Editor's Note

Alternative Market Briefing 22.Dec 2008

November 7th 2005: Harry Markopolos Submission to the SEC: `Madoff Investment Securities LLC is a Fraud`, and how a Geneva firm figured it out, too:

Dear Opalesque Reader,

Below we are carrying an Exclusive where we are presenting two outstanding documents relating to the Madoff case. The first one, Harry Markopolos' submission to the SEC from November 7th 2005, was already "flying" around the internet Friday afternoon in the U.S., and we have still included here at prominent place in case you have not seen in. It will make a good read.

The second document is from a Geneva-based fund of funds, which shares step by step how one of their Partners, despite the "total lack of transparency" of the Madoff operation, was able to come to the right conclusions. He too, like Markopolos, was following the "mosaic theory", where one patiently gathers external, factual information and eventually reconstructs the puzzle.

Due Diligence is counter-intuitive. Your highest priority should always be your "good" managers

As Chris Addy from Castlehall Alternatives emailed us: "Due diligence, though, is counter-intuitive: the highest priority is always managers who are doing – or appear to be doing - too well". The hope is that, after Madoff, the mosaic theory becomes part of the repertoire.
Opalesque Exclusive: Harry Markopolos submission to the SEC (November 7th 2005!): `Madoff Investment Securities LLC is a fraud`, How Geneva firm figured it out, too
Opalesque Exclusive: Review of hedge fund launches, closures, trends, and regulatory and legal events – week 51
Fund launches – Update: Da Vinci launches environmental, Shariah-compliant Green Falcon Fund
Performance – Only 3 Chinese hedge funds reported positive return in the 1H 2008, Chinese top hedge funds returned 23.55% this year
Strategies –Distressed debt funds line up New Year raids
Comment - Olympia Capital: Global macro managers will still be attractive in 2009
Hedge funds in crisis – Hedge funds gain access to $200bln Fed aid, Fortress cancels dividend, Madoff arrest forces hedge fund index shake-up, Madoff losses will change hedge funds, Comment: Would hedge fund registration have helped Madoff investors?
Outlook – Six changes hedge funds need to prepare for, Hedge funds to return to roots as niche products, US asset managers expected to recover in 2009, Ping An Trust: More hedge funds in China
White paper – Managing in the new paradigm: reducing hedge fund costs
Interviews – Andrew Feldstein of Blue Mountain Capital on suspendered withdrawals, Madoff and current opportunities, GAIA`s Coast Sullenger on the agri sector – Time to invest in food? (video), Fortune Group` Simon Hopkins sees bleak future for FoHFs
Madoff Update – Madoff`s accountant `was taken` like other investors, AICPA: No peer review of Madoff auditor in 15 years, Madoff agrees to receiver, asset freeze extension, Judge toughens Madoff`s home detention rules, FBI moves agents to Madoff and subprime probes, No deluge of lawsuits, yet, Flawed managed accounts failed Madoff investors, Layoffs at Madoff`s UK fund as liquidator moves in, How to make a Madoff, UBP says Madoff had `perceived edge` in the markets, Madoff fraud rippled around the world
Madoff Exposure – Bianco Comment: Madoff exposure may be less than $50bln, $12bln in Geneva, but many firms are not acknowledging exposure, Abu Dhabi wealth fund, EFG, UBS` Luxalpha, Int`l Olympic Committee, MassMutual
Other Voices: Why Madoff is not representative for the hedge fund industry
Investing – Bonds, the next bubble?, Funds see gold in convertibles, New Star bullish on regional Swiss private banks, Newedge sees retest of market lows in Q1-2009, Oil contango drives down investor profits
Institutions – Some institutional investors are ending or scaling back portable alpha programs, CalPERS charting new waters on currency hedge extension, Top global pension funds to build absolute return capabilities
Lehman Update – Lehman Europe update: client money to be pooled, each client entitled to share, Nomura-Lehman London tie-up will take longer than expected to move into profit, Nomura`s Lehman deal could boost shares
Credit Crunch Update – AIG, Munich Re near deal on Hartford unit, Merrill`s John Thain to get second chance with Bank of America, S&P downgrades 11 of world`s top banks, Bank of Spain chief fears `total` meltdown, IMF chief warns 2009 may be `even darker` if no more stimulus, Credit crisis spurs unprecedented volume of litigation
Europe – Ireland pours Eur5.5bln into banking sector and takes control of Anglo Irish, Hypo Real Estate to restructure business, cut jobs, Russian oligarchs seek $78bln in Kremlin loans
Regulatory – Belgium extends short-selling ban until March 20, Update: European Commission issues communication on recapitalization of financial institutions
Derivatives – Liffe, LCH.Clearnet, first group to offer CDS clearing as from today, Int`l Swaps and Derivatives Association launches research notes, South Korea to tighten grip on derivatives investment
Activist News – Sparx rises in Tokyo after plan to sell Cosmo stake
News Briefs – Harvard pays top fund managers $22.4m in 2008, Sam Israel sent to medical evaluation, NYC, Greenwich hedge funds are sub-letting office space, Canada unveils auto bail-out plan, Turquoise plans `dark pool` linking service, Bonuses of currency traders fall least on Wall Street
...And Finally – `The most magnificent, beautiful thing:` N.C. family has 61 Christmas trees
(*) Opalesque Note: Only in 2006, as part of an SEC investigation following the Markopolos filings (see below), Madoff registered his investment-advisory business with the SEC.

By Matthias Knab: In this article we are presenting two outstanding documents relating to the Madoff case. The first one, Harry Markopolos' submission to the SEC from November 7th 2005, was already "flying" around the internet Friday afternoon in the U.S., we have still included here at prominent place in case you have not seen in. It will make a good read.

The second document is from Peak Partners, a Geneva-based fund of funds, which shares step by step how one of their Partners, despite the "total lack of transparency" of the Madoff operation, was able to come to the right conclusions following the "mosaic theory", where one patiently gathers external, factual information and eventually reconstructs the puzzle.

Harry Markopolos' Submission to the SEC: "The World's Largest Hedge Fund (*) (Madoff Investment Securities LLC) is a Fraud" from November 7th 2005

"Opening Remarks:
I am the original source for the information presented herein having first presented my rationale, both verbally and in writing, to the SEC's Boston office in May, 1999 before any public information doubting Madoff Investment Securities, LLC appeared in the press....I used the Mosaic Theory to assembly my set of observations. My observations where collected first-had by listening to fund of found investors talk about their investments in a hedge fund run by Madoff Investment Securities, LLC, a SEC registered firm. I have spoken to the heads of various Wall Street equity derivative trading desks and every single one of the senior managers I spoke with told me that Bernie Madoff was a fraud....

29 Red Flags
I am a derivatives expert and have traded or assisted in the trading of several billion $US in options strategies for hedge funds and institutional clients. I have experience in managing split-strike conversion products both using index options and using individual stock options, both with and without index puts. Very few people in the world have the mathematical background needed to manage these types of products but I am one of them.

I have outlined a detailed set (Opalesque Note: 29) of Red Flags that make me very suspicious that Bernie Madoff's returns aren't real....."

Download from Opalesque: www.opalesque.com/files/Madoff_SECdocs.pdf

The WSJ was following up what happened after this filing: Madoff Misled SEC in '06, Got Off, writing that on Jan. 4, 2006, the SEC's enforcement staff in New York opened an investigation, based on Mr. Markopolos's allegations, into whether Mr. Madoff was, in fact, running a Ponzi scheme. The SEC staff received documents from Mr. Madoff and Fairfield Greenwich, a hedge fund that placed money with Mr. Madoff on behalf of its clients. The SEC also interviewed Mr. Madoff, his assistant, an official from Fairfield Greenwich and another employee.

...The SEC report also said Mr. Madoff had violated rules requiring investment advisers to register with the SEC, which makes them subject to inspections and examinations. Investment advisers must register if they have more than 15 clients.

The staff recommended closing the investigation because Mr. Madoff agreed to register his investment-advisory business and Fairfield agreed to disclose information about Mr. Madoff to investors.

Peak Partners: Where were the counter-parties?

Peak Partners, a Geneva-based fund of funds, issued a press release "Why we did not invest with Madoff" with more background:

"One of our Partners has been, during his career, a privileged observer of one of those Madoff Feeders. He had the opportunity to analyze in detail Madoff's investment strategy based on the trade confirmations that were sent by post. Contrary to market practice, none of those trade confirmations had a time stamp on it. And there was no way to check the trading account online. This was probably one of the easiest "red flags" to spot....

