November was a bad month for the hedge fund industry. A Bloomberg story reports on further losses at quant funds Global Alpha and AQR, as well as declines at non-quant funds:
Hedge funds run by Goldman Sachs Group Inc. and AQR Capital Management LLC fell in November as swings in financial markets confounded the computer-driven trading models used by the quantitative managers.
Goldman’s Global Alpha, which started 2007 with more than $10 billion, dropped 6 percent, bringing the decline for the year to 37 percent, according to an investor in the fund. AQR’s $4 billion Absolute Return fund is down 11 percent, after losing about 6 percent last month, said a client of the firm, based in Greenwich, Connecticut.
Losses in November extended beyond quant managers to stock pickers such as James Pallotta, whose Raptor fund declined 3.1 percent. Traders were tripped up by increased volatility, as the Standard & Poor’s 500 Index rose or fell by more than 1 percent on 12 trading days last month, compared with four days in October. The Reuters-Jefferies/CRB Commodity Price Index moved more than 1 percent on 10 days in November.
“Every manager at some point experienced a violent move against a position, whether it was in stocks, bonds, currencies or commodities,” Philippe Bonnefoy, chairman of Geneva-based hedge fund Cedar Partners Investment Management Ltd., said in a telephone interview.
Hedge-fund managers globally lost an average of 1.4 percent in November, bringing the average 2007 gain to 10.2 percent, according to the HFRI Index, a monthly estimate released today by Chicago-based Hedge Fund Research Inc. using a sample of managers worldwide. The benchmark S&P 500 ended the month down 4.2 percent, the most since December 2002….
The Old Lane hedge fund acquired this year by Citigroup Inc. lost 1.4 percent in November, trimming its 2007 gain to 2.7 percent, according to a report sent to clients yesterday. The fund, which has about $4 billion in assets, has lagged behind average industry returns since it was started in 2006 by Vikram Pandit and other former Morgan Stanley executives….
For quant managers, November was a reprise of August, when market volatility swamped their computer models….
Some quants fared better. Highbridge Capital Management LLC’s Statistical Opportunities fund gained less than 1 percent in both October and November, trimming its 2007 decline to about 14 percent, according to investors….
New York-based manager D.E. Shaw’s Oculus fund gained 1.1 percent last month and 21.5 percent this year….Quantitative Investment Management LLC, a Charlottesville, Virginia-based hedge-fund manager, gained 3.4 percent in November in its largest fund,…
So-called equity-hedge managers lost 2.4 percent on average last month, making their strategy one of the worst-performing, according to Hedge Fund Research. Such managers bet on rising prices of equities and hedge their risks by also shorting stocks they expect to decline.
Event-driven managers, who bet on securities of companies going through transitions such as mergers and spinoffs, declined 2.1 percent. Funds that focus on the securities and government debt of emerging-market countries lost 2.8 percent, Hedge Fund Research said today in a statement.
Fixed-income arbitrage funds were one of the few to rise in November, with a 1.3 percent average return, compared with the 0.8 percent average gain among the broader universe of fixed- income managers who bet on mortgage-backed, high-yield, convertible and other types of debt.
Among managers who use a variety of securities to bet on economic trends, Clarium Capital Management LLC gained 5.3 percent last month and 24 percent this year. San Francisco-based Clarium, whose $3 billion in assets are managed by Peter Thiel, was helped by wagers that securities firms’ stock prices would decline and the price of oil would rise.
Moore Capital Management Inc., the New York-based firm founded by Louis Bacon that has about $13 billion in assets, declined 2 percent last month in its Moore Global Investment Fund Ltd. The fund trimmed its 2007 gain to 15 percent.
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First Marblehead Corp.’s stock continued a five-day plunge on Friday after the student loan services provider cut its dividend and said it was unable to sell student loan bonds this quarter.
The Boston-based company’s shares have plummeted 44 percent in the past five days and almost 70 percent this year.
First Marblehead helps banks package student loans into bonds and sell them to investors. The company said it was unable to help banks sell student loan-backed bonds this quarter because of heightening aversion to risk in the bond market.
Friedman Billings Ramsey analyst Matt Snowling said he believes First Marblehead was trying to sell about $1 billion in bonds.
The immediate problem, Snowling said, is that First Marblehead does not collect much revenue if it cannot sell new bonds. Most of First Marblehead’s $871.3 million in revenue last year came from charging advisory fees on bond sales, while a smaller portion came from fees collected throughout the life of the bonds.
The bigger problem for the future, though, is that First Marblehead typically agrees to buy student loans from banks if the company cannot sell the bonds after 180 days. First Marblehead does not have enough money to do that, he said.
Snowling said if demand for student loans does not return to the bond market, First Marblehead will either have to breach its contracts with the banks or figure out how to raise enough money to buy the loans.
