The Hedge Fund Thread

bbmac

Veteren member
Messages
3,584
Likes
789
Let's make this the thread where we post anything interesting about Hedge Funds.

Interesting times with the collapse of the investment banks, tightening/effective freezing of some markets and withdrawal of credit lines means some are predicting a 50% attrition rate in currently quoted funds...interestuing article/s below from Mike "Mish" Shedlock @ Mish's Global Economic Trend Analysis



Hedge funds have been hit by a fresh wave of withdrawals as investors search for cash, prompting more funds to impose emergency measures to block repayments.

London Diversified Fund Management, one of Britain’s best-known fixed- income managers, on Friday suspended both its hedge funds as trading conditions in the derivatives markets created valuation difficulties ahead of redemptions.

LDFM, founded by former JPMorgan bankers David Gorton and Rob Standing, manages close to $3bn (£1.9bn), down from a peak of $8bn after its main fund fell 23 per cent this year and investors pulled out. LDFM is joining a roster of hundreds of hedge funds in restricting withdrawals, with investors and prime brokers estimating as many as a fifth have suspended or limited what investors can get back as they have their worst year on record.

This week CQS, a London convertible bond specialist run by former Credit Suisse banker Michael Hintze, began canvassing investors on whether it should change the terms of its main fund to allow it to restrict withdrawals if markets worsen next year.

Huw van Steenis, analyst at Morgan Stanley, said industry assets could shrink 35-45 per cent from June’s $1,930bn by the first quarter of next year, as heavy redemptions added to the pain of poor performance.

Two Bank of New York Mellon funds of hedge funds told investors this week they planned to restructure because almost a third of the funds in which they invest had limited redemptions. The Sanctuary I and II funds will split into continuing and wind-down classes, with pay-outs of about a third of the wind-down class expected early next year.

On Friday, London’s $4.3bn Atlas Capital, owned by New York-based Sciens Capital Management, suspended withdrawals from a dozen funds of hedge funds, while Crédit Agricole and Grenfell PAI each suspended a fund of funds as underlying hedge funds restricted withdrawals.

“We have seen really accelerating redemptions around the 30 per cent level,” said Derek Stewart, a director of Mellon Global Alternative Investments, which manages the Sanctuary I and II funds. “The reason for doing this [restructuring] is purely to protect the interest of investors.”
Tudor Investment Corp. Suspends Redemptions

Bloomberg is reporting Tudor’s BVI Halts Withdrawals, Plans Hedge-Fund Split.

Tudor Investment Corp., the firm run by Paul Tudor Jones, temporarily suspended redemptions from the $10 billion BVI Global Fund Ltd. as it plans to split the hedge fund into two, according to a person familiar with the matter.

Tudor is proposing to put hard-to-sell investments, mostly corporate bonds and loans from emerging markets, into a new fund called Legacy, said the person, who asked not to be identified because the information is private. BVI Global, which started in 1986, would focus on easier-to-trade stocks, bonds, commodities and currencies.

More than 80 firms have liquidated funds, restricted redemptions or segregated assets following stock-market declines and a credit freeze that started with rising defaults on U.S. subprime mortgages.

Tudor, which oversees $17 billion, is asking BVI Global investors to approve the plan to split the fund in the next two months. Clients would have their money allocated between BVI Global and Legacy based on the division of assets, said the person. Tudor wouldn’t be able to charge investors a performance fee until the Legacy assets exceeded their high watermark, or peak value. The firm would sell off the assets in Legacy next year and return money to clients.

Hedge funds have posted losses averaging 22 percent this year through Nov. 24, according to Chicago-based Hedge Fund Research’s HFRX Global Hedge Fund Index. Investors such as pension funds and university endowments are pulling their holdings from hedge funds after they “over-committed” to private equity investments, van Steenis said.
Mistake To Block Withdrawals

Suspending withdrawal requests is a mistake. Investors remember that Bear Stearns blocked redemption requests on two of its hedge funds and both went to zero. By blocking withdrawals, hedge funds are creating a pent-up desire to get out.

Furthermore, by suspending withdrawals, investors are going to have a heightened sense of mistrust of investing in hedge funds even after the market does bottom. Looking ahead, someone who wanted out but could not get out is unlikely to ever invest in hedge funds again.

The hedge fund industry is going to collapse in the wake of mismanagement, excessive use of leverage, blocking withdrawals, excessive fees, and a heightened sense of mistrust everywhere. Hedge funds were supposed to make money in any environment, either up or down, collectively they clearly failed.
 
  • Like
Reactions: BSD
Interesting post; I doubt very much however that hedge funds will disappear, though it is very likely that they, like the rest of the industry, will have to tighten their belts severely and sacrifice much of the decadence and glamour that they have enjoyed in the past.
 
Showing my ignorance here, I guess, but what's the difference between a Hedge Fund and a Mutual Fund?


I am pretty sure that the sort of funds that are managed by the likes of (for example) Fidelity (who I think are one of the UK market leaders in the "normal" managed funds business, are not classed as Hedge Funds, but what is it that characterises a Hedge Fund?

Is it that HFs are basically only for large investors, and not for the little man, looking for somewhere to invest his S&S ISA allowance?

Thanks.


p.s. Michael Covel often has interesting things to say on funds, especially trend-following ones. His latest comments aren't particularly in that area, but are quite interesting anyway:

Michael Covel


Regards,
M.
 
Last edited:
The Hedge Fund industry is not going to collapse or disappear but is having a overdue shakeout...too many people chasing too few (or copying others) strategies using too much leverage. We are in the middle of a generational change in the way that the financial markets are regulated (wait till Obama team starts working on new regulations). There is also a long term fundamental shift happening due to the loss of commission (hence revenue) to the sell side with the constant erosion of commission and the need for a sell side with the automation of markets.

The big concern is that regulators will step in and regulate what they do not understand and hence kill it.
 
It would help if hedge funds had actually looked to their names and hedged. Most seem to have done little more than taken one-directional leverage plays as far as I can tell. The attrition rate will be a function of redemptions and many investors seriously peed off that the HF model was so weak in extreme market conditions - one of the things they were supposed to protect against. Look at it another way, on the equity side with markets down 40%, AUM and comms will be down by similar amounts, so 50% shrinkage in HFs doesn't seem unreasonable from what I see and hear on my side of the fence. That in turn will put further pressure on IB models going forward, as AnEdge says.
 
  • Like
Reactions: BSD
Paulson Bucks Paulson as His Hedge Funds Score $1 Billion Gain


By Richard Teitelbaum...Bloomberg.com

Dec. 2 (Bloomberg) -- There’s not a lot of light in Paulson & Co.’s 28th-floor headquarters on a drizzly November afternoon. The Alexander Calder sculpture and multicolored prints have been shipped to the firm’s new offices six blocks south. Darkness envelops the New York skyline.

The Dow Industrials have lost a total of 929 points over two days, and the jobless rate is poised to hit 6.5 percent. And John Paulson, who oversees $36 billion in hedge fund assets, isn’t exactly Mr. Sunshine either.

“You have deterioration in almost every asset class,” Paulson says. “You’re looking at declines in housing prices, the health of manufacturers and the earnings of various companies. There are rising delinquencies in auto loans and commercial real estate.”

Paulson, 52, peers over his tortoiseshell glasses. “There’s more to come,” he warns.

Paulson doesn’t smile as he says this, even though with each new calamity his bottom line grows. Paulson & Co. funds generated profits of more than $3 billion for the firm in 2007, mostly by betting the housing bubble, swollen with subprime mortgages, would burst.

As that year ended, he set his analysts poring over the balance sheets of overstretched financial institutions, including many in the U.K. “We focused on those banks with lots of mortgages,” Paulson says. “After those companies fell, we expanded our focus not just to mortgage assets, but to all credit classes.”

The payoff: Four of Paulson’s funds were among the 20 best- performing, and the 20 most profitable, hedge funds for the first nine months of 2008, according to data compiled by Bloomberg, other hedge fund research firms and investors.