From the trade confirmations, our Partner was able to re-engineer the strategy and understand how the performance was generated, which ex post seemed perfectly plausible. Madoff appeared to be really generating returns by executing its "split-strike conversion" strategy.

...Our Partner eventually found out that most of the performance came from the options overlay. Given the volatility of the options, the timing of the trades was crucial to produce good performance. When checking the price range of S&P 100 options listed on the CBOE, options traded by Madoff were almost always executed at very good prices (close to the low of the day when purchasing options and close to the high of the day when selling options). Those systematically good prices seemed highly suspicious, and even more given the following:

Scrutinizing Volumes and Counterparties
Since the volume of the S&P100 options listed on the CBOE was tiny, it would have been impossible for Madoff to use exchange-listed options to execute his strategy. The only way was for him to use OTC options, which raised the question of counterparties. At the time, our Partner estimated the amount of money managed by Madoff in his strategy at about $20bln. Assuming that Madoff was executing the same trades at the same time for all its managed accounts, then the notional value of the options overlay when he was rolling over was around $80 bln. This number is huge, and when asked who the counterparties were, Madoff invariably answered that he was using the "ten biggest financial institutions of Wall Street, that had a credit rating of A or better". If that was the case, then Madoff should have been an well-known client of those firms, especially with the kind of volume he was supposed to be trading. Knowing how Wall Street traders think, it is hard to believe that they would have been willing to continue doing principal OTC business with a guy that was on the winning side most of the time.

But this latter point of couse is only conjecture....Madoff was by far the biggest users of S&P100 options, which are much less used than S&P500 options, thus making offsetting positions very hard to find. Second, there are no futures on the S&P100 index! This means that Madoff's counterparties for the OTC options would have had to hedge themselves by trading a proxy basket of stocks, which is much more expensive....But the strongest argument is yet to come.

"Never heard of this guy!"

Each time that our Partner had the opportunity to ask an Option Arbitrage manager (who had typically worked for 10,15 or more years as an option trader on various desks in Wall Street) if he had heard about Madoff trading options, he always got the same, stunning reply: "Never heard of this guy!" After a dozen similar answers, it became clear that Madoff could not be doing what he said he was doing. This also meant that the trade confirmations - at least the option ones - were most probably fake.

...Access the full document here. No online Source

By Benedicte Gravrand, Opalesque London: A roundup of last week’s hedge fund launches, closures, index performance, trends, regulatory, legal and financial events pertaining to the alternative investments world.

Last week, we heard of fund launches (or possible launches) from Dalton, Castlestone, Westbury Capital, MarketPsy, Nykredit, Analytix and NIR Group.

We also heard of fund closures from Arience Capital, Occam, Citadel and UBS. HFR reported that 344 funds had closed in Q3, 693 in 2008, and that liquidations had outpaced launches.

The HFRI Fund Weighted Composite Index was down -1.93% in November, -18.18% YTD;
The final Credit Suisse/Tremont HF Index was down 4.15% (-19.04% YTD);
The Barclay HF Index returned -2.34% (est.), (-21.30% YTD est.);
The Scotia Capital Canadian HF Index finished November with +1.65%/-2.73% (-17.43%/-22.44% YTD);
The RBC Hedge 250 Index returned -1.50%, -20.18% YTD;
The Barclay CTA Index added 1.54%, 12.69% YTD;
The Morningstar Hedge Fund Index was down 2.5%, -24% YTD;
Most EDHEC Alternative Indexes were negative, except for CTA, Global Macro and Short Selling;
The Ernst & Young New Zealand Absolute Return Index surged to +1.502 (+17.59% YTD);
The Credit Suisse Long/Short Equity Replication Index was up 4.13% through December 12th.

The Eurekahedge November 2008 asset flows update showed assets were down 4.4% (est.) to $1.5tln.

Citadel and Scandium suspended redemptions; Altedge said it would pay out redemptions in cash early-2009; Jabre clients agreed to stagger redemptions from its $2bln multi-strat fund; SAC allowed investors early exit from its multi-strategy fund. Investors in Cayman Islands hedge funds may not be able to redeem their investments, after a landmark ruling was passed to allow directors of funds to suspend withdrawals.

It was reported that banks were cutting losses by selling hedge funds holdings (and KBC Bank discontinued its hedge fund-related activities); that surviving hedge funds would profit from available attractive opportunities; that global macro funds attracted more interest as they had strong returns and easy liquidity.

Merrill Lynch reported that investors were hoarding cash but were becoming more optimistic, and a TIGER 21 survey showed that HNW investors were making a massive shift away from alternatives as cash stayed king. A Cass Business School research report indicated a lack of impact of the short selling restrictions globally; IMS Consulting reported that UK hedge fund managers agreed on a need for a reasoned short-selling regime.

UBP and UBS ranked first and second on the annual Alpha Fund of Funds 50 awards.

The following trends and outlooks were noted: Asian hedge funds stepped in distressed asset space as global players were fleeing; Brazil short-sales dried up as Petrobras was 65% cheaper; a survey found that credit spreads were expected to tighten in 2009; TABB said that buy-side traders would increase the use of options algorithms to execute more complex trading strategies; there is hope of fundraising for hedge funds who have proven the ability to generate alpha in market turbulence; Greenwich Associates saw reeling dealers, fewer hedge funds and limited liquidity for Europe’s future fixed income markets; Credit Suisse recommended investing in several asset classes and diversify risk, supplement portfolio with selected equity, gold and inflation-indexed bonds.

On the M&A scene, Grisons Peak and IGS Group joined and created a new merchant bank to broker hedge fund takeovers; United Capital Financial Advisers teamed up with Altegris Investments to provide an alternative investments platform; and GLG Partners is to acquire Societe Generale Asset Management UK.


The Madoff affair, uncovered the previous week and deemed as the scam of the century, is not unlike the famed 1920’s Ponzi scheme. Madoff, now under house arrest, might have swindled up to $50bln from investors. Madoff’s obscure auditor is under investigation by an NY prosecutor. The sorting of the files might require months. His family was found to be innocent, but its UK investment firm may have its assets frozen.

Among the victims were big name hedge funds, fund of hedge funds, banks, private banks, charities, universities, pension funds, insurers, tycoons, celebrities and private investors. It was reported that victims might recover some losses through the U.S. Tax Code and that those who had gained might have to surrender the funds. However, the scheme touched investors globally, including Brazil and Western Europe.

Investors have either launched or talked about launching lawsuits and investigations into Madoff, its intermediaries and the funds which had invested in Madoff. Fingers were pointed at big accounting firms and the U.S. SEC, which had received negative reports on Madoff in the previous years but never uncovered the fraud. The regulator is now being probed, and may see future changes in its processes. In parallels, many hedge funds had invested in Madoff, not detecting the Ponzi scheme. Lack of due diligence was deemed to be the cause and this might give rise to more hedge fund regulations in the future. FoHFs, who have been suffering from negative returns and heavy investor redemptions, are seeing this affair as a ‘devastating’ blow.

Goldman Sachs posted its first quarterly loss, of more than $2bln, since going public during the financial crisis; Citigroup is to merge its banking operations, and has boosted its lending after receiving government money; BNP Paribas suffered losses of Eur710m and may cut 700 jobs; AIG write-downs may rise by $30bln on European swaps, and sold $39.3bln of assets to a fund established by the NY Fed.; Australia’s Commonwealth Bank shares tumbled and the bank blamed Merrill Lynch; Credit Suisse will pay its senior bonuses with illiquid instruments; and ABN Amro cancelled the sale of its units to Deutsche Bank.

In the U.S., the Fed cut the funds rates and set a target range of 0% to ¼%; however it was noted that banks showed no signs of easing credit in step with the Fed’s rates; the dollar and the sterling plunged after the Fed move.

Treasury Secretary H. Paulson said he did not plan to ask Congress for the rest of the $700bln bailout fund before leaving office; New York government’s David Paterson proposed to expand personal income tax for non-residents to include income from hedge funds and management fees; Obama might seek a stimulus plan exceeding $850bln. According to CNBC, by Friday, the auto bailout was announced: General Motors and Chrysler will get up to $17.4bln in return for deep concessions. And H. Paulson reversed himself, asking for the second half of the TARP fund, some $350bln.