First Marblehead reported $1.1 billion in loans awaiting securitization in late October, and meanwhile Snowling said banks continue to pile more loans on.
“That pool of loans to be securitized keeps growing,” he said. “If they are unable to securitize them that potential funding issue gets bigger and bigger.”
First Marblehead’s stock slipped $1.24, or 6.9 percent, to $16.72 in afternoon trading. The stock touched as low as $15.69, the cheapest trade in more than two years.
A CDO Floor of 27 Cents on the Dollar?
By David Reilly, Gregory Zuckerman and Serena Ng
Word Count: 1,047 | Companies Featured in This Article: E*Trade Financial, Citigroup, Merrill Lynch
Ever since debt markets seized up this summer, investors have struggled with the question of how much securities backed by risky mortgages are worth.
Now, thanks to Citadel Investment Group’s purchase of $3 billion in debt held by E*Trade Financial Corp., there is at least one answer. Citadel paid an average of about 27 cents on the dollar for these assets. And it received a boatload of E*Trade shares as part of the deal.
E*Trade sold the portfolio of troubled debt, which includes structured asset-backed collateralized debt obligations, or CDOs, and other mortgage securities, after seeing its stock plummet in …
The Old Lane hedge fund acquired this year by Citigroup Inc. lost 1.4 percent in November, trimming its 2007 gain to 2.7 percent, according to a report sent to clients yesterday. The fund, which has about $4 billion in assets, has lagged behind average industry returns since it was started in 2006 by Vikram Pandit and other former Morgan Stanley executives….
And so now they’re going to make him CEO. LOL. Just like the Army: fuck up and move up.
Dominic Elliott
07 Dec 2007
The Blackstone Group has shrugged off lingering concerns over a lack of liquidity in the European leveraged loans market after raising €400m ($590m) for a fund to buy up debt.
The US alternatives manager yesterday revealed the closing of St James’s Park CDO, a collateralized loan obligation fund that pools investments in senior secured bank loans and other types of debt, repackages them and sells the risk to investors.
Blackstone said “to a lesser extent” the fund also includes riskier forms of debt: second lien loans, unsecured loans, mezzanine loans and junk bonds.
CLOs enable banks to reduce regulatory capital requirements by selling their commercial loan portfolios to international markets, but banks in Europe have been reluctant to sell at a discount since the summer credit crunch started in August.
This contrasts with US banks, which have been more ready to sell at a loss, easing the burden on primary debt markets.
Debra Anderson, portfolio manager and managing director at Blackstone’s corporate debt group in London, said the fund was priced and distributed during “difficult market conditions”.
She added it was “testament to Blackstone’s commitment to the European leveraged loan market”. The timing of Blackstone’s fund closure may indicate the alternatives manager believes the market is improving.
Howard Lutnick, chairman and chief executive of broker Cantor Fitzgerald, yesterday told Bloomberg that repackaging “valued assets” that underlie collateralized debt obligations instruments, which include CLOs, will become a “great opportunity” for US financial market players.
However, a report from Barclays analysts said US mortgage assets in CDOs have lost so much value that the top classes of the securities may be worth as little as 20 cents on the dollar in the event of liquidation.
Issuance of CLOs returned to almost pre-crisis levels in September, with $7.8bn (€5.5bn) in completed deals, according to Deutsche Bank. But Europe last month had a €76bn pile of hung leveraged loans that had barely moved since the credit crunch began, analysts said.
St James’s Park CDO is the fourth European CLO fund managed by the alternatives house, which started operations in London in 2005, according to Blackstone. It takes its total assets for the four vehicles to €2bn.
Citigroup was sole arranger and bookrunner for the fundraising.
With roughly $400 billion raised in the last year, private equity funds are searching for places to put their cash other than big buyouts which rely on large loans.
That’s fueling an interest in PIPEs, or private investments in public equity. PIPEs can either be straight equity investments or where investors purchase debt convertible to stock.
The average deal size for PIPES this year has surged to about $45 million this year compared with $21 million last year, according to research firm PlacementTracker, but it noted that was because of a relatively small number of large transactions.
PlacementTracker’s data also shows that private equity took a bigger share of the PIPE market this year, making up about a tenth of PIPE investments as opposed to about 3 percent in 2006.
“Private equity is going to look for ways to invest their money and if it’s a good investment — even for less than a majority of the company — I think they will make those investments,” said Morton Pierce, chairman of the mergers and acquisition group at law firm Dewey Ballantine in New York
Easier access to capital for small public firms is on the way after the Securities and Exchange Commission lifted heavy regulations that had spooked investors.
On Nov. 15, the SEC voted unanimously to adopt changes to Rule 144 – which governs the holding and selling of restricted company securities.
Smaller public companies often offer restricted securities – stocks or bonds not registered with the SEC or publicly traded – to private investors as a way of raising cash quickly. The company sells the securities at a discount, and investors then sell them at market value.
