Why Hedge Funds Are Ponzi Schemes

Published on Times.Com: The Ponzi Scheme in Every Hedge Fund

• By Ari J. Officer Monday, Jan. 05, 2009
  
  Bernard Madoff's $50 billion Ponzi scheme continues to rock the financial world. But most hedge funds actually engage in similar — albeit legal — practices in the short run. In the past, these practices helped inflate their gains as well as hedge-fund managers' salaries and bonuses, but recently they helped bring about the failure of many major hedge funds
  
  At the heart of the difference is the distinction between realized and unrealized gains. Gains are realized when assets are liquidated to cash. For instance, if you buy a stock for $100 and it is currently trading at $200, you have made $100 in unrealized gains. If you sell it at $200, you have made $100 in realized gains. Most hedge funds do not regularly liquidate their entire portfolio, so they report unrealized gains to their investors and to the public. (See the top 10 scandals of 2008.)
  
  Now comes the murkier part: Many assets — particularly those that unregulated hedge funds can trade — are not as liquid as stocks, so they do not always have a definite price on the market. Since a fund reports unrealized gains, it could easily get away with inflating profits. More specifically, the fund could use the most optimistic models to price its illiquid assets, which include mortgage-backed securities and other swaps. After all, economists disagree about how to value these assets, so the fund is not necessarily being dishonest in its assessment.
  
  Madoff never even came close to realizing the gains he reported and paid out to some investors. Yet even funds with fairly accurate estimates of unrealized gains are guilty of engaging in similar Ponzi practices in the short term. Here's why:
  
  Suppose some investors decide to withdraw their money from a hedge fund. The fund must liquidate the appropriate amount of its assets to pay these investors. Say the fund holds large positions in illiquid assets. The fund cannot immediately sell these assets, except at a fatal loss, so it would sell its more liquid assets. Given that the fund is more likely to inflate its estimation of the illiquid assets, it would seem that investors who withdraw early get the better returns over that time period. Sounds a bit like a Ponzi scheme, right?
  
  Even in the most vanilla of trades, liquidation can impact the market price. With lightly traded securities, this can be magnified. For example, a fund might corner some asset by buying and buying and buying and then reporting a huge unrealized gain. But the moment the fund tries to sell and realize the gain (perhaps to pay off its last few investors), demand disappears, and the asset crashes. Again, investors withdrawing early got better returns over that time period than those who waited until later. (See the top 10 financial collapses of 2008.)
  
  Every year hedge funds do have to liquidate part of their profits in order to pay their managers, traders and other support staff. Fund managers typically keep 20% of (unrealized) trading profits. But first they must realize that 20% by selling the liquid assets. If a fund is overestimating the value of the illiquid assets, then its manager's profit is grossly overestimated. In most cases, the profit is at least slightly overestimated because of slippage in the liquid assets. In other words, if a fund liquidated all profits, the supposed 20% taken out first would actually be larger than 20% of the total realized profit.
  
  If hedge funds had to regularly liquidate assets, we would not see the spectacular returns reported in the past. One factor of the supposed success of hedge funds is their ability to report unrealized gains and to be flexible in liquidation, since investors who believe they are getting high returns are unlikely to withdraw their money. That was how Madoff was able to maintain his charade for so long.
  
  Wonder why Chicago-based hedge fund Citadel is not allowing investors to withdraw their money until at least March? Citadel has already reported about 50% losses for its two largest funds. Remember: these are unrealized losses. If Citadel liquidated assets to pay out to investors, losses would be even greater. Barring a miracle, the first investors out would lose less than those going out later. But even in good times, the withdrawal of money from a hedge fund impinges its performance.
  
  Hedge funds are designed to take in more and more investors' money. Then inefficiencies and performance distortions of withdrawing money for investors and profit-taking for managers are smoothed out. The recent failures in hedge funds, while rooted in the financial meltdown, have been further fueled by the lack of new investment as well as pressure from current investors to take their money and run. Regardless of a fund's investment strategy, liquidation tends to make unrealized gains smaller — and unrealized losses larger — when they are finally realized.
  
  By design, hedge funds benefit managers more than investors. Since the liquidation of assets always results in slippage — the more that is sold, the worse the price — managers for every hedge fund always get the "best" 20% of the profit.
  
  So you see, there could be a little Ponzi scheme in every hedge fund. It is inherent to the model of the modern hedge fund. The only way to avoid these schemes is to regularly liquidate all assets and allow all investors to decide what to do with their cash returns. In the past, this would have meant seemingly diminished returns. With returns seemingly high, investors did not complain about the status quo. Now, given that regular liquidation would mean more transparency and diminished losses, in recent days investors' opinions would likely differ.

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Big Name Hedge Funds Like Citidel Suffers Massive Losses!

And the Big Boys are suffering Big Time!

