Showing posts with label hedge funds. Show all posts
Showing posts with label hedge funds. Show all posts

Monday, April 2, 2007

The Fake Fight Over the Iraq War

March 31 / April 1, 2007

That Was an Antiwar Vote?

By ALEXANDER COCKBURN
and JEFFREY ST. CLAIR

Has the end of America's war on Iraq been brought closer by the recent vote in the House of Representatives? On March 23, the full House voted 218 to 212 to set a timeline on the withdrawal of US troops, with September 1, 2008, as the putative date after which war funding might be restricted to withdrawal purposes only. It's not exactly a stringent deadline. It only requires Bush to seek Congressional approval before extending the occupation and spending new funds to do so.

On Democratic House leader Nancy Pelosi's website we find her portrait of what US troops will be doing in Iraq following this withdrawal or "redeployment," should it occur late next year on the bill's schedule. "US troops remaining in Iraq may only be used for diplomatic protection, counterterrorism operations and training of Iraqi Security Forces." But does this not bear an eerie resemblance to Bush's presurge war plan? Will the troops being redeployed out of Iraq even come home? No, says Pelosi, as does Senate Majority leader Harry Reid. These troops will go to Afghanistan to battle al Qaeda.

So the bill essentially adopts and enforces Bush's war plan and attendant "benchmarks" as spelled out in his January 10 speech. On March 27, the Senate voted 50-48 to start withdrawal in March 2008, said schedule being nonbinding on the President. At any rate, Bush has promised to veto all schedules for withdrawal coming out of Congress. Meanwhile the war goes on, with a supplemental, Democrat-approved $124 billion, more than Bush himself requested. As Congress considers the half trillion dollar FY 2008 Pentagon budget, there is no sign that the Democratic leadership will permit any serious attack on further war funding.

Thus when it comes to the actual war, which has led to the bloody disintegration of Iraqi society, the deaths of up to 5,000 Iraqis a month, the death and mutilation of US soldiers every day, nothing at all has happened since the Democrats rode to victory in November courtesy of popular revulsion in America against the war. Bush's reaction to this censure at the polls was to appoint a new commander in Iraq, General David Petraeus, to oversee the troop surge in Baghdad and Anbar province. The Democrats voted unanimously to approve Petraeus and now they have okayed the money for the surge. Bush hinted that he would like to widen the war to Iran. Nancy Pelosi, chastened by catcalls at the annual AIPAC convention, swiftly abandoned all talk of compelling Bush to seek congressional authorization to make war on Iran.

Although nothing of any significance actually happened on March 23, to read liberal commentators one would think we'd witnessed some profound upheaval, courtesy of Nancy Pelosi's skillful uniting of the various Democratic factions. What she accomplished in practice was the neutering of the antiwar faction. In the end only eight Democrats (plus two Republicans) voted against the Supplemental Appropriation out of opposition to the war. The balance of 202 no votes came from Republicans who opposed Pelosi's bill as anti-Bush and antiwar. So, in Congress 420 representatives officially have no problem with the war in Iraq continuing until the eve of the next election. Ten are foursquare against it, which is more or less where Congress has always been, in terms of committed naysayers.

Antiwar forces in Congress are now weaker. Take Sam Farr of Santa Cruz and Peter DeFazio of Eugene, both Congressmen with large progressive constituencies. In the last Republican-controlled Congress they were stout opponents of the war, voting against authorization to invade and money for the war thereafter. No longer. Pelosi handed Farr bailout money for his district's spinach growers and DeFazio got funding for schools and libraries. Who knows? Perhaps a few dollars of the latter will go to wheelchair access for the paraplegics who will come home from Iraq over the next sixteen months, maimed in the war for which DeFazio just voted more money.
Seeking to explain his yes vote for Pelosi's war-funding bill, Farr issued a press release saying, "This bill brings our troops home." But he also told the San Francisco Chronicle, "They want to go gung-ho. They want to escalate in Iraq. So what would our 'no' votes mean?"

