Friday, August 31, 2007

Pre-IPO investing - Too Risky For Private Clients?

Pre-IPO investing is one of the themes in the market today. There are, in London, many, many firms dedicated to the sales of shares in this area. It is often said that pre-ipo investing should be avoided as anything worth buying does not need to be sold. I am not sure that is true.

VC firm, Bessemer Venture Partners, have on thier web site an excellent page which details their 'anti-portfolio'. Basically Investments that they passed on for various reasons. Here is a snapshot:

Apollo Computer
(acquired by Hewlett Packard)
BVP's Felda Hardymon was offered a small position in the company's last private round, and waved it away: too small a position, he thought, at too high a price. In less than a year it was worth 17x.

Apple Computer
BVP had the opportunity to invest in pre-IPO secondary stock in Apple at a $60M valuation. BVP's Neill Brownstein called it "outrageously expensive."

Check Point
In 1994, Gil Schwed pitched his idea to BVP's David Cowan, who said that Gil would never get distribution in the US. The next year, Check Point got a huge Sun OEM deal and sold $25M of firewall software.

"Stamps? Coins? Comic books? You've GOT to be kidding," thought Cowan. "No-brainer pass."

Federal Express
Incredibly, BVP passed on Federal Express seven times.

Cowan’s college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to “these two really smart Stanford students writing a search engine”. Students? A new search engine? In the most important moment ever for Bessemer’s anti-portfolio, Cowan asked her, “How can I get out of this house without going anywhere near your garage?”

Rob Chandra met these guys in 2000 at the start of the telecom meltdown, and remembers saying something like, “Rajesh, I like you a lot but do you really want to build a communications semiconductor business right now?” He looked at Rob in a sort of funny way and then raised money from Greylock, Sequoia and others. They are now running at a $60 million revenue run rate by focusing 90% of their effort on the telecom boom in China.

BVP's Pete Bancroft never quite settled on terms with Bob Noyce, who instead took venture financing from a guy named Arthur Rock.

Along with every venture capitalist on Sand Hill Road, Neill Brownstein turned down Intuit founder Scott Cook. Scott managed to scrape together only $225K from friends, including HBS classmate and Sierra Ventures founder Peter Wendell, who personally invested $25K to get Scott off his back.

Lotus and Compaq
(formerly known as Gateway Computer)
Ben Rosen, one of the founders of Sevin Rosen, offered Felda Hardymon the chance to invest in both Lotus and Gateway Computer on the same day. Says Hardymon: "Lotus had just missed a payroll, and I was worried about the situation there. As for Gateway, I told him there was no real future in transportable computers since IBM could do it."

David Cowan passed on the Series A round. Rookie team, regulatory nightmare, and, 4 years later, a $1.5 billion acquisition by eBay.

The company has obviously made many successful investments but it shows that we forget that a number of companies that are pushed as investments do work out in the end and the gains, obviously, can be huge.

Does this mean that every one is going to turn out as a Google or and eBay? Of course not, but can it be ignored in a portfolio.. That depends entirely on what you are aiming for from your investments.

Investment in this sector has often been seen as either a rich man's pass time or a the territory of the venture capitalist funds, and there is reason for this. Research into the company, the market and sector requires an enormous amount of time and energy. Any Business Angel or VC worth his salt will also be spending lost of time with management after the event, helping with contacts, management structures expenses, further financing and a multitude of other areas. So can a private investor become involved in this area?

There are firms who have established to work with private clients that effectively operate a 'brokerage service' much like stockbrokers. They keep you on file for their deals and call with recommendations as to the latest deal they are running. This, to me, is a fantastic service if it is run correctly.

By correctly I mean that the service after the event of investment for these companies needs to be something that is inherent in the investment made in the first place. What I mean by that is that, structurally, there needs to be a steady mixture of pain and profit in it for the managers of the company, and there must be a firm commitment to following the plans and projections that have been put in place by the management.

The term 'pre-ipo' should mean just that 'funding prior to an ipo'. So if the company has said that it will float in one year, it should, others wise you have just made a 'private investment' rather than a pre-ipo investment. Corporate finance companies need to have enough influence going into a deal to force the issue on any unwillingness of management to go to the markets once they have said they will. Of course, if they are not in a position to do so, then there is not much you can do, but the plans for IPO should be there at the start, even ring fencing funds from the pre-ipo finance to do it.

Our approach, through our managed accounts, is just that. We are there for a company, to encourage the management, to help the business in anyway and to smooth the road to IPO as quickly and efficiently as possible. What must be remembered, however, is that an investment has been made to see a return, not to make any friends.

The responsibility does not only lie with the corporate finance firm though, it is also the responsibility of the investor. Many companies operate straight equity deals when another structure would be much more favourable. I recall a recent conversation with a corporate finance exec who said "we deal with intermediate clients, however these guys want plain vanilla equity, it is what they understand, complicated structures would reduce our business considerably".

I don't buy it. I just think its laziness. Maybe a few years ago this was the case, but not now. We have ETF's, covered warrants, CFD's and virtually everyone would be able to give some explanation of a spread bet (especially if they are truly 'intermediate' clients). A correctly structured investment that protects a client a lot more than just plain equity is an easier sale, in my opinion, because you can explain all the downside protections to clients. I woud doubt that business would 'reduce considerably' if there were more protections and therefore more winners.

Also, if a client doesn't understand the basics of a structured investment, should they really be dealing in the pre-ipo marketplace?

Me thinks not.

Nanny State Gone Mad

I love our American cousins, I really do. Land of the free home of the brave and all that, but what I admire most about them is their stoical attitude towards, what amounts to, a nanny state gone mad.

I read this from investordailyedge:

"I have been investing with Franklin Templeton for 25 years. The $ total grew to more than $100,000 and comprised 11 funds in all, the income of which I have been using in retirement now, and, when expenses permitted, for additional investment. I’m the kind of investor mutual funds appreciate - I’m committed to the long term, and didn’t care if the market was up or down at any particular moment.

Suddenly in January of this year, I phoned through to Franklin Templeton to have them tell me that I was now subject to “Blue Sky Law” and my accounts were virtually frozen in place because my address of record was not in the U.S. of A.

The fact that I had a track record with them for 25 years didn’t seem to matter.

In a subsequent letter from them I was informed that: “In keeping with the U.S. investment company industry practice, an account’s address of record is the primary basis of determining the legality of a securities transaction, rather than investor tax status or citizenship.”

I’m well aware of these changing times (due to terrorism) but the point I make is that I have not changed.

What has changed, however, is a shift in government understanding of where the world’s problems are coming from. With so much going on in the world today, I’m singled out as the only bad guy here, or so I’ve been led to believe. Doesn’t seem to matter that I am a U.S. citizen, born and raised there, educated there, and even carry a valid U.S. passport. Let’s not forget that I served in the U.S. Army for 3 years. Want to put my record up against any of the 12 million illegals? And yet, any one of these 12 million can open an account with Franklin Templeton … even Osama Bin Laden himself, if he uses a U.S. address … but I cannot!"

This really did cement my thoughts that the US government has gone quite barmy. I understand that the US has to lead the world in the fight against terror and for too long the financial system has been used to fund illegal activities but come on, an Army veteran that has been investing for 25 years is now singled out for censure because he moved out the country. A little extreme, perhaps?

I live outside of the UK, in Switzerland, obviously. If a UK fund manager froze my accounts because I do not live in the UK anymore after investing for 25 years I think I would be inclined to do a little more than 'remove my funds'.

The thing is, however, that UK expats may be subject to similar situations, but under the table. I myself served in the forces many moons ago and transferred a pension from the forces scheme to a private scheme. I have recently tried to get this moved, but it appears that the criteria for doing this is going back in time and not transferring it in the first place. As I am not in possession of a time machine at this stage it looks like this company will continue to invest the funds badly and continue taking their fees. My transfer was £1500 into a property fund in 1989. In eighteen years they have turned this into £3500 around 133%. Sounds impressive but that is annualised 7.33% not taking into account compounding..

So in the greatest property boom of all time my money has returned probably less than than if I had put it in a interest bearing account, and now they want me to bend time to get it back...

I am in favour of regulations to help clean up the financial system, however, if you are going to put a system in place then it cannot be all encompassing, it has to be tailored to individuals so that everyone is not lumped into the same basket. If this costs too much to implement for practitioners, then they should not be allowed to practice, simple as that. I say this as a practitioner myself, and so this comment will, no doubt, come to bite me in the backside, but implementing legislation is one thing, making sure those in the industry can afford to roll it out correctly and fairly, is quite another. I am girding my loins for a post on MIFID, I apologise in advance.

