Hedge Fund Exchange

Fairfield Greenwich Group Is Back Open For Business

By John Carney for ClusterStock, June 30 2009

The Manhattan offices of the Fairfield Greenwich Group are back open, according to a person familiar with the matter. The hedge fund was one of Bernie Madoff's biggest enablers, raising billions of dollars from outside investors that it wound up just pitching into the ponzi schme. (After taking its own cut, of course.)

For several weeks, the NYC offices of FGG were closed. We had figured that this was a sign that the disgraced firm was shutting down operations. After all, who in their right mind would trust them with bus fare much less any real investment capital?

But it looks like we were wrong. That office in midtown Manhattan is back open for business. In fact, the founder of FGG, Walter Noel, has been reporting for work in the office.

So what are they doing? We suspect that much of the work that goes on at FGG now comprises giving money back to investors and talking with lawyers about how to defend themselves from the various lawsuits that have already been filed, and the many, many more that inevitably will get filed.

Fund Of Funds To ‘Vigorously’ Defend Madoff Lawsuit

By FINalternative, June 30 2009

Austin Capital Management, a fund of hedge funds shop that had some 7.5% of its assets invested with Ponzi scheme mastermind Bernard Madoff, is going on the defensive against a hedge fund filed on behalf of two New Mexico state funds.

The firm, which is based in the Texas capital, said last week that it would “vigorously” defend itself against the lawsuit, filed by the National Education Association of New Mexico, a teachers union, over $25 million in losses suffered by state’s Educational Retirement Board and State Investment Council. The union lawsuit alleges that Austin ignored several red flags because of its longstanding relationship with Madoff, who was sentenced to 150 years in prison for running a $65 billion Ponzi scheme yesterday.

“Austin Capital is aware that it and certain of its employees and affiliates were named as defendants in a litigation filed and recently unsealed in New Mexico,” Sally Martin, a spokeswoman for the firm, told the Austin American-Statesman. “We believe the allegations made are unfounded, and we intend to vigorously defend Austin and its employees and affiliates.”

Austin Capital’s parent, Ohio-based KeyCorp, last month announced it was shutting down the fund of funds shop.

M&G’s Dobell blasts ‘selfish’ hedge funds

By Patrick Hosking and Miles Costello for The Times, June 30 2009

One of the most senior fund managers at Prudential has attacked hedge funds as selfish and devious and blasted derivatives as “the scourge of the modern age”.

Tom Dobell, who manages the £3 billion Recovery Fund for M&G, the insurer’s asset management unit, made the remarks in letters sent this month to the fund’s 100,000 investors.

The salvo came amid evidence that hedge funds are poised to deliver their best first-half returns in a decade, bouncing back from a disastrous spell last autumn.

Explaining his no-frills investment philosophy, Mr Dobell wrote: “We have strenuously avoided the use of derivatives, which I regard as the scourge of the modern age, and have often been at loggerheads with the hedge funds, many of whom I regard as clever but selfish and short-term.”

He said that M&G had refused to lend shares to hedge funds. Borrowing shares is a key part of the process of short-selling — taking down bets on share prices. “We have refused to fuel their [hedge funds’] often secretive and devious tactics by lending out stock in the companies that we hold on [sic] the fund,” he wrote.

Mr Dobell declined on Monday to expand further on the remarks in his letter, which was seen as unusually outspoken for Prudential, but it is thought that many fund managers at M&G are concerned that the activities of hedge funds can damage the interests of traditional investors, forcing some companies into insolvency when a more patient approach might have saved them.

In presentations to wealth managers, Mr Dobell has said that the average share is held now for only nine months. His fund, by contrast, holds for an average of three to five years and has some shares going back to its foundation 40 years ago.

Hedge funds worldwide have returned 5.63 per cent to their investors since January 1, according to Hedge Fund Research, a Chicago-based firm. If the returns hold up over the next two days, it would mark the best first half for the asset class since 1999. Hedge funds have comfortably beaten the S&P 500 index of US shares, which as of last Friday, was only 1.73 per cent higher for the year to date.