Mr. Farr, they would have meant more votes against the war, and had there been four more holdouts against Pelosi's palm-greasing, these no votes would have monkey-wrenched her bill, thus demonstrating that it is impossible to get a majority in the House of Representatives to endorse a piece of fakery designed to deceive the very people who put the Democrats back in power.

The real antiwar movement proved itself incapable of pressuring House Democrats to hold out. The January 27 demonstration organized by United for Peace and Justice did involve active lobbying of Democrats to hold their feet to the fire, but the demo itself was really a Bush-bashing session, with scant reminders that Bush's war has been and continues to be a bipartisan project.

Tom Matzzie, the Washington director of MoveOn, said after the March 23 vote, "Bush is our worst enemy and our best ally." In other words, when Bush savaged Pelosi's bill with accusations that it gives aid and comfort to the enemy, he cemented Democratic support for it. The focus stays always on Bush, over whom MoveOn will never have influence, as opposed to Democrats, whom MoveOn could have pressured with its three million­strong email list. But rather than rousing its members to accuse Pelosi of enabling the war, MoveOn carefully limited the available options in polling its members. It only asked whether they were for, against or not sure about war funding as dealt with in her bill.

MoveOn could have phrased it another way: Do you support the Pelosi plan (fully describing it); do you support the Barbara Lee plan (funding exclusively for gradual withdrawal of US troops); do you reject war funding altogether?

Will Congressional opposition to the war now get stronger, anchored by Pelosi's bill? Not likely. The window of opportunity for that flew open right after the election, when antiwar forces roared in outrage after being snubbed by Pelosi and Reid, who omitted the war and the Patriot Act from their must-do agenda. Instead, the Democratic leadership chose merely to appear to oppose the war while continuing to fund it. This they have now achieved, amid the satisfied cheers of the progressive sector.

And Now a Word of Clarification from Senator Joe Biden

Chris Matthews, Hardball, March 28, 2007

MATTHEWS: Thank you, David.

Letes go now to Senator Joe Biden, Democratic presidential candidate and chairman of the Foreign Relations Committee. Senator Biden, can Congress stop the war or just help start one?

SEN. JOE BIDEN (D-DE), PRESIDENTIAL CANDIDATE: It can help stop one. It can help start one, but it can also help stop one, and it can help change the direction, Chris. And what people donet read about the Senate resolution, the Senate bill we passed, it sets a goal just as the same goal set out by the Baker-Hamilton commission, the Iraq Study Group, to have combat troops out by March of e08, except for those left behind to protect the borders, to protect our troops, train Iraqis and go after al Qaeda. It is not as the president portrays it.

MATTHEWS: Well, you say a guideline. I thought it was an exit date.

BIDEN: It is a goal. It says thates the date picked, assuming military commanders believe it can be met. Thates what the Senate side says. The House side sets an absolute date.

The bottom line here is, Chris, that the presidentes policy, the Bush-McCain doctrine, just will not function. Think of what the basic premise is. Ites theyere going to establish a strong central government thates a democracy. Thates not going to happen in your lifetime or mine. Weere trying to redefine the mission to enable us to get to the point where we have a political solution everybody calls for, but no one but me and Les Gelb have offered a specific political solution. Give local control over the local fabric of their daily lives with a weak central government. Until we move toward that direction, there is no possibility of us doing anything but trading a dictator for chaos.

MATTHEWS: If the president were to sign some compromise between the House and the Senate versions of these exit dates, would we pull our troops out by next summer? If the president signed a bill, somewhereothat would effectuate a date of somewhere between March and August, somewhere like July or June, would that mean that we would have to leaveoin other words, does this measure really offer an alternative policy, which is, Weere coming out?

BIDEN: Well, it actually does offeroit says we are going to come out unless we have to leave troops a little longer in order to do one of four thingsoone, protect the troops that are there as they are getting out, two, train Iraqi troops, three, provide for taking on al Qaeda in Anbar province, where theyere trying to set up control.