$1.05 Billion Profit

The Paulson funds’ gains ranged from 15 percent to nearly 25 percent. Based on those returns, they were on track on Sept. 30 to furnish Paulson & Co. with $1.05 billion in profits.

Paulson’s performance was a striking success in a disastrous 2008 for hedge funds. The industry is reeling from convulsing markets, fleeing investors and the most serious credit squeeze since the 1930s.

Through September, the average fund lost 10.8 percent, according to data compiled by Chicago-based Hedge Fund Research Inc., putting the hedge fund industry on course to record its worst returns since at least 1990, the year HFR began compiling data. October saw another 6.3 percent decline.

HFR says hedge fund closures at midyear were 15 percent ahead of 2007. And that may be only the beginning for the world’s 10,000 funds.

“It’s pretty simple,” says John Siciliano, a managing partner at Grail Partners LLC, a merchant bank that serves asset management firms. “The number of hedge funds is going to be cut in half in the next two quarters. You’re going to see capital calls like you can’t believe.”

Long-Shorts Lose

Classic long-short equity funds -- the biggest category by assets -- were down 16.0 percent for 2008 through September. Such funds often wager that one group of stocks will rise and then hedge the bet by shorting a second set of stocks. In a short sale, an investor borrows shares of a company and sells them immediately, hoping to repay the lender later with shares bought at a lower price, pocketing the difference.

“Event-driven” funds, which bet on takeovers, restructurings or other company developments, were off 10.3 percent for the first nine months of 2008. Convertible arbitrage funds fell 19.4 percent. In their simplest transactions, managers make money by buying convertible bonds -- which can be converted to stock at a certain price -- and then hedging the investment by shorting the underlying stock. Convertible arb funds typically employ large amounts of leverage.

“What we’re going through is what differentiates talent from luck,” says Carrie McCabe, founder of New York-based Lasair Capital LLC, which invests in multiple hedge funds for large institutions. “Leverage kills you if you only use it to speculate.”

Medallion is No. 1

The highest return in the Bloomberg ranking was scored by the Medallion Fund, run by Jim Simons’s Renaissance Technologies LLC. The fund, which has an estimated $8 billion in assets, according to Bloomberg, racked up a gain in excess of 58 percent. That translates into firm profits of $1.43 billion for the quantitative juggernaut.

Simons, 70, is a former military code breaker and ex-chairman of the State University of New York at Stony Brook’s math department.

Paulson’s $13 billion Advantage Plus fund, which is designed to bet on takeovers, restructurings and other corporate events, was the second-best performer for the nine months ended on Sept. 30, with a 24.6 percent gain, according to Bloomberg data.

Waxman Hearing

Amid the torrents of red ink, hedge funds face the threat of government sanctions and regulation. In November, Representative Henry Waxman, chairman of the U.S. House Committee on Oversight and Government Reform, called hedge fund managers, including Paulson and Simons, to Washington to answer questions about their responsibility for the country’s financial meltdown.

President-elect Barack Obama’s economic advisers may recommend new capital requirements for hedge funds, according to a person familiar with the matter.

Casualties of the crash include some of the hedge fund industry’s biggest names. Kenneth Griffin’s Chicago-based Citadel Investment Group LLC is one victim. Its largest hedge fund, Kensington Global Strategies, was down 38 percent in 2008 through Nov. 4. A sour bet on Deutsche Boerse AG thrashed David Slager’s Atticus European Fund, which plunged 43.5 percent through September. And William Browder’s Hermitage Fund, which trades Russian stocks, lost 65.7 percent as of Oct. 31.

Medallion Siblings Fall

Even two of Simons’s Medallion siblings took hits. Renaissance Institutional Equities Fund and Renaissance Institutional Futures Fund were down 14.8 percent and 15.6 percent for the year as of Oct. 31, according to investors.

Some big funds have called it quits. Drake Capital Management LLC, founded by veterans of BlackRock Inc., told investors in April that it was winding down its Global Opportunities Fund. In October, it delisted three other funds that traded on the Irish Stock Exchange. Ospraie Management LLC, run by commodities trader Dwight Anderson, decided to shutter its flagship fund in September.

Investors are running, not walking, to the exits. TrimTabs Investment Research of Sausalito, California, estimates that September and October redemptions totaled $87.5 billion. Total industry assets, which peaked at $1.93 trillion in the second quarter of 2008, declined 11 percent to $1.72 trillion at the end of the third, according to HFR.

Methodology

The ranking of best-performing funds is based on figures taken from a variety of sources, including data compiled by Bloomberg, hedge fund research firms, investors and the fund firms themselves. To derive the profits for funds, a 20 percent performance fee was used if fee information wasn’t available. Some fund firms keep such a low profile that returns for their major funds couldn’t be found. Those firms include D.E. Shaw & Co. and Farallon Capital Management LLC.

Paulson, sporting a French-cuffed shirt and patterned tie, looks every bit the investment banker he was when he worked for Bear Stearns Cos. in the 1980s. He says his firm’s 2008 performance benefited from market hedging -- balancing out short positions with long ones.

British regulatory filings show that Paulson funds made short-selling bets totaling more than $1 billion against Barclays Plc, HBOS Plc, Lloyds TSB Group Plc and Royal Bank of Scotland Group Plc. On average, the shares of those banks lost more than half their value in the nine months through September.

Unforgivable

The billionaire points out that his funds also went long in sectors likely to do well in a recession, including health care, utilities and tobacco. Paulson says he’s at a loss to explain why other funds were not hedged like he was. “Investors will forgive you if your returns are below average for a period,” he says. “They won’t forgive you if you lose money.”

Paulson’s returns have catapulted the soft-spoken native of Queens, New York, into the spotlight of the investing world. “This is rock star status,” says Sol Waksman, founder of Barclay Hedge Ltd., a Fairfield, Iowa-based firm that tracks and invests in hedge funds.

At a March 2008 fund of hedge funds awards dinner at New York’s Pierre hotel, Paulson & Co.’s performance was the buzz of the evening, with many of the winning managers having invested in its funds.

“Almost everyone who received an award thanked Paulson,” says one person who attended.

Paulson keeps a low profile, even by hedge fund standards. Raised in the waterside neighborhood of Beechhurst, he’s the third of four children of Alfred and Jacqueline Paulson. He credits the New York public schools, with their programs for gifted children, with giving him a leg up.

“I always had reading and math skills four or five years ahead of my grade,” he says.

Summa Cum Laude

After graduating from Bayside High School in Queens, he went to New York University, where he earned a bachelor’s degree in finance, summa cum laude, in 1978. As valedictorian, Paulson gave a graduation speech on corporate responsibility.

He went on to earn an MBA at Harvard Business School in 1980, finishing in the top 5 percent of his class. At the time, he says, banking jobs were scarce. He settled for a spot at Boston Consulting Group Inc.

Two years later, he landed an associate position at New York- based Odyssey Partners, an investment firm run by Leon Levy and Jack Nash. An Odyssey specialty was risk arbitrage, in which traders typically buy the stock of takeover targets and short that of the acquirer.

Paulson says Levy and Nash, both now deceased, taught him about risk arbitrage, real estate investing and how to profit from bankruptcies.

Levy a Mentor

“Leon was brilliant,” Paulson says. “A lot of what I know about deals today, I learned from them.”

Paulson left Odyssey to join Bear Stearns’s mergers and acquisitions department in 1984, rising in just four years to managing director.

After Bear sold shares in 1985, Paulson says, he decided he didn’t want to work for a publicly traded company and in 1988 joined privately held Gruss Partners, another risk arbitrage firm. Founder Joseph Gruss taught Paulson an important lesson.

“Joseph Gruss used to say, ‘Risk arbitrage is not about making money; it’s about not losing money,’” Paulson says.

Paulson & Co, which he founded in 1994, also started as a risk arbitrage firm. Over the years, Paulson launched new funds to exploit market trends.

“We always operated with a lot of hedges,” he says. “We try to minimize market correlations. If you don’t, you’re going to be exposed when a market event happens.”

600 Percent Gain

He started the Paulson Credit Opportunities and Credit Opportunities II funds in 2006 after anticipating a shock in the housing and mortgage markets. In 2007, the funds racked up gains of more than 600 percent. They’re in the top 20 funds of the 2008 Bloomberg rankings for both performance and profits.

