Wednesday, April 16, 2008

Fotune Favours The Brave?

I recently returned from a trip to Canada. My flight was not going back until the Saturday so I decided to go to the airport via Niagara falls... never been there, thought it would be a box to tick on the 'things to do before you die' list.

While the Falls are indeed, impressive, I didn't realise they were in the middle of an industrial estate and overshadowed by tacky hotels.

There is a vantage point, right at the top of the Falls, where you are no more than a few feet away from water cascading down the escarpment and it gives you an odd falling of wanting to jump in. Obviously I resisted, or you would have heard about my death on CNN, but it did get me to thinking about the latest funds being raised.

Some intrepid investors are moving into the wounded structured credit markets, raising the hope that some stability may return. Dozens of asset managers have created funds since the start of the credit crisis to invest in distressed or mispriced asset-backed securities, collateralised debt obligations (CDOs) and other structured credit instruments.

"Some people have raised considerable amounts of money to invest in structured distressed assets," said Don Brownstein, chief executive and investment officer of U.S. hedge fund firm Structured Portfolio Management. "They believe there is blood on the ground, and they figure they will get to lap some up."

I can't help thinking that these investors are standing in a similar position as I was on the Falls.

OK, at some time there will be time to get into this market but is that now?

Start-ups are coming from groups with a track record in structured credit, such as Solent, Zais, Bluemountain and Structured Portfolio Management, banks such as Citigroup, Lehman and Goldman Sachs, and other big players such as Blackstone, AXA and PIMCO, along with a few hedge fund firms with no experience in structured credit, according to press releases, Web sites and industry sources.

"Some have been up and running since September; they probably started too early. Others have cash that is not deployed, and some are in the formation process," said Markus Kroll, a partner in Palomar.

A number of hedge fund groups now focusing on credit say they plan to give structured credit a miss, regardless of any opportunities. Pulling back from the edge Centaurus Capital Chairman Bernard Oppetit told the Reuters Hedge Fund and Private Equity Summit earlier this month, "Structured credit is not our style. We have always avoided correlation risk; it is a very dangerous market,"

To shield themselves from the consequences of short-term volatility and to be able to invest in illiquid securities, the new funds typically lock up investor money for three to five years, though that makes fund-raising difficult, Kroll said.

It seems to me that some of these funds are looking at this market in the same way thrill seekers have looked at the falls... build a sturdy barrel, take the leap and everything will be OK..15 have tried most died... including some guy on a jet ski in 1995...

Fortune favours the brave?... Good luck with that.

Monday, April 07, 2008

When Will The British Bulldog Wake Up?

Now don't get me wrong, I love the UK. There is no better place to be, in my opinion, in the summertime, than the Yorkshire Dales...if you haven't been, trust me, it is paradise on Earth.

The thing is, however, that the government in the UK is a tax machine and nothing more. You can bleat on all you like about 'the best education system in the world' - 'the best health care in the world' blah blah, but come on, you know as well I do that this is complete and utter b... er rubbish.

The UK people are a proud nation, I am immensely proud to be British, but when I see a government intent on taking money from its people at every turn and then do not deliver it makes my blood boil.

If you think that you are paying less than 75% of your income in tax in one way, shape or form then, my friend you are living in cloud cuckoo land. The indirect taxes on fuel, and everything else you can name, swallow up value that you are not getting... the health care system, although manned by heroes and heroines is a crumbling mess and don't even get me started on public transport and the transportation system in general. On a recent visit to London I paid £6.20 for a tube ticket to take me all of 1 mile.... and had to wait for three tubes before there was any room to get on.

The one shining light in the management of the country is the financial system. A world leader, whatever New Yorkers, say but now the government are systematically dismantling his system too.

I know I will get heckled by those who despise the hedge funds, private equity fund managers and non dom zillionaires for earning too much, but to start taxing them out of the country, to me, is just insane.

I have said many, many times on this blog, that buying into globalisation was a priority for the UK government, of any denomination, and it has brought riches to the country, but you cannot buy into that philosophy and then complain when the portability of industry bites you in the bum.

What I mean, and have said before, is that the financial industry is, probably, the most portable of all businesses. It is great to be able to meet your colleagues, business partners and clients five minutes down the road in a London wine bar, but the days of 'having' to be in London for that very reason are a long time gone.