What it really says is, Get out of the civil war. Change the mission, Mr. President. As long as you have us in this middle of a civil war, there is no prospect for success. None.

And youere going to hear from Barry McCaffrey very soon on your program. Iell be dumbfounded if he says anything else.

MATTHEWS: But he also said in the article today in iThe Washington Postioweell hear from him in a few moments, but he said that ites so dangerous for the government officials in Iraq, the people we put up there in that new governmentoweeve stood up that new governmentothat they canet walk the streets. Theyell be picked up and killed. And ifoand if...

(CROSSTALK)

MATTHEWS: ... canet walk the streets of its own capital, how can we step aside and say, Carry on, boys?

BIDEN: Put it another way. How can we stay if they canet even, after four years, provide enough security in the over 180,000 people weeve trained in their army to protect their members of parliament as they walk around? Thates the other side of the question.

MATTHEWS: Well, let me get this straight...

BIDEN: So the question is here...

MATTHEWS: Hillary Clinton has saidoSenator Clinton, your colleague, has said that she thinks we should remain, keep some troops in there after we pull our troops out. I donet understand that. Are we going to get out of that country or are we going to have a permanent base in that country?

BIDEN: What weere talking about doing...

MATTHEWS: Whates your policy?

BIDEN: My policy is what I set out a year-and-a-half ago, which is to set a goal of getting out by March of e08. Make it a local referendum. Let the Iraqi constitution work. Give that Shia control over their areas, the Sunnis over theirs, and the Kurds over theirs in terms of their local police forces. Have a weak central government that controls the army, the distribution of resources and their borders. And thates the way in which you begin to separate the parties.

Never in history has there been a case, Chris, when therees been a self-sustaining cycle of sectarian violence that anything other than a dictator, an occupation or a federal system has ended it. We need a federal system here.

MATTHEWS: OK. Thank you so much, Senator Joe Biden, whoes the chairman of the Foreign Relations Committee and a candidate for president.


Those Laptop Bombardiers

From: "Stephen Zielinski"
Date: March 24, 2007 8:35:16 AM PDT
To:
Subject: Re: Where are the Laptop Bombardiers Now?

To the Editors,

Alexander Cockburn wrote:

"Sometimes I dream of them, - Friedman, Hitchens, Berman - like characters in a Beckett play, buried up to their necks in a rubbish dump on the edge of Baghdad, reciting their columns to each other as the local women turn over the corpses to see if one of them is her husband or her son."

I believe Cockburn credits that lot with too much good sense. They'd never notice those women if they were reciting their prose. Expecting them to notice would be akin to asking a Diva to turn away from her vanity mirror.

Keep up the good work!

Regards,

Stephen Zielinski

From:
Subject: laptop bombardiers
Date: March 24, 2007 5:39:13 PM PDT
To:

hi alex, good article, buto you noted in your lead, apropos adverswe deeds wrought by US on that day in history, that the U.S. rejected the Treaty of Versailles? yes, of course it did. but the whole reason we're in this mess is because of the Treaty of Versailles. i mean maybe you have a different interpretation of world war one than io but that was a slave treaty put on a country germany who had a gun put to its head to accept full guilt for a war where others took no responsibility for the role they played. it was a war that never had to take place except for the machinations of france and russia with great britain tagging along into a mindless hideous onslaught. (america's entry into it, only prolonged the slaughter). the versailles treaty which was then imposed on germany by GB and France and some minor allies led to world war II which was also a mindless, needless slaughter. the whole shebang that we are going through can be directly related to the treaty of versailles if one wanted to make a narrow argument. that old historian . taylor, no lover of the germans that one, makes a great case for this in The Origins of World War II, but there are the great revisionist American writers, Charles A. Beard for instance who contribute to the historical view of that hideous treaty in his book to name only one, President Roosevelt and the Coming of the War 1941. There is also the great book by Walter Millis, Road to War, America 1914-1917, or the wonderful account of the first world war by Harry Elmer Barnes, The Genesis of the World War. i agree with the rest of your article and always enjoy them but that one statement took me back on my heels. lots of best wishes Christine

Note: a version of the first item in this column ran in the print edition of the Nation that went to press last Wednesday.