Paulson said in mid-November that more than 50 percent of the assets he managed were in cash and that the money he had invested was equally weighted between short and long positions.

“You have to get to the corner to see around the corner,” he says. “We haven’t gotten to the corner.”

He expects 2009 to reward those who invest in restructurings, strategic acquisitions and distressed credits. In November, Paulson began buying bonds backed by home mortgages, according to an investor. Spokesman Armel Leslie declined to comment. In making his investments, Paulson focuses on straightforward themes.

“You have to be simple to have a clear strategy,” Paulson says.

Quant Strategies

Don’t tell that to Simons, who has earned billions for his firm through often-complex quantitatively driven trading strategies. Simons helped start Medallion in 1988 and continues to oversee the fund from Renaissance’s gated headquarters in East Setauket on New York’s Long Island.

Medallion assesses Renaissance employee-investors what may be the highest fees in the hedge fund business: a 5 percent management fee and 36 percent of profits.

Medallion has thrived in volatile times. In 1994, when the U.S. Federal Reserve raised its fed funds target rate six times to 5.5 percent from 3 percent, Medallion returned 71 percent. In 2000, when the Standard & Poor’s 500 Index fell 10.1 percent, Medallion returned 98.5 percent net of fees. In 2007, when markets began melting down, it gained more than 70 percent.

Today, Medallion is almost exclusively owned by Renaissance employees, who include mathematicians, astrophysicists, statisticians and computer programmers. They search for patterns and correlations that can divine a market’s direction. The fund spreads its bets around the world, trading everything from soybean futures to French government bonds.

Skating Along

Simons told Congress in November that Medallion, like Paulson & Co., was long and short equal amounts of equity. “By and large our business is not highly correlated with the stock market,” he said. “And so that is how we have skated along here.”

Medallion is just one of many funds that used mathematical models to profit in the first nine months of 2008. Of the 20 best performers in the Bloomberg ranking, at least six employed such strategies. One was Man AHL Diversified, No. 20 in the Bloomberg best-performance ranking, returning 7.7 percent. That gain means manager Tim Wong was on track to earn London-based Man Group Plc $72.5 million through the third quarter, according to Bloomberg data.

Man AHL typically uses computer-designed models to invest based on market trends. Fund managers that follow this path are known as commodity trading advisers, or CTAs, though their funds don’t necessarily invest solely in commodities.

The CTAs Rule

Many of these funds trace their intellectual roots back to Adam, Harding & Lueck Ltd., or AHL, a pioneering London-based CTA- run firm founded in 1987 by Michael Adam, David Harding and Martin Lueck. In 1997, Adam, 47, and Lueck, 47, went on to help found London-based Aspect Capital Ltd., whose Aspect Diversified Fund rounds off Bloomberg’s list of the top 20 profit generators.

Also in 1997, Harding, 47, founded London-based Winton Capital Management Ltd., whose Winton Futures Fund ranks No. 18 for performance and No. 9 on the moneymakers list, generating $146.6 million in profits. AHL itself was wholly acquired by publicly listed Man Group Plc in 1994 and carries on as the investment manager of Man AHL Diversified.

Despite the success of Man AHL, Man Group’s stock was hit hard by the market downturn, losing 56 percent for 2008 through Dec. 1.

Trends tracked by CTAs can last a few hours, a few days or a few months. “We are trying to capture crowd behavior in different broad markets, around the world, 24 hours a day, five days a week,” says Anthony Todd, the Oxford-trained physicist and AHL alumnus who co-founded Aspect.

Trend Following

In the first nine months of 2008, Aspect Diversified benefited from following trends in short-term interest rates, energy markets and stock indexes, Todd says.

CTAs and their ilk put their faith in formulas. “We’re seen as annoying, geeky, black-box people,” Harding says. “We’re all scientists who are excluded from having opinions -- which are by their nature vanities.”

One way Colm O’Shea made money in 2008 was by having an opinion on how bond yield curves would move. O’Shea, 38, is founder of London-based Comac Capital LLP and manager of the Comac Global Macro Fund. The fund, with $1.3 billion in assets, returned 19.2 percent for the first nine months of 2008, earning it the No. 4 position on the Bloomberg list of top performers.

Late in 2007, O’Shea and his team predicted that as the U.S. economy deteriorated the yield curve between short- and long-term bonds would steepen, as central banks lowered short-term rates. Comac began buying U.S. fed-funds-rate futures and short-term Treasuries, among other instruments.

Obvious Trades

At the same time, O’Shea was shorting longer-term bonds such as 10-year Treasuries. When the Fed lowered interest rates, he profited.

“Many of the best trades we do, people say afterwards, ‘That was obvious,’ but people didn’t think it was obvious beforehand,” says O’Shea, a native of Oxford, England, whose parents were born in County Kerry, Ireland. “A lot of it is just thinking through logically the implications and repercussions of things that we already know.”

In March, as the economic outlook improved, O’Shea felt the trade had run out of steam and quit Comac’s positions. In September, as the market started to crumple and the economic outlook worsened, Comac jumped back in.

“This year has not been about your economic view, it’s been about being able to be flexible,” O’Shea says of 2008.

He founded Comac Capital in 2006, after managing money for Citigroup Inc., Balyasny Asset Management LP and Soros Fund Management LLC, where he was senior macro portfolio manager.

Brevan Howard No. 3

Brevan Howard Master Fund Ltd., No. 3 on the list of most- profitable funds, also wagered on economic trends. In the first nine months of 2008, the Master Fund returned 14.1 percent, generating estimated earnings for Brevan Howard Asset Management LLP of $489.3 million.

With $26.2 billion in assets, Brevan Howard is the largest hedge fund firm in Europe. Its secretive co-founder, Alan Howard, trades from his London headquarters and sits at the center of a network of 400 employees in offices as far flung as Hong Kong, Mumbai and Tel Aviv. Howard seldom talks to the media and declined to be interviewed.

Ian Plenderleith, by contrast, was happy to talk. He’s the chairman of BH Macro Ltd., a London-listed closed-end fund whose sole investment is the Brevan Howard Master Fund. “Their macro approach is not based on a wing and a prayer,” he says in a thick South African accent. “It’s based on substantial fundamental economic analysis.”

Balancing Strategies

Brevan Howard employs a stable of 14 economists who craft outlooks for various world markets and work with more than 70 traders devising strategies to profit from them. A September BH Macro shareholder report said the Master Fund made money from its wagers on foreign exchange and market volatility and lost money on bond, stock and commodity investments.

As of mid-October, Brevan Howard had adopted a dominant strategy: Head for the exits. The fund at that point was 80 percent in cash, according to an investor letter from Howard.

For every successful strategy in 2008 there were four that failed -- and some funds took both roads. The No. 5 fund in the Bloomberg ranking of best-performing funds, Clarium LP, managed by PayPal Inc. co-founder Peter Thiel, 41, chalked up an estimated gain of 18.9 percent through Sept. 30, according to an investor letter from San Francisco-based Clarium Capital Management LLC.

Clarium’s Ups, Downs

However, at midyear, the fund had been up 58 percent. It then gave back its remaining gains and more in October, when it plunged 18.3 percent after bets went bad on the prospect bond spreads would widen, according to an investor. In the nine-month period, the fund also gained from a bearish bet on commodities prices and lost on a bullish wager on U.S. stocks.

As President-elect Obama prepared to take office, hedge fund managers everywhere were in a defensive crouch, with Washington politicians demanding to know whether they contributed to the market meltdown.

At Rep. Waxman’s Nov. 13 hearing, Paulson, Simons, Griffin, George Soros and Philip Falcone of Harbinger Capital Partners were all on the firing line, as congressmen queried them about their trading strategies, tax status and the need for government regulation.

Paulson impressed. Responding to questions, he found fault with Treasury Secretary Henry Paulson’s Troubled Asset Relief Program, saying the Treasury gave banks overly generous terms on the preferred shares it bought from them. He said the government should be getting 10 percent yields, not 5 percent, and that banks should have suspended dividends on their common stock so long as they were being bailed out by the Treasury.