In Europe, Ireland announced a $20bln bank rescue; Hypo Real Estate offices were raided by Munich prosecutors over claims it had violated some disclosure rules; and Fortis revised its Q3 results after the plan to sell most of its assets to BNP Paribas was suspended by a Belgian court.

In Asia, it was reported that Japan might buy 20tln yen of bank-held stocks; Japan followed U.S. in slashing rates to close to zero.

On the regulatory front, US regulators stepped up their Citigroup oversight; Obama tapped veteran regulator Mary Schapiro to head the SEC and Gary Gensler to lead the CFTC. The Ontario Securities Commission’s staff required an extension of the order that Sextant Capital Management refrain from selling its hedge fund until March 17, to continue its investigation.

On the legal scene, investigators concluded that New York lawyer Marc Dreier, who was busted for criminal impersonation in Toronto, had stolen more than $380m. Dreier’s firm will seek bankruptcy protection.

There was a $200,000 penalty for hedge fund Linuxor A. M. and principal in a CFTC anti-fraud action; a former Morgan Stanley employee was sentenced to two years probation after pleading guilty in July to stealing a list of hedge fund clients; and the SEC charged ex-Lehman’s Matthew Devlin, other professionals and companies with widespread insider trading. No online Source
Da Vinci Invest of Zurich, Switzerland on Friday announced the launch of an environmental and shariah-compliant Green Falcon Fund.

In addition to its flagship Volatility Arbitrage Fund, this new vehicle will invest in the carbon markets and forestry. The carbon markets are steadily growing and they are characterized by recurring inefficiencies, enabling a range of arbitrage strategies.

The fund will comply with Islamic law on trading, and work closely with local advisors to set up halal (permissible) and haram (forbidden) trading strategies. This also means that the aim is to avoid bayu al gharar (trading with excessive risk) and they will concentrate on the more vanilla structures and strategies.

Not involved in Madoff
Hendrik Klein, CEO of Da Vinci Invest Ltd. confirmed that Da Vinci Invest Ltd. and Da Vinci Arbitrage Fund do not currently or ever had any involvement with Madoff Investment Securities. The Da Vinci Arbitrage Fund does not invest with any other fund structures. Corporate website: Source
Only 3 Chinese hedge funds reported positive return in the 1H 2008
From Chinahedge.com.cn: At the first half of this year, 111 non-structured securities investment funds which were surveyed dropped about 25.99%... Full article (subscription required): Source

Chinese top hedge funds returned 23.55% this year
From Chinahedge.com.cn: Two hedge fund products under the management of Chongqing Trust, returned 23.55% since this year, through November, ranking No.1 in total 269 local hedge funds in China... Full article (subscription required): Source

From Telegraph.co.uk: Industry sources say private equity and distressed debt specialists have raised about $26bn (£17bn) since the start of October, with some 80pc coming from hedge funds...

Among the biggest distressed debt fund raisings since October have been Oaktree, which has secured $10.5bn, Towerbrook with $2.75bn, Intermediate Capital with $1.5bn, and Alchemy with $1bn. Hedge funds are also aiming to buy distressed debt directly from banks that are under pressure to offload liabilities to shore up their balance sheets... Full article: Source
By Guido Bolliger, Co-Chief Investment Officer, and Laurent Dupeyron, Deputy Managing Director. Olympia Capital Management.

The global economy is in the worst recession of this century. The US property bubble and the credit bubble have burst, negatively impacting the performance of some hedge fund strategies. Under these circumstances, we would like to take this opportunity to draw our readers' attention to the performance of some hedge fund strategies in an uncertain economic and financial climate. We believe that Global Macro managers have aligned their style with the economic climate expected to prevail in 2009.

The purpose of this article is to explain why the Global Macro strategy is attractive to investors during a macro-economic environment which includes:

1) A sharp slowdown in the growth outlook for corporate profits, which is expected to continue to hurt equity markets
2) A sharp rise in credit spreads, which will put high pressure on corporate credit
3) An unprecedented rise in budget deficits, which could lead to substantial hikes in government rates for long maturities
4) High volatility
5) An overall reduction in market liquidity

We shall begin by describing Global Macro managers' strategy and the financial instruments they use. We will then explain why this strategy is so well adapted to the current market.

Global Macro strategy
Global Macro managers use a top-down investment strategy. They determine forecasts for the main macro-economic factors (economic activity and inflation as well as budget, monetary and economic policy of the main governments and geopolitical risks), which are in turn used to establish forecasts for the different asset classes, namely: equity, short rates, long rates, volatility, forex and commodities. These forecasts can be based on a purely qualitative or quantitative analysis, or a combination of the two approaches. The most reputable managers often seek advice from former politicians or members of central banks which help them anticipate political turmoil that could affect markets or monetary policy changes that could impact currencies and rates.

Once the forecasts for the different asset classes are determined, the managers use either a purely directional (e.g. short-selling on US equity markets) or a purely relative (e.g. buy corn and sell wheat) approach. Profit opportunities will be proportionate to the difference between the market prices and forecasts determined by managers. In other words, the strategy comes out extremely profitable when the market consensus is significantly different from the equilibrium price forecast by managers. This is generally the case during periods of high uncertainty…

Financial instruments used by Global Macro managers
Global Macro managers have no restrictions in choosing the nature and type of instruments they trade. As such, they can easily go from one asset class to another or from one opportunity to another. For most of their transactions, Global Macro managers use derivatives (primarily futures, swaps and options) traded on underlying instruments to obtain exposure to the equity markets, interest rates, currencies or commodities indices. Direct investment in equities or individual bonds is not exceptional but generally comprises only a very small portion of their portfolios.

The instruments used are among the most liquid in the market. As a result, Global Macro managers can liquidate their portfolio quickly and at a low cost when market risk becomes too great or their forecasts change. Moreover, the use of derivatives allows them to take advantage of the leverage effect without exclusively seeking out external sources of financing such as prime brokers…

Global Macro strategy against the current economic backdrop
At end 2008, the economy is sluggish and highly uncertain. Over the past nine months, we have seen increasing government intervention on financial markets, virtually nationalising some economic sectors. The macro-economic uncertainty has caused a sharp increase in volatility across all asset classes which had seen abnormally low volatility between 2003 and 2007. As mentioned earlier, we believe that this strong volatility will continue over the next few months. Risk reduction for investment banks and hedge funds has dried up liquidity in some market segments. It will take several more months before liquidity comes back to normal levels. As such, illiquidity risk will remain high on the financial markets. We believe that the cost of credit will also remain high over coming months, which will probably hurt investment strategies that use prime brokers to finance their leverage.

Several factors suggest that the current market environment will enable Global Macro managers to come out ahead. First of all, Global Macro managers are positively exposed to market volatility. When all asset classes post low volatility, the strategy tends to turn in unattractive risk-adjusted profitability. In the absence of volatility, Global Macro managers apply very directional strategies and tend to increase their betas, thereby reducing their alpha.

Secondly, Global Macro managers, through their flexibility, will be capable of harnessing the return of all asset classes to their equilibrium price. Significant uncertainty has prevailed on financial markets over the past few months. No clear consensus seems to be emerging as to the consequences of the financial crisis either on the economy or on government intervention. This dispersion of macro-economic forecasts in addition to forced selling across most asset classes has brought about major imbalances which present opportunities for the Global Macro strategy.

Thirdly, unlike other strategies (e.g. fixed income arbitrage), Global Macro managers should not be affected by the above mentioned reduction in liquidity since the instruments they trade are among the most liquid on the market. On the contrary, as a liquidity provider, the strategy could even benefit from the increase in the price of liquidity. However, it is advised to proceed with caution as some managers can deviate from their initial mandate by applying less liquid strategies: as such, at Olympia, we have carefully tried to avoid "macro" managers who, for example, attempted to diversify into structured credit in which the liquidity parameters are not as favourable.

Moreover, Global Macro funds thrive on trends. Although some (CTAs) have a more short-term strategy than others, most of them benefit from the existence of trends. Uncertainty is high for the time being, but we believe that in coming months, clear trends will begin to emerge for the most common themes applied by these funds, namely monetary policy, inflation and currencies.