Alexander Cockburn and Jeffrey St. Clair are the authors of End Times: the Death of the Fourth Estate (CP/AK Press).

Thursday, March 8, 2007

Is it payback time for world's borrowed prosperity?

Related
Man Group, Winton Hedge Funds Bruised by Market Rout
---
From the Baltimore Sun
By Rolfe Winkler

March 8, 2007

Lots of people are asking what's happening to the stock market lately. Are we in for a crash or a protracted bear market? No one, of course, can say for sure. But an understanding of some of the key factors that have driven stock prices up the last few years suggests stocks are headed down from here.

An interesting graphic in The Wall Street Journal two weeks ago, right before stocks fell so hard, showed that all of the world's top 20 stock markets were at yearly or all-time highs. Everybody was buying stocks. And it's not just stocks. Prices on many types of bonds are sky-high. Despite some areas of falling prices, real estate values are also still near all-time highs across the nation.

What could explain this? The biggest reason is that there is a record amount of cash around the world looking for a home. Investors have money to invest and so they're putting it anywhere and everywhere, bidding up the value of the assets mentioned above and many more.

That should be good, right? A record amount of cash means people are doing well, doesn't it?

Not so fast. It's crucial to understand where so much of this cash is coming from: It's borrowed. At some point, it has to be paid back.

For the last few years, investors worldwide have capitalized on rock-bottom interest rates to finance purchases of stocks, bonds, real estate, commodities and so on. When you buy things, their price goes up. But now it's payback time - literally.

Look at real estate. Over the last few years, it was very easy to borrow money to buy a house or a condo. In many cases, lenders stopped asking borrowers to provide proof of income before financing up to 100 percent of the purchase price of a home. But now, borrowers are discovering it's not so easy to pay a mortgage you can't afford.

A similar dynamic is playing out with stocks and bonds: The borrowing phase is ending and the paying-back phase is beginning.

Just as in real estate, investors have been borrowing record amounts of money to buy stocks and bonds the last few years. In late February, for instance, the New York Stock Exchange reported that money borrowed to buy stock (on "margin") reached an all-time high. With interest rates on yen near zero, hedge funds have been borrowing yen for virtually nothing to buy stocks. With junk-bond yields near all-time lows, leveraged-buyout firms have been borrowing billions to finance the purchase of huge public companies such as hospital owner HCA, commercial real estate company Equity Office Properties Trust, and, just last week, the utility TXU.

What's bringing on the payback period in stocks and bonds? One reason is that the Bank of Japan said last week it will raise interest rates on loans made in yen, forcing many hedge fund investors to sell the stocks they bought with borrowed yen. On the housing front, the implosion of subprime lending can only exacerbate the fall in real estate prices as borrowing to buy homes becomes more difficult. The bottom line is that easy credit to buy stocks, bonds and real estate may be a thing of the past.

When markets are driven up with too much borrowed money, it can set them up for a big fall. One of the key factors that led to the dramatic rise of stocks in 1929 was the explosion of broker loans to buy stock. It got pretty ugly when everyone was forced to pay back those loans over a short period.

The next Great Depression is likely not around the corner. The worldwide economy is probably too strong for that to happen. But we should never forget this lesson of 1929:

Markets that fly high with borrowed money can crash hard.

Copyright © 2007, The Baltimore Sun

Friday, March 2, 2007

Insider-Trading Ring Bust May Fuel Hedge-Fund Concern

(Update1)

By David Scheer

March 2 (Bloomberg) -- The U.S. government's accusations that Morgan Stanley, UBS AG and Bear Stearns Cos. employees were central figures in an insider-trading ring illustrate why regulators and lawmakers are suspicious of Wall Street's relationship with hedge funds.

