Hedge Fund Exchange

Developed Market Funds Suffer Investor Redemptions

By Daniel Bases for Reuters, January 28, 2010

Investor concern about tightening lending conditions in China and deteriorating finances in Greece and Japan led them to pull cash out of developed market equity funds for debt funds in the week ended January 27, fund tracker EPFR Global said late on Thursday.

"Overall, investors pulled over $9 billion out of EPFR Global-tracked equity funds while committing $4.8 billion to all bond funds tracked. Bond funds have now received net inflows every week since March 11, 2009," EPFR said in a statement released late on Thursday.

However, safe haven money market funds still proved too conservative for investors, leading to a $10 billion outflow from this sector, bringing the year-to-date total to $70.1 billion.

Emerging market equities suffered outflows while bond funds had inflows, particularly local currency-denominated funds, which took in an all-time inflow record of $515 million.

U.S. equity funds recorded their biggest weekly outflow since late June, 2008, the Boston-based firm said.

"The earnings season did not work the same magic for U.S. equity funds as dour forecasts combined with soft macroeconomic data and fresh uncertainty about the direction of key reform proposals prompted investors to pull over $8 billion out of this fund group," EPFR said.

But a safety trade led to U.S. bond funds getting a net inflow of $2.4 billion, marking 56 consecutive weeks of inflows.

European equity funds suffered net redemptions for the third time in five weeks.

"Mixed earnings reports and fresh doubts about the health of banks in several countries kept the pressure on Europe equity funds, with redemptions hitting a five-week high of $731 million," the firm said.

Mounting concerns over Greece's fiscal position has unnerved investors. The euro zone nation has estimated it will need to borrow about 53 billion euros this year to plug fiscal shortfalls and refinance its debt.

This week it raised 8 billion euros with a five-year bond issue, but was forced to offer a very high yield.

In Japan's case, a warning shot from Standard & Poor's added to global financial market uncertainty. The firm threatened on January 26 to cut the credit rating of the world's second largest economy unless it produced a credible plan to rein in its debt and lift growth in an economy plagued by persistent deflation.

EMERGING MARKETS

Equity funds tied to Brazil, Russia, India and China, collectively had net redemptions for the first time since early September. However, just as sentiment has turned negative toward China, China equity funds saw their first inflows since mid-December.

In the case of Chinese equity funds, they took in a net $288 million as investors took the moves by authorities to tighten lending conditions as a positive sign the government is moving to stop an asset bubble from growing.

"The possibility of weaker-than-expected Chinese and U.S. demand also weighed on Latin America Equity Funds, which posted collective outflows of $222 million for the week, while Taiwan Equity Funds - which were also hit by concerns about the outlook for the tech sector -- suffered their worst week in flow terms since late August," the firm said.

Emerging markets bond funds posted inflows of $572 million.

 

Avalanche Of Amendments Inundate EU Hedge Fund Rules

By FinAlternatives, January 28, 2010

No one said it would be easy: The European Union’s proposed alternative investments regulations have attracted a record number of proposed amendments from members of the European Parliament.

The 736 lawmakers are seeking more than 1,000 changes to the controversial rules, which, as written, would impose strict new reporting and custody requirements on European alternative investment firms, as well as possible leverage limits. The rules, which might also bar non-EU fund managers from collecting money in the 27-member bloc, have been decried by the industry as draconian. Many have warned it will drive hedge funds and private equity firms out of Europe entirely.

“We understand that well over a thousand amendments have been tabled by MEPs—this is unprecedented in EU financial services regulation, and shows clearly that there’s a long way to go to get the directive into an acceptable shape,” Javier Echarri (Above) of the European Venture Capital Association told The Telegraph.

Meanwhile, regulators in Britain, home to the overwhelming majority of European hedge fund firms, are sounding new warnings about the proposed regulation.

Dan Waters, who heads the Financial Services Authority’s asset management section, said the proposal’s equivalence requirements, which would bar funds whose home jurisdiction’s rules aren’t as strict as Europe’s, would bar a great many funds, indeed: 40% of the world’s hedge funds and 35% of its private equity firms.

“It would drive legitimate business models offshore,” Waters said. “It cannot be a sensible outcome from a directive that investor protection is delivered at the expense of the protection of financial stability.”

Poul Nyrup Rasmussen, the former Danish premier who has championed the EU legislation, called the report on which Waters’ claims were based biased.

 

Can the S.E.C. Get the Galleon Wiretaps?

