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.

Thursday, September 27, 2007

Hedge Fund - Thou Shalt Not Steal

In a marvellous 'slight of hand', worthy of the best magicians, the US government has put together proposals that hedge fund investors and managers should regulate themselves.

Amid calls from the German Chancellor Angela Merkel, President Sarkozy of France and other politicians urging for more transparency and better policing of the financial markets, the US has set up The 'President's Working Group on Financial Markets'. Its job is to develop 'best practice' guidelines for investors and managers who run the funds. This is against a back drop of saying earlier this year that regulations were 'sufficient' to prevent funds from 'threatening' the financial system.

The words 'Poacher' and 'Game keeper' come to mind.

Don't get me wrong, I rabbit and rant about regulatory interference all the time so I am in favour of self regulation. The idea, however, that hedge funds will all adhere to 'club rules' is a little far fetched. Who, for example, would police this system? Would we have Man group (the biggest dogs in the yard) sending boot boys around to your office if you did not adhere to the best practices? It all seems a bit of a waste of money to me. I wonder how much it cost to put a 'Presidents Working Group' together?

A second group is also coming up with some ideas on what type of 'due diligence' those investing in hedge funds should undertake as well as the kind of information they should receive.

Yes, you did read that correctly, and no I am not making it up.

With all the rules on who can and can't invest in hedge funds, is it really necessary to put together a group that will tell investors what they should be looking for as far as due diligence in hedge funds? I would respectfully suggest, that if you do not know then no matter how much money you have you should not be investing in hedge funds..

But lets play the game for the moment. What would be the Ten Commandments that this US group could come up with?

First the investors.

1. Thou shalt not invest in a fund if you are not rich beyond the dreams of Croesus.

2. Thou shalt not invest in a fund where the manager is a crook.

3. Thou shalt not invest in a fund that has naughty practices when it comes to shorting shares and bullying management.

4. Thous shalt not invest in a fund that is not based in the US and subject to US tax laws because the rest of the world does not really know what they are doing and we are the bosses of you.

5. Thou shall invest in a fund where the fund manager makes fat donations to campaign contributions (please read subsection 1)

Rule 5. Subsection 1. Thou shall redeem your funds from the fund invested in Rule 5 if the fund manager has backed the losing candidate and thou shalt re-invest those funds in a fund manager that backed the winner.

6. Thou shalt not covert another funds profits.

7. Thou shalt not worship false hedge fund gods. While we appreciate there are people in Europland, Switzerstan and the United States of the Carribean, we feel it is better that you stick with the USA, where all things are good and saintly.

8. Thou shalt not invest a fund if the fund manager does not send you monthly statements detailing every investment bought and sold where the NAV of the remaining holdings has been passed through a computerised modelling systems which calculates the liquidity of the market and the haircut price of any illiquid investments.

9. Thou shalt not invest in a fund where the managers name ends in 'ov', 'ziz', 'fif' or one with no vowels in it.

10. Thou shalt not sue the SEC.

And the Hedge Fund Managers, what will they come up with?

1. Thou shalt not get caught

2 - 10. See rule 1.

A little bit of fun, but the situation is one of spin. The government does not want to upset hedge fund managers or private equity firms but does want to be seen to be 'concerned' about the situation so they just set up a quango to talk about it while the heat dies down.

A political manoeuvre of the highest quality.

Wednesday, September 26, 2007

Switzerland - The Financial Pied Piper?

With over 9,500 hedge fund throughout the world creating over $1,400bn of wealth world wide, the race is on to draw the hedge fund managers from their traditional hide outs such as London and New York. Like the Pied Piper of Hamlin, the Swiss are starting their hypnotic tax tunes to tempt the hedge fund managers to within their borders.

The Swiss Federal Banking Commission issued a report earlier this week calling for more to be done to attract hedge funds into the country and they are, again, seeing tax as the key to this. We wrote an article here disputing this as the current regulatory structure is pretty much stacked against starting a hedge fund in Switzerland because of rules on diversity and equivalent regulation etc.

It is an interesting topic, however, as the nature of most funds is that they are run by few people and are boundaryless (most are set up in the BVI and the Caymans and run from London or New York for example). This makes the hedge fund management industry highly portable.

The portable nature of hedge fund management companies makes the job of the regulators and politicians a little more difficult than, perhaps, they think it is. We have seen much sabre rattling by governments and regulators looking to 'curb the excesses' of hedge funds via regulatory changes and, especially tax changes. In an excellent article from 'Greentrader' they discuss the consequences of the potential change of capital gains becoming income and being taxed accordingly. The 'Start Making Sense' blog has some interesting points too.

What is interesting for me, however, is the fact that hedge funds are so portable that any punitive tax regulations for hedge funds or for private equity funds, for that matter, could be quickly cancelled out by other jurisdictions, such as Switzerland, welcoming the managers with open arms while the traditional jurisdictions ponder the own goals they just scored.

Imagine a scenario where the big earners in the fund industry descended on Geneva and Zurich instead of London or New York. What economic effect would this have on London, as an example? I would imagine, for a start off, that estate agents wouldn't be too happy (every cloud has a silver lining). In reality the hedge fund managers are not going to move to the Bahamas, Caymans or the BVI, but centers such as Geneva and Zurich, with the right regulatory framework and attractive taxation could suck the life out of the industry in both London and New York.

It may be fanciful to say that fund managers would up and leave these countries for Switzerland (especially the US funds) but Switzerland is not a way out country on some chain of island somewhere, it is in the middle of Europe (without the inconvenience of many EU rules), it is business friendly like no other country I have ever been and the Swiss know how to make the rich feel welcome, after all, they have been doing it for centuries.

I used to think that I would get a nose bleed if I was too far away from London, such was the vibrancy of the financial district there, however, recent trips have shown the place to be over priced for office space with no discerning benefits except perhaps for Corney and Barrows on a Thursday night.

With technology almost at the point that you could trade on a deserted island in the middle of the Pacific Ocean, the argument for 'having' to be in one of the big financial centers is waning and more and more people are realising it. In an article we talked about 'The Monaco Boys' working in London and living in Monaco. This should serve as a reminder to politicians and regulators that, these days, business is fluid and when you have an industry that generates so much money, is run by so few people over a few computers and telephones, to move and set up in business in a more friendly jurisdiction would take days not years.

I hope the Swiss do follow through with amendments to the regulations and tax rules to make it more conducive to fund managers making a home here. What would I say to anyone contemplating it?

I have a postcard on my office wall that says '¥€$' - 'Swiss Philosophy' - need I say more?

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.....

Tuesday, September 25, 2007

More Regulator Meddling

Another regulatory situation has been brewing in the US for some time and it seems to be an odd thing to be fighting over. Fee based accounts are essentially brokerage accounts that pay a fixed percentage of the assets in the account as a commission. So if you are a frequent trader the account makes sense as after a certain point it is effectively commission free.

The problems occur, however, when clients in those accounts do not trade frequently and are therefore paying more in commission than they would be in a commission based account.

Morgan Stanley were fined $6.1mn in 2005, AXA were fined this month and others have been fined along the way.

The regulators have a problem with these accounts because they believe that clients accounts should be monitored to see if they are trading enough to make the fees acceptable and, basically, cheaper than a commission based account. OK, that's fine, but the alternative looks to be a nightmare waiting to happen.

Companies are now axing their fee-based accounts in favour of commission based accounts so the choice is becoming less. Now look at it from a brokers point of view. If you have $50mn under management on a 1% fee base to the company you work for and you get 30% commission you will make $150,000 per annum.If you increase these fund by sound advice to $60mn you get a $30,000 pay rise. If this amount now goes to a commission based system you will get a percentage of the trades that are done in the account. Doesn't this then incentivize bad behaviour? Wouldn't an advisor be more inclined to 'churn' trades to generate more commission?

It seems an odd step from the regulators to put pressure on an area like this, because in 1995 they were saying that these accounts were the best way to go.

I don't know what the solution is but it does seem like a bit of nannying going on again. If someone buys a fast car and leaves it in the garage should the police criticise the car manufacturer for the owner not using it enough? Do the utlity companies get fined if they are charging you more than the alternatives? This is a matter of choice. Yes, I believe that suitability of accoounts should be monitored, but fining a company for not doing it? It is as much the client's responsibilty than it is the company.

I can see where this is going. There will be a case in the not too distant future where some bank gets fined for 'over trading' accounts.

The regulators should really just make their minds up and then keep their noses out because the increased cost of all this regulation and monitoring is just passed onto clients much the same as in any other industry. I know this is the US and doesn't affect us, but it is only a matter of time before some bright spark regulator everywhere decides to start meddling with a system that already works.

I really do dispare with the regulatory situation in our industry. Maybe we should just leave it up to a bunch of geeks with computers trading on the advice of a bunch of ex-regulators.
Is there any wonder that the hedge fund industry exploded to the size it is now, with traders and brokers just wanting to do their job without constant rule changes... Well at least until they bring in some other rule for hedge funds, how about "2 + 20 is too much, and you can only charge 1%" that should be enough to kill off another profitable industry..

AbCap - Absolutely Confused

I am very confused about the whole Absolute Capital Management situation. Before their management start reaching for their lawyers phone number, I am not accusing anybody of anything.

The news that Florian Homm sold his shares in Absolute to Andres Rialas, a director, is just mystifying to me. AbCap shares were trading at 400p per share before Homm resigned and now he sells 10mn for 35.2p. Rialas has doubled his money on them in less than a few days, does this sound like the work of Homm the 'Financial Genius', I don't think so.

There seems to have been a bit of strong arming going on here. AbCap bought Argo (owned by Mr Rialas's brother) and the sale of Homms' shares has calmed fears that this deal would have to be unravelled, which could have caused irreparable damage, but it still does not makes sense. Argo are saying they may still seek compensation however.

Homm throws a hissy fit because his fund managers are not getting paid enough money, fair enough.. He then writes a letter saying he will fight for shareholder value. I believed this guy was the type to fight tooth and nail, but he gave up shares in a company he built without so much as a whimper. For a 6' 8" German who got shot because he wouldn't give his wallet to a mugger, this sale seems a suspiciously easy transaction.

So what could be up?

1. Homm is just cheesed of with the whole deal and is rich enough to wander into the sunset and put it down as a bad job.

2. He is going to start a new firm and batter his old firm out of spite.

3. There was something within AbCap that is not quite right and Homm saw the writing on the wall. (£3.5mn is better than nothing n'est pas? - please don't sue us - Compl)

Maybe its all down to the 'illiquid shares' that were in the funds. Obviously some of the performance of the fund could be seen in a great light because any movement on small caps can have huge affects on valuations. The problem, however, is that it is an unrealistic valuation because of the fact that small companies share price could not sustain a sale of large amounts of shares at the bid used for NAV. Maybe AbCap used a haircut valuation, maybe they didn't, I don't know.

Ask yourself this question; if all is OK back at the ranch why would you suddenly decide to resign and then suddenly decide to sell your shares at what amounts to a bargain basement price. Surely no one is that rich, not even Homm. Considering he also gave up 5mn shares of AbCap (then worth £33mn) to bolster funds his loss is around £66mn.

That money would have been a huge bonus for the 'underpaid' managers that Homm said was the reason for his departure. I just don't get it, maybe the coming days will make things a whole lot clearer.

Monday, September 24, 2007

The Sharks are Circling at Northern Rock

It looks like Northern Rock's woe's are just beginning with three of the most aggressive funds plotting to break up the company. Reports suggest that the break-up of the bank would generate hundreds of millions for the funds and leave very little for the shareholders.

Former Goldman Sachs trader, Chris Flowers is among the group looking at a possible deal for the bank. It is also said that Cerberus (the vulture fund that owns Chrysler) and Citadel are among the group circling the stricken financial services company.

The deal would see Northern Rock's mortgage book, worth £100bn plus, divided up amongst the funds but shareholders would come out of it 'penniless' according to the Telegraph.

The markets, recently, have thrown up huge opportunities for funds to snap up under performing securitized mortgage books from struggling banks at below face value. Holding them until maturity would reap huge profits for the funds concerned.

After having loaned NRK £3bn last week a market commentator said "The Bank of England has been trying to get someone to make a bid with no success at all this week. The easiest thing to do is to buy a lot of the assets. It's much more likely to happen this way."

The funds have yet to approach the Northern Rock board, which has spent the week scrabbling to find a new source of financing.

The management of NRK are in a catch 22 position as, obviously, a deal that gave no value on the equity, which a few months ago was worth £5bn, is not something the board would be happy to take. Their options, however, are becoming more limited by the day.

The problems we see here are that this is not some company that makes widgets in some far off land that has little impact on the collective consciousness of the UK public. This is a bank that little old ladies have their savings in. Any aggressive move against the bank will surely be spun by the 'Red Top' tabloids as some sort of 'rich getting richer' scheme at the expense of the little guy. With the fact also that there are depositor guarantees (increased to £100,000) the funds are on shaky ground and could look like they are profiting at the taxpayers expense, not to mention the shareholders.

We could see an old fashioned situation where the aggressive funds are seen as hostile takeovers merchants intent on breaking the company up for profit. RAB capital headed the call from management for hedge funds to buy into the company, by buying 6% of the equity a classic 'white knight move'.

Whomever gets hold of this firm better make sure that the spin they put on this is better than Tony Blair losing a by-election because the political fallout could be huge for the fund that gets it wrong. It is the kind of thing that brought the raiders of the 80's to the attention of the regulators and politicians and ultimately lead to the dismantling of much of the Junk Bond industry.

The bottom line here, in my opinion, is that the winner in this could ultimately end up as the loser through more regulation and politically motivated moves to curb the accesses of the hedge fund industry. If I was a politician looking to make my name, I would be circling this deal, licking my lips at having an arrogant hedge fund manager explaining his billion dollar salary while seeing pictures of little old ladies with placards outside the Houses of Parliament because they have lost thousands investing in NRK.

What is required is nerves of steal, flesh eating lawyers and a very, very fluffy PR company that can turn this particular lemon, for the hedge funds, into lemonade.

Friday, September 21, 2007

What are 'Hedge Funds'

Hedge Funds have matured from an almost mystical investment vehicle that takes care of the very wealthy's portfolios taking huge risks and returning huge profits. These days we all know about the managers making billions and every other fund seems to be called a 'hedge fund'. What is the reality and what really is a hedge fund?

Alfred Winslow Jones was cooking something up. After graduating from Harvard in 1923, Jones toured the world working as a purser on tramp steamers, served as a U.S. diplomat in Germany during the rise of Nazism in the 1930's and as a journalist covering the Spanish Civil War. In 1941, he received his Doctorate in Sociology from Columbia University and became a reporter for Fortune Magazine.

He was interested in the markets and started researching an article on current fashions and market forecasts for investing. It was 1948 and, after his reserach, Jones came to the conclusion that he had a better system for managing money. In 1949, he raised $100,000 ($40,000 of which was his own money) and began putting his theories to practice in a general investment partnership. In modern terms this was about $800,000 (according to this neat calculator).

His basic theory was that he looked at those companies whose share price rose faster than the average when the markets were up, invested in them and 'hedged' these with short sales on shares the fell faster than the average when markets were falling. In theory whther the market was up or down the fund would make money. He also borrowed to invest creating a leveraged fund. Thus the term 'Hedge Fund' was born. In actual fact Jones called his a 'hedged fund'.

His strategy turned out to be a success out performing the best five year mutual fund by 85%. The hedge fund was born and so, was the fee structure, Jones charged investors 20% of the gains.

Of course hedge funds started to crop up, but the strategy of Jones's was 'adjusted' by many who ran such funds. It takes discipline to run a truly hedged portfolio when markets are good, because, obviously, you are losing on your shorts while your longs are making money, many didn't bother with the 'hedged' part. This changes the risk profile of the fund dramatically.

Modern complex hedge funds, although inspired by Jones's original theory, bare little resemblance to the simplicity of Jones' original. Derivative products such as futures and options etc changed the face of investing forever and with the advent of wide spread computer systems the hedge fund industry introduced ever more complex trading patterns that could only be handled by computer. These 'quant' or 'algorithmic' systems use complex mathematical computations to trade programmed transactions across a wide variety of instruments and sectors.

For example is there a correlation between the gold price and the dollar rate? Could there be a trade computed for both? Long one short the other for example. By crunching numbers you could see the statistical correlation between the price of gold and silver over a period of time and create an 'algorithm' to spot trading opportunities in this market place. The trades for a system like this are endless and you can be sure that there are maths geeks sat with traders everywhere in the City and on Wall Street working out the latest wheeze.

Of the 9500 funds supposedly out there however, many are traditional 'long' funds that really are not a true hedged situation. The idea of hedging is that whether the markets are up or down the fund has an opposite trade to offset losses. If the funds were truly hedged how would it be possible for one to 'blow up' and lose lots of money?

How to Become a Millionaire

"Who wants to be a millionaire?". Not just the title of a catchy tune and the name of an annoying game show but a question that is on every body's lips. At least "How to become a millionaire".

I was looking around a websites hits this weekend (obviously in the public data) to see what search terms were searched most frequently for the site to be hit. I felt a little sneaky doing so, it was like going through someones garbage, but in the interests of research I pulled on my virtual gloves and started delving. The site I refer to shall remain nameless but it is a well known personal finance site. The most frequent hit for the site was 'How to become a millionaire".

Casting aside Richard Branson's answer to the question which was "Start as a billionaire and buy an airline" I thought I would have a Friday afternoon 'dress down' post and share the webs wisdom on the subject. Many of our readers are no doubt well healed already so maybe the question should be "How to become a billionaire"

So dressed in my jeans and loud shirt here is the best web advice for the Wunderkind millionaires who want to move to the next level or those that are just starting out:

1. Moneycentral bored me to tears with such gems as "Keep your eyes peeled for better ways to do your job" and "Get your ducks in a row", however their remark on "Flex your tax savings muscles" makes sense.

In our post "How to get the UK Tax Man to buy you a jet" we talked about how the 'Monaco Boys' work in London and live in Monaco saving millions in the process which could be used to purchase your very own flying gin palace. This site might be useful if you are looking to take the plunge.

We have also discussed Switzerland and the comparative lifestyle/tax issues. We can recommend it, so can Michael Schumacher, Alonso, Jackie Stewart etc etc. If Switzerland is an option 'Switzerland is yours' is the site for you.

2. Warren Buffet has done OK, so some sagely advice from him never goes amiss. 'Dance with the one that brung ya' is not a Buffet saying but a philosophy attributed to him. Basically he is saying that once you have the winning formula investing wise (or in business) stick with it. Makes sense..

3. Virtually all of the billionaires that have interviews somewhere on the web say that they are information whores. They watch everything and are always looking for the next big thing. Obvious we know, but true. A site we like called Killer Start-Ups is somewhere that we look over for something juicy to invest in. Yes there is a ton of dross there but would you bet against the next YouTube appearing on the site? I wouldn't.

4. Start a Hedge Fund.. Appropriate for this site I think. We are in the process of putting a fund together with some partners so I would suggest investing in that as a good start... (no solicitation! - Compl)

Seriously, it seems that everyone is doing it. I even read that some fund got started somewhere because of the success of Borat the movie. It has since invested in the Die Hard Movie and some other stuff I will probably never watch but will do fantastically well.

The thing is, these days, if you have a knowledge of a particular market place or are well connected in a particular area, you don't have to be a trader to start a fund. The Huffington Post discusses how young MBA candidates were just not bothering with business school at all and just staying out in their highly paid hedge fund jobs. Who can blame them? Start your fund and recruit some hungry young grads!!

When looking for a company to discuss setting up a fund with we were pointing in the direction of International Financial Administration in the BVI. Small but perfectly formed. Go on.. you know it makes sense, there are only 9,500 other funds out there to compete with, at least there was last week...

5. Invent something. Also very obvious. However, here are some of the daftest ideas (courtesy of Madconomist) that made someone rich.

Million Dollar Homepage

1000000 pixels, charge a dollar per pixel – that’s perhaps the dumbest idea for online business anyone could have possible come up with. Still, Alex Tew, a 21-year-old who came up with the idea, is now a millionaire.


Hire another person to think of a cool domain name for you? No way people would pay for this. Actually, naming domain names for others turned out a thriving business, especially, when you make the entire process risk free. PickyDomains currently has a waiting list of people who want to PAY the service to come up with a snappy memorable domain name. PickyDomains is expected to hit six figures this year.


Create goggles for dogs and sell them online? Boy, this IS the dumbest idea for a business. How in the world did they manage to become millionaires and have shops all over the world with that one? Beyond me.

LaserMonks is a for-profit subsidiary of the Cistercian Abbey of Our Lady of Spring Bank, an eight-monk monastery in the hills of Monroe County, 90 miles northwest of Madison. Yeah, real monks refilling your cartridges. Hallelujah! Their 2005 sales were $2.5 million! Praise the Lord.


Create a deck of cards featuring exercise routines, and sell it online for $18.95. Sounds like a disaster idea to me. But former Navy SEAL and fitness instructor Phil Black reported last year sales of $4.7 million. Surely beats what military pays.


How would you like to go on a date with an HIV positive person? Paul Graves and Brandon Koechlin thought that someone would, so they created a dating site for HIV positive folks last year. Projected 2006 sales are $110,000, and the two hope to have 50,000 members by their two-year mark.

Designer Diaper Bags

Christie Rein was tired of carrying diapers around in a freezer bag. The 34-year-old mother of three found herself constantly stuffing diapers for her infant son into freezer bags to keep them from getting scrunched up in her purse. Rein wanted something that was compact, sleek and stylish, so in November 2004, she sat down with her husband, Marcus, who helped her design a custom diaper bag that's big enough to hold a travel pack of wipes and two to four diapers. With more than $180,000 in sales for 2005, Christie's company, Diapees & Wipees, has bags in 22 different styles, available online and in 120 boutiques across the globe for $14.99.