Prosecutors in New York and Washington yesterday laid criminal charges against 13 people, accusing an executive at UBS and a former compliance lawyer at Morgan Stanley of tipping off traders and brokers to new analyst ratings and secret takeover talks. Bear Stearns was home to at least four professionals who traded on information leaked from inside the two firms, according to a complaint filed by the Securities and Exchange Commission.

``Incidents like this strengthen the hands of those who are urging greater scrutiny of hedge-fund activities and their sources of information,'' said David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton LLP in Washington.

Legislators such as Senator Arlen Specter, the Pennsylvania Republican, want market watchdogs to take action amid mounting evidence of rampant insider trading. At least two studies show that stocks and derivatives regularly rise ahead of takeovers, and in the past week trading of options to buy shares of TXU Corp. and Hyperion Solutions Corp. surged in advance of announcements that they agreed to be acquired.

Incentive to Trade

Hedge funds are private pools of capital that allow managers to participate substantially in gains on the money invested. That pay structure creates an incentive for employees to trade in non-public information. Hedge-fund managers also are under pressure to boost returns that since 2000 have averaged half the industry's gains in the 1990s.

The temptation to cheat extends to the securities firms, which collect $10 billion a year in fees for providing prime- brokerage services to hedge funds.

``The larger the pot of gold the more likely that you'll entice someone into stealing,'' said William Portanova, a criminal-defense attorney and former federal prosecutor based in Sacramento. ``Good people convince themselves over a cocktail that it's a victimless crime and that they're merely collecting a few crumbs from the feast that no one will ever miss.''

Earlier this year, the SEC asked at least 10 Wall Street firms to turn over stock-trading records for the last two weeks of September, seeking to determine whether they leaked details about big stock trades to favored clients.

Boesky, Levine

The government said yesterday that it broke one of the biggest insider-trading cases since the 1980s. According to the SEC, which brought a civil suit against 14 defendants, the scheme stretched over five years, included hundreds of tips and produced more than $15 million in illegal profits.

The arrests ended ``one of the most pervasive Wall Street insider trading cases since the days of Ivan Boesky and Dennis Levine,'' said Linda Thomsen, who heads the Securities and Exchange Commission's enforcement division.

At a meeting at the Oyster Bar in New York's Grand Central Station in 2001, Mitchel Guttenberg, an executive director in UBS's equity-research department, and hedge-fund trader Erik Franklin hatched one of the schemes, the SEC claims.

Guttenberg, 41, offered to settle a $25,000 debt to Franklin, 39, by slipping him analyst ratings in advance, the agency said. To avoid getting caught, the men used disposable mobile phones to send each other coded messages, according to the SEC's complaint.

Bear Stearns Officials

At the time, Franklin was working at Bear Stearns and managing money for Lyford Cay Capital out of the firm's New York offices, prosecutors said. He and his colleague, David Tavdy, 38, made more than $4 million on inside trades in brokerage accounts they controlled. Three Bear Stearns brokers also traded on Guttenberg's tips, the complaint alleges.

``The actions described in the complaint are clear violations of our policies and procedures,'' said Russell Sherman, a spokesman for Bear Stearns. ``We have and will continue to cooperate with the investigation.''

Lyford Cay's investors included ``certain senior officials'' of Bear Stearns, according to the SEC. Sherman declined to name them.

Prosecutors also accused Randi Collotta, 30, a compliance officer at Morgan Stanley, of telling her husband Christopher Collotta, 34, and Marc Jurman, 31, a broker in Florida, about deals in 2004 and 2005 including Johnson & Johnson's failed $24.2 billion bid for Guidant Corp., UnitedHealth Group Inc.'s $8.2 billion acquisition of PacifiCare Health Systems Inc. and ProLogis's $5.5 billion purchase of Catellus Development Corp.

Illegal Trading

Jurman traded on some of the information and passed it on to others, generating thousands of dollars in profits that were passed back to the Collottas and others, according to the SEC complaint. Two of the Bear Stearns brokers benefited from the leaks at New York-based Morgan Stanley, the world's second- largest securities firm.

