (nyse: KKR - news - people )' buyout of British retailer Alliance Boots and Cerberus Capital's purchase of Chrysler from DaimlerChrysler (nyse: DAI - news - people ).

Since then, the lack of appetite for riskier debt related to the American mortgage market, and fears of a recession in the U.S., have spread through the global economy, from stock markets to inter-bank lending.

Ferguson is no stranger to the bond market and its role in international finance. One of the main points in his 2001 book, The Cash Nexus: Money and Power in the Modern World, was the importance of marketable national debt. Such debt, he argued, created an effective "square of power" linking parliament, a tax-collecting bureaucracy, a central bank and the national debt itself.

But he is more famous for his outspoken and revisionist views of 19th-century imperialism, particularly Britain's. In fact, during one 2003 lecture he argued: "The British empire from the 1850s onwards was an incredibly liberal one. For all the warts on its face it created a free enterprise global economy, protected women and stopped infanticide in India, and ultimately brought representative democracy."

This may seem to have little to do with hedge funds, where quantitative analysis usually proves more reliable than historical conjecture for trading huge amounts of money. But, according to one senior industry insider, that could very well be GLC's incentive for hiring Ferguson.

"He has a completely different perspective," the insider said, adding that a hedge fund might benefit from a historical perspective during times of great market uncertainty. "The basic rationale is that times change, but people don't."

And even the best quantitative analysis cannot outwit price volatility when investors rush for the exit doors, as witnessed in August when Goldman Sachs (nyse: GS - news - people ) saw $1 billion wiped off the value of one of its funds.

Ferguson's fellow consultant to GLG is Campbell Harvey, professor at Duke University's Fuqua School of Business and author of papers including "Political Risk, Financial Risk and Economic Risk" and "Emerging Equity Market Volatility." Between the historian and the economist, GLG just might have the right intellectual capital on which to bank its financial capital as it attempts to navigate the crises to come.

Monday, October 01, 2007

Music Industry Winces at Free Album

This is off topic, I know, but it does have implications for those of us who have entertainment companies in our portfolio. Today, the Independent ran a story explaining that the band 'The Charlatans' are to give away their new album for free on the Internet. Guess what? The music industry is none too happy about it.

"You Cross My Path" will be free to anyone who wishes to download it from the web site of the indie music station Xfm. The music industry is not entirely blameless, however, as the band decided to give the album away after receiving an offer that was considered 'less than satisfactory'. Their manager, Alan McGee said "I thought, 'well nobody buys CDs anyway'. If you talk to a 19-year-old kid, they don't buy CDs. In eastern Europe, nobody buys a CD – everything is digitally downloaded from the Internet for nothing. I came to the conclusion, 'Why don't we just give it away for nothing'."

Predictably, the music industry has condemned the move with Kim Bailey, the director general of the Entertainment Retailers Association saying that it will "Narrow the spectrum" of British music by denying new bands, who are unable to attract large live audiences, the chance to make money from selling their music. "This model is fine if you are a band that has already made it but our worry as an association would be whether it takes away that ability of new bands to get their foot on the first rung of the ladder."

This approach will, in our opinion become more widespread. The Internet has change many business models and the music industry, with the exception of backing iTunes, perhaps, has tried all it can, including suing a 12 year old girl to make a point, to stop the inevitable change from buying music to downloading it.

It is time the industry realised that downloading of music is the only future for the industry. My son is 13, he was horrified when I bought a Police CD recently and questioned me at length as to why I was 'wasting my money' when music is free on the Internet. My argument about downloading being copyright left fell on deaf ears. Just as when I was young we used to swap cassettes at school and record each others albums, the reality is that kids are still doing it the only thing that has changed is the technology.

What is the value of music anyway? After all it is only around eighteen songs of 3 minutes each, should we be paying £20 for such work? I am not sure that this is so. Yes the Beatles were genius and Oasis, in my opinion are rock gods, but every product has its ups and downs. Think of the time when phones cost a zillion pounds and weighed a ton, now they are practically disposable being so cheap, that is market forces. Phones calls have come down in price because of competition, stockbroking on the web is virtually free (remember when you used to pay 1% or a fixed fee?) and air travel cost has plummeted because of low cost airlines.