However, sceptics argue that hedge fund indices can significantly flatter the reality because hedge funds that fail drop out of the statistics.

One hedge fund chief executive said that confidence in the market returned on a single day in March, when the US Government unveiled the second strand of its Troubled Asset Relief Programme. The signal that the US Administration was shoring up the financial system, particularly banks, made confidence return, he said.

In its draft Financial Services and Business Bill, outlined on Monday, the Government said that it was examining powers for the Financial Services Authority to restrict short-selling.

Managed Accounts vs. Hedge Fund Model

By Vishaal B. Bhuyan  for Seeking Alphs, June 30 2009

                                                                                                                                                                                                                           A former Deutsche Bank arbitrage trader has left to start ROC Capital Management with an estimated $1b of capital, $400 million  of which was invested by former employer DB who invested the capital in lieu of a bonus.The interesting thing about the deal is that it illustrates an emerging trend in the money management industry - 'managed accounts'. As oppose to tying up investor's capital for 2 years (sometimes for as long as 10 years in a private equity structure), investors are demanding access to their capital and requesting that their capital be held in a segregated account.

 This is exactly what DB demanded of ROC, and this is exactly what DB got. Over the past two years hedge funds experienced a record number of investor redemptions, which resulted in "gates" and other barriers being executed to ensure fund liquidity. I don't think there would have been this many redemptions, despite the losses suffered by the majority of funds, if investors had increased transparency and access to their capital. Investors want to know they CAN take their money out if they want to. The driving factor behind the record number of redemptions in 2007 and 2008 was more a poduct of fear than necessity. Investors will have more leverage with fund managers moving forward, especially after the Madoff and Stanford scandals have damaged the trust and reputation of Wall St. 

It is important to consider what will happen to more illiquid strategies if such a major shift was to occur. It may be difficult to manage a portfolio of loans, life settlements, or asset backed notes across a wide number of accounts. Although, such a model  may be necessary for fund of funds, endowments, and pension funds to get comfortable with alternative investments once again, especially if there is even the slightest liquidity mismatch between the root institutional investor and the underlying asset class.  

Bahamas/UK Hedge Funds Settle With SEC on Late Trading Scheme

By HedgeCo, June 30 2009

Najy N. Nasser, manager of Bahamas/UK based hedge funds, Headstart Advisers Limited (HAL) and Headstart Fund, has been ordered by the SEC to pay $17.8 million in a settlement regarding his hedge fund’s alleged late trading scheme.

According to the SEC litigation release, Nasser and HAL must pay, without admitting or denying the allegations, civil penalties of $600,000 and $200,000. In addition, the final judgment orders the relief defendant, Headstart Fund, to pay $17 million.

The Commission’s Complaint alleged that the Bahamashedge fund, Headstart, acting through its United Kingdom investment adviser, HAL, engaged in fraudulent late trading and deceptive market timing of U.S. mutual funds through accounts at U.S. broker-dealers. and that Nasser, HAL’s Chief Investment Adviser, provided instructions to personnel at U.S. broker-dealers to direct Headstart Fund’s late trading and deceptive market timing scheme.

Battered But Unbeaten, Sparx Offers Two New Funds

By FINalternative, June 30 2009

In recent months, the news from the Sparx Group was all about cutbacks. But Asia’s largest hedge fund firm is also growing, in certain areas.

The embattled firm, which posted a ¥23.3 billion (US$224.3 million) loss in the year ended March 31 and has announced a series of layoffs and retrenchments, has launched a new fund and is planning a second new offering, its first-ever global macro fund.

The Tokyo-based firm plans to market the global macro fund to institutional investors over the next few months, Bloomberg News reports. Firm president Shuhei Abe, who in recent months has shuttered Sparx’s U.S. business and London office, said the size of the new fund is still being worked out.

“We’ve been dependent on my past experiences in the equities market, but after the struggle we’ve gone through last year, we’re starting to utilize other expertise to expand the scope of our products,” Abe told Bloomberg.

