Kumaresan Selvaraj pillai


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Monday, June 24, 2013

| 06.24.13 | A raw look at the hedge fund industry

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June 24, 2013
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Today's Top Stories

  1. Dubious stock touts alive and well
  2. Banks, GSEs go after strategic defaulters
  3. Should the U.S. hike the leverage ratio?
  4. HD supply looks like an all-around private equity winner
  5. China credit bubble in the making?


Editor's Corner: An eye-opening look at the hedge fund industry

Also Noted: Spotlight On... Another China bear emerges
Interview with Blackstone CEO and much more...


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Editor's Corner

An eye-opening look at the hedge fund industry

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

There are millions of stories on Wall Street.

The best stories, frankly, are the ones that are only told privately. When it comes to the tales that are told for public consumption, you often get sanitized versions that serve a specific PR functions. You might get the truth, but only certain versions of it. All of which makes The Buyside, a memoir by former hedge fund trader Turney Duff, a valuable, intensely personal look into the hedge fund industry.

On one level, the book delivers what one would expect given the subtitle: "A Wall Street trader's tale of spectacular excess." The author recounts not-unfamiliar tales of hard partying, shockingly conspicuous consumption, drug use, hooker addiction, juvenile behavior by grown adults and so on.

This in and of itself is not necessarily a shocking narrative: A young man from humble roots, beset by a strained relationship with his father, arrives on Wall Street landing  an entry level job at Morgan Stanley. With pluck and determination, he rises through the ranks, makes good connections and ends up a top healthcare trader at a leading edge hedge fund. Along the way, he deals with many temptations and career pitfalls, and rubbing shoulders with some of the industry's most infamous villains -- men such as Raj Rajaratnam.

In the end, the narrator succumbs to drugs and must fight his way back to sobriety.

If you were to try to sell the story as fiction, a publisher might suggest that the story sounds cliché.

But this is not fiction, and what rescues this memoir from banality---apart from the affecting writing and insider view of what makes the industry turn---is the author's willingness to discuss his family life, especially his relationship with his daughter. The most moving parts deal with the sad truth that you can love others greatly and yet continue to fail them.

The view into universal truths, not merely the Wall Street truths, is what makes The Buyside well worth the read. 

Read more about: Memoir
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Events

> Public Funds Summit East - July 22-24 - Newport, RI - Newport Marriott
> High Frequency and Algorithmic Trading Conference - New York, NY - July 30-31
> 2013 ABA National and Graduate Trust Schools - September 22-27 - Atlanta, GA
> ABA Compliance Schools - October 19-25 - Atlanta, GA

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Today's Top News

1. Dubious stock touts alive and well

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

If you're a small emerging stock company, you'll do just about anything for exposure. The operative idea is that without a high profile with the public, there are few options to attract any liquidity. But there is a fine line between legitimate marketing and dubious stock touting.

Here's a fine example: Recently, a 20-page promotional piece about Petrosonic Energy was sent out, supporting by an email campaign featuring Tobin Smith, a money manager who has been on financial news shows for 15 years and who was a contributing market analyst for Fox News.

A MarketWatch columnist writes: "While investors might have ordinarily treated the 'special edition' of the new Next Big Thing Investor newsletter — Smith's latest, just-started investment newsletter — like junk mail or spam, Smith's name and his smiling, personable countenance had some investors doing a double-take, at least judging from the emails I received on the subject.

"The people who contacted me considered buying the stock entirely based on Smith's say-so, and the credibility he exudes in his Fox appearances. They didn't appear to read the disclaimers of the campaign; had they bothered, they would have quickly found it was paid advertising for which Smith's company pocketed $50,000."

Fox subsequently terminated Smith's contract -- a wise move.

The lesson here is that the financial news is so easily compromised. For some companies, that fact is enticing, as they ponder their marketing options. For others, it gets a bit squeamish. In the small-cap trenches, this sort of stuff isn't that unusual.  

For more:
- here's the article

Read more about: Stock Touts
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2. Banks, GSEs go after strategic defaulters

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

During the mortgage meltdown, a troubling trend quickly developed: Solvent homeowners who could make mortgage payments decided to stop making payments. Some wanted to force a lender to modify their loans. Others just left, perhaps fearing financial trouble ahead, leaving the bank to foreclose. These people were euphemistically dubbed "strategic defaulters."