Posted on Reuters: Hedge funds chalk up more losses, big names suffer

• By Svea Herbst-Bayliss
  
  BOSTON, Dec 4 (Reuters) - Some of the biggest names in hedge funds lost money in November, including Dan Loeb and Kenneth Griffin, but John Paulson was among the few who made money for their investors.
  
  Hedge fund investors around the world lost money for the sixth straight month as many in the industry reported steepening declines, investors said on Thursday.
  
  Dan Loeb, an activist investor known for his sharply worded letters to poorly performing companies, told investors that his Third Point Offshore fund lost 28.24 percent in the first 11 months of the year after the fund slipped 2.6 percent in November.
  
  James Pallotta's Raptor Global Fund lost 1.51 percent last month, leaving the fund off 17.36 percent for the year.
  
  Martin Hughes' Tosca Fund Ltd fell 5.15 percent and is now down 67.54 percent for the year.
  
  And Kenneth Griffin's Citadel Investment Group, which boasts one of the industry's longest winning records, lost roughly 13 percent last month, swelling its year-to-date losses to about 47 percent, investors said.
  
  The numbers came as investors suffered through more sharp stock market gains and losses that left many managers ill-prepared, if they were long or short, investors said.
  
  Funds also felt the impact of frozen credit markets.
  
  While many hedge fund managers are still compiling their numbers for the month, early indications show the average fund lost 2.25 percent, leaving it down 21.31 percent for the year, according to data from data tracking company BarclayHedge.
  
  Groups that monitor performance like Hedge Fund Research and Hennessee Group are expected to announce November returns in a few days.
  
  Fed up with the industry's worst-ever returns, endowments, pension funds and private investors demanded more money back, which forced even more selling among hedge funds, managers said. In October, industry assets shriveled 9 percent to $1.5 trillion, their lowest level in two years, according to data from Hedge Fund Research. Data for November is not available yet.
  
  "Money is coming out of the system, and people are redeeming because they need the money," said Antonio Munoz, who runs EIM Management USA, a fund of hedge funds.
  
  While many fund managers are nursing heavy losses there are also a few bright spots.
  
  Fund manager John Paulson, one of the first investors to bet that housing prices could decline on a national basis, made more money for his investors in November when his roughly $5 billion Advantage Ltd fund gained 2.04 percent. That leaves the fund up roughly 21 percent since January, according to an investor.
  
  Paulson's roughly $10 billion Advantage Plus Ltd fund rose 3.19 percent in November and is now up 33.52 percent year-to-date.
  
  Louis Bacon's Moore Global Investment Fund gained 3.74 percent through Nov. 26, leaving the fund down only 4.76 percent for the year so far.
  
  And Bruce Kovner's Caxton Global Investment fund is up 11.52 percent for the year.

The following article on Bloomberg talks more on Ken Griffin's Citidel: Citadel Funds Lose 13% in November, 47% This Year

• By Saijel Kishan and Katherine Burton
  
  Dec. 4 (Bloomberg) -- Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, lost 13 percent in November, bringing the decline for the year to 47 percent, according to two people familiar with the matter.
  
  Losses at the Citadel’s two biggest funds came from investments in convertible bonds, high-yield bonds and bank loans, and investment-grade bonds, which were hedged with credit default swaps that protect the buyer in the event of a default. These same wagers started the funds’ tumble in mid-September.
  
  “Digging out of this hole may be tough for them,” given the lack of trading in the credit markets, said Michael Rosen, principal at Santa Monica, California-based Angeles Investment Advisors LLC, which advises clients on hedge-fund investments.
  
  The Kensington and Wellington funds, which together manage $10 billion in assets, have received requests from investors who want to withdraw about $1 billion by the end of the year, said the people, who asked not to be identified because the information is private.
  
  Griffin, 40, had posted just one losing year since starting the firm in 1990, dropping 4 percent in 1994. Katie Spring, a spokeswoman for Citadel, declined to comment on the returns, which were reported earlier today by the Wall Street Journal on its Web site.
  
  The hedge-fund industry has posted its worst performance on record this year, with average losses of about 22 percent this year through November, according to data compiled by Chicago- based Hedge Fund Research Inc.
  
  The Citadel funds have made money in stocks and on so-called macro trades -- wagers on stock indexes, bonds, commodities and currencies based on macroeconomic trends.
  
  Three other Citadel funds, whose returns are tied to the firm’s market-making business, have climbed about 40 percent this year. Those funds manage about $3 billion.
  
  Even with Citadel’s drop in assets, the firm has not breached the terms of its contracts with lenders, one of the people said.

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About Hedge Funds And Meltdown In Euroland!

A couple of interesting postings on UK Telegraph.

GLG chief Emmanuel Roman warns thousands of hedge funds on brink of failure

• 24th October 2008
  
  Emmanuel Roman, of GLG Partners, said 25pc-30pc of the world’s 8,000 hedge funds would disappear "in a Darwinian process", either going bust or deciding meagre profits are not worth their efforts.
  