Paulson vs. Paulson

Democratic Representative John Tierney of Massachusetts said, “I was thinking we probably had the wrong Paulson handing out the TARP money here.”

As was made clear at the hearing, hedge funds will face greater scrutiny. “There’s enough blame to go around, but that doesn’t help politicians,” says Barclay Hedge’s Waksman. “They want scapegoats.”

At the very least, U.S. hedge funds are likely to see changes in their tax treatment, Lasair’s McCabe says. Performance, or “incentive,” fees -- the 20 percent or more of profits that hedge funds pocket -- that are held more than a year are currently treated as long-term capital gains and taxed at a rate of 15 percent. “That’s a lower tax rate than many schoolteachers, firefighters or plumbers pay,” Rep. Waxman said in his opening statement to the hearing.

Also on the chopping block: the tax break hedge funds get by domiciling their funds offshore, which allows a fund’s performance fee to grow on a tax-deferred basis until it is repatriated.

Fees Will Fall

Change lies ahead for hedge funds even without government intervention. Underperformers will be forced to bring their steep fund fees down, Siciliano says. The lockup periods that many funds demand from their investors will also fall, he says.

Hedge funds typically market themselves as being able to deliver positive returns in good times and bad. They’ve done that over the years: From 1990 through 2007, the HFRI Fund Weighted Composite Index registered just a single down year, 2002, when the industry lost 1.45 percent. And in that year, the S&P 500 lost 22.1 percent.

From 1990 through 2007, the HFR Index has delivered an average annual return of 14.2 percent.

That kind of performance attracted a flood of money from university endowments and corporate and public pension funds. Their managers were eager to earn back the money they had lost in the bursting of the Internet bubble. Those and other investors poured an additional $658 billion into hedge funds between year- end 2000 and year-end 2007, according to HFR.

Following the Herd

Investors may wonder whether they got what they paid for. Goldman Sachs Group Inc. has created what it calls the Very Important Position basket, which tracks a roster of 50 stocks -- including such companies as Anadarko Petroleum Corp., General Electric Co. and Google Inc. -- that most frequently appear among the top 10 holdings of hedge funds.

When fund firms scrambled to raise cash in September, those stocks were pummeled worst of all. The VIP fell 19 percent in that month.

A companion basket of stocks least likely to appear among hedge funds’ top 10 holdings fell just 2 percent.

The upshot is that investors who were paying 2 percent of assets and 20 percent of profit -- as opposed to the 1 percent or less they might have paid a plain-vanilla money manager -- now realize they were running with the herd.

A Premium Price

“The entire premise for the hedge fund industry is that you were paying a premium price for low correlations with the markets,” says Daniel Celeghin, a director at investment management consultant Casey, Quirk & Associates LLC in Darien, Connecticut.

Managers like Paulson zigged while others zagged. That means new money by the billions is likely to come their way. Paulson managed just $7 billion in late 2006, an amount that has grown fivefold.

“Even after the trillions of dollars that have been lost, there is still a tremendous amount of money lying about,” says Barclay Hedge’s Waksman. “There is more money than there are good places to put it. Good managers are scarce.”

That, in the end, may be the most important lesson to be learned from the 2008 market rout.

To contact the reporter on this story: Richard Teitelbaum in New York at [email protected].

Last Updated: December 2, 2008 00:04 EST
 
  • Like
Reactions: BSD
Media Brain Dead...Michael Covel blog @ Michael Covel December 3rd, 2008

I was speaking with a top trend following trader today. He manages over $100 million and made over +20% for the month of October, so yes he passes the credibility test! He told me that following their October performance they sent their results to over 500 media outlets. One responded. One. That one said, “well, I guess we need to get around to looking at the CTAs.”

Get around? The entire world is crashing, trend following traders (CTA is a regulatory term imposed by government to classify trend followers) are making a killing, and this reporter will get around to it? Why such ignorance? Most reporters, I am serious, are not qualified or perhaps even capable intellectually of understanding trend following trading. There is extreme ignorance. I thought that there was ignorance in 1996. Twelve years later and it seems worse!
 


Paulson Bucks Paulson as His Hedge Funds Score $1 Billion Gain



“What we’re going through is what differentiates talent from luck,” says Carrie McCabe, founder of New York-based Lasair Capital LLC, which invests in multiple hedge funds for large institutions.

---


“Joseph Gruss used to say, ‘Risk arbitrage is not about making money; it’s about not losing money,’” Paulson says.

---


In making his investments, Paulson focuses on straightforward themes.

“You have to be simple to have a clear strategy,” Paulson says.

---


Man AHL typically uses computer-designed models to invest based on market trends. Fund managers that follow this path are known as commodity trading advisers, or CTAs, though their funds don’t necessarily invest solely in commodities.

The CTAs Rule

Trends tracked by CTAs can last a few hours, a few days or a few months. “We are trying to capture crowd behavior in different broad markets, around the world, 24 hours a day, five days a week,” says Anthony Todd, the Oxford-trained physicist and AHL alumnus who co-founded Aspect.

Trend Following

In the first nine months of 2008, Aspect Diversified benefited from following trends in short-term interest rates, energy markets and stock indexes, Todd says.

CTAs and their ilk put their faith in formulas. “We’re seen as annoying, geeky, black-box people,” Harding says. “We’re all scientists who are excluded from having opinions -- which are by their nature vanities.”

Excellent stuff BB, those were the key points up there to my style of trading .

Only thing I'd like to qualify is that you definitely can trend trade using computers and backtested models, but it is by absolutely no means necessary to do so. I'm also basically a trend follower on the lower time spectrum of things trading off of plain visuals.

But that again I suppose is down to how people tick.

0,,5675247,00.gif


Before clicking decide if the girl is turning clockwise or anticlockwise.

The Right Brain vs Left Brain test | PerthNow

Your typical left brainer will do things logically with the help of computers, while your intuitive right-brainer like me will just rely on what I see.

No right or wrong, each to their own, but trend following and it's somewhat shorter held brethren momentum trading are without doubt some of the simplest yet most profitable of trading methods out there.

Thanks for posting that great article mate.

:)
 
Excellent stuff BB, those were the key points up there to my style of trading .

Only thing I'd like to qualify is that you definitely can trend trade using computers and backtested models, but it is by absolutely no means necessary to do so. I'm also basically a trend follower on the lower time spectrum of things trading off of plain visuals.

But that again I suppose is down to how people tick.


Good points/great link thx (tried to rep but says i have to spread it around, lol)
 
Fortress, the Hedge Fund, Is Crumbling

By MICHAEL J. DE LA MERCED
Published: December 3, 2008 , NY Times


When Wesley R. Edens and his partners founded their investment firm a decade ago, they chose a name that evoked unshakeable bastions: Fortress.

But now their stronghold is under siege — and some of its investors are running for cover.

Cracks are spreading throughout the Fortress Investment Group, once a leading player in the worlds of hedge funds and leveraged buyouts. On Wednesday, Fortress’s shares fell 25 percent to $1.87, a new low, after the company temporarily suspended withdrawals from its largest hedge fund. Investors had asked to withdraw $3.51 billion from the money-losing fund, Drawbridge Global Macro.

But Wednesday’s slide was just the latest turn in a long, downward spiral for Fortress. The once-celebrated company has lost 89 percent of its market value over the last year as hedge funds and private equity, once lucrative businesses that helped define an era of unrivaled Wall Street wealth, have crumbled in the credit crisis.

It is a remarkable turnabout for Fortress, which less than two years ago was soaring along with the rest of Wall Street. Its debut as a public company, in February 2007, was heralded as the dawn of a new age of big hedge funds and buyout firms. Mr. Edens, a former executive at Lehman Brothers and BlackRock, and his fellow founders became instant billionaires. Their deal paved the way for even splashier initial public offerings by the likes of the Blackstone Group.

But life as public companies has proved treacherous for Fortress, Blackstone and the other so-called alternative investment firms that sold stock to the public shortly before the credit crisis erupted. They have had to contend with the harsh judgment of stockholders as the credit on which they depend has grown increasingly scarce.