Some of that new expertise comes from a pair of proprietary traders Sparx added last year from an unidentified firm.

Sparx isn’t completely abandoning its traditional long-biased strategy. The firm yesterday launched the third so-called “baby” hedge fund based on its Sparx Japanese Stocks Long Short Strategy Mother Fund. The new fund, which raised about ¥250 million from institutional investors, is Sparx’s first new offering in six years. About 80% of the fund’s assets will track the mother fund, with the rest invested in index futures and other securities.

Sparx said it hopes to increase the fund’s size to ¥2.5 billion within five years.

Hedge fund returns are up, redemptions down

By Svea Herbst-Bayliss and Laurance Fltcher for Reuters, June 30 2009

Hedge funds are living up to their high-flying reputation again with strong returns in the last three months, but many investors burned by last year's losses are clamoring for reforms before committing new money.

Final June quarter data will not be released until next week, but Merrill Lynch analysts who track returns in the $1.3 trillion industry wrote on Monday that hedge funds will likely post their best quarterly performance since early 2000.

The rebound became visible in April when the average hedge fund returned 2.7 percent. It gained strength in May with a 4.4 percent rise, Merrill Lynch analysts wrote. For the second quarter, they estimate a gain of 6 percent or more.

That would mark a dramatic recovery from 2008 when the average hedge fund lost 19 percent and some celebrated funds, including Citadel Investment Group LLC -- run by Kenneth Griffin, the 41-year-old Chicago billionaire -- lost as much as 50 percent at the height of the financial crisis.

This year's stock rally, sparked by hopes that the worst of the global economic downturn is over, has helped boost many funds' returns.

Tudor BVI Global Fund, run by Paul Tudor Jones of Tudor Investment Corp, gained 12.4 percent through the end of May, while Lee Ainslie's Maverick Fund gained 8.8 percent through the end of May, their investors said.

"I believe there's been a very big change of mood and it has come at least three months earlier than I was expecting," said Christopher Fawcett, chief executive of hedge fund firm Fauchier Partners in London.

Last year, pension funds, endowments and wealthy individuals reacted to hedge funds' heavy losses and high fees by demanding a record $152 billion back in the last three months of 2008, research firm Hedge Fund Research (HFR) said.

This year, the pace of redemptions has slowed. In the first quarter, investors pulled $103 billion, according to HFR. In May, hedge funds saw inflows of $3.4 billion, their first inflows since May last year, researchers at TrimTabs found.

"Redemptions have really dried up," said Mark Kary, chief executive of hedge fund firm Polar Capital in London, noting that his firm also saw small net inflows in the second quarter.

While inflows are still small, industry researchers said they played a critical role by letting hedge funds stop selling market positions to raise cash needed to let investors out.

"The inflows kept hedge funds from being a drain on the markets," TrimTabs President Conrad Gann said.

Pension funds and other investors have said they plan to commit more money to hedge funds in the second half of 2009, but they are also ready to attach conditions about how their money will be invested and a right to get it back fast.

"Transparency, liquidity, good fee terms, no gates, no side pockets. That is what the institutional community will be pressing hedge funds for," said Eric Goodbar, hedge fund strategist at Mellon Capital Management, a unit of Bank of New York Mellon Corp. "Hedge funds that are essentially large lockup structures will be viewed with caution."

Hedge Fund Sued By Union Over Madoff Ties

From The New York Times, June 30 2009

Austin Capital Management, a fund of hedge funds that had invested 7.5 percent of its assets with Bernard L. Madoff, is being sued by New Mexico’s teacher’s union for negligence that caused big losses for the state.

The Texas hedge fund said last week that it would “vigorously” defend itself against the charges brought against it by the National Education Association of New Mexico, a teachers union.

The National Education Association of New Mexico said that Austin Capital missed several red flags when it invested money from the state’s Educational Retirement Board and State Investment Council into a hedge fund tied to Bernard L. Madoff Investment Securities, resulting in a $25 million loss.