A study by Measuredmarkets Inc. in August showed that insiders may have traded illegally in advance of 41 percent of the largest U.S. acquisitions the previous year. Two months later, Credit Derivatives Research LLC found that credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest leveraged buyouts by that point in 2006, rose before deals were announced.

More recently, trading in options to buy shares of TXU Corp. surged more than seven-fold on Feb. 23 before CNBC said the company would be acquired in the largest-ever leveraged buyout. This week, the volume of options trading to buy shares of Hyperion Solutions Corp. rose almost sixfold before Oracle Corp. yesterday said it will buy the company for $3.3 billion.

Guilty Pleas

Four of the criminal defendants have pleaded guilty. Eight, including Guttenberg, pleaded not guilty in Manhattan federal court and were released on bail of as much as $500,000. No firm was criminally charged. All the defendants declined to comment, as did attorneys for Guttenberg and the Collottas.

Lawyers for Franklin, Jurman and Tavdy didn't return calls seeking comment.

Morgan Stanley spokesman Mark Lake said his company is ``outraged that a former employee allegedly stole confidential information,'' and the firm is cooperating with investigators. UBS also is cooperating, said Rohini Pragasam, a representative in New York for the Zurich-based bank.

Bear Stearns, based in New York, is the fifth-largest U.S. securities firm by market value.

Charlotte, North Carolina-based Bank of America Corp., the second-biggest U.S. bank, also is cooperating with the government investigation after one of its brokers was accused of collecting kickbacks in exchange for shares of new stock offerings, spokeswoman Shirley Norton said.

The SEC case is SEC v. Guttenberg, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporter on this story: David Scheer in Washington dscheer@bloomberg.net .

Last Updated: March 2, 2007 03:55 EST

Friday, February 23, 2007

Officials Reject More Oversight of Hedge Funds

February 23, 2007

WASHINGTON, Feb. 22 — The Bush administration said Thursday that there was no need for greater government oversight of the rapidly growing hedge fund industry and other private investment groups to protect the nation’s financial system.

Instead, the administration, in an agreement it reached with the independent regulatory agencies, announced that investors, hedge fund companies and their lenders could adequately take care of themselves by adhering to a set of nonbinding principles.

The principles, many already being followed by the sharpest investors and best-run companies, say that investors should not take risks they cannot tolerate and should carefully evaluate the strategies and management skills of hedge funds. They also call for funds to make clear and meaningful disclosures to investors.

The decision came after months of study by a presidential working group of top officials and regulators. They looked at both the hedge fund industry, which has more than $1 trillion in assets, and the management of private equity firms, which take direct control and ownership of companies rather than relying on large numbers of outside stockholders.

The group’s conclusions reflected both the strong antiregulatory ideology of the administration and the formidable influence of Wall Street and the increasingly wealthy hedge fund industry among both Democrats and Republicans in Washington.

By STEPHEN LABATON

--MORE--

Tuesday, February 13, 2007

The Great Unwind is coming, warn Dresdner pair

It’s the sort of analysis that, as an investment banking analyst focusing on the investment banking sector, might seriously damage your career prospects.

No matter! Stefan-Michael Staimann and Susanne Knips at Dresdner Kleinwort have published a detailed tome on the importance of hedge funds to the investment banking industry. Their conclusion? Head for the hills, because “The Great Unwind” is coming — and it’s going to hurt.