Thursday, August 30, 2007

Raising Finance For AIM

Unfortunatley when it comes to technology, I am little bit of a 'technological Bermuda Triangle'. This is not to say that I don't like or understand technology, even if I do say so myself, I have a pretty good grasp of it. The problem, however, is that techonolgy doesn't really like me, things break all the time. Mobiles just stop working, check in desk computers fail (I kid you not, the system crashed in Barbados exactly as I was checking in a few years ago), cars mysteriously breakdown and need 'resetting' (whatever resetting a car is) and don't get me started on laptops.

So it is with a little trepedation that I tell you about our latest Internet tester. We all know that social networking is taking over the world and laying bear our very souls , but it has astounded me that someone has alreday come up with a 'Blogger' type solution for this latest craze. I use Blogger for this blog because it is very easy to use. Our techies have tried to convince me to have our own in-house one but why? It is super easy to use and costs nothing in fact there is a check on its way from Google for $100 fom those lovely users who clicked the adverts and affectively 'donated'. OK, it has taken a year, but what the heck, it's free money.

I digress. I came across a website called It has developed a blogger type solution to social networking and I think it is excellent. We set up 'The Investors Network' as a bit of a test, just to see how it works and what the possibilities are. Of course, it could also turn out to be a good resource, but I will leave that up to you. It would be nice to create a community from here, but we will see how we go, this is,of course, if I don't break it!

This also bring me on to the proper topic of this particular post. It seems that many of our visitors are in the business or the professions that service us, judging by the data we get from the site (not Big Brother, just search term data) so we need to ask a favour.

As you may or may know we invest on behalf of clients into listed companies through structured products, debt financing and straight equity. We are always evaluating projects, but we are always looking for more.

Basically if you have clients or colleagues in listed operations who are looking to raise finance, especially on the London markets we would like to hear from them. Our particular interset in up and coming AIM businesses that are looking for between £250,000 to £5mn. We can go higher but for this particular phase we are building a portfolio for our clients in this range.

If you have anyone like this then click on the 'contact us' button in the top right.

Wednesday, August 29, 2007

Small Company Investing - Scrumping For profits

Small Company Investment - Penny Shares

When I was a child we were fortunate enough to live near acres and acres of countryside which presented a small boy and his friends endless possibilities for adventure and mischief. My particular set of friends were always building dens, one particular den took us months to carve out of mud under a huge mass of bushes and trees, but the finished job looked like a home fit for a Hobbit. It also happened to be not to far from a small orchard, the owners of which also grew vegetables in their gardens.

Our favourite pastime was scrumping apples and potatoes and taking them back to the den where the apples would be the entre and the potatoes wrapped in foil and thrown on a fire were the most amazing main course.... for a 10 year old adventurer. Of course sometimes we would get caught, sometimes the potatoes were rotten and sometimes we went hungry, at least until tea time. Of course Karma comes to visit eventually, we have an apple tree in our garden and neighbors with children. Our crop is not what it should be..

The reason I romance about about this is that in the investment marketplace there is excitement, of course there is, but rarely do we experience the absolute thrills that we did as kids. The nearest we get is making a huge profit on an investment, a risk we took that turned out right. The financial equivalent of scrumping and no place is better to do this than the small cap market.

Yes, there are a lot of rotten apples out there, but when you manage to find a good one that returns huge money, there is, in my opinion, nothing like it. Image you had invested $10,000 in Wal-Mart in its IPO in 1970, you would have $130,000,000 now. Southwest Airlines would have returned (at its high) $2.7mn on the same investment. $10,000 in Dell Computers as late as 1990 would be worth $6mn and I do not even want to do the numbers on Buffets money machine, Berkshire Hathaway.

In the UK in recent years Asia Energy would have been a '10 bagger' in less than three months and there are many, many other companies that would have returned this and more. The incentive to invest is there, that is for sure, but it is a market place that inspires risk takers and also instills fear into investors. The only thing to fear, however, is not "fear itself' as FDR said but yourself. That's right, in this market place you need to fear yourself. The propensity to believe every rumour, watch and believe every bulletin board post and trade accordingly will almost always lose you your small cap investment stake and that would be a shame because it can be very rewarding. You need to approach the market place with discipline and with a strategy.

So how does one trade penny stocks? Are there any techniques that work best? Technical analysis that uses indicators and statistics to forecast price movements is one possible approach. However, trading small stocks has, for the most part, been shunned by the technical analysis community. Volumes of less than 400,000 to 500,000 shares a day make analysis unreliable and liquidity a challenge for trading any size. So what do you rely on?

Traditional research is always the best start if you are looking to be a long term player in the field and these days, with the advent of the Internet, there are many helpful sites that aid you in this task. But, by the nature of the reporting rules, you will be behind the curve on historical numbers, with a Blue Chip this is not really problem (unless it is an Enron situation) because if a company made €50mn last year you can be pretty sure that they are not going to go bust by looking at the accounts (assuming they are true, of course). But with a small cap who may have had €1mn in cash in last years accounts and earnings of €5mn, there are various factors that could have wiped the cash out and killed the earnings. There is also a chance that their earnings have gone to €20mn....

So looking at the company accounts is a first, but with small cap shares there is more work needed to be done on the sector. Do they have a good product? Is it reviewed by anyone, anywhere. Could you speak with a client of the company and ask their thoughts on the target company's product. For me, one of the biggest things to look at is management. Many a smaller company with a fabulous product, a growing client base and a good position in the market place has gone bust because the management were outgrown by the success of the business, and they screwed it up.

At the height of the Internet Bubble (Version 1.0) I was at a meeting called 'First Tuesday", you may have heard of it. It was, basically, a get together of investors and Internet entrepreneurs with the concept of putting money and ideas together. At this meeting was a presentation by who were discussing their version of world domination and how they were spending the millions they had just raised.

When one of the management team had finished speaking he introduced a lady who was part of the team and part of that introduction was "she is so good we fly her into the UK from LA every week". I turned to my business partner and said "Lets go". My premise being that nobody in the world is good enough for a start up company to pay for, conservatively, $20,000 per month of flights to come to work. If she is that good they should have made her come to London to live and if she was that dedicated to making the business a success she would have made that commitment.

True enough disappeared shortly afterwards after having spent £80mn of venture capital and also leaving £12mn in debt. Management and their commitment are a critical part of investing in a small cap. This doesn't mean that they have to be industry gurus and well known names, in fact sometimes this makes me suspicious. I look up how many directorships they have, if they have 20 or 30, what do they care if the one you are about to invest in goes wrong?

My favourite type of manager is one that works in the company 24/7, who has a big enough financial commitment to make it hurt if it goes wrong and make a difference to his life if it goes right. One who knows the sector he is in, inside out, and who has the forethought to have taken on others in his management team that have the same commitment. In the necessary due diligence meetings when hard questions have to be asked, I love it when a CEO gets annoyed with me criticising his business model. I have had CEO's visibly shaking with rage because I questioned their plan in some shape or another. Those guys are the ones we back.

Also a CEO needs to keep his investors up to date through regular press releases or RNS announcement. I absolutely abhor management who do not keep communication up with their shareholders, good or bad, it is arrogance and insulting and a guaranteed path to failure. I spoke with a CEO years ago on the subject and gave him my speech over dinner about how this element of running a listed company is critical, his response? "I will look after the business, the share price will look after itself". He is no longer CEO of that company, or any other.

Another element of making good money in this space is by watching the rumour mill. This is extremely risky but can pay off huge dividends. These days there are a lot of people who use bulletin boards such as ADVFN and Moneyam. Yes, there is an abundance of 'rampers' who post all sorts of drivel about how this company will be 500% by this time tomorrow and those who say the company is going bust (hoping to gain from shorts) so you have to be careful. But they are worth looking at because some posters give an excellent insight into companies. If you are looking for a site to use I would recommend Motley Fool, the community is very good and the administrators of the site try to cut out most of the rubbish.

You can be sure we are lurking on the same bulletin boards you are... scrumping, just like the old days, except this time it is for profits, not potatoes.

Tuesday, August 28, 2007

Hedge Funds - No Cold Turkey Yet

We start with a humble apology. Our post 'Redemption Song' was picked up by quite a few notable blogs and sites including a call last night from a delightful lady at Dow Jones Newswire. We weren't taking the mickey, we were just injecting a little humour...