“Frankly, it’s very difficult to say anything other than that I would have no interest as an investor in holding or buying these shares,” Jackson Turner, an analyst at Argus Research, said. Mr. Turner has a sell rating on Fortress shares.

A Fortress spokeswoman declined to comment.

Fortress’s plight reflects the ills plaguing much of high finance. Investors are abandoning hedge funds in growing numbers, and the industry, once so profitable, is now in the midst of a wrenching shakeout.

Even before Fortress lowered the gates on redemptions at its Drawbridge Global Macro fund, other big-name hedge funds had done so. More are expected to follow suit. Some investors fear that a rush of withdrawals could force funds to dump investments en masse, unsettling already shaky financial markets.

Fortress’s biggest fund is withering. In a regulatory filing on Wednesday, Fortress said that Drawbridge Global would have about $3.7 billion in assets under management as of Jan. 1, compared to the $8 billion it reported having as of Sept. 30.

But while Fortress’s earnings will suffer because of the redemptions — hedge funds earn fees based on both the amount of assets they manage and the performance of those funds — the withdrawals alone do not necessarily spell the company’s doom. Less than 30 percent of Fortress’s $34 billion in assets under management are subject to investor redemptions. Most are locked up in private equity funds that do not allow quick withdrawals of capital.

Still, private equity firms have been hurt by the near-freeze in the credit markets, which has limited their ability to strike new deals and dealt a severe blow to many of the debt-laden companies they own.

Fortress dodged a major setback when it managed to refinance IntraWest, the big Canadian ski resort. But investors worry that Fortress has taken damage from its exposure to the commercial real estate market, which is coming under severe stress. Fortress was a major lender to Harry Macklowe, the real estate mogul, who had to sell off trophy properties like the General Motors Building in Manhattan to pay back his creditors.

Just as it was the first major alternative-investment manager to go public, Fortress is now being watched closely as a canary in the coal mine. The Drawbridge fund’s nearly 50 percent redemption rate far outpaces the 20 to 30 percent that the market had expected at hedge funds on average, said Roger Freeman, an analyst at Barclays Capital.

“From my standpoint, I wonder how many other funds are seeing similar redemption rates,” he said. “This is definitely a negative indicator for the industry.”

For months, Fortress has been the subject of gallows humor suggesting that it might simply buy back its shares and take itself private once more. While the company’s executives have asserted their commitment to remaining public, several analysts said that Fortress’s problems were clearly intensified by the brighter light that comes with being a public company.

“It forces their problems to be out in the open,” Mr. Turner said. “It made the issues that they have much more amplified.”

A version of this article appeared in print on December 4, 2008, on page B1 of the New York edition.
 
"Citadel's Losses Add to Mr. Griffin's Pain

Kenneth Griffin's bad year just got a lot worse, making it even more difficult for him to collect the big fees that made him one of the country's richest fund managers.

Mr. Griffin's Citadel Investment Group in Chicago lost about 13% in November, bringing its investment decline to 47% during 2008, according to investors. Tabulating those losses and client withdrawals, the firm's total assets are expected to fall to $12 billion"


Citadel's Losses Add to Mr. Griffin's Pain - WSJ.com
 
Business Week Cover Story July 21, 2003

Still a good article:

The Most Powerful Trader on Wall Street You've Never Heard Of
Meet Steve Cohen. Even his enemies admit he's the best stock trader around, routinely trouncing the market with his $4 billion hedge fund. Just how does he do it?

A gunmetal-gray BMW 745 Li sedan slips out of Steven A. Cohen's 14-acre walled estate. The chauffeured car races along the winding backcountry hills of ultrawealthy Greenwich, Conn. At around 8 a.m., it powers into the parking lot of SAC Capital Advisors. Cohen quickly emerges and darts into the front entrance of his gleaming steel and terra-cotta-slabbed Stamford (Conn.) headquarters. His driver swings the car around to the back and parks in a space with a simple reserved sign amid a sea of testosterone-exuding cars belonging to his traders: Mercedes S600s, Lexus sport-utility vehicles, and Porsche Carrera 4s. Cohen will soon be sitting at what one trader calls "command central" -- his desk with its numerous screens, perched in the midst of a football field-length trading floor. In the next few hours he is likely to earn several million dollars.

Cohen, 47, is the most powerful trader on Wall Street you've never heard of. The founder of SAC Capital Advisors, a highly secretive and stupendously successful $4 billion group of hedge funds that bears his initials, is considered to be a market genius by even his harshest critics. His firm routinely accounts for as much as 3% of the New York Stock Exchange's average daily trading, plus up to 1% of the NASDAQ's -- a total of at least 20 million shares a day. And while most of his rivals struggle to keep their trading costs down, "Stevie," as he's known on Wall Street, is one of the few to pay full freight. He hands over about $150 million a year in commissions to Wall Street, making him one of its 10-largest customers.

The payments grease the superpowerful information machine that Cohen has built at SAC. The firm's credo, says a former SAC trader, is to "try to get the information before anyone else." The torrent of commissions wins Cohen the clout that often makes him privy to trading and analyst information ahead of rivals. Says one analyst: "I call Stevie personally when I have any insight or news tidbit on a company. I know he'll put the info to use and actually trade off it." Cohen expects to get the first call when an analyst upgrades or downgrades a stock, and if he doesn't, offenders have been known to get a tongue-lashing from SAC traders. Brokers lavish plenty of other privileges on him. For instance, SAC was a big beneficiary of allocations of red-hot initial public offering shares during the Internet boom, according to several former SAC traders.

Cohen manages less money than hedge-fund titans such as George Soros or Julian Robertson did at the height of their powers, but his sheer trading prowess leaves them in the dust. At the heart of his empire are 40 "portfolios." Each has between one and 15 traders and analysts who execute various strategies. The primary focus is a long-short equity strategy, but more recently the firm has branched out into convertible and statistical arbitrage, quantitative strategies, and big bets on interest rates. Investors' money is channeled through seven different "portfolio companies" or funds -- including a core fund, a global diversified fund, and a health-care fund, each with an offshore counterpart. One fund, Sigma, consists mainly of his personal money, say insiders.

But Cohen's reach, and power, extend well beyond the seven funds. The billionaire, who earned an estimated $128 million last year and $428 million in 2001, according to Institutional Investor, has a finger in funds other than his own. Top SAC traders have contracts that contain provisions giving Cohen the right to fund up to half their capital if they leave to start their own funds, as many have done. He sometimes gets more favorable terms than other investors, such as being able to pull out his money early. Says a former SAC trader: "Cohen's presence, and market-moving capability, is probably the largest of anyone on the Street."

So is the fear Cohen inspires on Wall Street. Says a trading executive at a brokerage house: "It's great if you're in the Stevie camp that day or that month. But he can turn against you in the blink of an eye and redirect his capital somewhere else if he gets pissed off." Few of the several dozen people -- including former and current employees, other hedge-fund traders, Wall Street analysts, and proprietary traders -- that BusinessWeek interviewed over a three-month period would speak on the record about Cohen or SAC. Cohen, who's "almost as secretive as Howard Hughes," according to one source, declined to be interviewed or photographed. An insider describes him as "incredibly camera-shy and publicity-averse." He requires employees to sign dense confidentiality agreements. SAC officials would not comment on the record for this story.

Colleagues praise Cohen for his intensity and singular focus on reading the tape -- identifying trends by studying money flowing in and out of stocks. He teaches his traders a strict discipline of cutting losses by bailing out of losing positions fast. His own ability to acquire and distill bits of seemingly innocuous information and then apply them to his trading is unparalleled. "He has incredible instinct and the uncanny ability, when faced with 100 facts, [of] knowing which one to pay attention to," says Jack D. Schwager, author of Stock Market Wizards, a book about world-class traders. Adds Laszlo Birinyi, president of Birinyi Associates Inc., an investment research firm in Westport, Conn.: "Cohen can absorb this huge amount of input and come out with music when most of us just come out with noise."

Cohen started picking up these skills at an early age. He grew up in Great Neck, N.Y., in a strictly middle-class family, with a father who worked in the dress manufacturing business and a homemaker mother. As a child, he followed sports scores assiduously in the New York Post that his father would bring home every evening. He started noticing that the financial pages were also filled with numbers. "I was fascinated when I found out that these numbers were prices and they were changing every day," he told author Schwager. By his early teens, Cohen was hanging out at a local brokerage office, watching stock quotes. "You could see volume coming into a stock and get the sense that it was going higher," he told Schwager. These days the action in the stock market is so fast that it's difficult to follow the tape so closely, "but everything I do today has its roots in those early tape-reading experiences," Cohen told Schwager.

By the time he attended the University of Pennsylvania's Wharton School, where he earned a bachelor's in economics, Cohen was so obsessed with stocks that he traded between classes, according to a college friend. He was also a mean poker player at Wharton. "I thought that I was quite the poker player, but Steve cleaned house on me," says a longtime friend and SAC investor. After Wharton, Cohen headed to Wall Street, where he landed a job as a junior trader in the options arbitrage department at Gruntal & Co. in 1978. His very first day, he made an $8,000 profit, and eventually was netting around $100,000 a day for the firm, says his former boss there, Ronald Aizer. "He learned early on how to use the block-trading ability of the big firms" by watching their trades, says Aizer. By 1984, Cohen was running his own trading group at Gruntal, which he did until he set up SAC.

Friends say Cohen, though now immensely wealthy, has never been driven entirely by money. "He loves what he does. The money is merely his scoreboard," says one longtime friend. His stats are impressive. Armed with hot information and an ironclad trading discipline, Cohen has posted blowout returns throughout his firm's 12-year history. He has been up an average of at least 40% annually before his eye-popping 50% performance fee. (Most hedge funds charge 20%.) Last year, his worst ever, Cohen gained 13%, according to investors. "It was quite a disappointing year for him," says George Fox, an SAC investor and president of Titan Advisors Inc., a fund that invests in other hedge funds. Still, with the Standard & Poor's 500-stock index down 23%, it was almost like turning water into vintage Bordeaux. In the first half of this year, SAC is up 14% before fees, vs 11% for the S&P 500. Says Fox: "Steve trades very actively. That's one way he controls risk. He won't let a losing position sit there." Cohen and his business partners are the biggest investors in the fund, comprising some 60% of its assets. The remaining investors are typically other big-money, largely anonymous Wall Streeters. In the past three years, Cohen has returned most of the pension money that his funds managed, says a former trader.

Cohen's single-minded focus puts enormous pressure on SAC's 200 or so traders and analysts. "If you can't cut it within a few months of starting, Stevie will blow you out like that," says a former trader, who says he was fired for losing a substantial amount in one trade. Another says he left to escape the "ulcers and night sweats" he suffered while working there. SAC traders, who often earn $2 million-plus, are paid according to what they make on their individual trades, not on the overall performance of the fund, as at most hedge funds. "You eat what you kill," says one former trader. Adds another: "At SAC, you either perform or you're dead."

Earlier this year, the Securities & Exchange Commission launched a wide-ranging investigation into the $500 billion hedge-fund industry, including whether some of its practices represent conflicts of interest. "Few hedge managers are out-and-out fraudsters, but there are no doubt thousands who have convinced themselves that crossing some lines is O.K.," says Randy Shain, president of BackTrack Reports Inc., a business investigator. BusinessWeek didn't turn up any records of disciplinary action against Cohen or SAC by regulators at the SEC or the National Association of Securities Dealers.

Some of Cohen's investors see the criticism as sour grapes. "People on Wall Street tend to get jealous of anyone with a terrific track record," says one. Adds Columbia University securities law professor John C. Coffee Jr.: "If you are a market force that's very successful, you're going to have some vocal enemies."

Because he practices what a former SAC trader calls "active trading on steroids," there's little doubt that Cohen and his traders are very aggressive in seeking an edge. On Dec. 27, 2001, the day after ImClone Systems (IMCL ) Chief Executive Samuel D. Waksal found out that the Food & Drug Administration had rejected an approval application for the company's cancer drug, Erbitux, an SAC trader named Jason Bonadio was one of a handful of investors to call Waksal that day. Former traders say SAC noticed a price movement, though the news wouldn't be publicly released until the next day. Domestic diva Martha Stewart placed her now infamous call to Waksal 17 minutes after SAC's, according to Waksal's phone log obtained by a congressional committee investigating ImClone. Sources familiar with the firm say Bonadio's call was forwarded to ImClone's investor relations department and never returned. SAC lost "millions" on a long position on ImClone, they say. Bonadio, who has left SAC, declined to comment.

Recently, the whispers about how Cohen and SAC operate evolved into full-fledged buzz. In January, one of SAC's star traders, Michael Zimmerman, came under SEC scrutiny for allegedly trading on information in company reports written by his wife, Holly B. Becker, a noted Lehman Brothers Internet analyst, before they were published. Both Becker and Zimmerman were served in late January with Wells Notices -- documents warning of a possible civil action by the SEC relating to stock trading. Their lawyers declined comment. Sources familiar with the company say SAC is not under investigation by the SEC. They add that if anything untoward occurred, it took place before Zimmerman joined SAC. Because Zimmerman still works at the firm, the affair has brought a great deal of unwelcome publicity to the fund and Cohen himself.

BusinessWeek has learned of a situation that has the appearance of a conflict of interest. Glenn Tatarsky, a trader at Sigma, one of Cohen's funds, had been actively trading the stock of retailer American Eagle Outfitters (AEOS ) Inc. in 2001 and 2002. He was then living at the same address as Kindra Devaney, a retail analyst at Fulcrum Global Partners, who is now his wife. At the time she was negative on American Eagle. On Jan. 28, 2002, she issued the only "sell" rating among the 21 analysts then covering the company, according to Bloomberg Financial Services. BusinessWeek found no evidence that she ever shared information with Tatarsky about American Eagle before publishing her report or that he traded on anything he heard from her. However, he did buy stock on each of the three days leading up to Devaney's sell recommendation, sources familiar with the matter say. Either way, the incident raises questions about how SAC handles potential conflicts of interest when employees trade stocks that their partners analyze at other firms. Sources familiar with the company say it has one of the most stringent codes of conduct in the industry. Fulcrum's CEO Michael C. Petrycki says: "We were unaware of the situation, but our policy prohibits only immediate family from trading stocks we cover."

Physically, Cohen doesn't live up to his image as the Rambo of traders. The bespectacled, balding billionaire, about 5 ft. 8 in., looks like a slightly more hip version of George Costanza -- the Seinfeld character played by actor Jason Alexander. "He's low-key and self-deprecating -- he definitely has an awkwardness about him," says Schwager. Even when Cohen is executing a multimillion-dollar trade, adds Schwager, he exhibits such zenlike calm, it's "like he's ordering a sandwich." Says Ari Kiev, a psychiatrist and trading coach who has worked with Cohen and his traders for more than 10 years: "As the market evolves, Steve keeps recreating himself and never rests on his laurels. He always asks himself, 'what more can I do, what did I do wrong, how can I do better?"'

Calm and self-reflective he may appear, but Cohen is not averse to using sharp elbows to get to the head of the line. For instance, several industry insiders say SAC sometimes tries to suss out what other hedge funds plan to do and beat them to the punch.

To stop rivals from riding its coattails, SAC sometimes makes head-fake trades to camouflage its own intentions, say former SAC traders. It's a tactic, they say, Cohen learned soon after setting up SAC in 1992 with $20 million of his own and investors' money. Says a former assistant to Cohen: "In the beginning, things were so disorganized that a trader would be selling off shares of a stock just when Stevie wanted to buy. Stevie would stand up and yell at the trader." But Cohen also noticed the stock would drop like a rock if the other SAC trader sold first. Then, Cohen could buy back the block, then some more, at a cheaper price. Critics claim that Cohen operates what they call a "reverse desk." Former traders say it works like this: The firm purchases a relatively small amount of the stock, then starts selling it off through various Wall Street brokers. "When word gets out that SAC is selling, the Street goes nuts and also starts unloading big blocks," says one. Then Cohen swoops to buy. Sources familiar with SAC say that this type of trading or a reverse desk have never existed. Even if it does, it wouldn't pose any legal problems. Says Columbia's Coffee: "There's nothing wrong with making inconsistent orders in order to prevent your competitors from knowing what you're doing."