Here’s the thesis:

  • Transaction costs run to 4 per cent of the $1,300bn of hedge fund assets under management. Manager salaries and performance fees take another 4-5 per cent, meaning hedge funds need to generate average annual returns of close to 20 per cent to keep everyone (including their investors) happy. Yet the strategies employed to produce these returns are not necessarily sustainable.
  • A clear majority of hedge funds can be thought of as leveraged sellers of deep-out-of-the-money put options. They employ long-short strategies - removing market risk with what are essentially spread or arbitrage bets with a relatively low return. To boost returns they employ extensive leverage. These spread positions do produce what look like low-risk returns most of the time — but, once in a blue moon, what are effectively options written by the hedge funds will get called. Think LTCM.
  • While hedge fund strategies across the industry may look diversified, there is actually a high degree of correlation, since many funds are effectively running leveraged bets on stable or tightening risk premia. Any widening of risk premia will force large-scale liquidations of positions, with margin calls by the banks and redemptions by investors reinforcing the process.
Staimann and Knips declare: “We believe that the great unwind is inevitable, but impossible to time. It looks like the process of building up leveraged spread bets has already run quite far. Risk premia in many markets are very low, making it increasingly difficult to find spread bets for new money. Market volatility has been driven to record lows (remember: selling a put is like shorting volatility). The process may not have much more room to run and may start to be more sensitive to factors that could threaten its delicate balance (such as a deterioration of corporate credit risk).”

“The virtuous cycle on the slow way up (the supply and demand from building spread bets
leads to tightening spreads, which in turn raises confidence to build new positions) turns
into a vicious cycle on the fast way down.”

So how vicious is this great unwind going to be? Well, the Dresdner pair estimate that investment banks sucked roughly $40-50bn in revenue out of hedge funds last year, mainly through sales/trading and services other than prime brokerage. That is about 15-20% of all industry revenues in investment banking.

P.S. If you do get hold of a copy of the Dresdner report, do have a look at Appendix 2, titled “Are hedge funds banks. It compares Citadel with Deutsche’s investment banking division and, in a word, answers “yes” — and then goes on to compare Citadel with LTCM.

Monday, December 11, 2006

Expect 20 hedge funds to collapse each year, warns FSA

The Times December 09, 2006

Patrick Hosking, Banking and Finance Editor

Call for more information on fees
Promise to look at relaxing rules

Day of the locust

More than 20 hedge funds are likely to collapse each year, the chairman of the Financial Services Authority predicted, as he called for more transparency from the industry.

Sir Callum McCarthy said that the failure rate of hedge funds was relatively small at 0.3 per cent, but, with 8,000 funds worldwide, “we might expect slightly over 20 to come to collapse this year”.

The chief City regulator called on the industry to provide more information on fees, redemption penalties and other opaque areas before plans to open it up to small investors.

It was “increasingly anomalous” that UK retail investors were prevented from investing in funds of hedge funds, he said, promising a consultation early in 2007 to relax the rules.

Referring to the implosion of Amaranth Advisors, the American hedge fund that lost its investors about $7 billion (£3.6 billion) in September after being wrongfooted by naturual gas prices, Sir Callum said that investors had been undaunted by its failure. He said that the FSA was relaxed about hedge fund failures as long as there was no danger to the stability of the financial system. Addressing fellow regulators in Germany, Sir Callum tried to diffuse German hostility to hedge funds, arguing that demonising the industry was to miss the point.

Hedge funds were converging with so-called traditional fund managers and many banks, brokers and insurers were already carrying out trades indistinguishable from hedge funds.

In an oblique reference to one senior German politician’s famous attack on hedge funds as “locusts” two years ago, Sir Callum said: “Luckily. . . I am a regulator and not an entomologist.”

Sir Callum called for hedge fund managers to spell out details of their fee structures. Typically they charge 2 per cent of funds under management plus 20 per cent of profits. Yet the true cost to investors is often buried in complex conditions governing hurdle rates of return and allowable expenses.

“Any hedge fund manager, like other asset managers, should disclose these clearly to potential investors,” Sir Callum said.

They should also fully disclose redemption arrangements, including the existence of so-called side letters, documents conferring favourable terms on some investors. There also needed to be more detail on valuation procedures, a controversial area for hedge funds that often own illiquid assets for which there is no market price. Sir Callum said there was “potential for dishonesty” in valuing complex instruments like collateralised debt obligations and catastrophe bonds.