Did they get away with it?

For many years, it looked like there would be no consequences. But now, as reported by the Washington Post, Fannie Mae and Freddie Mac are on the offensive targeting these defaulters many years after they walked away. They are seeking unprecedented amounts in deficiency judgments, engaging debt collectors, lawyers and the like to go after these people, many of whom are shocked to learn that they are still on the hook for the unpaid portion of their mortgages.

Banks are also stepping up their activity to collect more from people whom they foreclosed upon. The need for revenue is as acute as ever, and some mortgage holders who defaulted are now in much better shape financially. So there is apparently a lot of revenue to be gained. 

There's also some PR risk involved, as banks will likely cast a wide net in search of revenue. They will inevitably ensnare some people who should not be the target of this activity, which will likely end up in the media.

That said, it should not be surprising that banks and the GSEs are using deficiency judgments for revenue generation. Strategic defaulters have reason to worry.

For more:
- here's the article

 

 

Read more about: banks, GSEs
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3. Should the U.S. hike the leverage ratio?

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

The risk-weighted minimum common equity capital ratio (inclusive of the capital conservation buffer) has taken the lion's share of media coverage as the Basel III process progressed. But as of late, the focus has shifted to the leverage ratio, which was intended as a companion ratio that simplifies matters by using a more straightforward denominator. Those who think that the process of risk-weighting assets is less than satisfying tend to prefer the more pure leverage ratio approach.

The politics around the relative merits of a leverage ratio have been pretty intense as of late. Bloomberg reports that U.S. regulators are considering hiking the leverage ratio for the largest U.S. banks to 6 percent, compared with the 3 percent ratio that Basel III favors.

"Five of the six largest U.S. lenders, including JPMorgan Chase & Co. and Morgan Stanley, would fall under the 6 percent level, according to estimates by investment bank Keefe, Bruyette & Woods Inc. That means they would have to retain more of their earnings and withhold dividends to build capital. Only Wells Fargo & Co. would meet the higher standard now."

To be sure, some would prefer the leverage ratio approach to take precedence over other ratio requirements. FDIC Vice Chairman Thomas Hoenig has called for getting rid of the risk-weighted rules entirely in favor of a simple 10 percent leverage ratio defined even more stringently. And then there's the Brown-Vitter bill, which calls for a draconian 15 percent ratio, one that is much more akin to a pure leverage ratio than a risk-weighted capital ratio.

It's unclear just how aggressive the U.S. aims to be in terms of breaking with Basel III. But it will be interesting.

For more:
- here's the article

Read more about: FDIC, Basel III
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4. HD supply looks like an all-around private equity winner

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

 

The crass stereotype of a private equity transaction struck in the late 2000s goes like this: The private equity fund encumbers the target company with cringing debt, forcing it to lay off employees, all the while imposing draconian fees on struggling companies, enriching the fund. As the credit market weakens, the deal sponsors impose more and more pain, with little chance of an exit or a true revival in the company's operating performance. Bankruptcy court becomes a viable option.  

But obviously it doesn't have to be like that.

Consider the HD Supply deal. Carlyle, Bain Capital and Clayton, Dubilier & Rice originally agreed to buy HD Supply for $10.3 billion in summer 2007---right before the leveraged buyout market sank. In the midst of a weak bond market, Home Depot agreed to a lower price and to guaranteed $1 billion of the supply company's debt. It also kept an equity stub.

So how did it all work out?

According to Breakingviews, "Both sides started out looking like chumps. The private equity owners wound up with a highly leveraged industrial distributor of pipes and tools that soon began racking up large losses amid a serious recession. Home Depot, meanwhile, deployed the sale proceeds to buy back its own shares at $37 apiece. A year later, they were worth about half as much.

"A recovery turned fools into sages. If HD Supply shares sell in the middle of the desired price range, the company's market value will be about $4.3 billion. The stake owned by the buyout firms will be worth roughly $2.6 billion, excluding various fees earned along the way, after they injected just under $2.2 billion initially. It's a better investment than most would have anticipated six years ago, but not a great one by private equity standards. There is still potential upside.