  "This will go down in the history books as one of the greatest fiascos of banking in 100 years," said Mr Roman, who with Noam Gottesman, co-runs GLG, a former division of Lehman Brothers Holdings with assets of $24bn (£14.8bn). "There need to be some scapegoats, and the regulators are going to go hunt people. That will be good in the long run."
  
  His views were echoed by Professor Nouriel Roubini, a former US Treasury and presidential adviser known for his accurate prediction of financial crises, who estimated that up to 500 hedge funds would fail within months.
  
  Both men were speaking at the same hedge fund conference in London yesterday, and Prof Roubini said he would not be surprised if the US and other countries soon had to close their stock markets for more than a week to halt descent into "sheer panic".
  
  The economist warned that the world is heading for a protracted recession that will end the US’s financial dominance.
  
  "It’s the beginning of the decline of the US financial empire. The Great Depression ended in a massive war. I hope that’s not going to happen but it’s pretty ugly now," Prof Roubini said.
  
  He added that turmoil over world trade, currency markets and debt is likely to cause geopolitical tensions between the Western world and emerging superpowers such as Russia, China and "a bunch of unstable oil states".
  
  The conference saw analysts, economists and hedge fund managers discussing the possibility that global recession could now last two years on fears that government bail-outs and nationalisations have failed to stop the markets slumping.
  
  "We’re now paying the price for the biggest asset and credit bubble in history," Prof Roubini said, advising investors to stay clear of risky assets and keep money in cash. "The bail-outs have not worked because the markets are no longer rallying, and the policy-makers have run out of options."
  
  The global financial meltdown accelerated this month, with the UK and US governments being forced to take stakes in some of the world’s biggest banks. Stock markets around the world have fallen sharply this month as investors’ concern switches to the impact on the wider economy.
  
  "It’s like we’re walking blind in a minefield," said Prof Roubini. "Every situation has become risky and no one can trust each other. The banks are too big to be allowed to fail, but they’re also too big to save."
  
  Research from Hedge Fund Intelligence (HFI) shows that despite one of the worst months on record for credit funds, US hedge funds alone still have $1.7trillion (£1trillion) in assets.

Europe on the brink of currency crisis meltdown

• 26th October 2008
  
  The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.
  
  Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.
  
  “This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.
  
  Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.
  
  The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
  
  They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
  
  Europe has already had its first foretaste of what this may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.
  
  Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.
  
  Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.
  
  Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.
  
  Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.
  
  Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.
  
  The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.
  
  The IMF’s experts drafted a report two years ago – Asia 1996 and Eastern Europe 2006 – Déjà vu all over again? – warning that the region exhibited the most dangerous excesses in the world.
  
  Inexplicably, the text was never published, though underground copies circulated. Little was done to cool credit growth, or to halt the fatal reliance on foreign capital. Last week, the silent authors had their moment of vindication as Eastern Europe went haywire.
  
  Hungary stunned the markets by raising rates 3pc to 11.5pc in a last-ditch attempt to defend the forint’s currency peg in the ERM.
  
  It is just blood in the water for hedge funds sharks, eyeing a long line of currency kills. “The economy is not strong enough to take it, so you know it is unsustainable,” said Simon Derrick, currency strategist at the Bank of New York Mellon.
  
  Romania raised its overnight lending to 900pc to stem capital flight, recalling the near-crazed gestures by Scandinavia’s central banks in the final days of the 1992 ERM crisis – political moves that turned the Nordic banking crisis into a disaster.
  
  Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.
  
  The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
  
  Traders are paying close attention as contagion moves from the periphery of the eurozone into the core. They are tracking the yield spreads between Italian and German 10-year bonds, the stress barometer of monetary union.
  
  The spreads reached a post-EMU high of 93 last week. Nobody knows where the snapping point is, but anything above 100 would be viewed as a red alarm. The market took careful note on Friday that Portugal’s biggest banks, Millenium, BPI, and Banco Espirito Santo are preparing to take up the state’s emergency credit guarantees.
  
  Hans Redeker, currency chief at BNP Paribas, says there is an imminent danger that East Europe’s currency pegs will be smashed unless the EU authorities wake up to the full gravity of the threat, and that in turn will trigger a dangerous crisis for EMU itself.
  
  “The system is paralysed, and it is starting to look like Black Wednesday in 1992. I’m afraid this is going to have a very deflationary effect on the economy of Western Europe. It is almost guaranteed that euroland money supply is about to implode,” he said.
  
  A grain of comfort for British readers: UK banks have almost no exposure to the ex-Communist bloc, except in Poland – one of the less vulnerable states.
  
  The threat to Britain lies in emerging Asia, where banks have lent $329bn, almost as much as the Americans and Japanese combined. Whether you realise it or not, your pension fund is sunk in Vietnamese bonds and loans to Indian steel magnates. Didn’t they tell you?

