In order to comply with new regulatory changes, Goldman Sachs has said that it is winding down it’s hedge fund business, CNBC reports.
Lloyd Blankfein, CEO of the investment giant, indicated that clients will continue to demand some services prohibited under Volcker and while Goldman Sachs would still be permitted to co-invest with and provide liquidity to its investors, key businesses would no longer be as attractive as they once were.
The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict banks from making certain kinds of speculative investments that do not benefit their customers.
Volcker argued that such speculative activity played a key role in the financial crisis of 2007–2010. The rule is often referred to as a ban on proprietary trading by commercial banks, whereby deposits are used to trade on the bank’s own accounts, although a number of exceptions to this ban were included in the Dodd-Frank law.
In a move to take advantage of the SEC’s ratification of the JOBS Act, $100 million hedge fund investor Topturn Capital has aligned itself with professional Australian surfer Joe Curren. The company believes this will set a new precedent in hedge fund marketing.
“We feel that how we represent our company will change the industry norm,” Greg Stewart, Co-Founder and Chief Investment Officer of Top Turn Capital, said. “People look at numbers all day everyday. We just brought in The Trojan Horse for our investment strategy by introducing a surfer into the equation.”
In the surfing lexicon, a ‘top turn’ refers to a surfer’s ability to re-position himself back into the momentum of moving water. Topturn Capital says that their approach to asset management parallels this analogy. The recent JOBS Act ruling presented them with the opportunity to add to their company and investment strategy, Topturn says.
“The SECs recent ratification of the Jobs Act has dramatically changed everything,” Dan Darchuck, Top Turn Capital’s Co-Founder and Managing Director, said in a press release obtained by HedgeCo. “When our industry leverages the ability to outwardly market alternative investments, things are going to get very competitive very quickly. We just happen to be leading the industry.”
The founder of hedge fund investment firm Bridgewater Associates and one of Time magazine’s 100 most influential people in the world in 2012, has put together a video explaining economics, “How The Economic Machine Works.”
ValueWalk has transcribed the 30 minute video, which includes interesting but simple tidbits such as, “The economy works like a simple machine but many people don’t understand it or they don’t agree on how it works, and this has led to a lot of needless economic suffering.”
“I feel a deep sense of responsibility to share my simple but practical economic template. Though it’s unconventional, it has helped me to anticipate and to side step the global financial crisis and it has worked well for me for over 30 years. Let’s begin. Though the economy might seem complex, it works in a simple mechanical way, it’s made up of a few simple parts and a lot of simple transactions that are repeated over and over again a zillion times.” Dalio says.
BridgeWater embraces a corporate culture that encourages transparency and the elimination of the decision making hierarchy, and in 2011 was the world’s largest hedge fund company with $122 billion in assets under management.
On credit, Dalio said, “Productivity matters most in the long run, but credit matters most in the short run. This is because productivity growth doesn’t fluctuate much, so it’s not a big driver of economic swings, debt is, because it allows us to consume more than we produce when we acquire it and it forces us to consume less than we produce when we have to pay it back.”
“Debt swings occur in two big cycles. One takes about five to eight years and the other takes about 75 to a hundred years, while most people feel the swings, they typically don’t see them as cycles because they see them too up close, day by day, week by week. In this chapter, we’re going to step back and look at these three big forces and how they interact to make up our experiences. As mentioned, swings around the line are not due to how much innovation or hard work there is, they’re primarily due to ho much credit there is. Let’s for a second imagine an economy without credit, in this economy, the only way I can increase my spending is to increase my income which requires me to be more productive and do more work. Increase productivity is the only way for growth. Since my spending is another person’s income, the economy grows every time I or anyone else is more productive. If we follow the transactions and play this out, we see a progression like the productivity growth line but because we borrow, we have cycles. This isn’t due to any laws or regulations, it’s due to human nature and the way that credit works. Think of borrowing as simply a way of pulling spending forward. In order to buy something you can’t afford, you need to spend more than you make. To do this, you essentially need to borrow from your future self. In doing so, you create a time in the future that you need to spend less than you make in order to pay it back, it very quickly resembles a cycle. Basically, anytime you borrow you create a cycle. This is as true for an individual as it is for the economy.”
Watch the whole video (scroll down)
Hedge fund managers who survived the financial crisis are now beginning to focus on growing beyond their original business models, according to Ernst & Young’s seventh annual survey of the global hedge fund market, Exploring pathways to growth .
However, the survey shows that while managers want to grow their assets under management through new products and distribution channels, investors do not necessarily plan to increase allocations to hedge funds and are not interested in buying multiple products from one manager.
- A majority of investors (72%) say that they expect to maintain current allocation levels, while managers, particularly smaller managers, remain bullish about both inflows and market appreciation – managers with less than $10 billion under management are budgeting for 15% growth in 2013.