In another tactic, Cohen and his core group of traders sometimes "take the Street," according to former traders. SAC buys large blocks of a particular stock through a handful of major brokers simultaneously in an attempt to clean out their inventories. Often, the big investment banks have to buy back shares on the open market to replenish the inventories they need to hold as market makers, thus causing a pop in the price. Says a former SAC trader, "Stevie can take 8 desks in 10 minutes. The more guys he has doing what he's doing, the more he can move stocks." Once the stock has risen, SAC might even sell the same shares back to the brokers, making a tidy profit. Sources familiar with SAC say the firm doesn't engage in the practice. Says Coffee: "There's nothing wrong with trying to clean out market makers to get a lot of stock quickly at a reasonable price. If a large hedge fund buys slowly, the word gets out and that drives the price up more."

SAC also sometimes orchestrates "short squeezes," say former traders and rival fund managers. When there's a large short position in a stock, SAC will start buying it, causing shorts to cover, thus driving up the price -- at which point SAC sells. Sources familiar with the firm say SAC has never done this. Experts say the practice is legal.

What makes Stevie mad? Simple: Not getting preferential treatment. Several analysts say that SAC traders often pressure them for upgrades, downgrades, information, or insight into trading flow. And sometimes getting the information first doesn't seem to be enough. Says one analyst: "There was one day when I had at least 15 voicemail messages from two different SAC traders about how I was rating a particular stock. They don't exactly say, 'change your rating or else,' but they give you a hypercharged sales pitch on why you should change it." Sources familiar with SAC say that the firm expects employees to conduct themselves in a professional manner and doesn't condone such behavior.

Of course, Cohen usually makes nice with the Street. For example, former traders and rivals say one way he built his business and his relationships with brokers was by buying secondary offerings -- when public companies decide to bring more shares to market -- on which brokers receive around 40 cents to $2 a share on a built-in sales commission. "If you take down a million shares of a secondary, you've just paid your broker $1.5 million," says a fund manager. "That's how Stevie started off paying the Street."

Cohen's home life seems a far cry from the frenzied pace of SAC. He met his wife, Alexandra, who grew up in the Bronx and is described by a friend as "dark-haired and pretty in a petite way," through a dating service after divorcing his first wife. "From the time she was a child, Alex always said she wanted to marry a millionaire. She struck out," jokes a family friend. "She got a billionaire." Cohen has seven children and stepchildren.

In 1998, the Cohen family bought a 30-room Greenwich mansion built in 1930 for around $15 million. It was quite a move up from their previous $2 million house. They put millions of dollars more into an elaborate renovation and extension, say friends. Says one: "Steve told me, 'We took a beautiful old house and basically ruined it."' It is completely obscured from the street by a roughly 12-foot-high wall. Cohen is so secretive that he installed an extensive alarm system that beeps whenever someone walks into a room or out, say acquaintances.

The grounds, which some neighbors call Chelsea Piers -- after the mammoth Manhattan sports complex on the Hudson River -- include a basketball court that becomes an ice-skating rink in winter, several golf holes, and a bubble-enclosed swimming pool. "For kids, getting invited to the Cohens is one of the most coveted invitations in Greenwich," says a neighbor. Still, neighbors complained about massive, lengthy renovations at the house.

Cohen may not be impressed by his own billions, but Alex has coaxed him into "lavish entertaining, round-the-world art-buying trips, white-gloved butlers, that sort of thing," says an old acquaintance. For a housewarming party, she sent out an invitation she thought of herself: a deck of playing cards with a photograph of Steve as the king in a velvet robe and crown, herself as the queen, the children, and various and sundry household help as other cards.

Still, friends say Alex is a driving force behind the Cohen's generous charitable giving. In 2002, they gave $15 million to the Robin Hood Foundation, a charity founded by hedge-fund icons Paul Tudor Jones II and Stanley Druckenmiller. And they've given millions to aid families of World Trade Center victims and funded a walk-in clinic at Greenwich Hospital, among other activities. Cohen is also on the board of the Michael J. Fox Foundation, a nonprofit that fights Parkinson's disease.

The flow of charitable donations isn't likely to dry up anytime soon. SAC is having yet another good year, by most standards. But those 14% gains may not be setting well with Cohen. No doubt he wants to return to his mammoth 40%-plus gains. That may explain, in part, why he has branched out into multiple strategies recently. Indeed, in the wake of Wall Street scandals and the increased scrutiny of analysts, SAC is trying to live down its barracuda-like image. It recently hired a public-relations firm to assist it. "They know the spotlight is on them and they're really trying to clean up their act," says a former Sigma trader.

Cohen's active trading is now mainly focused on the firm's core fund that he manages. He continues to prune back the amount of capital he trades -- making the fund a lot more nimble -- while at the same time expanding his palette of trading strategies. Says a rival hedge-fund manager: "He seems to be trying everything to get that old magic back." Not that Stevie ever really lost it."
 
How to set up a hedge fund

How to set up a hedge fund...artcile from theguardian.co.uk

London hedge fund manager Crispin Odey has just paid himself £28m after tripling his firm's profits last year. But what exactly do these outfits do, how do they make a fortune in a slump - and can anyone start one? Andrew Clark explains the 10 steps to becoming a 'hedgie'


1 Chose a name

A posh part of London or New York can be suitable, as in Pershing Square Capital, Cheyne Capital and Thames River Capital.

Or you could choose something slightly aggressive such as Tiger Capital, Citadel Capital or Centaurus. Among the big financial firms, it is voguish to squeeze as many meaningless words as possible into the title of a hedge fund. Length is not a sign of quality, however; a Bear Stearns hedge fund which went from $642m to zero was called the "high-grade structured credit strategies enhanced leverage fund".

2 Get a brass plaque in the Cayman Islands

Nearly all hedge funds are legally registered in tax havens to avoid both the taxman and to skirt regulatory hurdles - the sunny climes of the Caymans and Bermuda are particularly popular. Theoretically, a fund registered in London would have to register with the Financial Services Authority, but this has never actually happened. An FSA spokeswoman says: "Nobody ever registers hedge funds in the UK. If somebody did, we'd be scratching our heads over how to deal with it. We'd have to devise something."

3 Set your fees

The real fun starts here. Hedge funds are enormously lucrative - their standard fee arrangement is "two and 20". This means that as a fund manager, you can take 2% of clients' money up front before you do anything, then keep 20% of any appreciation on the value of your fund. For successful hedgies, that means a phenomenal payday. For example, if a fund raises $1bn from investors and achieves a 30% rise in value over a year, the fund's management earns $78.8m. Crispin Odey - one of London's leading hedge fund managers - has just paid himself £28m after his firm successfully negotiated the credit crunch to make more than £55m profit in the past financial year. Most of the remaining £27m will be shared among Odey Asset Management's 11 other partners. The fund manages around £2.7bn of assets. London's top hedge fund duo - Noam Gottesman and Pierre Lagrange of GLG Partners - each took home $350m in 2007, according to Alpha Magazine, an industry publication. Gottesman recently sold his six-storey townhouse in London's Mayfair to steel magnate Lakshmi Mittal for £117m. When asked the secret of his success, he once replied "paranoia".

4 Raise some money

This is the tricky bit. You will need £50m at the very least to have any kind of credibility. It helps if you have private wealth or rich, trusting friends. In Britain, hedge funds are not allowed to advertise directly to the public so much of the fund-raising is done behind closed doors through contacts, conferences and presentations. Good relations with City and Wall Street banks are essential - in return for brokerage business, firms such as Goldman Sachs and Morgan Stanley will often arrange introductions for hedge funds to potential investors. It is wise to accept money only from extremely well-off people. The last thing you want is to have clients pestering you every day because their entire savings are tied up in your fund. In the US, only individuals with assets of $1m or an annual income of more than $200,000 are allowed to invest in hedge funds.