"Home Depot comes out further ahead. At the same assumed valuation, its stake in HD Supply would be worth about $400 million. With the housing market recuperating, there is more profit available for each Home Depot share following the buyback. And its stock is trading at about $77, twice what the company paid in 2007. That translates into an annualized return of 13 percent."

For more:
- here's the article

Read more about: Leveraged Buyout
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5. China credit bubble in the making?

By Jim Kim Comment | Forward | Twitter | Facebook | LinkedIn

It hasn't been a bad year for hedge funds that invest in Chinese stocks. Chinese funds have generated an 8.8 percent return for the first four months of the year. That compares with a 5.9 percent return for the HFRX Multi-Emerging Market Index. In May, Greater China-focused hedge funds took an additional step forward, rising 4 percent. But is all this about to end?

To be sure, there are plenty of China bears out there, who think the heady economic growth was built on a house of cards. The bears were given some ammunition recently in the form of a report from Fitch warning that the country's unwieldy shadow-banking system may be the spark for a profound correction. It warns of a building credit bubble that will have to deflate at some point.

"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," the agency's senior director in Beijing was quoted by The Daily Telegraph. "There is no transparency in the shadow-banking system, and systemic risk is rising. "We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signaling."

In overnight lending markets, there has been a lot of turmoil as of late, and that might portend worse news ahead as the market starts to tense up.

The agency downgraded China's long-term currency rating to AA- debt in April.

For more:
- here's the article
- here's a Reuters article

 

Read more about: China, shadow banking
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Also Noted

SPOTLIGHT ON... Another China bear emerges

A chess grandmaster-turned-hedge-fund manager has decided that the China market will likely find itself in danger of a checkmate. Patrick Wolff said institutions should be aware that rampant growth over the past decade in China fueled an unsustainable boom in commodity prices, one that now "just looks awful." While he's short China stocks, he's long U.S. stocks, except for those he deems overly exposed to China. Article

Company News: 
> UBS to close commercial business in India. Article
> Interview with Blackstone CEO. Article
> Tepper likes stocks still. Article
> Rlling Stone on S&P and Moody's. Article
> Moneygram cashing in. Article
> Blackstone eyes Brixmor IPO. Article
Industry News:
> Mexico bourse resumes trading. Article
> Skilling awaits sentence reduction. Article
> 10-year yields top 2.5 percent. Article
> Is the housing recovery over? Article
Regulatory News:
>More on leverage ratio controversy. Article
And finally … Phone contracts a thing of the past? Article


Events


* Post listing: Click here.
* General ad info: Click here.

> Public Funds Summit East - July 22-24 - Newport, RI - Newport Marriott

Opal Financial Group's annual public funds conference will address issues that are most critical to the investment success of senior public pension fund officers and trustees. The Summit will cover how surplus returns should affect employee benefit plans, the processes for selection and evaluation of investment managers, legal concerns with fund investment and management policies as well as the benefits and pitfalls of a wide variety of investment strategies. Register Now!

> High Frequency and Algorithmic Trading Conference - New York, NY - July 30-31

The marcus evans High Frequency and Algorithmic Trading Conference will bring together regulators and top-level executives focused on high frequency and algorithmic trading to discuss how profit can be found in the current low volume environment. Evaluate the real concerns on the upcoming high frequency trading regulation from industry leading experts!

> 2013 ABA National and Graduate Trust Schools - September 22-27 - Atlanta, GA

Now is the time to become a more effective advisor and a more productive member of your client team. Let this executive-level program help you prepare for the next step in your career with an in-depth exploration of account administration, fiduciary law, and tax and estate planning. See complete details.

> ABA Compliance Schools - October 19-25 - Atlanta, GA

ABA Compliance Schools offer comprehensive bank regulation training programs for compliance professionals at all levels of expertise. In this highly engaging educational environment, learn how to comply with federal banking laws, including overview of new lending requirements to be implemented in 2014 at the ABA National Compliance School. Experienced professionals will learn advanced skills to manage their bank’s compliance program at the Graduate School of Compliance Risk Management. Learn more.



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