Furthermore, the Global Macro strategy is the only strategy capable of harnessing the significant positive and negative interdependence between asset classes that is currently prevailing on the market. For instance, in the past few months, the profitability of commodities and equities has been closely linked. Similarly, long-term US government bonds have developed a very negative correlation to the profitability of equities. Consequently, Global Macro managers can play asset classes off each other in order to capture the benefits of this interdependence. They can harness it by using the impact that their forecasts will have on a given asset class on other asset classes. Lastly, these macro-economic strategies seem to be less affected by the current market chaos than others: the controversy over short selling has little or no impact on them. The reduction in credit provided by banks has also had a low impact. We also know that these funds are less affected in their strategy and management than "micro" funds, whose added value lies in the fundamental analysis of companies and therefore whose relevance is now extremely challenged due to liquidity issues.

By increasing the portion of the Global Macro strategy of our multi-strategy funds over the past year, we at Olympia have not only chosen the strategies with the best performance, thus enabling us to outperform the benchmark indices of multi-strategy hedge funds in a number of cases, but we have also significantly improved the liquidity profile of most of our portfolios. As a result, we have thus far managed to avoid changing the liquidity terms of our flagship fund.

Corporate website: Source
Hedge funds gain access to $200bln Fed aid
From FT.com: Hedge funds will be allowed to borrow from the Federal Reserve for the first time under a landmark $200bn programme intended to support consumer credit.

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions... Full article (subscription required): Source

Fortress cancels dividend
From WSJ.com: Fortress Investment Group LLC will not pay a fourth-quarter dividend, saying it will use the capital for investing or operations. The firm, which has more than $30 billion under management in private-equity and hedge funds, also chose not to pay a third-quarter dividend. In the second quarter, it paid a dividend of 22.5 cents a share.

… Big-name hedge-fund managers have been forced to put up what are known as "gates" that slow redemptions or stop them altogether. Fortress did so earlier this month on its largest hedge fund: the $7.2 billion Drawbridge Global Macro Fund, which lost 2.3% in November and was down about 23% for the year … full article (subscription): Source

Madoff arrest forces hedge fund index shake-up
From FT.com: The arrest of money manager Bernard Madoff is shaking up the way hedge fund indices are calculated, meaning returns from the beleaguered sector may be even worse than previously thought.

John Rekenthaler, vice-president of research at fund-tracker Morningstar, said it would this month write down the value of all Madoff-related funds to zero. However, it would not re-state its hedge fund index or remove the funds from it… full article (subscription): Source

Madoff losses will change hedge funds
From Businessweek.com: The arrest of Bernard Madoff, the financier who allegedly ran a $50 billion Ponzi scheme, could mark the end of the hedge fund industry as investors know it. … Full article: Source

Comment: Would hedge fund registration have helped Madoff investors?
From AllAboutAlpha.com: Could regulation of the hedge fund industry have prevented the Madoff fiasco? Perhaps. But likely not the specific type of regulation envisioned in the SEC’s failed attempt to regulate hedge funds back in 2006… full article: Source
Six changes hedge funds need to prepare for
From NYtimes.com: Hedge funds have suffered a shakeout in 2008. The average hedge fund fell almost 20 percent, according to Hedge Fund Research. No fund has yet required a bailout. But many won’t be around in the new year, and those that have survived are battered and bruised. Hedge fund managers must accept that the industry won’t be quite the same again. Here are six changes they need to prepare for:

Liquidity is the new watchword.
Fees will face greater scrutiny.
High water marks will blur.
Regulation will intensify.
Concentration will accelerate.
Unleveraged returns should improve.
… Full article: Source

Hedge funds to return to roots as niche products
From Reuters / Hedgeworld.com: Hedge funds are set to return to their roots as niche products for the happy few as they have been unable to deliver the gleaming returns they were promising ever since the start of the credit crisis…

With expectations of positive returns in all markets now shattered and redemptions flooding in, the industry is set to become much smaller again. Such a position could ultimately prove much healthier for the industry.

"They say profits cover problems, but there have been much fewer profits in 2008 and many of the problems are starting to be more apparent," says Odi Lahav, vice president at rating agency Moody's alternative investment group.

Looking into 2009, it seems that only a relatively small number of managers will be able to produce genuine alpha—the same situation as in previous years, although this time they will now make up a much greater share of the industry… full article (registration): Source

US asset managers expected to recover in 2009
From eFinancialnews.com: Assets under management at many of the largest US fund houses will rise next year as markets return to historical norms, a report has said, while minimal balance sheet risk and above-average leverage to rising markets could lead to fund managers' shares being among the first to recover.

Robert Lee and Larry Hedden, analysts at investment bank Keefe, Bruyette & Woods, forecast that there will be an average 7% increase in assets under management across listed US asset managers next year.

This will follow what has been a painful year for the industry this year, with KBW estimating that a 29% decrease in assets under management for the year… Full article (subscription): Source

Ping An Trust: More hedge funds in China
From Chinahedge.com.cn: Ping An Trust, the trust arm of insurance giant Ping An Insurance of China, is the second Chinese trust company which has hedge fund business... Full article (subscription required): Source

From Hedgeweek.com: Raju Panjwani, founder and chief executive of Epitome Global Services, says in a white paper that when the increasing costs of running a hedge fund threaten to overwhelm revenue, managers must plot a new course in order to survive. Source

White paper: Source
Andrew Feldstein of Blue Mountain Capital on suspendered withdrawals, Madoff and current opportunities
From FT.com: Andrew Feldstein co-founded hedge fund Blue Mountain Capital in 2003 and is the firm's chief executive officer and chief investment officer.

Mr Feldstein left JPMorgan to launch Blue Mountain after starting his career at JPMorgan in interest rate derivatives. Over 11 years there he worked as head of its structured credit unit, head of global credit portfolio management, and head of high yield sales, trading and research.

...In a video interview with FT.com, Mr Feldstein discusses Blue Mountain's decision in November to suspend withdrawals to investors in its Credit Alternatives Fund, the impact of the Bernard Madoff allegations and his first-hand experience of Barack Obama's basketball skills. Edited highlights appear below... Full article (subscription required): Source

GAIA`s Coast Sullenger on the agri sector – Time to invest in food? (video)
Coast Sullenger, Fund Manager of the GAIA World Agri Fund and the GAIA Resources Fund was featured on CNBC’s Squawk Box Europe this morning, speaking on the current state of the agricultural sector, demand drivers and the outlook for 2009. Video: Source

Fortune Group` Simon Hopkins sees bleak future for FoHFs
From FT.com: … if Simon Hopkins, chief executive of Fortune Group, is to be believed, the pain is far from over, with a myriad of fund of hedge fund operators likely to bite the dust in the year ahead.

"Fund of funds are doing worse than the underlying funds. Their additional fees are one of the great bugbears of investors and there are going to be a lot of people going out of business," warns Mr Hopkins.

"(Operating a) fund of funds doesn't pay a lot in terms of management fees but pays you this extraordinary performance fee in the event you are able to make money.

"When there is no prospect of a performance fee on the horizon you suddenly realise you have got significant costs. A lot of people who traditionally have placed high valuations on their business will exit." … full article (subscription): Source
Madoff`s accountant `was taken` like other investors
From Bloomberg.com: Neil Friedman, a retired life insurance salesman who followed the advice of an old friend, lost $4.5 million with Bernard Madoff after having decided 30 years ago to trust his money to the alleged swindler.

That old friend was Madoff’s accountant, Jerry Horowitz. He and Friedman were next-door neighbors in the 1950s when they lived in the same New York City apartment building. Twenty years later, he told Friedman about Madoff after being hired as the money manager’s outside accountant, Friedman said. Horowitz later founded a small New York auditing firm that has now come under scrutiny for signing off on Madoff’s financial statements... Full article: Source

AICPA: No peer review of Madoff auditor in 15 years
From Reuters / Financialweek.com: The main trade organization for U.S. accountants has begun an ethics investigation into the small accounting firm that supposedly signed off on the books of Bernard Madoff’s investment management business. The firm, Friehling & Horowitz...

AICPA’s Mr. Roberts said Friehling & Horowitz told AICPA that it was not doing audits for any company. Mr. Roberts said that although the firm was enrolled in the peer review program, it has not undergone a professional review in 15 years… full article: Source

Madoff agrees to receiver, asset freeze extension
From Bloomberg.com: Bernard Madoff … agreed yesterday to extend temporary court orders freezing assets and appointing a receiver, U.S. regulators said.

A hearing set for today in the Securities and Exchange Commission’s lawsuit against Madoff in federal court in Manhattan was canceled after he agreed to the orders and a preliminary injunction, said Andrew Calamari, the SEC enforcement official in New York overseeing the agency’s investigation… Full article: Source

Judge toughens Madoff`s home detention rules
From AP/Yahoo.com: Facing a growing chorus of angry investors, disgraced financier Bernard Madoff lost his right to leave his home Friday and was ordered to hire private around-the-clock security guards to protect him. U.S. Magistrate Judge Theodore H. Katz approved the revised bail conditions after prosecutors sent a letter requesting them earlier in the day. The letter, signed by Assistant U.S. Attorney Marc O. Litt, did not explain why the bail conditions needed to be tightened... Full article: Source

FBI moves agents to Madoff and subprime probes
From Bloomberg.com: The FBI has engaged in “triage,” taking agents off terror and other crimes to respond to a cascade of financial frauds such as the alleged Bernard Madoff Ponzi scheme, the head of the bureau’s New York criminal division said.

The Federal Bureau of Investigation was forced to reallocate its manpower in New York to deal with recent frauds involving subprime mortgages, auction-rate securities and Madoff, who prosecutors said confessed this month to bilking investors out of $50 billion… full article: Source

No deluge of lawsuits, yet, in Madoff case
From Reuters / Hedgeworld.com: There has been no rush to the courthouse yet by Bernard Madoff's angry investors, but a wave of legal action could be on the way as their lawyers spearhead private investigations into the suspected fraud.

A little more than a week after authorities say the veteran money manager confessed to a $50 billion swindle, only a handful of lawsuits had been filed in U.S. courthouses by investors seeking to recoup losses.

Lawyers are working overtime, though, to investigate the case and say they are sure that the scandal will ultimately spur plenty of court action—perhaps for years to come. When the big cases are filed, they are likely to seek huge damages, and many of the lawsuits will likely be consolidated… full article (registration): Source

Flawed managed accounts failed Madoff investors
From Reuters / Hedgeworld.com: Managed accounts—seen as a way to give investors clarity on fund strategy and protection from fraud—may have failed on both counts in the Bernard Madoff debacle and lessons will have to be learned, industry insiders said.

… Yet it appears that even those Madoff investors who sought safety through managed accounts have lost out because these accounts were run through Mr. Madoff's own trading house, Bernard L. Madoff Investment Securities LLC. Firms controlled by Mr. Madoff were therefore responsible for providing clients with trading histories and net asset values which have now been revealed as fabrications… full article (registration): Source

Layoffs at Madoff`s UK fund as liquidator moves in
From Wealth-bulletin.com: Employees at Madoff Securities International, the London-based fund of alleged Wall Street fraudster Bernard Madoff, have been made redundant after Grant Thornton was appointed as liquidator to unravel the affairs of the UK business, according to a report in The Daily Telegraph… Source

How to make a Madoff
From Businessweek.com: Spectacular investing frauds like the one allegedly created by the New York financier typically happen during investing bubbles—and only get exposed once they pop… Full article: Source

UBP says Madoff had `perceived edge` in the markets
From FT.com: A Swiss bank that helped channel funds to Bernard Madoff says the New York money manager had a “perceived edge” in the financial markets because he handled so many trades through his broker-dealer arm.

Union Bancaire Privée, which advised 11 hedge funds that placed money with Mr Madoff, included the characterisation in a letter that it sent to clients on December 17 to explain why it felt comfortable with Mr Madoff... Full article (subscription required): Source

Madoff fraud rippled around the world
From iht.com: By the end, the world itself was too small to support the vast Ponzi scheme constructed by Bernard Madoff… full article: Source

Bianco Comment: Madoff exposure may be less than $50bln, $12bln in Geneva, but many firms are not acknowledging exposure
An Opalesque reader sent us a few points that Bianco Research LLC (an Arbor Research & Trading, Inc. affiliate) had put forward:

At the beginning of the week, the press was unsure of Madoff’s $50 billion figure. At the end of the week, not only is that number possible, it might be low! [The] list of known exposure to Madoff… totals $33.6 billion with many firms only acknowledging exposure but not giving an amount.

Two interesting points:

? It seems that the private Swiss banks are giving a lot more transparency than American charities. Why are the charities so secretive? Are the new secretive institutions American charities?
? The known exposure out of Geneva Switzerland is over $12 billion. The known exposure out of the United States is $5 billion (with many not disclosing their amount). Press reports seem to focus on Palm Beach and typically show pictures of the Palm Beach Country Club. They have the wrong club. They should be camping out in front of La Société Nautique de Genève (Geneva Yacht Club) as its members may well have a greater exposure to Madoff.

Lastly, we just retuned from London and talked with some bankers from the Middle East. They said exposure to Madoff in the Middle East is “significant”. However, the list … does not include any institutions from that area. Bianco Research Link: Source

Abu Dhabi wealth fund may be Madoff victim
From BI-ME.com: The Abu Dhabi Investment Authority (Adia), the world's largest sovereign wealth fund, may have lost money in the US$50 billion fraud perpetrated by Bernard Madoff, according to media reports.

...Adia has since withdrawn portions of its original investment from Fairfield Sentry twice, but may still have had some US$132 million in the fund as of last year. Fairfield Sentry is part of Fairfield Greenwich Group, which is understood to have invested more than half of its assets under management with Madoff’s investment company... Full article: Source

ADIA may not have direct involvement with Madoff
From MenaFn.com: Source

EFG has $130m of client exposure to Madoff
From Reuters.com: Swiss private bank EFG International said on Friday its private banking clients had about $130 million of exposure to the companies of Bernard Madoff, who was arrested last week for fraud. EFG said it had no exposure itself to any fund managed or advised by former Nasdaq chairman Madoff, who stands accused of a $50 billion fraud... Full article: Source

Luxembourg fund run by UBS invested $1.4bln with Madoff
From Reuters / ITbusinessnet.com: A Luxembourg-based fund run by Switzerland's biggest bank UBS invested $1.4 billion with Bernard Madoff… Swiss weekly NZZ am Sonntag said on Sunday. UBS declined to comment on the size of fund, which the newspaper called Luxalpha.

Spokesman Christoph Meier told Reuters: "Madoff was not on our recommended list of direct investment options." … full article: Source

Int`l Olympic Committee has nearly $5m tied to Madoff
From Bostonherald.com: The International Olympic Committee could lose nearly $5 million in investments tied to the Wall Street financier accused in a $50 billion financial scam… Source

Fairfield Greenwich Group faces tough questions
From NYtimes.com: Source

MassMutual burned by Madoff
From WSJ.com: Even investors in the insurance giant's Tremont Unit weren't immune… full article (subscription): Source
From First Avenue Partners` Bryan Go: The Madoff Fraud is bound to have investors running from hedge funds. However, one should realize that Madoff was not structured as a typical hedge fund. The Madoff structure was unique, and allowed ample latitude for fraud. Madoff is not representative of the hedge fund industry.

Investors in Madoff:
  • Did not buy shares in an offshore entity advised or managed by Madoff.
  • Did invest in an offshore entity which in turn placed funds in a brokerage account.
  • Had the said brokerage account held at Madoff Securities.
  • Therefore had their assets custodied, managed, executed and reported and reconciled by Madoff Securities.
  • Ceased having an independent source of information and were thus vulnerable to fraud among other things.

The typical hedge fund is structured as follows:
  • investors buy shares in an offshore entity.
  • the entity would appoint an independent custodian to hold its assets.
  • the entity would appoint an independent administrator to manage it on a day to day basis, such management to include the calculation and determination of the gross and net asset values.
  • an investment manager would manage the assets of the entity.
  • the investment manager would execute trades through independent third party brokers.
  • the investment manager would not be able to operate the bank accounts of the company or limited partnership without the involvement of the third party, independent administrator.
  • the company or limited partnership would engage reputable and independent third party auditors.

It is sad that a long standing and prominent member of the hedge fund community has succumbed to fraud. The reputational impact to the industry is significant, however, with time it is hoped that investor faith will be restored.

It is likely that the Madoff Fraud will precipitate certain changes in the industry. Whether these changes are useful or not is not the issue.

  • Investors will lean towards having managed accounts.
  • This will allow them to use service providers and counterparties of their choice, or at least influence the choice of service providers and counterparties.
  • A managed account will provide investors better transparency as well confidence.
  • This will allow them to live test the portfolio on various fronts from time to time, albeit at a cost.
  • Bespoke mandates eliminate style drift and allows better segregation of risk factors.
  • Places control back in the hands of the investor.

BGoh@firstavenuepartners.com No online Source
Bonds, the next bubble?
From Forbes.com: In record numbers, panicked investors are fleeing to the safety of Treasury bonds. Just last week, the U.S. government sold $32 billion worth of four-week bills at 0% interest, with demand for the offering outpacing supply 4-to-1. This insatiable appetite for government debt is driving yields for all maturities down to record lows... Full article: Source

Funds see gold in convertibles
From FTfm: Fund houses are rolling out convertible bond funds in the belief they have found an investment opportunity to restore their fortunes and those of clients.

Both large traditional houses, such as Aviva Investors, and specialists, such as credit manager BlueBay Asset Management, have recently launched convertible bond funds, while other big names like JPMorgan Asset Management and Schroders are lauding the opportunities available.

“This challenging environment has provided opportunities we have not seen for a long time,” said Tracy Maitland, president of Advent Capital, a US asset manager specialising in convertibles. “As a result of these value opportunities, we’re seeing more enquiries from institutional investors than we’ve seen in a long time.” … full article: Source

New Star bullish on regional Swiss private banks
From Wealth-bulletin.com: Guy de Blonay, manager of the New Star Global Financials Fund, has issued a bullish outlook for regional Swiss private banks that are benefiting from the mistakes of their larger rivals, according to a report in The Daily Telegraph… full article: Source

Newedge sees retest of market lows in Q1-2009
From Moneycontrol.com: Kirby Daley, Senior Strategist, Newedge Group, feels the stimulus packages being announced are not going to get equity markets to earlier levels. "Most global economies are in an extremely precarious situation. So, we expect to see further central bank action."

According to him, the market bottom is not in place yet, so one should be ready to book profits. He sees further downside in the markets… Daley said there is a strong possibility that markets will retest the lows in Q1 CY09… full article: Source

Oil contango drives down investor profits
From Reuters.com: The deepening discount of near month oil futures contracts against later months is scaring investors off simple passive funds that helped drive big returns during crude's six-year rally, Erik Simpson, managing director at Vantage Energy Hedge Fund said on Friday… full article: Source
Some institutional investors are ending or scaling back portable alpha programs
From PIonline.com: Some institutional investors are ending their portable alpha programs and others are scaling back as a painful year in the markets winds down.

However, while conceding widespread disappointment in 2008, proponents say a focus on better matching those programs' beta and alpha segments will pave the way for renewed interest in the strategy in 2009.

… The chief investment officer of one large U.S. corporate defined benefit plan, who declined to be named, said his company “abandoned” its portable alpha program after a brief trial. Staff concluded that “it wasn't profitable for us,” he said.

Others — including the Pennsylvania State Employees Retirement System, Harrisburg, and the South Carolina Retirement Systems, Columbus — have reduced the beta side of their programs, at least for now, to guard against having to find cash to top up swaps or futures positions should the market continue to fall.

Amid the market turmoil, PennSERS is taking a tactical approach to portable alpha, reducing its beta exposure to less than $2 billion … full article: Source

CalPERS charting new waters on currency hedge extension
From PIonline.com: CalPERS officials have proposed extending their currency hedge to include all asset classes instead of just international equities in a move that is considered very unusual.

In doing so, they propose putting in place a 15% hedge across the total fund, replacing the 25% applied just to international equity exposure… full article: Source

Top global pension funds to build absolute return capabilities
From PIonline.com: Officials from some of the top pension funds globally are ramping up their internal absolute-return capabilities.

Driven by inadequate transparency, performance problems and redemption issues among external hedge fund managers, pension fund officials at the 367 Danish kroner ($69 billion) ATP pension plan and the €23 billion ($32 billion) Ilmarinen Mutual Pension Insurance Co. — a multiemployer pension fund — are quickly building their own hedge fund expertise.

Also, Hermes Investment Management Ltd., London, which manages the £34 billion ($52 billion) BT Pension Fund, is also preparing to launch its own hedge fund team as soon as early next year. As a result, billions of dollars in absolute-return strategies from these three funds might be shifting in-house… full article: Source
Lehman Europe update: client money to be pooled, each client entitled to share
From CliffordChance.com: On 18 December the administrators of Lehman Brother International (Europe) ("LBIE") provided a market update regarding the return of client money. The update indicates that the appointment of administrators constitutes a primary pooling event, such that client money held by LBIE on a segregated basis prior the administration is to be pooled in a single notional client money pool and each client will be entitled to a rateable share in the pool.

Further, the administrators advise that they have been able to recover US$1 billion of a total of US$2.1 billion which had been segregated prior to the administration. They are also in discussions with the German Regulator: BaFin, and the insolvency administrator of Lehman Brothers Bankhaus AG ("Bankhaus"), as US$1 billion of client money was deposited with Bankhaus.

In addition, the update details the ongoing work being undertaken by the administrators to investigate whether the amounts of client money have been correctly calculated…Source

PWC’s market update on client money: Source

Nomura-Lehman London tie-up will take longer than expected to move into profit
From Timesonline.co.uk: The acquisition of the bulk of Lehman Brothers in London by Nomura International will take longer to move into profit than originally budgeted, according to the man who orchestrated the groundbreaking deal.

Sadeq Sayeed, chief executive of Nomura in Europe, said that he now expected the business to continue to make losses until early in 2010. Originally the target break-even point was October/November 2009… full article: Source

Nomura`s Lehman deal could boost shares
From Reuters.com: Nomura Holdings, knocked by some large losses this year, may have a brighter future if it can successfully build on its deal for bankrupt Lehman Bros' operations in Europe and Asia... Full article: Source

AIG, Munich Re near deal on Hartford unit
From FTAlphaville: AIG was closing in on a deal Sunday to sell its Hartford Steam Boiler unit to Germany’s Munich Re for a price expected to be greater than $700m, or 1.2 to 1.5 times the unit’s book value, reports the WSJ. The transaction would mark AIG’s first major divestiture as it seeks to pay back up to $60bn in loans it received as part of its September US government rescue…. Full article: Source

Merrill`s John Thain to get second chance with Bank of America
From Bloomberg.com: On John A. Thain’s first day running Merrill Lynch & Co. last year, he pledged to live up to his reputation as “Mr. Fixit,” a nickname earned during his prior job rescuing the New York Stock Exchange…

Thain, 53, will get a second chance under his new employer, Charlotte, North Carolina-based Bank of America Corp., which is buying Merrill for about $20 billion, based on current share prices. He plans to stay at the combined firm as president of investment banking, trading and brokerage, reporting to Bank of America CEO Kenneth D. Lewis, 61. This time, Thain will be repairing his own legacy after net losses that grew every quarter he was in charge, adding up to almost $12 billion… full article: Source

S&P downgrades 11 of world`s top banks
From FT.com: Eleven of the world’s biggest banks were downgraded Friday by Standard & Poor’s after the ratings agency said the current downturn could be longer and deeper than previously thought.

Six major US banks were downgraded, including JPMorgan Chase, Bank of America and Wells Fargo, as well as five banks in Europe.

The agency cut its ratings on Citigroup, Morgan Stanley and Goldman Sachs by two notches each. In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS: Full article (subscription): Source

Bank of Spain chief fears `total` meltdown
From NineMSN.com: The governor of the Bank of Spain issued a bleak assessment of the economic crisis, warning that the world faces a "total" financial meltdown unseen since the Great Depression. "The lack of confidence is total," Miguel Angel Fernandez Ordonez said in an interview with Spain's El Pais daily on Sunday... Full article: Source

IMF chief warns 2009 may be `even darker` if no more stimulus
From Breitbart.com: The head of the International Monetary Fund (IMF) warned on Sunday that the economic situation could get even worse in 2009 if governments fail to take firm enough action.

… The IMF has called for global fiscal stimulus of about two percent of GDP, equivalent to some 1.2 trillion dollars…. Dominique Strauss-Kahn told BBC radio that he feared recent initiatives, including that announced by the G20 in Washington last month, may not go far enough…. Source

Credit crisis spurs unprecedented volume of litigation
Navigant Consulting released a report showing an unprecedented escalation in the number of subprime-related filings – as worsening economic conditions promise to drive the litigation volume ever higher.

The number of subprime mortgage and related cases filed in federal court during just the first nine months of 2008 already exceeds by more than 50 percent the total for all of 2007 (448 to 294). Filing volume in the September 2008 quarter was the third highest on record with 131 new matters, while the total number of cases filed reached an astounding 742 for the 21-month period ending on September 30, 2008.

The Navigant report, titled Third Quarter 2008 Update: Breaking New Ground, also shows the subprime-related cases further outstripping the 559 U.S. savings-and-loan cases of the early 1990s, the previous high-water mark in terms of litigation fallout from a major financial crisis… press release: Source
Ireland pours Eur5.5bln into banking sector and takes control of Anglo Irish
From Telegraph.co.uk: The Irish government is pouring €5.5bn (£5.13bn) into the country’s three main banks to recapitalise the giants of the sector and stave off a crisis, having already guaranteed their €400bn of liabilities and savings… full article: Source

Hypo Real Estate to restructure business, cut jobs
From Reuters / Guardian.co.uk: Hypo Real Estate said it planned to restructure its business and cut about 40 percent of its total workforce to reduce costs amid the global financial market crisis.

Hypo Real Estate, which blends investment banking and commercial real estate, said it expected significant additional burdens to its fourth-quarter results from net trading income and allowance for credit losses. It reiterated that it expected to post a 2008 loss… full article: Source

Russian oligarchs seek $78bln in Kremlin loans
From Bloomberg.com: Russian oligarchs are lining up for $78 billion of Kremlin loans to survive the credit squeeze, handing Prime Minister Vladimir Putin the opportunity to increase government control of the nation’s biggest companies… full article: Source
Belgium extends short-selling ban until March 20
From Thomson IM: Belgian markets regulator CBFA said on Friday it had extended a temporary ban on short sales of financial stocks until March 20.

'They (the measures) are now being extended as a result of the ongoing turmoil on the financial markets,' it said in a statement… full article: Source

Update: European Commission issues communication on recapitalization of financial institutions
From Mondaq.com: In the past two months, the European Commission ("Commission") has approved a great number of national schemes for stabilizing the financial sector as well as individual recapitalization measures. Member States and potential beneficiary institutions have nevertheless called for more detailed guidance as to whether specific forms of recapitalization are accepted under State aid rules. In particular the fact that the real economy has started to be affected as well as the fact that even financially sound banks may need State capital to ensure an adequate level of loans to companies calls for further clarification.

Hence, on 5 December 2008, the Commission issued an additional communication on the recapitalization of financial institutions in the current financial crisis… Full report (registration required): Source
Liffe, LCH.Clearnet, first group to offer CDS clearing as from today
From FTAlphaville: Liffe, the futures exchange, and LCH.Clearnet, the London clearer, will on Monday become the first group to offer clearing of credit default swaps, which are central to regulatory worries over the risks posed by defaults in the credit derivatives markets. The development comes as efforts by regulators on both sides of the Atlantic to get such bilaterally negotiated, or OTC, contracts shifted on to centrally cleared platforms are coming to a head. Article: Source

Int`l Swaps and Derivatives Association launches research notes
From Riskcenter.com: The International Swaps and Derivatives Association, Inc. (ISDA) announced the launch of ISDA Research Notes, a quarterly research publication that discusses public policy issues and market trends related to the privately negotiated derivatives industry. ISDA Research Notes will be available at Source

South Korea to tighten grip on derivatives investment
From Thomson IM: South Korea will tighten disclosure rules and limit trade in derivatives products such as credit default swaps from next year, as part of an effort to protect investors from soaring volatility in financial markets.

The moves contrast with the upcoming introduction of new legislation, designed to give financial services firms more leeway in asset management and product sales… full article: Source

From Bloomberg.com: Sparx Group Co., Asia’s biggest hedge-fund manager with $8.6 billion in assets, rose in Tokyo trading, after announcing plans to sell a stake in Cosmo Investment Management Co. to Lotte Group.

Tokyo-based Sparx rose much as 11 percent on the Jasdaq exchange before closing 0.8 percent higher at 14,110 yen at the 3 p.m. close of trading. The stock has slid 73 percent this year, compared with the 42 percent drop by the benchmark Topix index.

Sparx, which holds about 80 percent of Cosmo, plans to sell a 21 percent stake to South Korea’s Lotte for 4.1 billion yen ($46 million)… full article: Source
Harvard pays top fund managers $22.4m in 2008
Harvard University, the world's richest, paid its six top money managers $22.4 million to invest its endowment in fiscal 2008, marking a modest increase from the previous year. The men will take home the money for having helped grow the endowment 8.6 percent to a record $36.9 billion in the fiscal year that ended June 30, Harvard said on Friday. (www.Reuters.com)

Sam Israel sent to medical evaluation
For the second time, hedge fund swindler Samuel Israel III is being sent to a federal medical prison for an evaluation. This time, he's likely to show up.

At a hearing Friday, U.S. District Judge Kenneth Karas said federal marshals will take Israel, now at the Westchester County jail, to Devens Federal Medical Center in Ayer, Massachusetts, next week for a physical and psychological workup. (www.etaiwannews.com)

NYC, Greenwich hedge funds are sub-letting office space
…in East Coast hedge fund capitals New York City and Greenwich, Conn., several high-profile hedge funds are scrambling to sublet office space.

In Manhattan, hedge funds Duff Capital Advisors, RiverPark Capital, SAB Capital and Sansar Capital Management are among those with Midtown space to sublet, real-estate brokers say. Twenty-eight miles northeast in Greenwich, Duff Capital and quantitative fund firm AQR Capital Management have spare square footage. (online.wsj.com)

Canada unveils auto bail-out plan
Canada has unveiled a plan to help hard-pressed automotive parts suppliers and dealers in tandem with C$4bn in emergency loans to the local subsidiaries of GM and Chrysler. The weekend move followed Washington’s announcement Friday of a $17.4bn lifeline to their ailing parent companies. Under Canada’s plan, suppliers would have easier access to government-backed credit insurance and a new facility will be set up to support car-related consumer credit. (ftalphaville.ft.com)

Turquoise plans `dark pool` linking service
Turquoise, the equities trading platform, plans a pan-European service linking "dark pools" operated by banks in a bid to combat the fragmentation of liquidity, the FT said. The move pits Turquoise against the London Stock Exchange (LSE.L) for a second time because the LSE plans a dark pool of its own, the paper added. (www.reuters.com)

Bonuses of currency traders fall least on Wall Street
The most volatile foreign-exchange markets since at least 1992 means currency traders will see the smallest pay cuts as the worst financial crisis since the Great Depression wipes out bonuses on Wall Street.

While bonuses, which account for the bulk of annual pay for traders and investment bankers, will fall an average 45 percent this year, currency traders will see declines of about 15 percent from 2007. (www.bloomberg.com) No online Source
From BizarreNews.com: A mother in Trinity, N.C., says her family home has 61 Christmas trees, each of which is decorated with a different theme. Bren Knox said her home's Christmas trees began to multiply 11 years ago when her daughter requested a tree in her bedroom to help her sleep while Knox was out of town, WFMY-TV, Greensboro, N.C., said Wednesday. During the ensuing years, Knox said she added tree after tree to the home and began creating themes for each of the holiday items. Among the themes featured in the Knox home are chef and fruit-themed trees.

"When people hear how many trees I have in my home, they think I'm crazy," the mother of two said. "But once they come in, they say it is the most magnificent, beautiful thing they've ever seen." Knox, who occasionally holds open houses to showcase her tree collection, told WFMY-TV her favorite tree contains items her children personally made.