5 Rent an office

Mayfair is a good spot. It's handy for a lunchtime plate of yellowtail tuna at Nobu. Rents can be as high as £90 per sq ft, compared with an average of £65 in the Square Mile, which means premises of 2,000ft for a fledgling fund will cost £180,000 per year. Joshua Gilbery, a commercial property consultant, says hedgies want "class A" premises with raised floors, suspended ceilings, a concierge and acres of space. "There might be only four or five chaps in a hedge fund office but they have so much money that it doesn't make much difference. These guys will have big, huge desks and lots of screens." Greenwich, Connecticut, has become a global hedge fund capital - it is home to more than 380 firms. The wealthier hedgies live in sprawling palaces with ice rinks, private cinemas and ballrooms and some commute by speedboat. Mike Tedesco, a local estate agent, can find you something top-class for $150 per sq ft, more than twice the typical Manhattan rent of $60 to $65.

6 Recruit some staff

Fund managers should be easy to find given the number of people recently laid off by Bear Stearns, Citigroup, Merrill Lynch and other banks suffering fallout from the global credit crunch. One pin-striped banker in New York has even taken to wandering around with a sandwich board declaring "experienced MIT graduate available for hire". Your back office and accounting functions can be contracted out to the many firms specialising in servicing the hedge fund industry. Scott Epstein, US head of HSBC's alternative fund services arm, says his staff can do your book-keeping, maintain your shareholder register, send out monthly statements to investors and do any regulatory paperwork. But you will have to be vetted first. "When we look at clients, we go through a very, very robust process of due diligence," says Epstein. "It's very much establishing a relationship with a counterparty - both parties want to be confident it's going to be comfortable mutually."

7 Choose an approach

Do you want to be a "quant" or a fundamental? The most hi-tech operators on the block are quantitative funds, which use highly complex software to trade at lightning speed. Buying and selling by the second, their programs
pick up trends in prices that are often imperceptible to the naked eye. Their software will process variables such as companies' earnings ratios and price history to determine what to buy - or they might pounce on tiny discrepancies between the price of the same stock on different stockmarkets. The downside is that when the market takes a knock, the quants' machine-driven trading can cause chaos. Last year, one Goldman Sachs fund lost a third of its value in a week - a drop of $1.8bn - as a "herd mentality" prompted scores of quant programs to dump stocks simultaneously. More traditional-style funds with a "fundamental" approach spend time researching the prospects of companies, currencies and commodities. They might take the time to talk to analysts, meet corporate management and attend shareholders' meetings.

8 Adopt a strategy

The classic hedge fund is called a "long/short", which means it takes straightforward positions to bet on different shares going either up or down. In addition to buying shares that you think will rise, you can "short" those you expect to fall. This is done by borrowing shares from a broker and selling them on the open market, in the expectation that you will be able to buy them back for a lower price and return them to the owner, pocketing a tidy profit on the way. During an FSA clampdown this summer on traders, Odey Asset Management was outed as one of several funds shorting shares in the troubled Bradford & Bingley. Other strategies are more sophisticated. A "convertible arbitrage" fund finds and exploits discrepancies in pricing. A "distressed debt" approach involves high-risk dealing in struggling companies, while a "global macro" fund bases its decisions on broader economic calls. An "event driven" strategy means watching the news carefully - after an air crash, for example, these funds might short airline stocks and in the aftermath of the 2004 tsunami, some attempted to invest in Sri Lankan construction firms.

9 Accessorise

As the money rolls in, it is a good idea to install quirky diversions to make sure your big-brained staff don't get restless and leave. One American fund, Pequot, boasts a basketball court beside its trading floor. Aquariums,
waterfalls, pinball machines and games rooms are useful symbols of quirkiness and success. Art is an obvious way to spend all your profits. One of the world's top hedgies, SAC Capital founder Stevie Cohen, has amassed a
collection which includes works by Van Gogh, Gauguin, Warhol, Lichtenstein, Manet and Jackson Pollock - not to mention Damien Hirst's shark pickled in formaldehyde.

10 Hope for the best

It could, of course, all go horribly wrong. Although 1,152 new funds opened for business last year, Hedge Fund Research reckons that 563 funds shut down. As many as one in five funds fail within their first year. And the strain can be telling - therapists in New York reported an increase of 25% in enquiries from distraught Wall Street workers towards the end of last year as the markets went crazy.
 
""After considerable thought and deliberation I have decided to make a major change in my life: I am going to close my hedge fund. I have several reasons for no longer wishing to run a short-only fund as I have for the past 12 years. First, my original reason for starting the fund was because of developments I saw occurring in the late 1990s that I wanted no part of. I felt that Greenspan was fomenting an environment that would lead to disaster, as consultants, financial advisors, and the public at large were losing all respect for risk. Of course, the reckless behavior carried far higher and lasted much, much longer than I ever imagined it could. However, the recent carnage in the stock market, real estate market and the financial system (as well as the job losses) has washed away those excesses to a large degree and it has violently demonstrated the risks associated with investing.

A future goal of mine, when I set up the fund in 1996 -- as I attempted to step aside from the madness -- was to return to the long side of the business at some point in time when I felt that investors had become more rational regarding risk and stocks offered a more favorable risk/reward proposition. I considered this option very briefly in 2002 after the stock bubble imploded, but the cleansing process was postponed due to the burgeoning real-estate bubble.

Second, though I think that the stock market still has unfinished business on the downside, I believe that 2009 is the year to prepare for a return to managing money in a more balanced fashion, with longs (and some shorts), as there are currently plenty of interesting ideas that appear to offer a margin of safety. On the flipside, compelling opportunities on the short side are not as abundant as they were just a few months ago (though there still are plenty.) The "value restoration project," to quote Jim Grant, has been brought about by the consequences of disastrous Fed policies and the madness of the crowd, both of which have concerned me for the last 15 or so years.

Lastly, on a personal note, I no longer want to run a short-only hedge fund, as it is very stressful, nerve-wracking and generally not very much fun, entailing an intense focus on the short term to effect risk control. In addition, one views the world differently when operating solely from the short side and I would like to widen my focus as I did when I managed money from 1982-1995. My wife is especially happy about this potential change."


Continued:
Calculated Risk: Fleckenstein Shutting Down Short Hedge Fund
 
$50bn fraud charge at hedge fund

BBC NEWS | Business | $50bn fraud charge at hedge fund

The Madoff fraud could be one of the biggest yet
The former chairman of the Nasdaq stock market has been arrested and charged with securities fraud, in what may be one of the biggest fraud cases yet.

Bernard Madoff ran a hedge fund which ran up $50bn (£33.5bn) of fraudulent losses and which he called "one big lie", prosecutors allege.

Mr Madoff is alleged to have used money from new investors to pay off existing investors in the fund.

His lawyer said he would fight to get through these "unfortunate events".

The 70-year-old has been released on a $10m bail.

'One big lie'

Mr Madoff founded Bernard L.Madoff Investment Securities in 1960, but also ran a separate hedge fund business.

According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn of money under management - was a fraud and had been insolvent for years, losing at least $50bn.

He said he was "finished", that he had "absolutely nothing" and that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.

Under a Ponzi scheme, also known as pyramid scheme, investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors.

On Thursday, two agents from the FBI went to his apartment.


Investors have withdrawn from hedge funds amid market volatility

According to the complaint, Mr Madoff told them he knew why they were there, and there was "no innocent explanation".

Stunning fraud

If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.

"Our complaint alleges a stunning fraud - both in terms of scope and duration," said Scott Friestad at the SEC. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."

Dan Horwitz, Mr Madoff's lawyer, said: "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."

Many investors have been pulling money out of hedge funds in an effort to reduce their exposure to risk.

"This is a major blow to confidence that is already shattered - anyone on the fence will probably try to take their money out," said Doug Kass, president of Seabreeze Partners Management, a hedge fund.
 
  • Like
Reactions: BSD
A $5m fine! I'm sure that will go some way towards paying back investors.
 
..and has the ability to use investors' monies in whatever fashion it desires.
 
Top