So, if you take away incentives for the wealthy to be in the UK, they will just up sticks and leave. We have seen the German government bribe a bank employee for tax information and we have seen the UK government impose similar strong-arm tactics to holders of offshore accounts. Now we are seeing a change in tax structures and possible further regulation and a general environment that says 'you are not welcome'.

Does this really make any sense? Even the most ardent communist can see, surely, that an economy that fosters the wealthy and provides incentives for them to set up businesses, spend their money and contribute to the economy is a better plan than one that involves alienating these people?

I am all for people paying the taxes that are due after all even God set a tithe of 10%, but what he didn't do was add VAT on ten thousand loafs of bread. He didn't say..ah because you have become successful I am increasing your tithe to 20% and He didn't change the rules every year in the annual Bible Budget.

I am not for leaving the rich alone to wallow in taxes that are lower that the average, but I am also not for blaming the rich for the ills of a nation (I will leave that to tin pot politicians). To allow the wealthy to prosper may annoy some people, but it is a fact of life that these kind of people are the drivers of economies and the providers of jobs, we should tax them, sure, but we should hold onto them, treat them well and encourage them to invest their wealth in the economy by providing as many tax breaks as possible, not by taking money from them in some new fangled tax structure.

If the UK continues down this road, which I am sure it will under this government, then others such as the wiley Swiss, will dismiss the barracking of a Europe that cannot compete on the tax front and welcome an entire industry and generation of the uber wealthy with open arms.

I live in, and love Switzerland, but the UK is my home and its people my kin, so to see it drowning because of a tax junky government is a depressing sight. The one bright side is, however, that the British people won't be taken for mugs by anyone for long, and when the British bulldog awakes from this particular slumber, that has allowed tax rates to spiral, this government will find they are being run out of the country quicker than a non dom billionaire hedge fund manager who doesn't know the words to 'God Save The Queen'.

Friday, April 04, 2008

Bears Running Scared?

OK, so the dust has settled...I lost the passwords to the wordpress site and my huff has subsided with deathly silence from the detrators from the old firm. So Asset Manager is back, independent and ready to go.

And what a ride we have been watching while we have been away! The markets have all but melted down and the hedge fund industry has change forever (OK at least until the next bull market).

One of the interesting things that we have seen from hedge funds is the bear raids that have been going on in the financial sector. I am assume readers will know of the rule change that helped all this is the US but if you don't let me tell you about the 'up tick' rule.

What is the ‘up tick’ rule? After the short-selling bear raids that caused the crash of 1929 and the endless knockdown of stocks that followed, regulators required that there be a buyer willing to pay more for a stock than the last sale, known as an uptick, before that stock could be sold short. Basically, a stock had to go up a bit before it could be brought down.

That rule stayed in effect for almost 80 years until July, 6, 2007, when the SEC got rid of it. Hedge funds lobbied for a repeal, and the feds conceded after a test proved life without the uptick would be just fine. Of course, that test took place during a bull market, where a bear raid would never happen, and not an environment like the one we have now where raids are rampant.

The SEC claimed smaller spreads, higher liquidity and greater transparency would prevent such drastic downturns as 1929, but spreads don’t matter, it is liquidity that counts and, courtesy of a brokerage credit crisis, that disappeared.

‘Bear Raids’ as they are known are where huge pools of capital (hedge funds basically) point these funds at companies and drive the price down hoping to buy cheaper and thus reap the profits. This they have been doing in spades on financials. The JP Morgan situation, where the bid for Bear Stearns was raised, caught out the hedgies, but something far more significant happened recently.

The only way to fight off the bear raiders is to have capital behind you, to buy your own shares or to show the wider community that you are solid. If you do that it is a brave bear who will attack you. Lehman Brothers raised $4bn in fighting funds. The fact that this was more than they, and the markets, thought they would raise was a wake up call to the shorts. It was also a wake up call to the hedgies because if other banks follow suite there will be deep pools of capital ready for a titanic battle between the bears and the bulls.

It is more likely that the bears will take their business elsewhere and target other sectors of the market, we feel.

Does this mean that it is all over and we can happily skip into the stock market with birds singing in our ears and the Sun warming our face?… Er no… there are still tough times to come and the battle will rage.