The premise of the post was that redemption day (being the last 45 day notice for withdrawals) was upon us and there were rumoured to be tidal wave of redemptions coming to funds which could make the matter a whole lot worse. However, as pointed out by the FT, history doesn't seem to be repeating itself...not yet anyway.

Its only been a couple of weeks of course but I am yet to find a report on a mass exodus from hedge funds. According to the FT “there has been nothing like the level of outflows that accompanied market wobbles in 1998, 2005 and 2006.” The FT's explanation for this is that the changing dynamics of the industry have a lot to do with it. Diversified strategies and institutional investors in it for the long term have worked to calm the nerves of other investors. Also “The slow-burning nature of the subprime fallout has also given managers time to mop investors’ brows – while steering expectations downward.”

This could, of course, change in an instant and it could be that managers who have suffered large redemptions are keeping them quiet for the short term at least.

Another situation could be that hedge funds have just shut the doors. Most hedge funds have "lock-ups," a minimum period of time during which investors agree to tie up their money and not make any withdrawals. Once that period ends, investors generally can redeem their stakes as long as they give advance notice, usually 45 to 90 days before the quarter end. Although that cut-off has passed for many funds for the current quarter, investors can still put in requests to get their money out by year-end.

But there is a nifty sting in the tail in some of the funds and that is the 'Gate'. Basically it is a withdrawal maximum imposed on investors. For example the fund could have in it's documentation that only 10% of the fund can be withdrawn in any quarter. Clearly if you are not the first in, you have pretty much had it until the next quarter where, one would assume, you get priority on the withdrawal list.

According to a memo from law firm Morrison & Foerster recently issued to its clients, of the more than 9,000 hedge funds that currently exist, at least 2,000 are vulnerable to "runs on the bank" by investors.

Obviously at this early stage it is unclear whether this 'run on the banks' will happen as some funds have already posted big recoveries in losses. One thing is for sure, however, and that is that investors have now seen the vulnerability of some hedge funds. This may lead to investors cashing on their chips on a winning streak and waiting to see how the land lies before diving into the next 'big thing'.

UBS Launch 130/30 fund for Private Clients

UBS has launched a new fund based on the investment concept incorporating a 130/30 strategy, again (for the second time in a week) UBS come up with a silly name, it is the "UBS (Lux) Key Selection Sicav - US Equities 130/30 B". We do love UBS dearly and would recommend them to anyone as their systems and professionalism is second to none, however, I may have to apply for the position of 'Fund Naming Manager' as their present employee seems a little burnt out.

The fund has the aim of extending the availability of 130/30 strategies from institutional to private investors, which is a significant step to providing more institutional strategies to the average investor. As we manage funds on account for a number of private investors this particular launch is pleasing for us.

The strategy is to first put 100% into an index like the S&P 500. Then sell short 30% in stocks expected to do worse than the market. Take the proceeds from the short sales to go long stocks likely to beat the index.

Up to now, UBS says, fund products with a 130/30 strategy have mostly been the preserve of institutional investors. The new fund offers private investors access to the strategy, which takes advantage of additional sources of out performance by taking on average long positions equivalent to 130 per cent of the fund's capital and short positions amounting to 30 per cent, giving the fund net long exposure of 100 per cent.

Because of its ability to take short positions on overvalued stocks, UBS says, the Key Selection US Equities 130/30 fund has more potential to outperform than long-only equity funds, while its volatility is not substantially higher than the market average.

The fund portfolio is broadly diversified in terms of both stocks and sectors and favours listed US large and mid-cap stocks. Its benchmark is the MSCI USA index, and is designed for private investors with a long-term investment horizon.

It is particularly interesting from the point of view of our personal managed accounts. We utilise structured PIPE-type transactions along with late stage Pre-IPO's and IPO's which is an aggressive strategy developed for aggressive investors, however, the availability of products such as these that allow private clients exposure to institutional type fund strategies are a welcome addition to our arsenal.

If you would like more information, please get in touch

Monday, August 27, 2007

Opening A Swiss Bank Account

OK, so the money managers out there may skip over this post knowing all about the subject, but we do get a number of mails on the subject so I thought I would write a definitive take.

So first let look at the history and then I will get to the meat:

Secrecy in the Swiss banking system is enshrined in law, both civil and criminal, and has been protecting the accounts of the wealthy for over 300 years.

Initially bankers to the Kings of France, the Swiss reputation for service and discretion has grown to legendary proportions and it is estimated that one third of the worlds private fortunes are based in Swiss banks.

The admiration for the Swiss banking system has been tainted by the accusations of hiding laundered money and of aiding tax evasion. Ever the cautious, the Swiss authorities mulled over this situation for many years and created regulation and systems that allow freedom for bankers to do business, protection for account holders and disincentives for the criminally minded. This flexible and affective approach to regulation is seen to be more affective than the draconian systems in the UK or US, for example.

Atop of the pile of regulators is the Swiss Banking Federation who regulate and monitor Swiss Banks and Securities Dealers. There are several regulatory organisations overseeing Asset Managers who have to join one of the organisations to practice. These regulatory organisations combined with Swiss criminal and civil law would impose harsh penalties to asset managers, banks or securities dealers who decided to aid any criminals in laundering their funds. The affect has been that Swiss financial professional will politely decline any business that looks like trouble.

However, for those who are seeking a home for legal funds away from the prying eye of tax authorities the banking secrecy remains in place. A banker who reveals information, even that an individual has an account, will suffer severe penalties which could included custodial sentences. These penalties can be imposed, uniquely in Switzerland, without the client even complaining.

The Swiss Federal Act on Banks and Savings Banks was enacted in 1934 in the wake of the rise of Nazi Germany. Its Article 47 is directed primarily against espionage in banking. Nazi agents began bribing bank employees to crack the secrecy of accounts. Once a depositor was known, the agents demanded his assets under threat of reprisals against relatives living in Germany. In those circumstances, to many, the existence of a secret secured bank account made a lot of difference.

Article 47 reads thus: "1. Whoever wilfully divulges a secret which has been entrusted to him in his capacity as a representative, officer, employee, authorised agent, liquidator or commissioner of a bank, as an observer of the banking commission, as an officer or employee of a recognised chartered accountant, or which secret he learned about in such capacity and whoever incites to such divulging of professional secrecy, shall be punished with imprisonment of up to six months or with a fine of up to 50,000 Swiss francs.

2. If the offender has acted negligently, the punishment shall be a fine of up to 30,000 Swiss francs.

3. Breach of professional secrecy remains punishable even after dissolution of the official or private mandate or work contract.

Basically, don't ask a Swiss banker about his clients...

Swiss banks will divulge information on an account if it is a criminal investigation for drug money, proceeds of other crimes and money laundering, of course. The system will allow enquiries concerning divorce, tax evasion, bankruptcy etc but these will need to be heard by a Swiss Judge (who are the only ones who can lift the secrecy laws) and the judiciary are extremely unlikely to lift the secrecy laws for anything other than crime.

Opening an Account

If you would like to open an account just for the sake of having an account then you should look to have a deposit for at least CHF25,000 for one of the major commercial banks or much more if you are keen to have an account with a niche private bank. Basically the private banks make money from investing your funds and therefore will only entertain your account if it substantial and they get to earn fees from it.

For a commercial bank there are ways of applying for an account online, however, we would suggest flying to Switzerland in person and setting up the account yourself. The fees that are charged online are better spent on the flight and meeting the banker in person.

By far the easiest way is to open an investment account with a company such as ours. It can be opened for no fees, a minimal deposit and all over the phone or online, however, we are a commercial operation so if there are no fees to be earned from managing funds then like other organisations we would decline to open the account.

Services Provided

A commercial account with a major bank (such as the ones we open for the majority of clients with funds under management) will give you access to services beyond what you will be used to with other accounts. The online systems for reporting, investing in products and transferring funds are second to none, in our opinion. Couple this with having the ear of a personal banker (something that a number of clients have commented is the best part of all) then there is no reason, if you have the funds to invest with a manager, that you shouldn't open an account.


The myths surrounding Swiss Bank Accounts have been perpetuated by spy novels and movies and have reached silly proportions. You will see on most movies these days that a villain will stand over a computer and watch as the funds are drained from one account and immediately received in another. Although the Swiss banking system is good, I have not seen any system like this...ever.. See 'Swordfish' the movie for an example.

Drug dealers and dictators are always referred to as salting away money in their Swiss Bank accounts. In reality, these days these types of criminal are more likely to avoid Switzerland like the plague. While we suspect there may be some small bankers who still handle these type of funds, the Swiss regulators have gone out of their way to outlaw this type of business. Lets face it, there is a lot more legitimate money in the world these days and the Swiss are keen to get their hands on it. They are also very, very keen to show that their banking and regulation system is still the best in the world.


Opening an account as a US citizen is not difficult, however, there are various forms and disclaimers that need to be signed. The US government is very keen on not allowing its public to have offshore accounts or employ tax efficient plans. As such it has imprisoned a number of people seen to be 'promoting' such schemes which has bankers and advisers all over the world running for the hills when a US client comes knocking. Having said that, there are a number of ways of assisting US clients to obtain accounts but you need to be speaking with a specialist. If we can't help, we know of companies that can. It sounds a little subversive, buts its not. It is just setting things up correctly and making sure you have double checked the structure of the account and any other vehicles employed so that the IRS are happy (OK, maybe not happy...but at least not 'angry' at a blatant tax dodge).

The UK have recently 'unleashed elite tax inspectors' to seek and destroy offshore tax schemes and tax undeclared offshore bank accounts, so you can be certain that some time, someday they will find an unprotected offshore account.

Basically what you should know, is that banking in Switzerland is very good indeed, opening an account is straight forward if you are prepared to have a manager invest some of your money and can be very tax efficient if you are prepared to spend the time and inevitable funds to do it properly.

Jack and Vera... The Takeover Team???

It has been described as a 'Tsunami of money' just waiting to be unleashed. A time for 'Mercenaries' to make money. I have even had an email naively suggestion that I could get 'privileged information' for a small fee.. What is it? The estimated $300bn that is still sitting in Private equity funds world wide just itching to get into the takeover market.

I have a few problems with this. Number one, anyone offering 'privileged information' can only be talking about inside information or a guess at takeover targets, neither interest me as the first one would land me a spell in the local Swiss Prison (which may not be a US Federal Penitentiary, but it is still prison and meeting Mr Big in the showers would be an unpleasant experience on any continent). The second one is relying on someones research that sends out emails in capital letters and red titles.. I am not a presentation snob (as can be seen from the blog!) but a little more effort to be less gimmicky would have gone a long way. Now if Goldman Sachs was offering free research I would have kept quiet and started a hedge fund.

But, regardless of the red titles and the spivvy language, they do have a point. There is a lot of cash still waiting to go into takeover targets even with the credit crunch where it is, in fact the credit crunch is making valuations much more attractive to private equity firms looking for bargains.

One such firm to take a look, if you are interested in identifying something in the retail space, is Arev Brands. But first a little history..

As a youth growing up in Yorkshire and having a father who worked a month on and a month off on the Oil Rigs, my television viewing was determined by an older sister and my mother. With my older brother ensconced in his bedroom with his own TV and unwilling to battle alongside me, my entertainment options were limited. Football and generally wondering the streets on my bike were usually the order of the day, however, rain and snow often caged me in the house. It was then that my television horrors began. Life indoors was a seemingly endless round of Coronation Street, Crossroads (anyone under 30, look it up) and Emmerdale Farm.

I only revisit this scar on my mental Rolodex (again..under 30 look it up) because I saw something highly amusing which proves that investment bankers do have a sense of humour.

We locked horns in 2006 with Arev Brands. We made a bid for Hardy Amies Plc the AIM listed couture house, all was going along swimmingly until the deal was snatched from under our noses. Arev, founded by Jon Scheving Thorsteinsson, a former right-hand man of Jon Asgeir Johannesson, the chairman of The Baugur Group, are hailed as the new 'Baugar' and have notched up some impressive buys alongside Hardy Amies the most recent being 'Blooming Marvellous'.

Judy Lever and Vivienne Pringle sold Blooming Marvellous, the 14-store chain, to Arev, the Icelandic retail investor, for a price believed to be around £5m.

The so-called mumtrepreneurs built the chain from scratch in 1983 after failing to find alternatives to frumpy, old-fashioned and tent-like maternity dresses and trousers. Lever, a documentary director for Thames Television at the time, and Pringle, a director at an ad agency, set about finding suppliers and factories in their spare time around Lever's kitchen table.

Despite having six children between them, they grew the business significantly. Blooming Marvellous now has subsidiary brands, such as Mini Marvellous, and a website and mail order business. It is pitched at the affluent "yummy mummy" market with a cult following online and stores in upmarket areas such as Fulham in London, Bath and Winchester. Last year it won two awards at the Pregnancy & Birth Awards. Arev plans to increase the number of Blooming Marvellous stores to 25 and position the chain alongside Mamas & Papas, the upmarket family-run retail group, according to an executive close to the company.

The mother and baby wear market is currently being reformed by a round of consolidation: earlier this year market leader Mothercare bought its biggest rival Early Learning Centre for £85m. The Blooming Marvellous acquisition will further raise Arev's profile in the UK.

Arev is slowly building a stable of boutique UK retailers. It already owns Ghost, the womenswear chain, Hardy Amies, the one-time dressmaker to the Queen, Linens 'n' Things, the homewares retailer, luxury brand Duchamp, Limeys, the Midlands retailer, and Cruise, the Glasgow-based fashion designer. Earlier this summer it bought Mountain Warehouse, the outdoor clothing retailer, for £15m.

Arev is believed to be considering selling its Jones the Bootmaker chain, which no longer fits into its strategy of acquiring upmarket or niche businesses with expansion opportunities. Its strategy is similar to that of Baugur, which owns a raft of UK high street brands such as Karen Millen, Oasis, Iceland and House of Fraser.

It is certainly worth keeping a close eye on what the group are doing with these brands, we are, as we are holders of Hardy Amies and they seem to be doing all the right things excepts PR on the share price. At today's price Hardy Amies has a market cap of only £2mn sterling. This for a brand that has been around for 60 years, was dressmaker to the Queen, that has a fabulous reputation and an eminently marketable brand. At this price we think it is a give away.

Although we were gazumped by Arev, we hold no grudge, in fact we are warming to them. Especially since it looks like someone in the group suffered the same television Hell as I did as a child.

They have a private equity arm called Kcaj.

Observers have suggested the company's penchant for all things British is hinted at in its seemingly obscure choice of names: Kcaj and Arev spelt backwards is 'Jack and Vera' the star characters in Coronation Street.

I feel your pain guys, I feel your pain....

Its Not All Bad News...

Its nice to see a little good news:

Hedge fund manager HFA Holdings has booked a surge in annual profit, in line with its most recent guidance, and says its outlook is very positive. Annual profit was $20.3 million, up 288 per cent, while normalised profit, excluding one-offs, was up 157 per cent.

HFA, which listed on the Australian stock exchange in April 2006, said the result beat its prospectus forecast guidance of a $13.9 million profit, by 46 per cent. The strong result reflected continued inflows into its hedge fund products, plus two capital raisings during the year.

Chief executive Paul Jensen said the outlook for the company remained very positive despite recent equity market volatility, which caused a sharp fall in HFA's share price. The declining share price forced HFA to postpone an estimated $700 million cash-and-scrip takeover of US counterpart and long-time investment partner Lighthouse Investment Partners.

HFA previously told the market that it had taken short positions on the US sub-prime mortgage market and was therefore benefiting from the crisis, but that hasn't stopped its shares falling from $3.00 on July 25 to a low of $1.65 on August 15. By 1500 AEST, HFA was up seven cents, or 3.4 per cent, at $2.15.

Mr Jensen said global share market upheaval presented HFA with an opportunity to promote the value of absolute return funds. "The complacency toward risk that has been present in investment markets for some time has been removed and we are looking forward to maximising this change in investor sentiment to promote absolute return fund investing and its unique qualities."

Absolute return funds attempt to provide more consistent annual returns, so might underperform the rest of the market in good times but outperform in bad times.

HFA will reopen two of its funds for investment in the first half of fiscal 2008.

The company declared a fully franked final dividend of four cents a share, bringing the total dividend to 8.1 cents for 2006/07, up 80 per cent on the previous financial year.

For those who are not doing so well, we can always rely on country music!

Friday, August 24, 2007

Here We Go - Cue The Excuses.....

I didn't particularly want to be writing about specific hedge fund failures unless it was a monster one, mainly because, in reality, smaller funds are failing all the time, for one reason or another. This story, however, peaked my interest and its not a hedge fund.. A $1.6bn cash manager (small, in the grand scheme of things), Northbrook, Illinois-based Sentinel, wrote to investors last week saying that it could not meet client redemption requests without selling securities at a deep discount.

Would you like me to write that again? the company "could not meet client redemption requests without selling securities at a deep discount".

So follow the logic on this one (and please if I have got this all let me know) a 'short term' cash manager is investing money given to him by hedge funds and the like (funds that are suppossed to be 'un-invested', one would imagine) and then investing these in the market...hmmm...

Following the ethos that now "is a good time to get bad news out" they wrote this letter to clients saying:

'Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade. We've all read the stories about one hedge fund or another suffering losses related to sub-prime exposure and closing down or being rescued.

'This fear has spilled over into the rest of the credit market and liquidity has dried up all over the street. This liquidity crisis has caused bids to disappear from the market and makes it virtually impossible to properly price securities or to trade them. High-grade securities are trading like junk bonds as panicked investors dump names like General Electric at Tyco-like prices.

'We had previously thought that the market would return to some semblance of order and that our clients would not join in the panic. Unfortunately, this has not been the case. We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.'

Re-arrange this well know saying "CROCK - WHAT - A"

'High grade securities trading like junk'. I know I have been away for a few days and haven't really been paying too much attention but I must have missed this particular meltdown.

Forgetting the financial equivalent of 'the dog ate my homework' excuse what is the logic here? You pay your 2 & 20 fees to a hedge fund which you have, presumably, done your research on. There would have been a note in the prospectus about Sentinel being short term managers and you assume this would be overnight stuff aimed at getting a better return on cash... Then you find that the cash manager has been trading in securities that 'are impossible to properly price' in a fast market....

I don't know about you, but I would be looking in my contacts file under 'flesh eating lawyer'.

After having their trading strategy eating by Fido, Citadel Investment Group, a hedge fund manager that has already acquired distressed credit portfolio assets over the past month from Sowood Capital, bought a reported USD312m in assets from Sentinel at a discount of at least 10 per cent. It turns out this was not a popular move.

Investors, such as Penson Worldwide, said "the assets had been sold at an unfair price" without consulting creditors and against agreements between the companies. While this was being argued Sentinel filed for Chapter 11 bankruptcy protection.

The SEC is now bringing fraud charges against Sentinel, saying that a previous inspection had revealed that it had been concealing losses and had submitted false client account statements. Something tells me that Sentinel will need to get a bigger dog.

The SEC claims: 'For a period of at least several months up to and including the week of August 13, Sentinel's advisory clients suffered undisclosed losses and risks of losses as a result of several unauthorised practices engaged in by Sentinel.

'These include pledging securities owned by clients as collateral in order to obtain a line of credit [from Bank of New York] as high as USD500m for Sentinel, placing at least USD460m of client securities properly belonging in segregated customer accounts in Sentinel's house proprietary account, commingling client assets without the ability to verify ownership of particular securities by particular clients, and providing false client account statements that did not accurately reflect client portfolio holdings or the fact that securities had been encumbered by Sentinel.'

A Chicago bankruptcy judge ruled on Wednesday that Sentinel could distribute to investors the USD312m proceeds of the asset sale to Citadel, but the money currently remains blocked by an order from the National Futures Association.

Although some investors are understood to have recovered their assets from Sentinel prior to its collapse, Paris-based hedge fund manager Capital Fund Management has told investors that its Discus Master Fund may face losses of as much as USD407m.

It is a very odd situation when a company such as this has the internal structures that allow this to happen. We have individual discretionary accounts where client funds are managed via block trading in deals. When setting up the accounts we have the ability to be 100% fully in charge of the accounts if clients so wish, but we never, (and cannot see a time when we ever would) have this facility put into our terms and conditions, why would we? When would there possibly be a time when clients funds would need to be sent to a proprietary account of our company?

I feel sorry for those who have lost money from this debacle, but I have to say, that if we had invested into a 'cash manager' who was playing the markets without adequate backup for the bad times, then we would have a hard time explaining to our investors why we didn't know this....

I hope that there will be no 'investment speak' given to investors that have lost out in the funds that used Sentinel, but I fear that there are a few hedge fund managers dogs who will be taking the blame for this...

Monday, August 20, 2007

Major Hedge Fund Failure?

NEW YORK (MarketWatch) -- Moody's Investors Service warned Thursday that the credit crunch roiling global markets has the potential to cause the collapse of a major hedge fund that could further disrupt markets.

The firm doesn't have a specific fund in mind. But it believes that as investors try to unload illiquid investments such as collateralized debt obligations, hedge funds that are unable to exit their positions could run into trouble, Chris Mahoney, vice chairman of Moody's, said during a conference call with investors.

The result could be the "failure and disorderly liquidation of a hedge fund of sufficient size to disrupt markets, as LTCM threatened to do," he said during the call. He was referring to Long Term Capital Management, a hedge fund that borrowed heavily and had to be bailed out by Wall Street banks after collapsing in 1998. Mahoney said the risk of such hedge fund failures will exist for the next three to six months.

In an interview, Mahoney noted that the collapses of several hedge funds over the past year haven't caused widespread financial trauma. But he said larger fund liquidations in the future could have the potential to ripple through the financial system due to the extent to which different financial institutions and asset classes are entwined. Mahoney estimated there's a roughly 50% chance of a big fund collapse triggering another LTCM-style crisis.

"We've seen quite a bit of contagion over the past two weeks, and it doesn't seem to be abating," he said.

Moody's, which earlier Thursday downgraded its ratings on Countrywide Financial Corp. (CFC) and Residential Capital LLC, or ResCap, also said that smaller financial institutions could be severely harmed in the current environment, possibly requiring unspecified outside intervention.

David Fanger, Moody's chief credit officer for financial institutions, said during the call that investors should brace for "impairment losses at many banks, and in some cases these will be sizable."

Nonetheless, the ratings agency said the current credit turmoil poses little systemic risk to the U.S. or global financial systems, even as some institutions are likely to come under stress.

Algorithmic Trading Systems - Trouble ahead?

UBS Bank continues to develop in the algorithmic trading market (and also continues the tradition of being rubbish at naming funds) with the launch of the UBS Commodities Portfolio Algorithmic Strategy System (Comm-PASS). The system is a portfolio based algorithmic strategy developed to benefit from momentum movement in long and short commodity positions on an auto trade basis.

The portfolio is based in five sectors; energy, base metals, precious metals, agriculture and livestock and is a basket of strategies from nineteen commodity futures markets.

'As familiarity with the commodities asset class grows, an increasing number of investors are recognising the value of taking a more active approach with their investment strategy,' says UBS's global head of commodities Peter Ghavami.

'UBS Comm-PASS is the first of a new generation of portfolio-based algorithmic strategy products for the commodities asset class which allows for the generation of returns in both bull and bear markets.'

The individual strategies generate long or short signals in the individual commodity, which takes into account both the trend and the counter trend of specific commodities in combination with the asymmetric return distribution seen in the commodity markets.

'For the last few years, commodity price volatility has been substantially greater than other asset classes, largely due to supply concerns as well as changes in global consumption and the influx of financial commodity investments,' says James Paget, co-head of structured commodity sales for Europe, the Middle East and Africa.

'High volatility offers trading opportunities provided an appropriate trading strategy is implemented. We believe Comm-PASS offers investors the opportunity to generate high returns by exploiting commodity market characteristics.'

With algorithmic trading systems reportedly getting a battering over the last few weeks ,this is a brave time to be selling such a system of trading to clients, but if anyone knows what they are doing, in our opinion, it is UBS.

I am sure we will start to see more and more use of algorithmic trading systems, however, is there a danger in this? Essentially algorithmic trading systems were developed to be able to execute large volumes of trades by splitting these trades up into smaller lots and programmed to create any mathematical outcome that the trader wants. The trading patterns can, of course be customised for example trading more at the close, when volume is higher, and less at lunchtime when its not. The thing is, are these trading patterns predictable?

Some critics say that when less experienced hedge- or mutual-fund traders use the software they've bought from Wall Street, they inadvertently expose their trades. How? Canny traders, mainly those who trade on behalf of big banks and brokerages with the firms' capital, may be able to identify patterns of algorithms as they get executed. "Algorithms can be very predictable," says Steve Brain, head of algorithmic trading at Instinet (INGP ), the New York City-based institutional broker.

Most Wall street firms will go to their deaths saying that there are no leaks in information about their trading strategies and argue that such leaks would kill their business because advantage would be lost and this argument makes sense.

With the algorithmic trading systems becoming more prevalent, will this affect the market itself? Take the human element out of trading and you have, in our opinion, lost some of the magic of the market, levelling out volatility and therefore opportunity. Ever played Chess against a computer? There is always the feeling that it knows what you are doing before you do it and it makes the competition element (and the fun) go out of the game.

And how long will it be before someone at MIT comes up with a computer trading system that analyses trades in a specific market and identifies the algorithms of the big trading houses and thus creates its own predictive trading systems? Paranoid, me? Who said that?

Of course there is a human cost to this also. If computer systems are more prevalent, why would you need a trading floor that you have to pay millions in bonuses to? Best to spend $5mn on a computer trading system that trades day and night, does not take holidays and does not want to go and work for another bank when you don't pay it enough.

The scariest thing for me, however, is the very thought of more and more systems coming into play and the market being worse for it. Sure, things would poottle along a with a little more stability, we probably wouldn't see the wild swings we do on the exchanges and we could all rest safe in the knowledge that our money is being managed by highly sophisticated computer systems rather than the banks twenty year old Ferrari driving, hung over maniac with a machismo complex. But would it be as much fun?

I don't know about you, but when I decided to get into this business, when I was a boy, it was the very fact that what we do is exciting, stimulating and a test of man against the market. Playing the computer at Poker is fun when you are practising, but its just playing the odds programmed into it. I am sure we all prefer it when we scoop up a few hundred dollars having just convinced other players that our pair of two's was a Royal Flush.

Algorithmic trading is great, we love it, but we just hope that its not the beginning of the end of the traditional trading floor being replaced by teenage 'Googlers' sitting on bean bags and playing Foosball while creating ever more clever computer trading programmes which just make the market....well... predictable and boring....

Friday, August 17, 2007

Fed Rate Cut - Cramer wins the day....

It looks like Jim Cramer's rant last week about a cut in the discount rate had some supporters not least in the Fed themselves. The rate cut today sent the Dow on a surge but, as of writing it has settled to 125 up.

The Fed recognised that turmoil in the financial markets could affect economic growth saying "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward".

The Fed cut the discount rate (the interest rate it charges banks to borrow) 50 basis points to 5.75%. 'Discount window borrowing' is designed to provide liquidity to institutions in the event of urgently required funds. The Fed funds rate (used when banks lend to each other) has been left alone but it the Fed said it is monitoring the situation.

The rally maybe short lived, we will have to see, but major indices around the world have been hit very hard. Asia is suffering from the knock on affects of the US markets but also partly from the unravelling of carry trades (where investors have borrowed in yen at a low interest rate and invested in higher yielding investments) which has seen the Japanese yen rise to its highest against the dollar in over a year.

Some 'little rays of sunshine' in the markets are suggesting that the Fed rate cut is an indication that they believe that there could be some institutions that fail, even as early as today. It is suggested that it is unlikely to be a bank but rather "an institution that has substantial bank liabilities that may not be able to clear"...

hmmm.......shall we start a sweep stake on a hedge fund?

The rate cut, no doubt, caught out the spread betting firms who were calling a substantially lower market at the opening, those who were able to bet against this will, as I write, be pouring money into Corney and Barrows coffers in the City. It must be an odd Friday night out with those who had been talked down from window ledges getting drunk alongside those who have made a killing. I would be betting on a few punch ups if I was the manager of any City drinking establishments.

Some say that this rate cut could be "the best decision the Fed has ever made" others are seeing it as a sign that there could be some big unravelling going on. I am still is two minds. On the one hand this rally is great news and at least the Fed are being proactive. Also fundamentals are generally good although, and I quote Jim Cramer directly "I never, ever again in this period want to hear about the underlying fundamentals. They are not in control of this period. In fact, they are meaningless for the short term. Meaningless. And it is a sop to the public to talk about them. That's what I heard endlessly in the week before the October 1987 crash. It is a joke." All this leaves me with a bad 'feeling' about the coming weeks.

Its hard to put my finger on it but its like when your football team has lost 5 matches in a row and then they win the next two. You want to believe that they have turned the corner but you start thinking that it really wasn't skill that won those matches, it was the dodgy penalties the referee awarded.

If the Fed are not able to bail the markets out again, will we see our losing streak continue?

Thursday, August 16, 2007

Hedge Fund - Redemption Song..

(With apologies to the late, great, Bob Marley - If you have forgot the original...It's here.. This maybe appropriate too ............. OK..I am getting carried away now, sorry.. (Can you tell we have closed our positions!!)

Old hedge funds, yes, they rob I;
Sold I to the merchant banks,
Minutes after they thought my
cash was a bottomless pit.
But my will remains strong
By the love of the Almighty.
Move forward in this general mayhem

Won't you help to sing
These songs of freedom? -
'Cause I've submitted my:
Redemption forms;
Redemption forms.

Emancipate yourselves from Quant slavery;
None but ourselves can free our cash.
Have no fear for aggressive managers,
'Cause none of them can stop the crash.
How long shall they kill our profits, ... (er...sorry!..Ed)
While we stand aside and look? Ooh!
Some say it's just a part of it:
We've got to fulfil de book.

Won't you help to sing
These songs of freedom? -
'Cause I've submitted my:
Redemption forms;
Redemption forms;
Redemption forms.

Emancipate yourselves from 2 & 20 slavery;
None but ourselves can free our cash.
Wo! Have no fear for market crashes,
'Cause none of them-a can-a stop-it this time.
How long shall they kill our profits,
While we stand aside and look?
Yes, some say it's just a part of it:
We've got to fulfil de book.

Won't you help to sing
Dese songs of freedom? -
'Cause they have had all I ever had:
Redemption forms -
Submitted my:
Redemption forms:
These songs of freedom,
Songs of freedom.

This is the last one, I promise......

Is that a hedge fund manager in the video??

Yesterday was a red letter day in the hedge fund market and should produce some absolutely fascinating stories over the coming days and weeks. For those who are panicking about their investment in hedge funds, Wednesday was the last day to get redemptions (via 45 days notice) to get the funds back for the 4th quarter.

Those likely to be affected most are the sub-prime based funds and those in the quant sector. I would imagine also that little known funds that have mostly taken investment from family based money and high net worth individuals would be a little apprehensive of the post yesterday. Institutional investors can and do ride out the storms, but 'retail' money is more protective and, generally, more easily swayed by the media coverage of the markets.

One of the investment strategies that is common is 'stop loss' where an investor has a price at which he/she wants to sell the investment to avoid further losses. We saw in the crash of '87 that losses were exacerbated by computer programs auto selling positions when stop losses were triggered. There will, no doubt, be investors who have these kind of arrangements with funds and these will need to be redeemed, of course the quant funds will be the main sellers on stops.

However, it is not as if this situation has just occurred and caught everyone by surprise, hedge fund managers will have been cutting back leverage positions and preparing for redemptions for some time. Also there are many hedge funds that have increased their notice period for redemptions and created 'gates' within their documentation which limits the amount of redemptions to 10%-15% of assets being withdrawn in one quarter.

Market Speak...

We are all aware of the double talk that real estate agents pour into our ears when advertising.

Benefits From: Contains a feature you may expect to be the bare minimum for the extraordinary price you are paying. Example: "Benefits from roof, floors, walls".

Bijou: Would suit contortionist with growth hormone deficiency.

Borders: Loose term signifying that a property is sufficiently close to a desirable area to ensure the burglars who live next door to you will travel to work. Example: "Fidel Castro's house is situated in the highly desirable Bahamas Borders area".

Charming: Pokey

Compact: See Bijou, then divide by two.

You get the picture. As a public service to our readers we now provide the translation of 'Market Speak' that you may have heard in the last few weeks.

"Challenging market conditions"

..1000 point drop in the Dow caught us with our pants down, panic!

"Unprecedented market"

We don't know whats going on.

"Our Black Box solution is programmed to work the market. "

Lets hope our maths geeks got it right.

On a pulled IPO..."We believe the inherent market value is beyond what the market would be prepared to pay"

We overpriced the IPO, and now we can't place it.