As the law stands, investors must hold the securities for a year before they can sell them, and when they do sell, they are limited to selling 1 percent of the company’s outstanding securities per quarter.
The revisions to the rule – which will go into effect 60 days after a final draft is published in the Federal Register – reduce the holding period to six months and lift all limitations on sales volume.
This removes a great deal of risk from an investor standpoint because the securities can be sold before prices drop.
“The longer you hold a security, the greater the risk that it will decrease in value,” said Irvin Brum, chair of the corporate and securities department at Ruskin Moscou Faltischek in Uniondale.
Looser investing standards will boost public investments that are particularly important to Long Island’s small-business driven economy, Brum added.
Investors are subject to Rule 144 when they either invest in a public company’s restricted securities, or a private company in which they hold securities goes public.
Private investments in public equity – or PIPE investments – are becoming an increasingly popular source of financing for small companies. Investors are expected to pump $45 billion into the public equity markets in 2007, according to PlacementTracker, which researches PIPE and other private investments.
“This has been a booming market in the last five years,” Burm said.
Back in 2000, PIPE investments reached $24.4 billion.
The changes to Rule 144 will also eliminate pricey, time-consuming registration requirements on small firms.
In the past, when investors bought securities and didn’t want to hold them for the whole year, they would require the company to register the securities with the SEC. Once the securities were registered, they could be freely traded on the public markets, thus giving the investors access to the shares eight months sooner.
Ira Halperin, co-chair of the corporate and securities department at Meltzer, Lippe, Goldstein, & Breitstone, said such registration could cost over $50,000 and take up to four months.
Burm said some of these changes are being implemented to combat growing Sarbanes-Oxley costs. Financial reporting tied to Sarbanes can be a huge fiscal burden on small companies that don’t have the internal structure to comply.
“In recent years, the general trend has been against going public,” he said. With easier access to capital, however, small firms could find the funds they need to support a publicly traded company and more private companies will be encouraged to go public.
Stifel Nicolaus analysts today, who believe the global credit bubble is only beginning to unwind, and that the pressures will continue to be felt throughout 2008…”‘Simply put, risk was underpriced, leverage was too high, and structures were too aggressive,'” write Chris Brendler and Michael Widner of Stifel. ‘As this unravels, it is putting enormous pressure on balance sheets and valuations, causing lending institutions (including hedge funds and private equity) to pull back at a time when borrowers (both consumer and corporate) need it most.'”
blackrock snakes sell Florida junk Bonds, Now sell SIV bailout junk:
Dec. 7 (Bloomberg) — Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. established the “SuperSiv” fund, designed to bail out short-term debt markets, and named BlackRock Inc. as the manager, two people with knowledge of the plan said.
The banks also began marketing the fund to smaller institutions, aiming to raise $75 million to $100 million, including their own undisclosed contributions, said the people, who asked not to be named because details of the SuperSiv haven’t been made public. The banks, the three largest in the U.S., are set to meet with potential contributors on Dec. 10.
“Having BlackRock as the asset manager to run such a program definitely adds credibility,” said Roger Smith, an analyst at investment bank Fox-Pitt, Kelton Inc. in New York. “They are one of the best risk managers on the Street.”
The fund, supported by U.S. Treasury Secretary Henry Paulson, is one of two private-sector efforts fostered by the Bush administration to address fallout from subprime-mortgage delinquencies, which reached a 20-year high in the third quarter, according to data from the Mortgage Bankers Association. President Bush yesterday announced a five-year rate freeze on some mortgages to stop foreclosures.
The fund will buy assets from structured investment vehicles, or SIVs, which would otherwise be forced to dump their $300 billion of assets to repay debt. SIVs sell short-term debt to finance purchases of higher-yielding assets. They were shut out of the commercial paper market on investor concerns that SIV held troubled subprime-related securities.
Questions Raised
Florida officials this week hired New York-based BlackRock to run an investment pool for local governments that lost almost half its assets from withdrawals sparked by the subprime- mortgage crisis. BlackRock, which oversees $1.3 trillion for clients, is the largest publicly traded asset manager in the U.S.
The SuperSIV may not attract additional funding, said Josh Rosner, a managing director at Graham Fisher & Co., a New York- based firm that analyzes structured finance and real estate investments.
“Besides those banks that want to see this bail them out of their problem, why would anyone else get involved except for fees?” Rosner said.
VMMXX
EPFR Global, which tracks net investment flows by the world’s biggest equity managers, says all of the major equity funds and ETFs posted net outflows for the week ending November 14. Equity funds in emerging markets had $5.58 billion pulled out, while $5.07 billion was pulled out of developed markets.
If investors were leaving their money in emerging markets, they tended to favor the larger economies. Net inflows to Brazil, Korea, China and Russia totaled $878 million. The BRIC funds took in an additional $480.6 million.