- Two in three managers reported an increase in revenues over the past year as performance improved and assets grew. However, just half of managers reported improvements in margins. One in three managers said margins declined and another 10% noted margins remained unchanged as costs increased.
- One in three European managers noted that costs have increased versus 58% in North America. Although three in four managers in Asia said that costs had increased, they have also been the most successful in raising capital and thereby growing revenue, and margins have improved as a result.
- Over two-thirds of investors say that regulations have had no impact on their due diligence process for vetting investments. Investors and managers are more aligned than in the past in their expectations for the future. Both expect increasing regulatory intrusions and accompanying costs.
- Increased polarization in the industry is more evident than ever, with the largest funds succeeding because of their size and scale and their ability and willingness to invest in the business, and the smallest by virtue of simplicity. In particular, the largest and smallest managers have the most efficient headcount ratios between front-office and back-office personnel – the largest because they have been able to achieve economies of scale and the smallest because they cannot afford to be inefficient.
- Nearly two-thirds of investors either already invest or would like to invest in a customized product. Demand is most evident among funds of funds, with nearly 70% of funds of funds surveyed already invested in a customized solution and another 15% saying they would like to. However, there are some geographical differences, as 75% of managers in North America offer customized solutions or plan to, compared with just 50% of managers in Europe.
More than 75% of hedge fund managers in Europe and North America say that direct investment has increased and most expect this trend to continue.
The survey compares opinions from 100 hedge fund managers who collectively manage nearly $850 billion and 65 institutional investors with over $190 billion allocated to hedge funds. Topics covered in the survey include strategic priorities for hedge funds, changes in revenues and costs, technology, headcount, outsourcing and shadowing, and the future of the hedge fund industry.
The SEC taken action to freeze the assets of Ponzi scheme involving U.S. and New Zealand-based companies peddling sham investment opportunities ranging from a bank trading program to kidney dialysis clinics.
Christopher A.T. Pedras, who has residences in Turlock, Calif., and New Zealand, misled his initial investors when his hedge fund encountered problems paying the promised 4 to 8% monthly returns. Pedras began steering investors to a different investment program to purportedly increase the value of their investment by 80% by funding kidney dialysis clinics in New Zealand. However, the money was never invested as promised. Earlier investors were paid supposed returns with funds received from newer investors, and Pedras stole more than $2 million and spent another $1.2 million on sales agents. The SEC alleges that the Ponzi scheme paid investors more than $2.4 million in “returns” using new investor money.
“Rather than conducting any legitimate business activity, Pedras and his partners were simply operating a Ponzi scheme that was ultimately doomed to collapse,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “This emergency action stops them from fraudulently raising any more money from U.S. investors.”
Pedras raised more than $5.6 million from at least 50 investors in the U.S. since July 2010 by selling securities in two phases, the SEC says.
According to the SEC’s complaint, during at least one conference call, Pedras advised investors not to respond if contacted by the SEC. He characterized SEC investor questionnaires as “fake” and stated that the SEC’s investigation was motivated by a “personal vendetta” against him.
As new rules and regulations are being placed on the hedge fund industry, the role of service providers has become increasingly important, Risk.Net reports.
Investors into hedge funds are also monitoring service providers as part of the due diligence process. Both factors highlight the role played by services providers in keeping hedge funds compliant with regulations and supporting them in ongoing due diligence scrutiny by investors.
This year’s service provider rankings reinforce the importance of this segment of the industry. While some areas saw little change in voting patterns, there were some surprises in the changing preferences of voters.
Herre are some of the winners:
Fund administrator (single manager)
1 Citco (22.5%)
2 Apex Fund Services (14.6%)
3 JP Fund Administration (12.1%)
4 SS&C GlobeOp (8.1%)
5 Deutsche Bank (7.4%)
Fund administrator (FoHFs)
1 Citco (19.7%)
2 Apex Fund Services (18.5%)
3 JP Fund Administration (11.9%)
4 Deutsche Bank (10.2%)
5 BNP Paribas Security Services (9.6%)
Managed account platform from hedge fund viewpoint
1 Deutsche Bank (24.5%)
2 Lyxor Asset Management (15.1%)
3 Morgan Stanley (11.0%)
4 AlphaMetrix (8.6%)
5 Gottex (7.6%)
Managed account platform from investor viewpoint
1 Deutsche Bank (20.4%)
2 Morgan Stanley (14.9%)
3 Lyxor Asset Management (11.9%)
4 AlphaMetrix (9.7%)
5 Innocap (7.5%)
Ucits platform from hedge fund viewpoint
1 Deutsche Bank (23.8%)
2 Alpha Ucits (17.9%)
3 Lyxor Asset Management (11.3%)
4 Morgan Stanley (10.2%)
5 Credit Suisse (7.9%)
Ucits platform from investor viewpoint
1 Alpha Ucits (23.9%)
2 Deutsche Bank (21.7%)
3 Lyxor Asset Management (12.0%)
4 Morgan Stanley (10.1%)
5 Credit Suisse (7.4%)
Man announced in its interim management statement for the quarter ended 30 September 2013, that its funds under management (FUM) at 30 September 2013 has reached $52.5 billion with net inflows of $0.7 billion.