“We believe the allegations made are unfounded, and we intend to vigorously defend Austin and its employees and affiliates,” Sally Martin, a spokeswoman for the firm, told The Austin American-Statesman.

Mr. Madoff, who pleaded to guilty to leading a $65 billion Ponzi scheme, was sentenced to 150 years in prison on Monday, one of the most severe sentences ever handed out in a white-collar crime case.

Arthur Nadel, the 'mini-Madoff," might be released pending trial

By Susan Taylor Martin for TampaBay, June 30 2009

As Bernard Madoff heads to prison for 150 years, the man at the heart of Sarasota's "mini-Madoff'' scandal could get at least a temporary break from incarceration.

At a hearing last week, a federal judge said he was "obviously inclined" to reduce the $5 million bail set for Arthur Nadel, the former hedge fund manager accused of swindling 371 investors out of nearly $400 million. Nadel, arrested in January, has been unable to post $1 million in cash and get four "financially responsible'' individuals to co-sign his bond.

Nadel's lawyer wants bail lowered to $1 million, saying his 76-year-old client is in frail health and should be allowed to await trial at home in Sarasota. Judge John Koeltl's decision is expected within a few weeks.

Nadel, who faces life in prison if convicted, is considered a flight risk because he owned five planes and disappeared for two weeks after defaulting on quarterly payments to investors. Among those who think he should stay behind bars is Maria Fouracre of Osprey, an investor who wrote to the judge after learning he was considering a bail reduction.

Nadel's "frail health is questionable — he did well on his own for the two weeks when he was hiding,'' the letter said. "Furthermore, to allow Mr. Nadel to remain in his home will give him the time he needs to plot the extrication of the millions that cannot be located.''

Fouracre, 75, didn't say how much she lost, but told the St. Petersburg Times on Monday that "I'd be sick to my stomach'' if Nadel were released.

A court-appointed receiver has seized most of Nadel's assets, including rental properties in Mississippi and Georgia. The receiver has also asked 84 investors to relinquish "false profits'' — money that exceeded their original investment. Three investors so far have agreed to return a total of $250,000.

Other investors are suing Holland & Knight, the law firm that helped prepare offerings for Nadel's hedge funds. The suit says the firm shares responsibility for the alleged fraud because it approved documents that failed to disclose that Nadel, a law school graduate, was disbarred in 1982 for improperly using $50,000 from an escrow fund.

Holland & Knight says it had no duty to investigate Nadel. In support of its motion to dismiss the case it submitted the prospectus for his Victory Fund.

The fund "involves a high degree of risk,'' the prospectus warned, "and should be considered only by persons who can afford to sustain a loss of their entire investment.''

UK Hedge-Fund Headstart To Pay $17.8M To Settle SEC Charges

By Lauren Pollock for The Wall Street Journal, June 30 2009

U.K. hedge-fund adviser Headstart Advisers Ltd., its chief investment officer and the hedge fund itself will pay a total of $17.8 million as part of a settlement with the U.S. Securities and Exchange Commission to resolve claims of deceptive market timing.The SEC claimed the defendants traded mutual funds between September 1998 and September 2003, engaging in late trading through Headstart's accounts at two broker-dealers. Headstart, which had at least $500 million in funds at its height, would trade after the market closed but still receive the current day's net asset value, profiting on post-market events, according to the SEC. The commission alleged the fund earned about $198 million through the process.

The SEC also said Headstart bypassed rules prohibiting trades above a certain dollar threshold by splitting Headstart trades among multiple accounts.

As part of the settlement, Headstart is neither admitting nor denying the allegations. Of the settlement total, the now-defunct hedge fund will pay $17 million, while Headstart Advisers and Chief Investment Officer Najy Nasser will pay $200,000 and $600,000, respectively.

"Headstart is very pleased to have reached a settlement," Nasser said. "We responded to U.S. concerns about market timing and immediately ceased this element of Headstart's business in September 2003."

The adviser said the settlement will allow it to concentrate on its business as an investment adviser to offshore hedge funds and expand the business with the launch of new funds.