By Peter J. Henning for The New York Times, January 28, 2010

The Galleon Group insider trading case is quite unusual in many ways, perhaps most strikingly in the government’s use of wiretaps to record telephone conversations of the defendants while they were apparently exchanging inside information. Those recordings are valuable evidence, and there is a fight going on over whether the Securities and Exchange Commission can force the defendants to give them up.

Odd as it may sound, one arm of the federal government, the S.E.C., cannot get the wiretaps from another arm, the Justice Department, because the wiretaps can only be disclosed by prosecutors in limited circumstances under federal law. Instead, the S.E.C. wants the defendants to provide the recordings, evidence that may well lead to their being found liable for insider trading.

Wiretaps are rarely used in white-collar crime cases because most investigations begin well after the crime is complete, so there is nothing to learn from listening to conversations. The recordings in this case provide a rare window into what the defendants knew about the companies at the time they traded, and so the S.E.C. wants to hear what the defendants said to prove their knowledge and intent.

A common feature of securities fraud cases is the filing of parallel criminal and civil cases, which occurred in the Galleon case when the S.E.C. filed its civil action the same day the Justice Department arrested Raj Rajaratnam and six other defendants, accusing them of trading on nonpublic information. While the prosecutors have full access to the wiretaps, the S.E.C. has not, so its civil complaint merely mimicked some of the quotes from the wiretaps that the prosecutors put into the criminal complaint.

The secret recording of telephone conversations is governed by the Wiretap Act, which is Title III of the Omnibus Crime Control and Safe Streets Act of 1968. The statute requires the government to obtain judicial authorization in most instances before it can record conversations. The law restricts disclosure of the contents of the wiretap to those who need it for law enforcement purposes, and that does not include the S.E.C.’s enforcement of the federal securities laws, so the recordings could not be shared to assist in pursuing the civil case.

Once the grand jury indicted Mr. Rajaratnam and Danielle Chiesi on charges that they engaged in insider trading, however, the prosecutors were required to turn over the contents of the wiretaps to the defendants. These are two of the defendants sued by the S.E.C. in the parallel civil case. The discovery rights of a party in civil litigation are quite broad, so rather than try to pry the recordings out of the Justice Department, the S.E.C. has instead simply asked Mr. Rajaratnam and Ms. Chiesi turn over the evidence they received from the Justice Department in their criminal cases.

The defendants have objected quite vehemently in both the civil case being heard in Federal District Court by Judge Jed S. Rakoff and now in the criminal prosecution before Judge Richard J. Holwell. As the S.E.C. has sought to compel the defendants to turn over the wiretaps in the civil case, the defendants have filed a motion in the criminal case asking for an order prohibiting any disclosure.

It is not clear which judge will ultimately decide whether the restrictive approach to disclosure in the Wiretap Act trumps the broad civil discovery rights accorded to parties in civil litigation. Whoever makes the decision will be dealing with a statute that does not deal directly with this scenario. The issue has not come up before because wiretaps are rarely used in white-collar crime cases, so the courts have not squarely addressed civil discovery in a parallel proceeding involving such evidence.

The defendants have argued that the Wiretap Act limits disclosure to those few situations specifically enumerated in the statute (18 U.S.C. § 2517). They point to a recent decision of the United States Court of Appeals for the Second Circuit — In re New York Times Company to Unseal Wiretap and Search Warrant Materials — in which the court said that “Title III created a strong presumption against disclosure of the fruits of wiretap applications.”

The federal judge in that case was none other than Judge Rakoff, whose decision was to release a wiretap application related to a prostitution ring that included among its customers former Gov. Eliot Spitzer of New York. That decision was later reversed.

The Justice Department has taken a different approach, arguing that the statute does not address the issue of discovery of wiretap evidence in a civil case, and that the Wiretap Act’s silence on the issue should be interpreted as allowing for the S.E.C. to obtain the recordings from the defendants. The government points out that the defendants possess the recordings lawfully, and therefore they can be compelled to turn them over because they will not violate any express provision of the law that prohibits such disclosure.

The differing provisions reflect a fundamental legal divide: Does the statute limit disclosure of wiretaps to the specific instances identified and therefore bar the S.E.C.’s request, or does the failure to affirmatively preclude such disclosure mean that there is no basis to bar discovery by the S.E.C.?

In a hearing before Judge Rakoff, prosecutors argued that he could seek an order from the Judge Holwell authorizing the disclosure, but has not done so yet. The statute authorizes a prosecutor to use the contents of a wiretap “to the extent such use is appropriate to the proper performance of his official duties.” (18 U.S.C. § 2517(2)) The government asserts that assisting the S.E.C. in pursuing its case is a “proper performance” of official duties, and it went so far as to claim that there is no need to even seek judicial approval for the release.

Mr. Rajaratnam and Ms. Chiesi have raised a second objection to being forced to disclose the recordings to the S.E.C., arguing that the demand was made in violation of the Wiretap Act and therefore should be suppressed. One of the remedies the statute provides if its provisions are not followed properly is a prohibition on any use of the wiretap evidence. Until the suppression issue is decided, they argue that it is improper to compel them to turn over the recordings to the S.E.C.

While the wiretaps provide real-time evidence that will be helpful to proving the government’s case, they have also made a complex case even more complicated. Judge Rakoff has imposed a very tight schedule for the S.E.C.’s civil case, with trial to start in August 2010. Judge Holwell has not yet set the criminal case for trial, and the wiretap issue is likely to require considerable attention in both cases. As I discussed in an earlier post, “Timing of S.E.C. Trial Could Complicate Case Against Galleon,” it will be difficult to complete the criminal trial by early August because of the number of conspiracies, and holding the civil trial first may result in the jurors not hearing all the relevant evidence from the witness or, perhaps, the recorded telephone conversations.

In the recent hearing, Judge Rakoff described the issue of whether the wiretaps can be disclosed to the S.E.C. as “really kind of interesting.” He couldn’t be more right, for whoever gets to decide this thorny issue.

S.E.C.'s Request for Wiretap Evidence Justice Department Letter in Support of S.E.C.

Obama Bank Plan Could Pass In Months

By FinAlternatives, January 28, 2010

President Barack Obama’s plan to bar banks from proprietary trading or participating in the alternative investments industry could be passed by the summer, the head of the House Financial Services Committee said.

Rep. Barney Frank (D-Mass.) told the Financial Times that he and his Senate counterpart, Sen. Christopher Dodd (D-Conn.), would have a bill ready by March, and it could be passed within six months, and definitely before November’s mid-term elections to Congress. Frank also moved to quell concern that the U.S. would be going it alone on the new regulations, a worry expressed most recently by French President Nicolas Sarkozy.

“I think we’re going to see substantial harmonization,” he told the newspaper. “We’re taking to the EU and I’m hopeful we’ll end up in the same place.” And despite the protestations of its leaders to the contrary, Frank said he believed the U.K. is “ready to come with us.”

Frank said Obama’s proposals, which would bar bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds, could be added to the financial industry regulation overhaul making its way through both houses of Congress.

“We’ve been working with Paul for most of the year, so I wasn’t surprised,” Frank said of former Federal Reserve Chairman Paul Volcker, the driving force behind Obama’s planned restrictions. But he said that banks would be given “at least three years” to comply with the new regulations.

“You can’t have a fire sale,” Frank told the FT. “There would have to be a phase-in.”

 

Hedge Funds Charged With Secondary Offerings Violations

 Paula Schaap, HedgeFund.net, January 27, 2010

The Securities and Exchange Commission, for the first time, charged two California hedge fund firms with violating a rule to prohibit certain kinds of short selling in advance of secondary share offerings. 

The SEC claimed that AGB Partners and Palmyra Capital Advisors were guilty of a practice called “shorting into the deal,” where a fund offers secondary shares within five days of selling the same securities short. 

In 2007, the SEC tightened up its regulations against the practice. 

The two firms, AGB Partners and Palmyra Capital Advisors, have already settled with the SEC without admitting or denying the charges. 

Palmyra made short sales in advance of a secondary offering for Capital One Financial, resulting in profits of $225,500, the SEC alleged. 

The SEC claimed AGB Partners violated the rule both before and after it was amended. In April 2007 AGB Partners used secondary offering shares for Boots & Coots International Well Control to cover a portion of a short position in the company. In June 2008, after the rules were changed, AGB Partners sold short shares of inter-dealer broker BGC Partners and then bought BGC Partner shares in the company’s secondary offering. 

In settling the case, Palmyra paid the SEC more than $330,000 in disgorgement and penalties. AGB Partners and its principals, Gregory Bied of Boise, Idaho and Andrew Goldberger of Santa Monica, Calif., paid more than $50,000 in total.

New Castle’s Kurland Pleads Guilty in Galleon Insider Probe

David Glovin, Bloomberg, January 27, 2010

Mark Kurland (Above, left), co-founder of New Castle Funds LLC, pleaded guilty to insider trading charges, the eighth person to admit his involvement in the Galleon Group LLC case.

Kurland won’t cooperate with prosecutors in their probe, defense attorney Patrick Smith said. Seven other individuals who have pleaded guilty are cooperating. U.S. magistrate judge Ronald Ellis accepted Kurland’s plea in Manhattan federal court today.

Kurland is among 21 people who have been charged in two waves of arrests since October. Among them are Galleon Group founder Raj Rajaratnam, who was indicted last month for using confidential tips to earn $17 million on illegal stock trades, and Danielle Chiesi (Above, right), who Kurland supervised at New York-based New Castle.

According to an indictment, Chiesi was leaked inside tips from employees at technology companies. Chiesi then passed on the information to Kurland, and both traded on the news, according to prosecutors.

Kurland was recorded on government wiretaps of Chiesi talking about the alleged scheme, according to court papers. In one recording, he is heard encouraging Chiesi to meet more people who would provide tips, according to court filings.

Kurland’s plea will likely be accepted by a magistrate judge today. The magistrate will then recommend whether a federal judge should formally accept the guilty plea.

The case is U.S. v. Chiesi, 09-cr-02307, U.S. District Court, Southern District of New York (Manhattan).

Hedge funds move to release investor cash

David Walker, GlobalPensions.com, January 25, 2011

GLOBAL – The rebound in market liquidity since the credit crunch has spelled good news for some pension funds locked into hedge funds during the crisis, as some prominent funds have returned cash to investors sometimes years earlier than expected.

From September 2008, many pensions were stuck in funds as evaporating liquidity led many to halt withdrawals. By the end of 2008, Credit Suisse estimated, 25% of funds halted redemptions. Investors wanting to exit were put in ‘wind-down' share classes, and told the wait for the manager to liquidate assets at reasonable prices could be years.

By September last year, 9% of funds were still not paying out all redeemers.

One London-based fund of funds manager said: "In January last year managers were saying it could take three or five years in some cases to liquidate assets...as markets recovered. We were going to have to wait. But in some cases markets have returned to normality so quickly, and the world is awash with so much liquidity, they are able to liquidate the assets in nine months and return cash."

Data providers Credit Suisse / Tremont estimate 58% of fund assets that became "impaired" in the crisis - or US$102bn worth - are liquid again, although a further $72bn are still defined as illiquid.

As normality returned to the convertible bond markets since June 2009, Ferox Capital Management, which gated its flagship early last year and warned investors they would wait to early 2010 to retrieve cash, sold assets and returned cash to redeemers already.

A source close to Ferox said: "Liquidity and markets improved substantially and we were able to sell the assets at limited price impact and return cash much earlier than envisaged." The market recovered so strongly, even withdrawing investors made 20% during the liquidation process. Continuing investors made about 50%, the source added.

BlueCrest Capital Management, which declined to comment, has done so for redeemers from its Strategic portfolio, a person familiar with the situation said.

Alexandre Col (Above), manager of the fund of hedge funds at Switzerland's Banque Privee Edmond de Rothschild, said his fund of funds received most of the money back from a handful of funds that restricted repayments in the crunch, though "one or two names originally told us [it would take] three to five years."

He added hedge funds can sell assets, to rivals if not in public markets, to repay investors. "It's just a question of what price you get. It may be far from what investors expect, but the question then is, who decides what to do?"

Col said, because Rothschild met all redemption requests it received, it was not under pressure to force investee funds to pay out immediately.

"Getting our money back immediately is not a question of life or death, and from the manager's point of view I can now be convinced to be patient.

"A manager could convince me, for interesting investments, to wait for three years. The worst case is when a manager does not pay back assets because he doesn't want to, and he keeps earning fees on them. It can be very difficult sometimes to force managers to do something they do not want to do, even if shareholders come together to try."

Hedge Fund Regulators Turn Up The Heat

Alex Akesson, HedgeCo.net,  January 27, 2010

New York – FINRA and the SEC have recently issued statements and taken bold steps to put the industry on watch, hedge fund compliance consulting firm, FrontLine Compliance, LLC., reports. FINRA is now being more active with exams, document requests, and specialized investigations – and it is not accepting staffing problems as an excuse from firms unable to respond in a timely fashion.

FINRA’s Enforcement chief Susan Merrill (Above) stated in a recent speech that, “Scaling back a compliance department doesn’t justify not fully cooperating with document requests, even during a challenging economy.”

The SEC has stepped up its investigative tools through a significant reorganization of its Enforcement Division. Five new priority areas have been established through the creation of specialized units, including an asset management unit to target misconduct at investment advisers, investment companies, hedge funds and private equity funds. In an announcement, SEC Enforcement chief Robert Khuzami stated that the units would provide, “earlier and better capability to detect emerging fraud and misconduct” and a “greater capacity to file cases with strike-force speed.”