“The net inflow in the quarter was driven by institutional flows into discretionary alternatives and long only strategies. Inflows were linked primarily to stronger performance in the first half of the year and were characterized by sizable asset flows from certain customers, albeit into relatively low margin products.” Manny Roman, Chief Executive Officer of Man, said. “The equity rally in July, followed by a sell-off in August, and volatility in financial markets in September provided challenging market conditions for hedge funds, and in particular CTAs. As a result performance in the majority of the AHL and FRM strategies was negative in the quarter, although performance at GLG overall was positive.”
FX movements of positive $1.2 billion in the quarter, driven by the weakening of the US dollar against the Euro and Sterling.
Also in the news, GLG Partners, the investment firm acquired by Man Group in 2010, has started a hedge fund modelled after its flagship European equity pool that will trade the stocks of global companies.
The majority of GLG alternative strategies had positive performance in the quarter, adding $0.3 billion to FUM. GLG long only strategies contributed positive investment movement of $0.4 billion in the quarter. AHL Diversified programme was down 6.6% in the quarter.
A NJ-based investment advisory firm and its owner have been charged by the SEC for “misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors,” the SEC reports.
The SEC alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO. These rights, which were not disclosed to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments. The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.
“A collateral manager’s independent selection of assets is an important selling point to potential CDO investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.”
According to the SEC’s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO. Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006. Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO. Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs. Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar’s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.
The SEC’s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process. Harding’s own credit analysis of many of the selected assets was disregarded, and Magnetar’s influence over the portfolio was omitted from materials used to solicit investors for the CDO. Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.
The SEC’s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers. As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored. In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, “I never forget my true friends.”
The insider-trading lawsuit against Rengan Rajaratnam has been delayed due to the ongoing federal government shutdown. Rengan is the younger brother of the now imprisoned hedge fund billionaire Raj Rajaratnam.
Bloomberg reports that the case has been delayed because “Prosecutors in the Rajaratnam case have been unable to access certain evidence held electronically at U.S. Department of Justice facilities in Virginia.”
Rengan Rajaratnam has pleaded not guilty in NY court to charges of conspiring in an insider trading scheme to illegally earn nearly 1.2 million. He has been charged with conspiring with his older brother Raj, to cheat on Wall Street and earn nearly $1.2 million illegally.
Rengan voluntarily surrendered, his lawyer said, flying in from Brazil the day before the hearing. He was released on $1 million bail after Monday’s court appearance.
Rengan was also a portfolio manager at the hedge fund Galleon Group, and the trades for which he was charged resulted in nearly 1.2 million dollars of illegal profit, according to prosecutors. The defendant was charged with six counts of securities fraud and one count of conspiracy, and faces up to 20 years in prison on each of the fraud counts.
Miami Finance Forum and Bilzin Sumberg will be hosting and presenting a panel discussion of certain implications and anticipated market developments resulting from the SEC’s recent rule amendments allowing general solicitation of investors in private placement offerings.
Since Obama’s Jumpstart Our Business Startups Act (JOBs Act), the ban on hedge fund advertising has been lifted. The JOBS Act became law in March 2012 and made the initial recommendation to allow “general solicitation” for private issuers, the law was approved with bipartisan support in both houses of Congress.
The rule went into affect on September 23rd 2013 and so far only 8 hedge funds have filed for the *506c exception:
- Zeus Alpha LP
- Steben Select Multi-Strategy Partners, L.P.
- Force Select LTD
- Big Tree Capital Opportunity Fund I, L.P.
- Big Tree Capital Emerging Markets Fund, L.P.
- Ogee Group LLC
- Steben Select Multi-Strategy Partners, L.P., and,
- Israel Investment Fund LP.
“While hedge funds are finally allowed to advertise, we believe that funds will be cautious in adopting general solicitation.” Evan Rapoport, founder of industry portal HedgeCo.net, said. ”No one wants to be first and sign up to be the regulators’ guinea pig, but I do think that if you work with advertisers that have familiarity with securities regulations, the early adopters have a large opportunity to launch successful campaigns.”
He went on to say: “We believe the first funds to take advantage of the JOBS act will more than likely be some of the largest funds in existence. It is the larger investment companies that can afford the upfront costs associated with rolling out a successful advertising and branding campaign.”
*Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:
- The company cannot use general solicitation or advertising to market the securities;
- The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
- The company must be available to answer questions by prospective purchasers;
- Financial statement requirements are the same as for Rule 505; and
- Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.
If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. . If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws.