Hedge Fund Reader

Presidential Ties to Hedge Funds

-- Pushpa Sathish, Staff Writer

If you remember him as I do, it would be for the stellar role he played in handling the disastrous consequences of that fateful day in September, 2001 when a terrorist outfit wreaked havoc on the United States. Now, Rudy W. Guiliani is making news for an altogether different reason.

The former mayor of New York City is in the limelight as he contemplates running for president next year – especially because of the large contributions that are pouring from hedge funds to his campaign fund. T. Boone Pickens and Paul Tudor Jones II stand out in the list of contributors – they run the hedge funds BP Capital Management and Tudor Investment Corporation respectively and were named by Alpha Magazine as the second and fifth highest earners among hedge fund managers.

Besides these inflows, there have been others from the employees of BP Capital Management and Elliot Associates – the latter, a hedge fund managed by Paul E. Singer, a staunch supporter of Giuliani.

Hedge Funds’ Cup of Woes Overflows

-- Pushpa Sathish, Staff Writer

January has not been a good month for a few hedge funds. Red Kite lost more than 20 percent on bad bets on copper – the fund is now trying to deal with the investors who are knocking down its doors in an attempt to redeem their investments. The two-year old fund which had a strong showing last year is pinning its hopes on the 45-day notice that investors are supposed to provide before they pull their money out. The lock-out period was increased from 15 to 45 – perhaps in lieu of what was in store at the fund?

Meanwhile, across the ocean in the United Kingdom, things are not too good at the offices of SemperMacro. The hedge fund, beset by a cascade of troubles including a 16 percent loss last year and a subsequent withdrawal of funds by investors, is in the process of cutting back on its staff. SemperMacro, which was set up by a former Goldman Sachs employee and a former BBC chairman, plunged to $500 million from $1.5 billion after an investor redemption in December 2006.

Make Sure you Share Share-Purchase Information

-- Pushpa Sathish, Staff Writer

Buying the majority of shares in a company, hiding the fact from the SEC, not informing your investors about the beneficial interest due to them, being involved in a securities fraud – these are misdemeanors that will get you into heaps of trouble, a fact that John H. Whittier will attest to.

The former head of the now defunct hedge fund Wood River Capital Management LLC was indicted on the charges of cheating investors to the tune of $88 million in Oct 2005. He’s being accused of securities fraud and failure to disclose beneficial interest in a publicly traded security - of 5 percent in one and 10 percent in two others.

Whittier, who purchased 80 percent of wireless communications company EndWave Corp., failed to disclose ownership of the same – which is why he is being charged with attempting to con investors in the hedge funds Wood River Partners LP and Wood Rivers Partners Offshore Ltd.

His arraignment is scheduled for Feb 8.

No Freedom From Fraud For Hedge Funds

-- Pushpa Sathish, Staff Writer

Hedge fund executives fund plane trips and expensive cars using investors’ money – this is the sort of headline that gives the entire hedge fund industry a negative tinge; this is why the U.S Securities and Exchange Commission (SEC) is stepping up its efforts to infuse some transparency in the operations of these secretive agencies; and this is why hedge funds are not the average investor’s cup of tea.

Bret Grebow and Robert Massimi, former trader and manager of the now defunct fund HMC International, played around with investors’ money as if it was their own, literally. While one used funds from new investors to meet redemptions and pay out non-existent profits to other investors, the other went a step further – he impressed his friends by flying them out to Houston on a Learjet for a Super Bowl game and also treated himself to a brand new Lamborghini, all with money fished out from investors’ pockets.

Grebow learned too late that’s there no free ride, especially not in a Learjet or a Lamborghini; he has to cough up not only a $120,000 civil penalty, but also $3 million that he stole. Massimi also faces the same civil penalty, but he gets off lighter than his partner-in-crime; he owes investors only $1.3 million. Considering the amount raised to fund this fraud - $12.9 million from 80 investors – this punishment seems a bit tame.

The former traders, who have been banned from working for investment advisors, settled the charges without admitting that they stole the money or used it fraudulently.

Unlikely Hedge Fund Managers

-- Pushpa Sathish, Staff Writer

It’s akin to law-enforcers setting up their own crime shops – with all the fuss that the U.S. Securities and Exchange Commission has been making recently about bringing hedge funds under their eagle eye, you’d expect that a former chairman would be the last person to float one of his own. But that’s exactly what’s happened – Richard Breeden, erstwhile chairman of the SEC, has crossed over and set up a $500 million hedge fund registered in the Cayman Islands.

Another surprise startup emerged from the shadows of the Clinton administration – news of former Secretary of State Madeleine Albright’s hedge fund raised more than an eyebrow or two. The Albright Capital Management fund, which will focus on emerging markets, has been built with $329 million from Dutch pension unit PGGM.

I’m curious - Will the former SEC chairman toe the line with current SEC rules relating to hedge funds, or, now that he’s on the other side, will he flout them?