Video from WNCT.com: Source

The most influential gathering of the alternative investment industry in 2009, GAIM USA is the ONE event you need to attend to ensure you are:
  • Fully informed on the key changes that will impact global markets, the hedge fund industry and fund performance in 2009
  • Up-to-date with what the leading alternative investment firms are predicting and planning for 2009 and how this could impact your business
  • Reacquainted with your key personal contacts and equipped with the host of new relationships you are guaranteed to make during the highly networked program of events scheduled for January 25th -28th
New Challenges – A New GAIM USA Agenda
The program has been fully updated to reflect the new information you need to navigate the change in 2009:
  • The new Administration’s plans for financial market regulation, the hedge fund industry & the latest news on how the recovery will be financed
  • Where investment opportunities lie globally in 2009
  • How the evolving financial crisis is shaping future business models of the alternative investment industry
  • The new risk management paradigm, revised asset allocation strategies and industry consolidation trends
Opportunities for hedge fund managers to get their funds in front of the influential investors
  • The Expanded Quickfire Showcase – Present your fund in front of assembled investors on the Quickfire Stage
  • A Brand New Forum: "How Robust Is Your Alpha?" – Enter your fund into a new forum designed to uncover “the most promising source of robust alpha.”
Opalesque subscribers get a 10% discount on their registration at www.gaimusa.com. Mention priority code XU2430AMB at or call 1.888.670.8200 or +1.941.951.7885
  • Which Quant strategies would you consider for your portfolio in 2009 and 2010 as market conditions continue to deteriorate? And ultimately show recovery?
  • Recent cataclysmic market violence: are quant funds cause of or victim of?
  • How has the current global market dislocation created new quantitative ideas and strengthened ideally positioned strategies?
Risk management can have a couple of different objectives.  One is to control risk day-to-day, in other words in any non-extreme environment.  Another is to control risk particularly in an extreme environment.  These two objectives, however, are not only completely different, but are very likely opposite.  In other words, to focus on controlling day-to-day risk may well mean taking on excess risk in more extreme environments.

Meanwhile, controlling for extreme risks may lead you to take far too little risk, say, 95% of the time.  How do you think about risk management and quant investing?

This full day event focuses on comparing and contrasting the various quantitative solutions, which are increasingly influencing hedge funds. Capturing the entire spectrum, panelists cover fully discretionary to 100% systematic. Plus, new modeling techniques and algorithms will be reviewed.

This event will draw the leading minds in quantitative analysis to debate the influence and integration of quantitative tools into today’s global hedge fund sector.

Please visit: www.battleofthequants.com
InterContinental Hotel, Geneva, Switzerland - Opalesque Readers Save 15% on the Registration Fee

Returning to Geneva in 2009, The 14th Annual European Hedge Fund Conference will gather leading hedge fund and fund of funds managers, private banks, high-net-worth brokerage units, institutional and high-net-worth investors from all over the world to delve deeply into the next generation of alternative investments.

  • Listen to Investors reveal what they are looking for from managers
  • Discuss how tighter regulatory scrutiny and market reforms are opening up new avenues for investment opportunities including Antonio Borges, Chairman, Hedge Fund Standards Board
  • Hear Managers detail the challenges of executing strategies in emerging markets and unique investment styles in more established arenas including keynote presentations from Richard Brennan, Chairman & CEO, Camulos Capital and Emmanuel Roman, Co-Chief Investment Officer, GLG Partners
  • Meet more investors from private banks, family offices, funds of hedge funds and institutional investors from Europe and around the world including senior decision makers from Lombard Odier Darier Hentsch , Government Actuary's Department, Swiss Capital Group, Harcourt Investment Consulting SA, Alberta Teachers' Retirement Fund Board, Parly Company SA, Union Bancaire Privée, FRM Capital Advisors, Pacific Alternative Asset Management Company (PAAMCO), ABP, Connecticut Investments LLC, National Grid, GE Asset Management, RogersCasey, and more...
For more information, to register or to download the complete programme, please visit www.ii-alphahedge.com

Remember, Opalesque readers save 15% off the registration fee. To claim your discount, mention Priority Code MKNB15

Early bird rate available before February 16

The first annual Alternative Asset Allocation Seminar draws on the latest research and best industry practices to equip participants with advanced approaches for optimal construction and risk management of multi-style multi-class portfolios.

This intensive course will enable participants to derive the full benefits of alternative investments for asset management and asset-liability management solutions while controlling for their specific risks.

The seminar brings together a team of instructors who combine academic expertise and industry experience to address pressing industry issues: François-Serge Lhabitant, PhD, CIO, Kedge Capital and Associate Professor, EDHEC Business School
  • Building resilient multi-style multi-class portfolios, managing class exposure, minimising the liquidity, valuation, and counterparty risks of alternative investments, and implementing portfolio-wide risk management.
Lionel Martellini, PhD, Scientific Director, EDHEC Risk & Asset Management Research Centre
  • Optimising the integration of alternative investments into asset management and ALM: reducing the cost of inflation protection, maximising diversification benefits.
  • Implementing dynamic risk-controlled strategies to optimally displace traditional assets and designing open-ended investment solutions with liquidity, drawdown, and performance constraints.
Nicolas Mougeot, PhD, Managing Director and European Head of Global Equity Derivatives, Deutsche Bank
  • Exploring the potential of volatility for portfolio diversification and hedging of downside equity risk. Surveying volatility products and strategies and assessing their relevance for strategic and tactical asset allocation.
Christophe Reech, Chairman and Founder, Reech Aim Group
  • Understanding property derivatives and examining their hedging, synthetic allocation, and arbitrage uses. Bringing synthetic liquidity to property portfolios.
Etienne Rouzeau, PhD, Director & Head of Allocation and Risks, Allianz Alternative Asset Management
  • Recognising the nature of extreme risks in fund of funds structures and analysing the efficiency and tractability of the various tail-risk hedging strategies.

The programme is intended for investment management professionals who advise on or participate in the design and implementation of asset allocation and risk management policies, and for sell-side practitioners who develop new asset management and ALM solutions for investors.

Register before February 16 to benefit from a €1,000 early bird discount.

Book a seat online at: store.edhec-risk.com or contact Mélanie Ruiz at AMeducation@edhec-risk.com or on: +33 493-187-819

ISSN Number: 1450-1953
Alternative Market Briefing has been called the best news service on hedge funds. Our mission is to intelligently select and timely provide the most important daily news for professionals dealing with hedge funds. Alternative Market Briefing offers both a quick overview and indepth coverage of all subjects through the "Source" link that leads you to the publicly available online news sources. The concept that we follow is that of a "clipping service" - the added value for you is that we screen, intelligently select and efficiently present each day the most important hedge fund news. The majority of the news sources used do not require a subscription, however some may ask you to register. Once registered, you can access these news sources freely. Please mail us your feedback and suggestions to feedback@opalesque.com - we love to hear from you!

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This newsletter is edited by Matthias Knab for Opalesque Ltd. For more information about me and Opalesque Ltd. please use this link.

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Disclaimer: The information contained in this newsletter does not constitute an offer or solicitation to sell any security or fund to or by anyone in any jurisdictions, nor should it be regarded as a contractual document. Under no circumstances should the information provided on this newsletter be considered as advice for any investment, or as a sufficient basis on which to make investment decisions. The information contained herein has been gathered by Opalesque Ltd. from sources deemed reliable as of the date of publication, but no warranty of accuracy or completeness is given. Opalesque Ltd. is not responsible for and provides no guarantee with respect to any of the information provided herein or through the use of any hypertext link. Past results are no indication of future performance. All information in this newsletter is for educational and informational purposes and does not constitute investment, legal, tax or accounting advice.

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Hedge Funds at Inflexion Point:

Opalesque Round Table

The whole financial industry has reached an inflexion point, at which all market participants are challenged to identify the new themes and new paradigms that will determine asset management and how to create returns going forward.

The Opalesque South Africa Roundtable discusses the range and consequences of this inflexion point, from a fund manager as well from an investor point of view.

The participants also discussed the particularities of investing in Africa (ex-South Africa). You will hear portfolio managers explaining new ways to construct hedges, new and upcoming products. How do you deal with restricted liquidity, is Africa really uncorrelated?

With 28 pages, this is one of our larger Roundtable scripts, but as with all the other ones, you will find valuable intelligence on each page.

A SQUARE Faculty
A Diversified CAT Bond Fund

Faculty Dirk SchmeizerAn early participant in cat bond investing - experience and expertise

» Read More

Litigation Funding

Litigation Led Investing

Fund will focus on investing in financing mid-sized corporate litigation cases brought before the UK courtsRead More

NYMEX - GOLD (February)- Daily graph

Near Term Trend: Neutral to Negative Wedensday’s Close: $808.80 (- $11.90) UPDATE: Following the rally of $136.00, (from December 5 to December 17), the market had been in a broad sideways congestion pattern for basically a month (see chart). We were under the belief the market would have traded up toward $920.00 following the settlement above $884.00, about a week and a half ago, but it never happened, and as of Monday the market retraced around $35.00 lower. At this juncture, the market has been testing support at our longer term trend (blue) line near the $809.00 region. As we stated Monday, a daily settlement below $809.00 could bring test of $760.00. Was 20 cents below our point enough?