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Andrew Lahde's Farewell Note

Ok, I am sure you be asking Andrew who?

Well Google and of course Wikipedia are our bestest friends!

Nov 2007, Andrew Lahde: The Hedge Fund Manager With a 1000% Return

And here is Wikipedia's entry on Andrew, http://en.wikipedia.org/wiki/Andrew_Lahde

• Andrew Lahde (b. 1970 or 1971) was a California-based hedge fund manager who in 2007 earned some fame for achieving return rates in the vincinity of 1000%[1] with his Lahde Capital, based in Santa Monica, California. The fund speculated on increases of U.S. subprime mortgage defaults[2]. Because of the subprime mortgage crisis, which caused several major banks to fail, Lahde's fund probably was the one that profited the most during its existence.
• Lahde earned a Bachelor's degree in Finance from Michigan State University and an MBA from the Andersen School of Business at the University of California Los Angeles.[3].
• In September 2008, Lahde closed his fund, telling investors that credit problems - the basis of his profits - were likely to continue, but that possibility of defaults by counterparties was too high.[4] On October 17, he released an open good-bye letter to his investors, in which he said that the "low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking." Lahde criticized the harried life of the rich, and said that "Capitalism worked for two hundred years, but times change, and systems become corrupt." He suggested that George Soros "start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest". He concluded his letter by proposing to legalize hemp, saying that it been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products, and thus should be part of making the U.S. "truly become self-sufficient".[5][6]

Anyway, the following is Andrew's farewell note. It's an incredible read.

• Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.
  
  Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.
  
  There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.
  
  I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.
  
  So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don't worry about my employees, they were always employed by Mr. Springer's company and only one (who has been well-rewarded) will lose his job.
  
  I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life -- where I had to compete for spaces in universities and graduate schools, jobs and assets under management -- with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.
  
  On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.
  
  Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.
  
  With that I say good-bye and good luck.
  
  All the best,
  
  Andrew Lahde
  

Source: http://www.portfolio.com/html/assets/AndrewLahdeFarewell.pdf

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Hedge Fund Woes

Here's an interesting update on the hedge funds by Charlie Gasparino (one of my favourite presenters on CNBC)

• Ongoing hedge fund losses and liquidations spooked markets Wednesday, and some of the biggest names in the mix now are Citadel Investments and Highland.
  
  Hedge funds had their worst month ever in September, with average losses of 6.2 percent, according to an estimate by TrimTabs Investment Research.
  
  All major categories of funds chalked up losses over the month, but emerging markets, long equity funds and distressed strategies had the worst results. The declines came as investors withdrew $43 billion from hedge funds—almost seven times the previous monthly record for redemptions, TrimTabs said.
  
  Citadel confirmed to CNBC that its flagship Kensington and Wellington funds, which hold around $15 billion in assets, are down between 26 percent and 30 percent so far this year.
  
  But Chicago-based Citadel denied rumors that it's having difficulty meeting margin calls and is facing mass redemptions. The firm also denied that it's unwinding any positions.
  
  Highland, on the other hand, is unwinding positions, according to traders with knowledge of the activity of the big hedge fund company, which has $14 billion under management.
  
  According to one trader with firsthand knowledge of Highland's activities, Highland is selling big blocks of assets; today, Highland settled on 30 cents on the dollar for $20 million to $30 million in bank loans that the firm only last week was trying to unload for 60 cents on the dollar.
  
  More tellingly, the trader said, Highland has put out a bid list for $600 million of loans. It's important to note that it isn't clear whether the bid list represents the beginning of a massive unwinding of positions, or just some major selling in order to meet redemptions.

Source: http://www.cnbc.com/id/27204824

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Massive Redemptions At Hedge Funds!

This is massive!

Published on the UK Independent.

• By Nick Clark
  Tuesday, 23 September 2008
  
  Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week's shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
  
  One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch "to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use".
  
  The group's "imploded funds" list has hit 51 companies since the sub-prime mortgage crisis in the United States kicked off a widespread downturn. That compares with its historical list, stretching back more than a decade to the end of 2006, of just 14, including the collapse of Long-Term Capital Management and Amaranth.
  
  This year, big names including Peloton Capital Partners, Carlyle Capital Corporation and Dillon Read Capital Management are just some of the half century to collapse. "We think hedge funds have largely lost their way," HFI said. "Notably, most have abandoned capital-preservation for the goal of aggressive accumulation of capital gains, with the benefit of lax regulation and extreme leverage available to exploit."
  
  It has 34 stocks on its "ailing/watch list" of those that have suffered significant value declines or temporarily halted redemptions. According to EuroHedge, a hedge fund data provider, 272 individual funds strategies were launched during the first six months of 2008, the lowest for nine years. In the same time, 243 funds have been liquidated, the highest in a six-month period.
  