Hedge Funds Face Opposition

-- Pushpa Sathish, Staff Writer

Hedge funds Centaurus Capital and Paulson find other Dutch voices being raised against them for forcing Stork NV to break up. Minor shareholder Robeco and pension firm ABP (though not a shareholder) are up in arms against the funds’ strong-arm tactics to push Stork to sell all except its aerospace and defense divisions. The two hedge funds jointly own a 31.4 percent stake in Stork, a figure that they apparently feel is enough to demand the dismissal of the supervisory board and curbs on its rights to take decisions on acquisitions and divestments higher than 100 million euros. Forbes reports:

ABP's Eugene Rebers said dismissing the supervisory board would be 'premature' and not in the interest of Stork. He added, “As yet Centaurus and Paulson have provided insufficient proof that their proposed strategy is indeed the best. If they wish to adopt a different strategy at all costs for reasons of their own then they should take the royal road to achieving this by making a public bid for all shares.”

Phony Hedge Funds Do Not Pay

-- By Pushpa Sathish, Staff Writer

Setting up a fake hedge fund, passing yourself off as the heir to Turkish business magnates, flaunting your largesse with a $1.25 million endowment to the New York University, using investors’ money to fund the gift, using the publicity generated to attract new investors, and finally being arrested while attempting to pass spurious checks at three banks in an effort to pay off furious investors – this sums up the infamous fame of the then 20-year-old Hakan Yalincak.

The founder of the Daedalus Relative Value Fund, who was released after cooling his heels in the slammer for twenty months, is still not home free; he faces a trial on February 14. He had to pay $1.1 million in cash bonds and promissory notes for his short freedom, during which he will live under house arrest, with a guard and wearing an electronic monitor. Yalincak and his family members also had to surrender their Turkish passports to ensure that he wouldn’t leave the country under the cover of darkness.

More arrests are due, said Yalincak, who is apparently co-operating with federal investigators to bring the other crooks to book. And if one were to believe Bernard Grossberg, Yalincak’s lawyer, the lad had nothing at all to do with the whole scam, and was just a mere tool used by the real masterminds.

Goodbye Amaranth, Hello Continuum?

-- By Pushpa Sathish, Staff Writer

It sure looks like that Nick Maounis is not one to take things lying down! So who’s he, and why is he newsworthy? Because he’s the founder of that hedge fund that made the most headlines in 2006, Amaranth Advisors LLC. According to his attorney David Boies, Maounis and a few former colleagues are toying with the idea of floating a new company that will either offer wealth management services for investors or consultation services for other funds.

But first things first – the closure of Amaranth is the issue at hand now. The hedge fund is in the process of settling its affairs and finding suitable work opportunities for its erstwhile employees. In case you’re interested though, watch out for the appearance of funds named Continuum or Segue – they’re the ones that will involve Maounis and his team!

Renting and Commissioning Trouble

-- By Pushpa Sathish, Staff Writer

Is it a case of you scratch my back and I’ll scratch yours? That’s what William Gavin, Massachusetts Secretary of State is attempting to find out. European bank UBS AG finds itself plumb in the middle of this controversy. The financial institution rents office space to hedge funds in Boston, and also provides them with staff, consultants and other perks including coffee machines.

All above board, you say? Not so, according to Massachusetts officials. They are probing allegations that the hedge funds leasing space are in return providing the bank with trading business at higher commissions than normal. With the final bill being footed by the hedge funds’ clients, the question remains – do they know why they are incurring the higher costs?

Galvin says that hedge funds may be in violation of soft dollar rules – soft dollars are generally not reported in accounting books, and are added to brokerage fees. If hedge funds are in deed using trading commissions to pay for office space, they are transgressing the rules, since it’s against the law to pay rent using soft dollars.

Though the use of soft dollars by wealth management institutions is controlled by the Securities Exchange Act of 1934, hedge funds are not bound by the Investment Company Act of 1940, and so, do not have their trade commissions monitored too closely, according to Tamar Frankel, a professor of corporate law at Boston University.

Regulation problems at the root here? Sure looks that way!

Amaranth to Goldman Sachs

-- By Pushpa Sathish, Staff Writer

Amaranth may have bitten the dust after biting off more than it could chew in bad energy calls, but its staff is still being sought after by some of the biggest names in the hedge fund industry. Recent reports claim that Goldman Sachs has roped in 17 of the former hedge fund’s traders to help the company expand its investments in debt markets.

While no formal announcement has been made by Goldman Sachs, sources said that the 14 credit specialists hired from New York and the 3 from Singapore had already started work in New York. Following Amaranth’s collapse, the fund’s top management had offered to help its staff find suitable alternative employment opportunities even while asking rivals to put a hold on recruiting its staff while it gained some control and consolidated its assets to pay back investors. 

Goldman Sachs, the world’s largest securities firm, manages the $10 billion Global Alpha Fund that uses computer-driven models to make investment decisions. It fell 11.6 percent in November after wrong bets that the dollar would rise, equities in Japan would rise, and that stocks in Asia and the US would fall.