"....these specific conditions have not materially impacted our funds' performance, but there can be no assurance that we will not suffer adverse effects from the overall tightening of global credit markets... "

We are not in sub-prime, but our lenders have given huge margin calls..

"...we are unable to "accurately estimate" the value of units..."

Things have gone tits up so fast, we can't be bothered to tally up the losses...but they are big!

"We are encouraging a rational view to the current conditions, as a correction was always likely, at this stage we feel that there is no place in the market for irrational selling.."

We are so fully invested that redemptions would kill us... (Or) ..Please help us out and stop selling positions, we can't get out fast enough...

Performance is.."Unsatisfactory"

Someone will be sacked

Losses are "significant"

Your money is gone... sorry..

We would be happy to add any others to this list...please leave them in the comments section...
UPDATE..... OK I lied, but this time this really is the last one (unless some rastafarian Hedge Fund Manager wants to do a YouTube video with the above lyrics...I would just HAVE to post that.... Serious service will now be resumed....) This, however, is genius....

Wednesday, August 15, 2007

Pre-IPO Funding With a Guarantee?

For most entrepreneurs, the conventional way to attract serious sums of money to develop their fledgling businesses has been to float on the London Stock Exchange, NASDAQ, AIM. OTCBB or Plus Markets via an initial public offering (IPO) or placing.

However, a strategy that throws up exciting possibilities for many entrepreneurs, investors and those institutions allowed to dabble in unlisted securities, is one of taking a chance with pre-float fundraisings when the company is still private.

The concept of pre-float finance is very simple. Basically, non-risk-averse investors agree to invest a set amount in a business, at a pre-arranged price, prior to its flotation on the market within (usually) six to 12 months. One group that successfully exploited the pre-float funding route is Adwalker, a hi-tech sandwich board venture brought to the market by former Ogilvy & Mather adman Simon Crisp. When it joined OFEX, its shares were priced at 8p (valuing the company at £8.5 million), but pre-float investors were able to buy their shares at a variety of prices ranging from 1.25p to 7p. The company's fortunes, as far as share price is concerned have not fared well recently, but those early investors would have been able to sell their stakes for a tidy profit.

As the example shows, the attractions of a pre-float funding for the actual investors are obvious. This select group are offered the possibility of doubling, tripling or even quadrupling their investment within less than a year should the company they back go public as planned.The attraction for all the players is that they know they can get exposure in a soon-to-be-listed venture at attractive prices. However, they get in at lower prices because they are essentially backing a private company, which, by its very nature, represents a greater risk than a publicly listed one.

The problems that have occurred in this area for clients, companies and corporate finance boutiques alike has been that many brokerage company's have entered this arena but have not been selective about the companies with which they operate, thus a listing of these entities has not occurred as promised. So the phrase 'pre-ipo' has become a by word for 'low quality issues'.

An interesting compromise has, however, come into fashion in recent years. This is essentially raising the funds for a private company into escrow but only releasing them when the company is actually admitted to a market such as AIM etc. This gives the investor that confidence in knowing hat his investment will actually be used for what will become a listed company.

There are a number of benefits to the company of such a structure including; increased commitment from investors (because of the known listing element); reduced costs (because there would be no offer to the public at the floatation date) negotiation on contingency fees with advisers (because funds are escrowed and they know they will be paid on when the company floats and the funds released).

The investor benefits from a low share price, the comfort of knowing there will be a listing and, in some cases, participation in an IPO where perhaps only institutions would have been invited had the company gone the normal route.

Of course company's will always want to get their hands on funds as soon as possible but if they are not in a position to be able to function up to the floatation without and injection of funds, then perhaps the quality of the issue is not what it should be anyway. In the circumstances where there is a need for an immediate injection of cash because of expansion, for example, then some cash could be released on a convertible basis, but secured on the company's assets or intellectual property. Because of the extra risk the convertible could be at a percentage discount to the float price.

If you have a company that would be interested in such a funding or are an investors interested in this sector then please contact HF Capital in London

Hedge Fund Quants - Trouble in Math Town?

Goldman Sachs, on Monday, made the announcement that the markets had been anticipating. The banking giant said that three of its hedge funds had sold huge equity positions following the recent stock market woes and it appears that other quant funds are in a similar position. Hedge Fund Research's EMN index had lost 7.6% by last Thursday and probably saw more loses in Fridays plunge.

Basically they way EMN make money is that they take long positions in shares that they expect to to do well in the market and take short positions in those they expect to do badly. The programmes are set by the managers of the fund based on many different criteria. They plug in the programme press that 'go' button and churn out profits. At least in theory.

Billions of dollars have flowed into the EMN funds because it is the closest thing to being in the market with no risk, they have been seen as investment vehicles that couldn't make a loss, one of the leading fund of hedge fund manager talking to The Times said "People know now that that's not true"

I know of a hedge fund manager who was in the quant business before it became all the rage and I remember going into his office during some other market turmoil and he told me that the fund was down 20% in the last month. I asked him why they were executing the trades that the computer was pumping out (it wasn't automatic then) when they were obviously, even from a basic trading perspective, wrong. His answer then is probably the same as people are getting now from EMN managers. He said "Its either a computerised trading system, or its not, we will find out in the next few weeks if it knows what it is doing". Sure enough in the following two months, the system made 33%.

By their very nature, quant systems have to operate in liquid markets, because you can't expect a computer to wait for a trade, so the quant funds, I believe will have some short term problems, but will inevitably recover. Where the problem lies is in those funds who are in more illiquid situations, derivatives etc, where margin calls are going to be increased.

As shares fall (or rise if you are short) then you have a choice if you are the wrong side, anti up extra margin with your leverage providers or start getting out of the market and off-loading positions. The problem is that you are now not necessarily second guessing the market itself, you are second guessing your fellow hedge funds.

If you stay and he off loads, you are in trouble. The safest way, you would think, would be to swallow your losses and not get wiped out. Unfortunately this creates a run for the exits and with it, big problems for the markets.

The thing is, however, the guys that run the big hedge funds are not stupid people who are swayed by the vagarities of the markets. These are smart, well connected people who know what they are doing. They have made money by taking risks and in any period of market instability there are huge profits to made for someone... We know Goldman have taking their hands of the 'touch a truck' hedge fund competition...who will be the winner? Now if I knew that, it would make a great article for this blog...

Monday, August 13, 2007

Going Public on AIM

When going public on AIM there are various advisors that you need to retain to help with the process.

Nominated Advisor

Under the AIM Rules, an AIM company must appoint and retain a Nominated Adviser (or “Nomad”) at all times. The Nominated Adviser is responsible for confirming to the London Stock Exchange (“LSE”) that the Company is suitable for AIM. This is an important role as the LSE does not itself examine whether an individual company is suitable for AIM, and, instead, it delegates the task to the Nominated Adviser, which becomes the Company’s point of contact with the LSE. After Admission, the Nomad will have an ongoing role to help and guide the Company on the application of the AIM Rules.


The Company must also appoint and retain a Broker. This may be the same firm as the Nominated Adviser. The Broker is responsible for managing dealings in the Company’s ordinary shares.


Together with the Nominated Adviser, the Company’s solicitors will assist the Board of Directors to ensure that the Company is ready to join AIM. For example, the solicitors will consider the corporate structure of the Company and its subsidiaries and whether it requires any form of group reorganisation. They will also undertake due diligence and provide a report, on Admission, to the Company and the Nominated Adviser,which (along with the Reporting Accountant’s long-form report and/or working capital report) will assist the Nominated Adviser in enabling it to recommend the Company to the LSE.

They will also be involved in the verification process and assisting the Nomad in drafting the Admission Document, and other ancillary documentation.(b) the Nominated Adviser will also appoint another firm of solicitors to review the Admission documentation on its behalf and draft the placing agreement.

Reporting Accountants

The Company’s accountants (or a firm of chartered accountants nominated by them) will undertake thefinancial due diligence, and will assist the Directors in their working capital review.

Other Advisers

In preparation for Admission, the Company will also appoint a registrar, PR consultants and, if necessary, printers.

Our Role

Our Company acts as a buffer between all these advisors. We can select a Nominated Advisor and others if required.

We liaise with these advisors on your behalf, negotiating fees and general management of the whole process.


There must be no restrictions on the transferability of the Company’s ordinary shares, and, as part of due diligence (see below), the company’s solicitors will review the Company’s constitutional documents (e.g. its articles of association) to ensure that its ordinary shares are freely transferable with effect fromAdmission and eligible for electronic settlement.