  Nouriel Roubini, the New York University economics professor, says worse is to come. He believes there will be an increase in client withdrawals and a shake-up of how funds are regulated.
  
  The redemptions seem to have started in earnest, although currently the evidence is mainly anecdotal. One UK hedge fund manager confided that last week had the highest number of investors rushing to withdraw funds that he has known. The industry will know for sure whether it is a drip or a deluge when the data providers release their statistics for the third quarter, next month. One market analyst said: "I know even the good hedge funds have been suffering withdrawals recently. Investors are very nervous."
  
  Performance numbers are also under pressure. Some have done well out of the market disturbance, but on average the performance numbers are at a low ebb. Andrew Baker, the deputy head of Aima, the hedge fund trade body, said: "The performance is undoubtedly soggy. There are not many strategies that stand out."
  
  EuroHedge revealed that strategies that have done particularly badly this year include several run by Naissance Capital, once bankrolled by the Habsburg families, which are down a fifth and Pico Fund, which is down 32 per cent. At Endeavour Fund, set up by former Salomon Smith Barney traders, the second fund has fallen by 40 per cent, while its third fund is down 38.79 per cent in 2008. In the emerging markets, PharmaInvest Fund's investments in emerging markets are 38.16 per cent down.
  
  Other funds have sought to lock in investors by halting redemptions. The latest example was RAB, with its flagship Special Situations Fund, as it was so desperate to prevent exits after a 22 per cent drop in performance that it offered vastly reduced fees in return for a lock-in period of three years.
  
  One of the main problems experienced by hedge funds is the extent of leverage in the industry. The funds were able to take on huge amounts of debt, with little capital needed as security, to boost returns. One observer said some of the leveraged strategies were like "picking up pennies in front of a steamroller, and that only takes a turn in the market to cause severe problems".
  
  Andrew Lodge, the managing director of fund of hedge funds Nedbank Investments, said: "Some funds have gone in for huge leverage-driven strategies, which can be a problem. The appetite for leverage is less." He added that some could be affected by increased margin calls, and could face issues over their covenants.
  
  At the same time, hedge funds, like the banks, have had to write down exposures to investments in risky instruments including collateralised debt obligations and asset backed securities, and also been exposed to the huge swings in the market.
  
  Another issue is the regulators sniffing around. There have been wider calls for transparency and official controls of the industry, which has already been stung by the shock short-selling rules.
  
  Mr Lodge said: "It's a myth to say hedge funds aren't regulated. There is a perception that they are running wild with no oversight, which isn't true. We would welcome some regulation, just as long as it doesn't strangle the industry."
  
  On Friday, the FSA banned short selling in financial stocks, and forced hedge funds to disclose their positions. As the underlying shares rose as a result, the industry was looking at well over £1bn in paper losses on the day.
  
  Stuart McLaren, financial services partner at Deloitte, said: "When the dust has settled, I expect the regulators to look at the role that hedge funds have played in the current issues. I expect there will be increased calls for regulation, but I doubt much will come from it."
  
  Mr Baker said: "Some hedge funds are doing well. However, the number of professionals feeling good about life will be dwindling. The health indicators are generally negative, while costs are up and performance is down. Many are feeling battered and bruised and feeling worried about the future."

Source: http://www.independent.co.uk/news/business/news/hedge-funds-suffer-mass-redemptions-938959.html

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Money Market Fund Warns Of Losses!

WOW! Here's an article about a money market fund warnings of losses!

It's amazing and truly shocking, in my opinion, for I always assumed that money market funds, despite its low returns was always a safe investment because money market funds basically invests in bonds issued by government.

However, this is not the case for Primary Fund.

Here's the article posted on Herald Tribune: Money market fund warns of losses

• Money market fund warns of losses
  By Diana B. Henriques
  
  Wednesday, September 17, 2008
  In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account.
  
  The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.
  
  The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.
  
  This is only the second time in history that a money market fund has "broken the buck" — that is, reported a share's value was less than a dollar.
  
  This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.
  
  The Investment Company Institute, the mutual fund industry's trade group, issued a statement Tuesday assuring investors that "the fundamental structure of money market funds remains sound." It noted, too, that in the only previous case of a fund breaking the buck, investors nevertheless were paid 96 cents on the dollar.
  
  But the Reserve Fund's announcement may shake investors' confidence. Moreover, institutional markets that are already under severe stress could be further shaken if this giant fund, and others like it, are forced to sell some less-liquid holdings to meet redemption demands from nervous customers in coming weeks.
  
  The Primary Fund allowed its share price to fall below a dollar "after reviewing the unprecedented market events of the past several days and their impact" on the fund, the company said in a statement.
  
  Specifically, the fund's management, which boasted as recently as July about its cautious approach to the current crisis, determined that its stake in debt securities issued by Lehman Brothers Holdings, with a face value of $785 million, was essentially worthless, given the investment bank's filing for bankruptcy protection. As a result, the fund said, its per-share value fell to 97 cents a share.
  
  The fund's financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.
  
  If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fund's money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Florida
  
  The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.
  
  The fund is part of the complex run by Bruce Bent, who invented the money market fund concept with Henry Brown in 1970.
  
  Since their inception, money market funds increasingly have been seen by individual investors as a safe harbor in turbulent times. According to industry statistics, the assets of money funds have grown sharply since the credit crisis began to intensify last summer.
  
  But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors' shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.
  
  Those facts would probably surprise most money fund investors, who have come to think of money funds as being "just like cash, just like a checking account," a fund industry lawyer, Jay Baris, said.
  
  Whenever money funds have run into trouble, they have been propped up by parent banks and investment managers that provided the necessary cash. The single exception was in 1994, when one small regional money fund reported a share price below a dollar, according to the Investment Company Institute.
  
  The continuation of this informal bailout policy "is much discussed in the fund industry, because funds are so much bigger today," said Barry Barbash, a fund industry lawyer with Wilkie Farr & Gallagher and a former senior mutual fund regulator at the Securities and Exchange Commission.
  
  In the past, regulators tended to focus on banning money funds from buying inappropriate investments in the first place, he said. "But now," he added, "we're talking about instruments that were completely appropriate for a money fund when they were purchased. That's what makes this so much harder."
  
  Not only are funds bigger, markets are more turbulent. Many mutual funds have found their portfolios battered by investments in commercial and investments banks that were long considered close to bedrock on Wall Street. Money funds, too, suddenly found that some of their blue chips were tarnishing.
  
  But with individual mutual fund investors showing little sign of panic, most funds have simply ridden out the current turbulence.
  
  Several industry analysts said on Tuesday, however, that the Reserve Fund's action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses.
  
  "We're really in uncharted territory here," said Peter Crane, the president of Crane Data, a fund industry newsletter.
  

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All Over For Hedge Funds? Gold As Low As $600?

It's all over said Hugh Hendry, CIO of Electica hedge fund.

• As losses mount, hedge funds no longer have the ability to drive speculation in the markets, Hugh Hendry, chief investment officer and partner at Eclectica hedge fund told "Squawk Box Europe" on Tuesday.
  
  "There is no role for speculation or speculators today. This is kaput," Hendry said. "If we were Second World War generals, we've exposed our flanks. We've been wiped out. This is about fundamentals … this is about losing money."
  
  As the crisis unfolds, the policymakers' focus should shift from the threat of inflation to that of the world economic downturn, which could be more severe than economists anticipate, he said
  
  China, which many believe will balance out slowdowns elsewhere, will struggle if difficulties in the U.S. continue, while the current spike in producer prices is just a hangover from rising oil prices earlier this year, Hendry said.
  
  "I fear that the central bankers of the world are fighting yesterday's battle," he said.
  
  As for the banking sector, it is "insolvent," Hendry said, adding he can't tell just how low those stocks will go.
  
  In addition, Fannie Mae and Freddie Mac "have no value" and it is likely that they will be put under the control of the Treasury "in a matter of months," he said.
  
  The slip in gold, which was joined by fellow precious metals platinum, silver and palladium, dragged it well below its all-time high of just over $1000 an ounce in March.
  
  But that was predicatble, Hendry said.
  
  Bull markets "of this variety, with the potential to trade higher, paradoxically can have these savage, and quite prolonged, bear market components, and I fear that is where we are headed," he said.
  
  The "current markets could take gold as low as $600 or $550 per ounce," he added.
  
  "I have greater comfort being in 10-year bonds than gold for the first time in ages," Hendry said.

Gold as low as $600 or $550?

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Jim Rogers Blasts The Insanity Of the Feds while remains bullish on Oil & Commodities

Here are some latest comments from Jim Rogers.

• Jim Rogers: Oil Bull Market Has Years to Go
  
  Thursday, June 12, 2008 5:18 PM
  
  The bull market for oil has many years to go before it peters out, says billionaire Jim Rogers, chairman of Rogers Holdings.
  
  There are several factors for this view, but the primary one is that "known sources of petroleum are dwindling," Rogers told Bloomberg in an interview.
  
  Global oil supplies could fall far short of need and expectations in the next 20 years, reported the International Energy Agency in mid-May. The agency long expected supply to rise to meet demand of 116 million barrels a day by 2030.
  
  It now expects oil output to struggle to reach 100 million barrels in that time frame.
  
  These market conditions will make life difficult for airlines — and airline stocks — well past 2010 and will also impact Federal Reserve policy in the coming months, Rogers said.
  
  Rogers has proved astoundingly prescient since suggesting that investors buy into the older, industrial economy back in 1999 when gold and oil were coming off 25-year lows and when the Internet stock market was soaring.
  
  Now in his mid-60s, Rogers retired from full-time work when he was 37, and invests for fun. ( source of article: here )

And fresh on Forbes.

• "We think the bull market in commodities still have a long way to go, especially when you look at growth rates in China, India, the Middle East, North Africa and throughout most of the developing world, where demand for just about every commodity is rising at unprecedented rates," Rogers said. ( Taken from Forbes article here )

Do note that Jim Rogers made them comments when he announced he is teaming up with S-Network Global Indexes to launch The Rogers Van Eck Hard Assets Producers Index. Unlike the Rogers International Commodity Index, the new index tracks the performance of companies that deal in commodities--rather than performance of the commodities themselves.

And in another article on MoneyNews, Rogers blasts the insanity of the US Fed

• Jim Rogers: Helicopter Ben Bernanke 'Insane'
  
  Friday, June 20, 2008 2:40 PM
  
  The Fed, explains commodities bull Jim Rogers, has made things worse by printing huge amounts of money, causing huge inflation, and driving the dollar down.
  
  Plus, American taxpayers will have to pay off the $400 billion spent on Bear Stearns.
  
  "If the system is so fragile that the collapse of the fifth-largest investment bank in America could bring the whole thing down, what’s going to happen in a few years when the No. 2 or No. 1 banks go bad?" Rogers asks.
  
  "What’s Bernanke going to do, get in his helicopter and fly around the country repossessing cars and houses? This is insane."
  
  So, Rogers say he's buying airlines.
  
  It's counterintuitive: Twenty-four airlines went bankrupt last year, and five of the seven largest U.S. air carriers went bankrupt during the past decade.
  
  "That’s great news," Rogers says. "Bankruptcies are signs of bottoms, not signs of tops."
  
  "I fly a lot and planes are full," Rogers notes. "You read every day that the airlines are cutting capacity and raising fares. How much more bullish can you get?"
  
  Rogers' current investment picks also include Swiss francs, Japanese yen, agriculture and oil — but no financials right now.
  
  "I'm short on the investment bank ETF, which means I’m short on all of them," Rogers observes.
  
  "Some of these companies have horrendous balance sheets."
  
  Financials go for unbelievably low prices in bear markets, he points out, but this bear hasn’t hit bottom yet.
  
  Rogers — who is also short Citibank and Fannie Mae — says the excesses in financial markets have been far too great.
  
  "You don't see any 29-year-old cotton farmers driving Maseratis," Rogers says.
  
  "But a lot of 29-year-olds on Wall Street are driving them. This is not the way the world is supposed to work."
  
  However, the oil bull market has years to run, Rogers says, even though big market reactions can still occur.
  
  He points out that the price of oil has dropped by 50 percent twice since 1999.
  
  "Unless someone discovers a lot of oil very quickly in accessible areas, we’re running out of known oil reserves," Rogers says.
  
  "If the price of oil goes high enough, they’ll be drilling on the White House lawn and Buckingham Palace."
  
  And because food reserves are at their lowest level in 50 years, unless someone starts bringing on a lot more capacity soon, Rogers believes the agricultural bull market has got a ways to go, too.
  
  Meanwhile, prices for nickel, zinc and silver are down 50 percent to 80 percent from their historic highs, yet Rogers is waiting to add more of these commodities to his portfolio.
  
  "It looks like Congress is about to do something that will drive commodity prices down, and that will create a fantastic buying opportunity," he says.
  
  Rogers advises investors, however, not to panic in bear markets.
  
  "Bear markets perform a necessary service by cleaning out the system," he says.

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Any more Carlyle?

Looks like they reckon they are more to come. I am not surprised at all.

From a Washington Post article. Anatomy of a Carlyle Collapse

• Many investors think Carlyle Capital is only the tip of the iceberg. Drake Management's three hedge funds, with nearly $5 billion under management, recently suspended investor redemptions as it considers liquidating its assets. Nuveen Investments, purchased last year by Chicago private-equity firm Madison Dearborn Partners, faces lower profits and slower growth because of higher borrowing costs brought on by the credit crunch.
  
  Peloton Partners, a hedge fund based in London, was forced to liquidate its funds recently, and Thornburg Mortgage, a big U.S. lender, failed to meet margin calls by lenders last week. Citigroup is committing $1 billion to shore up its hedge funds.

Less we forget the genius money making strategy stated in this article.

• The company's business was to borrow money to buy mortgage-backed securities, and to make money on the difference between the firm's borrowing costs and what it earned on the interest paid on the bonds.

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Another US Fund Sank

And this wasn't good for the Asian markets.

• Asian markets sank Thursday with investors spooked by news that a major U.S. fund, Carlyle Capital, expects its lenders to seize its assets and cause its likely liquidation. Carlyle Capital is an affiliate of private equity firm Carlyle Group.
  