I am afraid that the music industry, and the artists, have to recognise that there is not the money in music as there was, at least not in the traditional business model sense. The Internet has made producing it cheaper, marketing it is cheaper and distributing it cheaper. Any businessman will tell you that when that happens margins get less...simple economics.

With kids out there mystified at their parents paying for CD's that clutter up their rooms and get scratched and lost when they could simply download music onto the latest gizmo, is it any wonder that some, like The Charlatans have realised this and are going with the flow.

As for not allowing new bands to get started, the Internet can take care of that too.. take a look at you can invest in the next 'Beatles'.

Come in The Music Industry... Your Time is Up....

UBS - Big Losses, But Big Profits

What is the world coming too? Just when you think you know someone they go and surprise you with something unexpected. Those that read this blog know that we are huge fans of UBS Bank, our dealings with them are always professional and the staff in their private banking departments are different class. OK, so they may be rubbish at naming funds, trying to put as many words and numbers into the titles as possible, but generally they are the business.

It may have been a little romantic of us then to assume that the Swiss philosophy of diversity and low risk would shield our friends from the ravages of the sub prime market, however, this turns out not to be the case.

In a trading update, as you probably know by now, UBS said it will record a loss of up to SFr800m (£340mn) for the third quarter thanks to losses on investments in the sub-prime mortgage market.

It also said that it will be shedding about 1500 employees by the end of the year, the first to go is Huw Jenkins the chairman and chief exec with Marcel Rohner taking over "for the foreseeable future". Huw Jenkins will become an 'advisor' to Mr Rohner however.

The good news is that UBS, more than most, is equipped to ride out this particular storm as it is still projected to make SFr10bn in the first nine months of the year.

Commenting on the situation the new chief said that UBS had been hit harder than its rivals by the credit crunch "because we are clearly overweight in the US sub-prime market, with much higher volumes in a market which has, for many years, had low volatility but which has become more of a credit risk."

They still own about $19bn of sub prime assets but these are not high risk holdings because 90pc were AAA rated, and 80pc had a weighted average life of less than three years.

The whole situation begs the question of what is happening out there to other banks. Stephen Pope, analyst at Cantor Fitzgerald, called for UBS to open its books: "My view is that in these stressed times it would be appropriate for UBS...and perhaps all the banks to make a clean breast of their exposure.

"So I call on all banks to get the dirty laundry out and into public view so that we can try and draw a line under this issue, this is a time for clarity not secrecy."

My experience of all things Swiss, especially at UBS, is that covering up losses is not really a situation you will find here, but in these volatile times can we say this for others in the banking sector?

Commentators have made suggestions that UBS should not just dismiss the sub prime assets that they still hold and give the market a better idea of the exposure that could be created here. I would have thought, however, that if UBS do think that there are further losses, the new chief would have got all this out in the open and made a clean start, wouldn't you?

Personally, I think that UBS have just been the first to really tell it like it is and thrown everything but the kitchen sink in, it will be interesting to see what the other big banks do now.

Abcap Relents on Redemptions

Absolute Capital Management has relented on the 'no redemption' policy that its was looking to get investor approval for. The company has suffered a collapse in the share price over the last couple of weeks but seems to be taking the bull by the horns and doing its best to get the company back on track.

In a letter to investors in four of its funds the company said it was going ahead with proposed restructuring with one exception. "Following discussions with numerous fund investors, the proposals now include provisions under which investors may redeem up to an aggregate 30% of their investments in the funds' liquid share classes on scheduled redemption days over the following 12 months."

The company last week halted redemptions on the Absolute Activist Value Fund, run by Homm. It is still asking investors to agree to deferring their redemptions from this fund for up to 10 months. It is also proposing deferrals of redemptions on two of its other hedge funds. Only the Absolute Large Cap Fund, which is highly liquid, has escaped restrictions on redemptions.

Saturday, September 29, 2007

NetBank Fails - ING to the rescue

I missed this one..........

It was reported in the FT on Friday night that ING Direct, a subsidiary of the Dutch financial group, is taking over the customers and insured deposits of NetBank, an online lender with $2.5bn (£1.2bn) in assets. Apparently the bank was shut down on Friday by the US government following losses on sub prime mortgages and other loans.

It is a significant situation and marks the largest US bank failure the savings and loans crisis of the early 90's. It is a stark reminder that the sub prime mortgage market is not a story that is dead and buried yet.