The Nominated Adviser and the Company will consider the composition of the Company’s board of Directors, especially the number of non-executive directors. As the Company is being admitted to AIM, it is not required to comply with the Combined Code on the Principles of Good Governance and Code of Best Practice (the “Combined Code”). However, it is recommended that, as a matter of good practice, AIM companies should follow the same core recommendations relating to corporate governance.

Among other things, the Combined Code requires the board of Directors to establish committees of non-executive directors to deal with audit matters, executive remuneration and nominations to the board, and the Company should therefore seek to ensure that there is a sufficient number of non-executive Directorsto meet these requirements.

The Directors’ service agreements should be in writing and their key terms will be disclosed in theAdmission Document. As a result, it is normal for all Directors’ service agreements to be reviewed during the preparation for Admission.

Finally, the Company’s advisers will be carrying out due diligence, which is basically an information gathering exercise but is also intended to expose any commercial messes or skeletons in the cupboard which would have an impact on the pricing of the Company’s shares. The results of the due diligence will allow the Company’s advisers to prepare a high quality Admission Docuement for the purposes of marketing as well as ensuring compliance with the AIM Rules and minimising any liability for the Directors in relation to its content.

Firstly, on the legal side, the Company’s solicitors will carry out anextensive investigation of the Company’s business, including its ownership of its assets and property(including intellectual property), its employment and pension policies, the validity of its ordinary shares, any material contracts and any current or threatened litigation. Secondly, if required, the Reporting Accountants will look at the Company’s financial affairs with a view to preparing, if required, a long-formreport. The long-form report generally describes the history of the business over the last three years and specifies any areas of concern for the Nomad.


The Company must provide the LSE, at least 10 business days before the expected date of Admission, with a“Ten Day Announcement”. The announcement will include details such as the name of the Company, its registered office, country of incorporation, the number and nature of its ordinary shares, whether it will be seeking to raise capital on Admission; the names and functions of its Directors; its substantial shareholders (i.e. those holding 3% or more of its ordinary shares) and the name and address of its Nominated Adviser.

At least three business days prior to the expected date of Admission, the Company must provide the LSE with a completed AIM application form, the first year’s AIM fee and a declaration from its Nominated Adviser confirmingthe Company’s suitability for AIM.

It is at this time that the Company will also submit an electronic copy of the Admission Document to the LSE. As part of the Admission process, the Company and the Nominated Adviser will also enter into a NominatedAdviser Agreement. This will provide for the Nomad’s terms of engagement, its continuing duties to the Company under the AIM Rules, and its fees. Finally, the Company and the Broker will enter into a placing agreement, which will deal with the Placing and howit will be conducted. The Company and (to some extent) its Directors will be expected to provide warranties.


Verification Notes

Verification is the process of checking all the statements of fact or opinion in the Admission Document to ensure that the document is true, accurate and not misleading. Verification is largely undertaken for theprotection of the Directors who will ultimately assume legal responsibility for the document. In the UnitedKingdom, verification generally involves a line by line analysis of the Admission Document with full verification notes, containing questions produced by the Company’s solicitors covering every line of the document together with answers received from various personnel in the Company.

Representatives of the management team of the Company will have a significant role in working with the Company’s solicitors on the verification of the document, and a point of contact within the Company should be nominated at the outset.

Directors’ Power of Attorney

Once the Admission process is nearing completion, the timeline may mean that there can be no delay caused by the absence of a Director. It is therefore usual for each Director to execute a power ofattorney authorising one of his fellow directors to sign, on his behalf, any document required under the Admission process (including the Admission Document).

Responsibility Letters

While the Directors will sign the Verification Notes, it is also usual for the Directors to sign a letter acknowledging their responsibility for the Admission Document, and any other document, advertisementor announcement published in connection with the Admission.

Memoranda on Directors’ Responsibilities

The Company’s solicitors will provide two memoranda: the first covering the Directors’ responsibilities in relation to the Admission Document (including civil and criminal liability); and a second covering the continuing obligations and responsibilities of the Directors under the AIM Rules, following the Admission of the Company.

Lock-in Undertakings

If it is decided that the Company has had, as its main activity, a business which has not beenindependent and earning revenue for at least 2 years, all “related parties and applicable employees” willbe asked to enter into written undertakings agreeing not to dispose of their shares for a period of at leastone year from the date of Admission. A related party, for these purposes, will include a director of the Company’s group or a substantial shareholder (holding 10% or more of the shares). Even for companies which have been revenue earning for 2 years or more, it is common for the Nomad to seek lock-ins toprovide comfort to new investors or the market as a whole, that the key drivers behind the Company demonstrate their commitment to the Company.

Long Form Articles of Association

Finally, it is usual for the Company to adopt a new set of long form articles of association suitable for a public listed company.


Under the AIM Rules, the Company must produce an Admission Document which, subject to specified exceptions, contains information equivalent to that which would be required by the Prospectus Rules published bythe Financial Services Authority from time to time (the “Prospectus Rules”). The Admission Document must contain all such information as “the Company reasonably considers necessary to enable investors to form a full understanding of:-

(a) the assets and liabilities, financial position, profits and losses and prospects of the issuer of thesecurities for which admission is being sought;

(b) the rights attaching to the securities; and

(c) any other matter contained in the Admission Document.” (e.g. material contracts/related party transactions)

There will be a responsibility statement on the front cover of the document to the effect that: “to the best of theknowledge and belief of the directors (who have taken all reasonable care to ensure that such is the case) the information contained in the Admission Document is in accordance with the facts and does not omit anything likely to affect the import of such information.”

The above information has been taken, in part, from Charles Russell .

Charles Russell is one of the leading legal advisors to both companies listing on AIM and brokers/NOMADs in relation to AIM transactions.

Jim Cramer and the Rant of Truth!!

Today's Comment: This Friday marked a high on the European stock markets - but in terms of turbulence. Investors seem to be rushing the exits. Good fundamentals - a strong European economy and high corporate earnings - seem to have lost their appeal. We are sticking to our investment strategy - panic has never been a good counselor in the stock market. This week a number of economic statistics will be published, while the flow of company earnings figures is drying up. By the end of the week we should have a clearer picture of the state of the US economy.


This week should be an interesting one for the markets. Jim Cramer the renowned market commentator told it how it is on CNBC on Friday. The crush is the fixed interest and sub prime mortgage market. Meaning those whose credit is not great were borrowing money at higher rates and are now struggling to pay the mortgages.

Cramer is calling for a rate cut to calm fears in the market place but believes that the Federal Reserve (who decide rates) are 'asleep'.

See what he said here:

Jim did appear later to say 'don't panic' and still believes that the Dow will finish the year on a high, but he reiterated that it was important for the Fed to realise the seriousness of the situation and use interest rates to help the market place. Various reports also have the Fed injecting up to $100bn recently to prop up the markets and add liquidity.

Another issue is there will soon be the 'redemption window' coming up on a number of hedge funds, meaning this is the time when investors can get their money out of hedge funds. The problem with that is that if there is significant redemptions across a number of funds then the funds in question will have to sell positions to fund redemptions. The thing is, as leverage increases potential profits, it also amplifies sales.

For example, if you are in a a fund that has leveraged 3 to 1 and you invested $1mn, assuming your $1mn is still intact the fund would have to sell $3mn of a particular investment. Of course the fund will have cash to fund redemptions so this could dampen any affect, but if there is mass redemptions because of investor uneasiness the crisis could turn into a very large problem.

Its not all bad though. Most commentators are urging caution and believe that corporate earnings are good and the general economic outlook is good, at least in Europe, so don't panic.

A knock on affect from all of this will be the inevitable failure of more hedge funds crushed under the weight of redemptions or but the collapse of the niche markets in which they invest. Large quant funds such as the Barclay's Global Investors' 32 Capital Fund Ltd has described trading as "challenging", but it has not faced large-scale redemption requests from clients or liquidations of its holdings.

Goldman Sachs are due to report on their quants funds later in the week, so this is also one area to watch.

The bottom line is that there is no doubt that we are in dangerous territory at the moment and there could be just one factor that could send the market either way. A Fed rate cut for example would ease pressure, a huge hedge fund collapsing would, possibly, have a massive negative affect and cause major problems for the worlds markets.

We believe it is a time to keep your eye, very carefully, on the ball, but not to leave the game just yet.