Staffed by former SEC and FINRA regulators, and chief compliance officers, FrontLine Compliance is a regulatory compliance consulting firm of former high-level regulatory insiders offering customized services to broker-dealers, investment advisers, investment companies, hedge funds, and insurance company affiliates.

Investor portals bring transparency to alternative assets industry, survey finds

HedgeWeek.com, January 27, 2010

A large portion of alternative investment firms may be hindering their capital raising efforts by not providing investors with access to online reporting systems, according to a survey by Netage Solutions.

The survey also revealed that limited partners and their advisers overwhelmingly agree that such systems increase transparency.

The survey of 31 institutional investors, family offices and advisers conducted in the fourth quarter of 2009 found that nearly 87 per cent of respondents either agreed or strongly agreed with the statement, “online reporting systems provide much needed transparency in the alternative assets industry”.

Further underscoring the importance of investor portals in the wake of the Madoff scandal and the financial crisis, 63 per cent of respondents said that they “prefer to invest with alternative asset managers that report online to investors.”

Despite validating the intrinsic value of online reporting systems, the survey reveals that a significant portion of alternative investment firms do not currently provide their investors with a secure portal for viewing and downloading reports, documents, and other information.

Nearly 42 per cent of respondents said that only 26 to 50 per cent of their fund managers provide access to a portal, while another 16 per cent of respondents reported that less than a quarter of their managers do.

“The conclusions that can be drawn from this survey are eye-opening,” says Stuart Sheppard, managing director at Netage Solutions. “That a majority of respondents prefer to invest with alternative asset managers who report online indicates that firms without investor portals are potentially missing out on opportunities to raise capital from new clients. On the operational side, these firms are definitely not realising the significant time and cost savings typically generated by online reporting systems.”

The survey also found that even those firms that do offer investor portals have some work to do. Overall, respondents ranked online reporting systems between “fair” and “good” with a rating of 2.61 (on a scale of one to four).

Although the quality of investor portals offered by each alternative asset class varied somewhat, the scores still fell within the same range. Private equity topped the list with an average rating of 2.74, followed by venture capital (2.57), hedge funds (2.56), funds of funds (2.32), and real estate (2.21).

When asked what improvements investors would like to see in online reporting systems, most comments centred on their navigation and search capabilities—enabling users to find information quickly, and with fewer clicks.

Another popular suggestion was the ability to download data (e.g. transactions and capital account balances) to Microsoft Excel, so these figures do not have to be manually re-keyed.

Several investors recommended back-filling new online reporting systems with historical fund information, including capital calls, distributions and unfunded commitments.

Hedge fund transparency top worry for institutional investors

 Jenna Towler, Professional Pensions, January 25, 2010

Transparency and liquidity risk have overtaken poor performance as the top concerns for institutional investors with hedge fund allocations, research shows.

A global survey from SEI and Greenwich Associates showed institutional investors remained committed to hedge funds despite investment scandals, market dislocations, and increased regulatory scrutiny.

It showed 80% did not plan to change their hedge fund allocation in the next 12 month and 15% intended to increase their investment.

The report, The Era of the Investor: New Rules of Institutional Hedge Fund Investing, also found more than 70% had requested more detailed information from managers than they did a year ago.

The type of information sought ranged from counterparty and leverage exposure data to sector and position-level detail. More than 80% of the respondents reported a focus on funds' valuation methodologies.

Investors also continued to exert influence on fee structures, as nearly one in five respondents reported negotiating fee arrangements different than the standard "2 and 20" for single-manager funds and "1 and 10" for funds of hedge funds over the last year.

SEI said the report showed the need for "hedge fund managers to institutionalise responses to transparency demands and to demonstrate clear sources of alpha to retain and gain assets among an increasingly demanding institutional investor base".

SEI investment manager services division managing director Phil Masterson said investors remain committed to hedge funds - but that commitment comes with increased expectations.

He added: "The balance of power has clearly shifted and managers must meet the growing demand for transparency and increase their focus on operational effectiveness if they want to be successful in this ‘era of the investor.'"

SEI said institutional investors were focused on a manager's ability to identify and clearly explain the alpha source from which the performance is derived. It added another critical factor in manager selection was compliance infrastructure, with nearly 50% citing it as "very important."

Independent administration and a separation of investment management and operations management roles were also identified as high-ranking factors in manager selection.

The survey revealed investors were also concerned with issues such as liquidity risk, valuation methodology, and whether performance characteristics are in line with stated strategies.