OK, how’s that for a brilliant idea. Get a postal address at North Pole, Alaska, pretend you are Santa Claus and charge parents 10 bucks for every letter you send to their kids? Well, Byron Reese sent over 200000 letters since the start of the business in 2001, which makes him a couple million dollars richer.

Lucky Wishbone Co.

Fake wishbones. Now, this stupid idea is just destined to flop. Who in the world needs FAKE PLASTIC wishbones? A lot of people, it turns out. Now producing 30,000 wishbones daily (they retail for 3 bucks a pop) Ken Ahroni, the company founder, expects 2006 sales to reach $1 million.

If you are a budding inventor check out (the clockwork radio inventor) some years ago we were on the corporate finance team that helped him raise his initial funds.

We could go on and on but the Friday afternoon beverage is calling and its time to go. Happy hunting, or hedging, or inventing...see you Monday.

King Mervyn Fights His Corner

As the finger pointing begins it is the two most important central bankers in the firing line with Mervyn King and Ben Bernanke being grilled as to their performance in the recent market turmoil.

In the red, white and blue corner is Professor Mervyn King. He has has been criticised because it is perceived that he fluffed the whole Northern Rock issue by firstly refusing to inject large amounts of cash into the money markets to help banks suffering from liquidity problems and then doing a quick u-turn. Injecting £10bn into the market and agreeing to accept a wider range of collateral from banks moved to calm the system.

This criticism had Professor King off balance for a few rounds at the Treasury Select Committee meeting but like Ali in 'The Rumble in The Jungle' he was just soaking up the punches. He came out fighting by saying he would have liked to have intervened earlier but was tied by EU and UK legislation "If any of these pieces of legislation weren't there" he "would have been able to move sooner".

Bam! The brilliant 'I would love to help you out but your rules won't let me' defence.

After this it all went a little odd for a while, I thought I was watching some Iraq issue when King talked about the fact that he wanted to bail Northern Rock out in a 'covert operation'. Did this involve black balaclava clad SAS guys swooping into the Northern Rock buildings and 'covertly' leaving bags of cash in the vaults, I wonder? Surely the BOE was not talking about keeping the fact that Northern Rock was in trouble away from the general public and it's depositors... no, must have heard wrong..

'King Mervyn' gets an earful from Robert Peston in his article 'Unstable Governor' but I am not sure all the barracking is justified.

I am not one to bash the FSA, primarily because I am a regulatory coward and regulator's powers to take away my livelihood scares me, but it seems to me that a Bank in trouble should have been spotted by the monitoring department. The FSA spends enough time poking into brokerages and making everybody fill out copious amounts of forms for capital adequacy and liquidity etc so my questions is; Who dropped the ball when looking at banks? You didn't have to be Miss Marple to spot the clues after all..

Blaming the Bank of England would seem to me like blaming your corner man for losing a boxing match, yes he is there with you and backs you up when things go wrong, but he is not the one in there fighting. Maybe the FSA did warn the BOE, if so I will happily retract. We shall find out when the FSA takes the stand. I must admit, I am looking forward to that more than OJ's trail II.

There will be all sorts of stories coming out over the next few weeks as politicians, regulators and bankers all play musical chairs but there is one thing for sure, when the music stops someone is going to have nowhere to sit. My money is on the Deputy of The BOE, close enough to seem meaningful, far enough away to let King Mervyn fight another day.

Thursday, September 20, 2007

Homm Quits - Investors Locked-In

Don't you just love the hedge fund industry? The swash buckling image that is prevalent is underpinned by a certain arrogance written into documents that investors sign up for. So keen have investors been to grab a ride on the money train that they have basically thrown away rights that others would take for granted..such as being able to get your money back, for example.

On Tuesday we saw Florian Homm quit Absolute Capital Management Holdings, an AIM listed hedge fund manager, because he was unhappy that his top fund managers were not being rewarded enough. The shares in Absolute plunged 84% in two days and people were, obviously, a little worried about their investment.

With Northern Rock you could just turn up on the banks doorstep with your tent and a few sandwiches, sing some songs with other panicked depositors and wait for the smiley girl at the cashiers desk to give you your money back, unconcerned at what the shareholders in Northern Rock were suffering.

Imagine the scenario in high streets up and down the UK if Northern Rock had said "sorry we are locking up our branches for restructuring and you can have your money in a years time". Victorian riots would have ensued and people up and down the country would be taking the side of crying pensioners and baying for blood.

Pity then the investors in Absolute. On the news of Homm's departure $100mn of the funds under management wanted to leave, however Absolute have executed a lock-in provision for the funds under management and have suggested that investors cannot get at their funds for a year while restructuring of the funds takes place.

"The proposed restructuring of the equity funds and the imposition of the lock-in period will provide stability to its equity fund business," Absolute Capital said in a statement. "The company has held discussions with large fund investors, who have indicated their preliminary support for the proposal."

I can understand the issues that Absolute have to a certain extent, as they have as much as $500mn in illiquid over the counter shares in funds which would be difficult to sell. Under the proposed reorganization, the illiquid positions will be transferred to a new fund in which investors will get separate shares. Absolute will hire external advisers to value the illiquid assets before selling them, the company added. The other shares would track the liquid portfolio.

It does show, however, that there are a number of get outs that funds have when structuring the documents which investors just have to grin and bare. I do think, however, that investors will now be wising up to these lock-ins and 'gates' for future investments into hedge funds.

As for Homm, he is still the single largest shareholder in Absolute so standing on principal has just cost him 84% of his holdings value, you have to take your hat off too him for that. Also bare in mind that this was the guy who got shot because he would not hand over his wallet to a mugger. If I was the management at Absolute I would be looking for another job, as this guy is hardly likely to walk away from the company he founded if he is prepared to get shot for a few bucks in his wallet.

For me, Absolute looks like a buy today, when Homm comes riding back into town like John Wayne, having just disposed of some evil corporate management Bandidos, it will be a nice little earner.

Our investment accounts are managed on a discretionary basis via an external asset managers agreement with a large Swiss bank. We are not securities dealers and do not execute individual trades only those emanating from our management of accounts. We are regulated to provide discretionary managed services in the name of our clients and not in the name of our company. We also provide cost affective corporate finance solutions for small companies who are seeking to raise funds. Should you wish to know more, please get in touch below, or visit our offshore investment site here


Wednesday, September 19, 2007

Back to The Future - Inside Information 80's Style

It looks as if the SEC is stepping up its examination of insider trading at hedge funds. According to Bloomberg "SEC officials told hedge funds to list clients and workers who serve as officers or directors of publicly traded companies, along with the names of any relatives who hold such posts, according to a 27-page letter to industry executives."

I have to say. My market radar has been sounding the alarm for some time now and I will tell you why. Read the book The Junk Bond Revolution. You will have to buy an old copy but you can get it through Amazon (link on the right). It is the story of the all powerful junk bond market of the 80's where billions were being made by lots of young people and the King of it all, Mike Milken, came crashing down after being accused of inside information. This was against a background of political concerns over the role junk bonds played in the market.

The problems started for Wall Street when Ivan Boesky was caught red-handed trading on inside information for his arbitrage fund. That quickly lead to lawyers, investment bankers and analysts being arrested and put in hand cuffs for all to see. There is a good account of the whole thing in 'Inside Out' - a confessional book of Dennis Levine, one of the culprits (also available on the Amazon link, right)

The case against Milken was brought under the RICO statutes in the US, which were originally designed for the Mafia. This effectively closed down Drexel Burham Lambert (Milken's fim) and eventually lead to Milken recieving a 10 years prison sentence (he served just over 2) even though they found only $300,000 worth of trades that were suspect. Considering he earned a then record of $500mn this seemed more of a political statement than anything else. Rudolph Guliani was Mayor at the time.... and he is going for the highest job in the land now...enough said.

My point here is that there has been a raft of corporate convictions with Enron etc and there is now an environment of political criticism of both the hedge fund and private equity industry, there are also many politicians who would love a large hedge fund or private equity scalp to kick off their carreer. With the markets being turbulent, people losing jobs as PE bought firms are 'rationalised' and huge earnings being atributed to hedge fund managers and PE firm bosses alike, it just seems to me that the environment, and will, is now there to reign in the industry one way or another.

I hate to be the prophet of doom, but can you see the similarities too?

The odds of not finding someone trading on inside information is small, in my opinion, because it is just too lucrative for some to ignore. With some deals involving over 1000 people as reported in some corners of the press, can you tell me that absolutely none of them traded on inside info? If you think that you are not only 'away with the fairies', you have probably bought a house in Goa and smoke copious amounts of mind bending drugs.

We, in the industry, know it goes on and so do the politicians and regulators. I will make a prediction now that someone big, somewhere, is going to pay the price and this SEC investigation is just the start.

Our investment accounts are managed on a discretionary basis via an external asset managers agreement with a large Swiss bank. We are not securities dealers and do not execute individual trades only those emanating from our management of accounts. We are regulated to provide discretionary managed services in the name of our clients and not in the name of our company. We also provide cost affective corporate finance solutions for small companies who are seeking to raise funds. Should you wish to know more, please get in touch below, or visit our offshore investment site here


Fed Rate Cut - The Bulls Win This Round?

So we got the Fed rate cut. The Dow went up 335 points the FTSE (as of writing) is up 141 points and pretty much every other bourse is following suite. Will it last?

Our view is that this is a very important psychological boost to the economy but like the tides we may may see some ebbing and flowing going on over the next few months. ClearView Economics said "This does not heal the financial markets, but it can help the process of healing. But we are not there yet." This is a good assessment of this particular news and portrays the cautious optimism that seems to be in play across all commentators.

The thing is, if you are a US homeowner that can't afford your mortgage (which is what started this whole issue) then a 50 basis point cut is not going to have you leaping around the room because its sorted out your mortgage problems. There will still be defaults and growing missed payments, this will lead to penalties and further defaults.

In the UK in the early nineties defaults on home loans were at a high and the buzz word 'negative equity' was everywhere. Basically people were defaulting on home loans being repossessed and then finding that they still owed money to the banks. With housing prices still cooling off significantly in the US the spectre of this potential problem has not been scared off by a small rate cut. This is especially when all of the teaser rates that millions of US home owners took, expire and come home to roost.

The response by the markets is also being fueled by short term speculation. Basically if you stuck a pin in the FT or WSJ quotes pages today and invested in the company you hit you would, more than likely, have made money from the trade and most people with a rudimentary knowledge of the markets know that. Many speculators were waiting for the rate cut to make a move and there will be profit taking from that bulge in the FTSE and the Dow, mark my words.

The strange thing is that these days moves like these are generally priced into the markets. It was a fairly decent bet (we took this view and are on the plus side today) that the Fed were going to cut rates, definitely by 25 basis points, but more likely 50 basis points, so why the huge reaction on the announcement?

Personally I think we are seeing a traders dream market where rumour and innuendo, if played correctly, can yield huge profits for the volatility these comments create. When Greenspan said we had a thirty percent chance of recession, the markets tumbled, why? He isn't even the Fed Chairman anymore. I know he knows his stuff, but do we have to wait for old Fed Chairmans to shift off this mortal coil before the markets stop listening to them? Speaking with friend this morning his comment, when discussing Greenspan was "I mean come on, he's retired now he should shut the **** up". Coarse, but accurate.

The fact is that when the markets are like this there are jumpy traders with a squillion dollar nuke buttons not to far away from them in banks everywhere. Hedge funds making ever more outrageous bets on where the market is going and market commentators trying to make sense of it all. Any news or rumour that can be used to an advantage is being done to death.

My feeling is that we have a lot of investment dollars in the hands of those who are paid to take very big risks for very big profits and very big earnings, this does not a stable market make... Be prepared for more volatility, more hedge fund blow ups, more 'consolidation' and more bad news.

The good news, however, is that we think recession is unlikely (sorry Mr Greenspan). This will all play out, it will be painful for some Americans, but the old saying "When Wall Street sneezes, Europe catches a cold" is old hat these days. I think we have learned to see the signs and although we have the odd sniffle, we have learned to wrap up warm and take our medicine before we are bed ridden.

We are at round 2 now, our money is on the Bulls, a technical knock out in round 5.

Our investment accounts are managed on a discretionary basis via an external asset managers agreement with a large Swiss bank. We are not securities dealers and do not execute individual trades only those emanating from our management of accounts. We are regulated to provide discretionary managed services in the name of our clients and not in the name of our company. We also provide cost affective corporate finance solutions for small companies who are seeking to raise funds. Should you wish to know more, please get in touch below, or visit our offshore investment site here


Tuesday, September 18, 2007

Insitutions or High Net Worth Clients?

Unfortunately we have never really been an institutional business as far as the acquisition of clients is concerned, primarily because we don't offer any institutional products at this stage. It is in the business plan to develop those kind of products later down the line but at the moment the concentration is on private high net worth clients. Is this a bad thing or have we, by slowly building our business, stumbled upon the best area to market to?

The initial investments for hedge funds were traditionally high net worth clients and family offices which has been overtaken in recent years by the institutions. With this influx of money from pension funds, savings and loans and mom and pop mutual funds has come the eagle eyes of the regulators and the evil eye of the press and politicians. Private wealth, however, is now growing at such a rate that marketing into this sector alone doesn't seem such a bad idea.

According to Scorpio Partnership Ltd a private banking consultancy, total high net worth assets available to private wealth managers stood at $24.4 trillion in 2006 and they estimate it will increase to $35.3 trillion by 2011. I don't know about you but a small portion of the '.3' would be enough to keep me happy over the coming years. This figure also doesn't include real estate, private equity or art so we are probably talking double the figure.

There is a saying that an old boss of mine used to say which was 'this business would be great if it wasn't for the clients'. Personally I have never felt that way. I believe that having clients to speak with and relate to on a regular basis makes the business much more interesting it is, after all, a relationship business even if you are dealing with institutions.

Dealing with institutions such as pension funds can, however, prove to be a pain for the privacy of hedge funds. Losses in pension funds are a matter for public record so the losses reflected in hedge funds are there for all to see which, when you are trying to be secretive, can't be fun.

There are, of course, downsides with private clients. Losses are never a good conversation to have with anyone, but with a family office or private individual the call to come to a 'meeting' can be a daunting experience for even the best relationships. It is always said, 'never invest money for friends or family' but with private clients this can be difficult.

Many of the clients that we deal with have become good friends so that saying is turned on its head and the conversation about any losses or, perhaps, timing issues of an investment become strained. All in all, however, I would prefer to be friendly with the people whose money I invest because, I believe, it gives you a different edge. Investing money for a faceless pension scheme may make some a little less careful than investing the money of a clients whose wedding you have been invited to. I could be wrong, but it seems that way to me.

We don't manage a huge amount of money, by the end of this quarter it will be somewhere in the region of $15mn somewhere less than a weeks wages for some of the 'Wunderkinds' of the industry, but it is not a bad start.

As long as the markets don't completely blow up private wealth will keep on growing and our focus, after all, may stay on the private client where your performance may not be touted in the newspapers but is measurable by the amount of times you get invited to weddings, Bar mitzvah's and golf trips. So far, however, no one has invited me to the VIP section of the Monaco Grand Prix, I think we need to up our game..

Monday, September 17, 2007

Northern Rock, The Saga Continues


The troubled Northern Rock bank has opened early to deal with fresh queues, as anxious customers look to withdraw money from their savings accounts. Bank boss Adam Applegarth said people were entitled to take out their money.

He said staff were "busting a gut" to ensure all customers were seen, but stressed it was "business as usual".

About £2bn has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds, and on Monday its shares were down 28%. In early trade in London the bank's shares, which had lost 32% on Friday, fell from 438 pence to 300 pence. And shares in fellow bank Alliance & Leicester fell by 8.5%.

Meanwhile Chancellor Alistair Darling told the BBC that customers' money was there for them to withdraw, and that it was backed by the Bank of England.

'Logistics exercise'

Northern Rock branches had opened at 0800 BST on Monday - an hour earlier than usual. Mr Applegarth apologised to customers who had had to wait in queues to be dealt with by staff, but said that bank branches had been "extremely busy".

It is understood Northern Rock was almost sold to rival bank Lloyds TSB. However, the deal fell through because of the difficulty of borrowing money in the current financial climate. Mr Applegarth told the BBC he could not discuss possible takeover talks, nor would he confirm the exact amount of cash withdrawn from bank branches since Friday.

"Customers are entitled to get their money - it is a logistics exercise for us, making sure we can look after our customers," he said.

'Hard slog'

On Friday, Northern Rock shares fell 32% and will be closely watched this week. Mr Applegarth said the bank faced a "hard slog" but was sure the brand would recover.

However, he would not confirm how much had been withdrawn.

He told the BBC he was "absolutely confident" that his customers' money was safe, but they were welcome to withdraw it if they wished. Mr Applegarth also said: "Not everybody in the queue is withdrawing money, and not everyone is withdrawing tens of thousands of pounds."

As well as extending its opening hours, Northern Rock has also increased bandwidth on its online banking, which has struggled under the volume of people trying to access the website.

The BBC's business editor Robert Peston said the £2bn withdrawn - which represents about 8% of the £24bn deposits it held on Thursday - was actually less than the mortgage lender and officials at the Bank of England and Financial Services Authority had feared.

However it cannot be certain whether much more will be withdrawn in the coming days, especially from holders of Northern Rock's postal accounts - which contain about £10bn.

Mortgage banks and building societies such as Alliance & Leicester and Bradford & Bingley, as well as the bigger banks, are understood to have seen much of the money withdrawn from Northern Rock.

This suggested there did "not appear to have been a loss of confidence" in other firms.

"Although the risk of contagion has not been eliminated, so far there is no great sign of it," he added.

Nervous bidders

The City watchdog, the Financial Services Authority (FSA), has backed comments from the Treasury, saying it is confident Northern Rock is solvent and savers could continue to deposit and withdraw funds.

"To be absolutely clear, if we believed that Northern Rock was not solvent, we would not have allowed it to remain open for business," FSA chairman Callum McCarthy said.

The BBC has learned that two banks were very interested in acquiring the beleaguered firm.

However, they were concerned about doing such a big deal amid turmoil in money markets and when it was difficult and expensive to raise money from other banks and financial institutions.

The Bank of England has told our business editor the emergency lending facility offered to Northern Rock would be transferred to any new owner.

However once the facility expires - and the Bank will not make the expiry date public - there is no guarantee it would be extended for the new owner.

"Most bidding banks will remain nervous about taking on a balance sheet of Northern Rock's size with the risk hanging over it of needing to refinance a large chunk of loans from the Bank of England at short notice in markets which may remain frozen," Robert Peston said.

Summer markets

Northern Rock's realisation that selling the bank had become impossible in current market conditions, persuaded the board to approach the Bank of England and ask for access to emergency loans, he added.

"Plainly, a takeover would have been a less humiliating option. But it just couldn't be done."

Northern Rock has struggled to raise money to finance its lending ever since money markets seized up over the summer.

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business. It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.

Friday, September 14, 2007

Pre-IPO Investing Tips

Pre-ipo equity is the issuance of equity by a company prior to a stock market listing. Don't confuse this with 'private investment' or 'angel investing'. The line is not as fine a one as some would have you believe.

There are many companies offering pre-ipo investments that aren't really what it says on the tin. They are deals that might, one day, go to IPO. True pre-ipo deals are those that are virtually already geared to go to an IPO. These have taken on brokers and advisers to take them through the process or have put in some mechanism that ensures (as such as it can be) that the company will be listing.

So here are some guidelines that may help you to find deals and what to lok for when choosing what to invest in:

1. Listen to Everybody. This is probably a controversial one to start off with, because there are so many jokers and dreamers out there who have zero chance of getting their issue, or that of their clients issue (in the case of brokers) off the ground. However, if you are new to this area then reading prospectuses of those that are rubbish will give you an insight to those that are viable. Talking to everyone will also give you a regular deal flow of ideas and, sometimes, will give you access to people in these small companies that are serial deal doers which is what you need (see 2).

Talking to everyone will also allow you to get a feel for who is good in the space and who isn't when dealing with brokers. I read an excellent quote on the net the other day "Even a blind squirrel sometimes finds a nut in the forest". This is a good quote to bear in mind when you are dealing with brokers you don't rate. Sooner or later they may stumble on something interesting.

2. Cultivate you list of 'players'. This list is not necessarily static. Like a football player, sometimes they have a bad season, sometimes they have a good season.

You need to look for the player that is on form. But most importantly you need to know who they are in the first place. Looking on the net is a good place to start. Choose your search term "successful entrepreneurs" etc etc. But drill down through the press dross and find out whose names keep occurring and in what sector. You will find that these players have a 'fan club' who follow their investments. You want to be in the 'fan club' of as many of the players as you can.

It doesn't mean that the 'players' are just individuals, some firms have a good track record and should be watched.

For example, a recent survey of the best and worst performing NOMADS (Nominated Advisers) on AIM was released by Lombard Asset Management and Growth Company Investor. This is a key list to look at when considering pre-ipo companies looking at AIM floats. Obviously some of the info was skewed by the number of issues, but it is a good place to start. Basically if you are looking at a pre-ipo deal and the NOMAD taken on does not have a great track record then it may be a factor in your decision.
Join mailing lists of firm that do deals so that you can receive updates on transactions they are involved in, if you see something interesting then you can make the contact. HF Capital have an 'alert service' among other small corporate fnance firms.

3. Read the prospectus. Obvious? Most people don't get beyond the nice blurb in the first 20 pages.

The best places to look are 'Risk Factors' and 'Statutory and General Information'. Risk factors will, more often than not, be generic but may bring up something for further research.

The 'Stats and Gens' should give you a better idea of the company itself. Look at the history section. This should tell you how many shares are authorised (meaning how many shares they could issue) and the issued share capital (meaning how many shares they have issued). The issued share capital will tell you, for example, that there have been 10,000,000 shares issued and they are fully paid up (meaning that if the basic price of the share is 1p - called the 'nominal' price, then £100,000 has been paid for these by the founders 10mn / 1p). If you are being asked to pay £1 for these shares then you may want to have a look at why you are paying 99p over the initial price for the shares, is it worth £10mn?

Also something to look out for is that the shares are 'partly paid'. In the UK, for example, the minimum share capital for a PLC (the issue has to be a PLC to be offered to the public) is £50,000 but only 25% of that needs to be paid up meaning a PLC can have only £12,500 paid in by the original shareholders. If the shares are partly paid up ask yourself why the rest hasn't been done when you are being asked to pay a premium.

On this subject, look for issues that have been 'fluffed up' by the directors/founders saying that, as an example. £2mn has been paid in by the directors as 'sweat equity'. Sweat equity is affectively the work that has been done for not much, if any money, by the founders/directors, and this is a way of them trying to capitalise it. I do, however, look very closely at how this is calculated, and you should too. I saw a prospectus a number of years ago where the founder had worked on the project for two years before raising funds. He had charged the company £10,000 per week for 'services', (which it didn't have, of course) he then wanted to capitalise this in the business for 'sweat equity' of over £2mn. If this was Steve Jobs or Warren Buffet, I could stretch to that. This guy had never earned more than £50,000 per annum. It was a pass.

If there is a clause in the prospectus (which there generally is) saying that pre-emption rights (basically pre-emption rights is the right for shareholders to be offered shares first before new investors) have been suspended up to £X. That means that the company can issue shares up to that level without asking the shareholders. For example if the authorised capital is 100mn shares and the offer is for 10mn, and the company has suspended pre-emption rights up to 100mn shares. You could be investing and then be diluted massively by the issuance of a further 90mn shares.

Check out and 'loans from directors'. There simply shouldn't be any. I would be hugely suspicious if there were any outstanding loans because why would the directors be asking you to invest at a certain price but would not be prepared to capitalise their loans? They either believe in the company or they don't. If they haven't converted their loans it would be a pass for me.

Check out if any director has been involved in companies liquidated previously. This is point that I argue with people on. Some see failed companies as a bad thing, I believe that people grow by learning from their mistakes, don't write the company or director off because he has made errors, but do look at the circumstances of these errors.

Check out how much management owns of the shares. If its above 75% after the offer, be careful, there are a lot of things that can be done by someone holding 75% of the shares that may be against the interest of shareholders. If it is less than 30%, ask yourself whether there is enough to lose or gain from the success or failure of the company for the directors. I like to see between 40%-60% (obviously depending on the size of the company and the stage of investment).

On the subject of shares, be very, very careful of warrants and convertible debt from the management or outside investors. Convertibles are a fabulous tool for investors when used correctly, but when they are not they can be a nightmare. For example, lets say there is a loan for £200,000 to the company that is convertible into shares at 1p. f you are buying shares at 3p hoping for the IPO price to be 6p, look at the dilutive affect those warrants will have. I am not saying dismiss any issue on this basis, because the guy who put in the £200,000 may have been taking a huge risk when he put the money in and now the company is OK, but do look at these carefully.

Check out other shareholders. If you see Warren Buffet in there, chances are it is a good one to look at. If you see 'Bodgit and Scarper Investments' you may wish to take another look.

What are the transfer rights? In a small number of prospectuses I have seen odd transfer rights stated in the docuemnt. Ones where transfers are restricted. In a private investment you don't want this and, frankly, there is no good reason for it. If it's in there ask why.

4. Do your Research. An obvious one, but a crucial one. Check out the sector, the management, the investors, the concept, the product, the accounts..everything. If you find that the information you come up with is beyond your knowledge then ask someone who knows about such things. If it is still beyond you and you cannot rely on other known investors to have done the research, pass.

5. Make a Move, but don't Over Do It. By all means, if you think you have discovered the next Google and want to invest your life savings, go ahead. But don't complain if it doesn't work out. In our accounts we aim to be spreading investments in these kind of deals across a range of shares.

6. Define what your objective is with each issue . Remember we are talking here about pre-IPO's. So, there will be a decision to make when the company actually lists. Is it good for a quick sale after the float? Or is it worth hanging on for a defined period of time? These are questions that will be answered by the research that you have done. If it is a 'keeper' you will know by now.

By following the steps above you may lose out on a few '10 baggers' but it is a little like playing Blackjack. If you play the odds and take the odd flyer when things look good, then you will win. If you bet on getting 21 every time, you are going to go broke very, very quickly.

Hedge Fund Advertsing Rules - Causing More Problems Than They Solves?

If ever there was an argument for the advertising ban on Hedge Funds to be lifted it is this one. Over the last three years a brazen group of New York scam artists raised about $30 million from unsuspecting investors by posing as principals of a successful hedge fund and then fled with the loot.

Investments from $5,000 to $500,000 were obtained from college professors and educated professionals. It took the group a little more than three years, from early 2003 September 2006 to raise the $30 million.

A grand jury empaneled by Michael J. Garcia, the U.S. Attorney in Manhattan, is said to have handed up a sealed indictment in the case, according to a lawyer hired by 10 of the victims, who said that the FBI was investigating the matter.

The criminals are clearly to blame here, however, this is a problem that, in our opinion, is caused in part, by the regulators themselves.

There is a scam out there that is based on "Prime Bank Guarantees" or "Medium Term Notes" that has taken billions from investors with promises of astronomical returns. The SEC web site says:

"Lured by the promise of astronomical profits and the chance to be part of an exclusive, international investing program, investors are once again falling prey to bogus "prime bank" scams. These fraudulent schemes involve the purported issuance, trading, or use of so-called "prime" bank, "prime" European bank or "prime" world bank financial instruments, or other "high yield investment programs" ("HYIP"s). The fraud artists who promote these schemes often use the word "prime" – or a synonymous phrase, such as "top fifty world banks" – to cloak their programs with an air of legitimacy."

The thing that allows the bogus 'brokers' and 'investment managers' of this fraud to operate is that they have created a veil of secrecy over the whole operation. The SEC says:

"Promoters claim that transactions must be kept strictly confidential by all parties, making client references unavailable. They may characterize the transactions as the best-kept secret in the banking industry, and assert that, if asked, bank and regulatory officials would deny knowledge of such instruments. Investors may be asked to sign nondisclosure agreements."

This 'secrecy' is what perpetuates the fraud. Simply put, the peddlers of this scheme will tell you that when you do your research that you will find everyone denying the existence of the scheme. They will say that those not in the industry don't about it because there would be outrage that rich people could make so much money and those in the industry will deny it because they either aren't high enough up or are trying to keep it a total secret. They will also tell you that a minimum investment of $10mn is the norm, but they have split up that $10mn to allow their investors in. The perfect cover. And I speak from personal experience, 15 years ago as an investment pup, to my eternal shame, I got caught in a the same scam.

So we have an 'investment' that is supposed to be super secret, has a minimum investment and is not advertised anywhere. Do elements of this ring any bells?

Simply put, the regulators are perpetuating the 'secrecy' of hedge funds by not allowing advertisement of the funds. Their rules about only being able to invest a certain amount of money did not protect the people in this case who invested $5000, did it? Something tells me the scammers did not check to see what the net worth of the investors was either.

How would advertising funds have helped? As with everything, the fact that advertising is allowed generates an awareness of a particular industry. How many of you knew how to play poker before the online casinos plastered the web with advertising? My limit was 'Snap', now I am a stone cold poker shark. (sure - when the anti is 5 Ruppen! - Ed)

By the very nature of advertising and, therefore, informative web sites, brochures etc etc, this kind of fraud would be more difficult to perpetrate because the veil of secrecy would be lifted for all to see.

Of course, there will always be criminal elements who will attempt to subvert whatever rules are out there but the regulators throughout the world don't need to make it easy by perpetuating a secrecy myth that can be exploited by the criminal element.

Thursday, September 13, 2007

$100mn Fine For McLaren

News Flash....... According to the BBC , F1 Team McLaren have been hit with a $100mn fine and stripped of their constructors points. I sit in the middle of a dilema in F1. I am a Brit and Lewis Hamilton is the new David Beckham for me, but I have always supported Ferrari, so you can imagine how the season has been for me so far.

The thing is, if you transpose the alledged 'spygate' situation to the fund management industry (meaning people copying ideas and exchanging information on how to perform better) then we would all be in court all the time. I mean how many hedge funds really have a secrets for very long?

Hedge Funds Aim to Tame Volatility

Now is the time where hedge fund managers will earn their keep. Earnings season, market volatility, high oil price and possible rate cuts. Working out a strategy that ties all these together and ends ups with a correct trade in each or a trade that makes all these factors neutral, has to be the Holy Grail over the next few weeks and months.

Strategies are being created and battle lines being drawn, it should be interesting.

Some of the trades that have been catching the markets eye have been worryingly bizarre, at least at first glance. Options trades on Bloomberg screens last week were suggesting that some investors were gambling on a 50% drop in the equity markets by September 21st. The number of options that were bet on the S&P reaching half its current level was 120,000 contracts. To put this in perspective there was only 819 at this time last year.

But far from being so-called Bin Laden trades – referring to bets that were allegedly placed on a sharp fall in US stock markets just before the September 11, 2001 terrorist attacks – a large part is down to a cheap funding strategy known as a box spread. A box spread involves combining two pairs of options with the same expiry date. For example, a trader buys S&P 500 calls with a strike price of 700, which gives it the right to buy the index at a set price and time, and sells 700 puts, which gives it the right to sell the index at a set price and time.

The third and fourth legs involve buying puts with a strike of 1,700 and selling 1,700 calls simultaneously.

This structure has a pre-determined pay-off, regardless of where the index is trading on September 21 at expiry. It is called a funding strategy, because it allows one party to lend money, typically a bank with a high credit rating, at a more attractive rate to another borrower, which does not have a balance sheet and usually pays more to borrow money, such as a market maker or hedge fund. src - Financial Online

When I was in the commodities business we always knew that volatility was our friend. If the market was going up or going down, that was fantastic, if it was going sideways it made for a boring day at the office. Trading in 1998 and 1999 in the commodities market was thoroughly mind numbing with little volatility and, consequently, less stress. My colleagues still trading in this market place since 2000 must be licking their Ferrari's clean every day and seeing their doctors regularly about their ulcers.

I was at a party with an actor friend of mine during this period and many of the people who were there openly despised anyone in our industry. One 'actress' went so far (after a gallon of cheap wine) as to suggest that people in our industry were parasites who fed off the collective wealth of the world.

My argument was that our industry (commodities trading in particular), to a certain extent takes volatility out of everyday life. I suggested that if financial mechanisms were not in place in the coffee market, for example, that you may pay £2 for a jar of coffee today and £2.50 next week. A simple and crude example I know, however, it was the best I could come up with at short notice.

She was unimpressed and continued along similar lines until I resorted to a low blow and asked what her appearance in a recent advert for Campbell's soup had done for society, she said "It pays the bills". That ended the argument and any chance I had of leaving with an actress that night.

My argument of 'price smoothing' is looking a little lame these days with rising food and energy prices to the consumer. We will see if the complicated trades being executed on trading floors throughout the world will save my theory and the rest of us, from sustained volatility that affects our everyday lives.

The actress, by the way, ended up as lawyer....Enough said.

Wednesday, September 12, 2007

Switzerland Targets Hedge Fund Managers?

As one of the world's biggest hedge fund buyers it is odd that only a handful of hedge fund managers are located in Switzerland. Of the estimated $600bn invested in funds of hedge funds $200bn comes from Switzerland making it second only to the USA.

The Swiss authorities, according to a recent report from the Federal Banking Commission (EBK), is looking at making it more attractive for hedge fund managers to locate themselves in Switzerland.

"What is lacking still is an attractive tax environment for hedge fund managers to locate here," said EBK director Daniel Zuberbuehler in reference to the report.

"If we wanted a level playing field, we would have to tax the managers at the same level as competing financial centres, not undercut them," he said.

The EBK welcomed changes to make Switzerland more tax-friendly to hedge fund managers, saying it would be good for the Swiss fund sector overall, but it was a political decision.

Of the 9,500 hedge funds assumed to be in operation, only 40 or 50 hedge fund managers are based in Switzerland which seems at odds with the amount of money that is invested via Switzerland.

The EBK, however, may be missing a point and that is that regulations, as we understand them, presently only allow for the marketing of fund of hedge fund products from or within Switzerland.

The relevant legal framework as regards to hedge funds is the Collective Investment Scheme Act 2006 (CISA). The Act sets out a framework governing the setting up of Swiss mutual funds and the promotion of non-Swiss collective investment schemes in Switzerland. This piece of legislation shows other reasons than tax, as to why hedge fund managers may be staying away from Switzerland.

The Act only allows for the establishment of collective investment schemes having a contractual form (i.e. fonds com-mun de placement – FCP). With this is the requirement for a Swiss management company to be licensed by the EBK. The relevant legal and regulatory framework imposes strict rules to Swiss funds, in particular with regards to investment restrictions, such as leverage, risk spreading rules and limited leverage. It is obvious that these particular rules are at odds with the whole strategy of hedge fund investment.

Fund promoters have, therefore, looked into ways to distribute their offshore hedge funds in Switzerland. In generally no professional offer of a fund is allowed in or from Switzerland without the prior registration of the scheme with the EBK. In practice, registering a hedge fund in Switzerland is a non starter.

Registration is only available to a non-Swiss fund that has been set up in a jurisdiction which has an 'equivalent' level of supervision and investor protection as offered under the Act.

If you have set up your fund in BVI, Cayman etc then you are out of luck because these jurisdictions do not qualify. Also registering under the act would require the compliance with the investment restrictions, limited leverage, risk spreading etc, which a hedge fund would not be able to comply with.

If the Swiss Authorities are trying to attract hedge fund managers into the country then it is these laws that need to be dealt with. Hedge fund managers need to be able to have nimble structures that allow them to invest in pretty much anything they want, this is the reason that this particular type of investment is risky, and historically profitable for many. A manager does not want to set up shop in Switzerland and worry about the promotion of the fund, the risk spreading rule, leverage and all the other stuff that goes along with it.

Switzerland is a fantastic place to do business, there is no question about that. It feels to me like a country built specifically for people in our industry. It is hot in the summer, there is skiing in the winter, if you pay your taxes, the authorities will leave you alone, the people are fantastic, everything works, trains are on time, etc etc. There is a reason that half the Formula 1 grid lives here, past and present and its not just the taxes, or everyone would live in Monaco.

Having said all that, it is clear from the rules that are imposed on funds marketed or established in Switzerland, that until this particular piece of legislation is reviewed there will not be an influx of hedge fund managers anytime soon.

I have taken the information above from various sources. If anything is incorrect please free to contact me and put me right...