ING will be taking on $1.5bn in deposits insured by the Federal Deposit Insurance Corporation and said it had paid about $15m to acquire the deposits. ING will also acquire $724m in assets from NetBank, which filed for bankruptcy protection.

Arkadi Kuhlmann, ING Direct chief executive, said in an interview that ING stepped in partly to insure continued consumer confidence in companies such as his and NetBank that conduct all their banking business online and do not operate branches.

“This is all about confidence in the market,” he said. “Since we are the largest direct bank we were very pleased to assist and help out and hopefully take on these customers who will continue to do business on the Internet.”

ING Direct’s announcement came just an hour after the Office of Thrift Supervision, which oversees US lenders, said it would close NetBank following loan losses.

In addition to the losses, OTS said Georgia-based NetBank failed to improve what the regulator said were weak underwriting standards, poor documentation, a lack of proper controls and failed business strategies.

NetBank’s losses came largely due to early default on loans that it had sold, OTS said.

“While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful and it became clear that high operating expenses combined with continuing losses were jeopardizing the institution’s viability,” the OTS said. It added that the closure came after NetBank’s previous attempts to sell itself failed.

Many small mortgage lenders have been forced out of business in the wake of the mortgage crisis and Countrywide Financial, the largest US home lender, appeared close to failure over the summer. Countrywide was aided by a $2bn equity investment from Bank of America and a fresh $12bn in financing from its lenders.

The FDIC said NetBank had approximately $109m in1,500 deposit accounts that exceeded the federal deposit insurance limit. These customers will have access to their insured deposits but will become creditors for the their uninsured funds.

NetBank’s website was shut down on Friday but was to reopen Sunday evening.

Google - Where Have You Gone?

Following on from my recent posts about the 'Google Factor' where Google hits had dried up for a while, I would have been happy to report that the Google traffic increased by 25% after that period.

Sadly, it appears this was just breaking up love as they have gone, and my posts have disappeared for keywords on Google. I know not why. Hence my ode to Google (with apologise to the Fine Young Cannibals). This 'search engine optimisation' stuff seems like some sort of sinister witchcraft to me.

The one good thing
In my life
Has gone away
I don't know why
They've gone away
I don't know where
Somewhere I cant follow them
The one good thing didn't stay too long
Woo who who who
My back was turned and they were gone
Hey hey hey

Where have you gone?
Doo doo doobie doo
My Google
You've been gone too long
Doo doo doobie doo

People say I should forget
There's plenty more don't get upset
Don't get upset
People say they're doing fine
The visitors I see sometime

That's not what I want to hear
Woo who who who
I want to hear they want me near

Where have you gone?
Doo doo doobie doo
My Google
You've been gone too long
Doo doo doobie doo

Then one day
They came back
I was so happy that I didn't ask
Morning came
Hey hey hey hey
Into my room
Woo who who who
Caught me dreaming like a fool

My Google
Doo doo doobie doo
My my my my Google
Where have you gone?
Doo doo doobie doo
My Google
Hey hey my good thing
Doo doo doobie doo Google

Where have you gone?
Doo doo doobie doo Google
Its been so long
You're gone again
Doo doo doobie doo Google

OK, so it was a rubbish song to begin with....

Brand it like a hedge fund.

It's interesting to contemplate the growth of the hedge fund industry over the last few years and the amount of money that has flowed into them. The Wall Street Journal put it best saying that they had sprung up 'like weeds'.

As we have commented before, however, a lot of so-called 'hedge' funds are not strictly doing what it says on the tin. For example, how many times have you heard the phrase 'long only hedge fund'?

How can a fund have a hedging element if it is 'long only'? It seems to me that the branding of funds over the last few years has changed and any mention of the fund being called a hedge fund has set the pulses racing of investors and lead to them opening their wallets to, what amounts to, an aggressive and expensive, mutual fund.

Wouldn't you (or have you!) done the same? If you call your fund a mutual fund you are immediately lumped in with the words 'boring', 'stable' and 'not very good performer' (whether it is or not). If you call your fund a 'long only hedge fund' you are projecting an image of 'sexy', 'exciting' and 'good performance'.

I know this may not be the case at all and we should probably put 'risky' in the definition for hedge funds but you can see why a lot of funds that are not traditionally hedged investments have taken up the brand. It is the phrase 'hedge fund' that is capturing the brand value of the sector and consequently everyone is using it.

It will be very interesting to see what happens next year as the credit crunch takes hold and the affects of this 'wipe out' some hedge fund as was recently suggested by Anthony Bolton of Fidelity. Will the brand of 'hedge funds' still be as sexy? It is a tough call but I can see a few funds quietly moving away from the term if things get too tough.

Think of the dot com era (version 1) where everyone was scrabbling to call themselves 'something'.com ahead of their floatation, hoping to get in more dollars and a bigger valuation because they had some spurious link to the Internet. How many companies in the following years after the bubble burst changed their names to anything other than 'something'.com?

The cult of the hedge fund brand has grown unabated for the last few years. I first heard the term from a business partner in 1997 who had a 'quant' fund. (It was the first time I had heard that too). He did his best to explain to me what the whole situation was about, but I could not get my head around it and was in the middle of building a commodity broking business so did not pay too much attention. In what was a huge mistake in my hunt for personal fortune, I just didn't think it was lucrative or sexy enough. As my son would say, aping Homer Simpson, ... Doh!

Of course the hedge fund industry won't disappear, it may be just a little unfashionable for a company to use the 'brand name'. As in the fashion industry, styles come and go. In the eighties 'risk arbitrage funds' were all the rage, made famous (or infamous, should I say) by Ivan Boesky, the arbitrage trader convicted for insider trading. Maybe we will see this particular fund brand name come back into fashion with a squeaky clean new updated image.

Some have said that the current hedge fund situation is a mirror of the tech bubble, but I use the example above as a branding issue not a comment on whether the hedge funds success is a bubble like we saw in the early part of this decade in the tech market.

The difference is one of simple economics, hedge funds make money and have real product, albeit dematerialised bits of paper giving ownership, if only fleetingly, in companies that make real, saleable products.

No, Och-Ziff is no that is for sure but it may be time for some to have a hedge in place on their fund branding strategy.

Friday, September 28, 2007

Hedge Funds and Private Equity firms at their peak?

At a recent Reuters seminar speakers made their point that the hedge fund and private equity industry is at a near term peak in their cycle after the rampant growth of both industries in the last few years.

Anthony Bolton of Fidelity said "Private equity and hedge funds both have cycles, and I think we're now at the peak of the cycle for the time being," and added "The flow of money has encouraged some mediocre people. They will all be wiped out in the current environment, which will allow the good people to go on."

How they will be 'wiped out' was not clear but maybe he was suggesting that these 'mediocre' managers will simply not be able to sustain the hedge fund business model with their current investment strategies. It's true that in an industry of $2 trillion and, essentially being conducted in a bull market, some managers will find it difficult to survive in a market that is less predictable.

Many funds have been battered by the equity and credit market woes which has prompted some commentators, including us, to suggest that further defaults in the sub prime markets and the turmoil in the equity markets will kill off a number of funds or, at the very least, cause them to be eaten by bigger funds.

As far as the private equity market is concerned there is a virtual standstill because of difficulty in obtaining credit, which is a big part of the market. The Bank of England Auction for loans was expected to produce interst rates over 6% to win on a bid although wider collateral is to be accepted, but still..6%!

"As the credit market currently stands, the large leveraged buyout market in the Western world does not exist today," said Charles Sherwood, a partner at private equity firm Permira, pointing out that the business model depends on the use of leverage, or heavy borrowing, to "magnify" returns.

"That magnifying glass today is broken. (However), I don't think there is huge pressure. Private equity firms can sustain a period of reduced activity."

Also affecting the private equity market is the lack of IPO's being completed. Private equity companies rely on taking a business private, giving it some spit and polish and then selling it back to the market in an IPO at a higher price than they paid for it. With the equity markets shying away from virtually all IPO's this route is looking increasingly difficult, in the near term, for the private equity groups.

They say every cloud has a silver lining and that was provided by Christopher Fawcett, CEO and founding partner of fund of hedge funds firm Fauchier Partners. He said there had not been the levels of redemptions he hoped for in certain funds.

"We were hoping for redemptions so we could put money in," he said. "There have been pockets of redemptions in certain strategies and certain hedge funds, but not across the industry."

That's the spirit Chris! You get the inaugural 'Asset Manager Financial Hero of the Week' award for being the most positive. This was snatched away from Florian Homm whose total disregard for tons of cash had made him a front runner for most of the week.