  Carlyle said it has defaulted on around $16.6 billion of its debt and said the only assets held in its portfolio as of Wednesday were U.S. government agency AAA-rated residential mortgage-backed securities. During the last seven business days the company had received margin calls in excess of $400 million. Carlyle was unable to pay the margin calls, so its lenders had proceeded to foreclose on the mortgage-backed securities collateral. ( link here )

In another Bloomberg article, Carlyle Capital Lenders to Seize Assets `Promptly'

• Carlyle Group's mortgage-bond fund, which received more than $400 million in margin calls since March 5, said it was unable to reach an agreement with lenders, who will ``promptly'' take over all of its remaining assets.

And of course there is more to come.

• ``Carlyle won't be the end of it,'' said Greg Bundy, executive chairman of Sydney-based merger advisory firm InterFinancial Ltd. and a former head of Merrill Lynch & Co.'s Australian unit. ``There's more to come. The problem is no one can give you an educated guess about how much.''

What was interesting was the following.

• The blowup is a rare setback for Carlyle Group co-founder David Rubenstein, who created the fund and tapped public markets for $300 million last year to expand the Washington-based firm beyond leveraged buyouts.
  
  The fund originally delayed and then cut the size of its IPO by about 25 percent as the subprime contagion began. It then added the money raised in July 2007 to a private $590 million pool opened in 2006. For every dollar of equity, the pool borrowed $32.
  
  ``It was a poorly conceived fund launched at the worst time,'' said Toby Nangle, a member of the strategic policy group at Baring Asset Management in London, which manages $55 billion.
  
  Carlyle's fund has said its so-called agency debt has an ``implied guarantee'' from the U.S. government.

See also Carlyle Fund's Assets Seized

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Hedge Funds and LBO Funds in Danger?

Here is an article worth reading. Money manager, Jeremny Grantham, believes that credit-market declines may force as many as half of all funds to close in the next five years!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZdtk8hhjZr4&refer=home

• ``Probably the most stretched silly credit that ever walked the face of the earth was subprime, and that was the start of it,'' Grantham said in an interview in his Boston office. ``And then you started to see more of the fixed-income market getting contagion.''



• Grantham said investors putting money into private-equity funds will lose most of their money because of the amount of leverage used in deals and profit-sapping fees. An overload of debt will sink at least a couple ``very large'' firms. He didn't say which firms may be imperiled.
  
  ``These guys are in a big hole,'' he said. ``Most of the money going into private equity today will be a total loss.''
  
  

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What about Fund Flows

Saw an intereting comment on the issue of Flow of Funds. here

As one can see from the above chart, the selling that we endured on the U.S. stock market during February 27th and the following four days was one of the most intense in history. Not only was this apparent in the U.S. stock market, but all around the world as well as the major global market indices plunged. At the height of the selling, money managers in Asia were remarking that they have not experienced this kind of selling intensity since the height of the Asia Crisis in October 1997.

(btw.. saw a citigroup commentary posting on this thread here )

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Will Big Name Funds Gurantee you Success?

Came upon this article posted on Bloomberg. It's about the performance of Goldman Sach's flagship fund, Global Alpha Fund. Mind you, we are talking about a hedge fund worth some US$10 billion.

Here is the link to the newsclip: here

• Goldman Sachs Flagship Hedge Fund Falls 11.6 Percent (Update1)
  
  By Katherine Burton
  
  Dec. 8 (Bloomberg) -- Goldman Sachs Group Inc.'s $10 billion flagship hedge fund dropped 11.6 percent this year through the end of November, extending earlier losses as its managers misjudged the direction of global stock and currency markets, according to two investors.
  
  Goldman's Global Alpha Fund lost money partly on wrong-way bets that equities in Japan would rise, stocks in the rest of Asia and the U.S. would fall and the dollar would strengthen, the investors said. In August, the fund lost almost 10 percent on unprofitable investments in global bond markets. New York-based Goldman is the world's largest hedge fund manager, with $29.5 billion in assets.
  
  Global Alpha, managed by Mark Carhart and Raymond Iwanowski, both 40, is designed to make big, risky wagers, which can produce large returns as well as heavy losses. Other so-called macro funds that bet on global stocks, bonds, currencies and commodities are up an average of about 7 percent this year through November, according to Chicago-based Hedge Fund Research Inc. Last year, Global Alpha returned almost 40 percent, said the investors, who declined to be identified.
  
  ``The fund was anticipated to be volatile -- it has had volatile periods in the past,'' said Peter Rose, a Goldman spokesman in New York. ``Since inception it has delivered positive returns for investors,'' he said. Rose declined to comment specifically on the fund's performance.

Would I be wrong to say that it would appear that big names, top guns, top reputations do not neccarily gurantee one success.

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