BarclayHedge reported on Tuesday that the managed futures sector surpassed all other hedge fund strategies in assets under management at the end of the second quarter. According to the Iowa based data provider money under management in managed futures grew to $223.4 billion in the second quarter, surpassing all the other hedge fund sub sectors it lists.
If one is to believe the Securities and Exchange Commission’s (SEC) version of what occurred leading to its charges of fraud against Goldman Sachs; hedge fund Paulson and Co. identified a group of vulnerable mortgaged backed securities, worked along with Goldman on creating a synthetic collateralized debt obligation (CDO) based on those securities while Goldman went about to find suckers to take the long side of the trade. One of Goldman’s defenses is that it was one of those suckers.
A couple of weeks ago I went down to Key Biscayne, Florida for the Managed Funds Association (MFA) conference. To be more precise, I went down to Florida to meet with and interview several commodity trading advisors who managed to earn positive returns in a difficult year.
It has been almost one year since the subprime problems first surfaced last July as two Bear Stearns hedge funds acknowledged that they had lost virtually all of their funds. It was the beginning of a slow drip of disturbing information regarding the extent financial institutions, primarily investment banks, were affected by subprime holdings.
While it was the collapse of a couple of hedge funds that introduced us to the problem, it was the investment banks that had the greatest exposure. So much so that the Federal Reserve had to open its lending window to these institutions for the first time in 80 some odd years and arrange the bailout of Bear Stearns. And while hedge funds continue to be watched with suspicion, it is the banks who have had to book billions of dollars of losses due to this exposure.
The somber news for investment banks continued today with Merrill Lynch’s dismal first quarter earnings report. The investment bank reported a $1.97 billion net loss and net write-downs totaling $1.5 billion, and said it would cut 2,900 more jobs. Compared to some other investment banks’ woes this quarter, though, Merrill doesn’t come off looking quite as bad – UBS reported a $12 billion loss and $19 billion write-down in Q1 (after which its chairman stepped down), and Deutche Bank wrote down $3.9 billion in the first quarter.
While banks are recording massive write-downs due to the subprime meltdown, hedge fund managers, like John Paulson, number one on Alpha Magazine‘s 2007 ranking of highest-paid hedge fund managers, are making billions shorting the subprime market. In 2007, Paulson, who also topped Forbes‘ list of Wall Street’s Top 20 Earners for 2007, earned $3.7 billion shorting the subprime market. Seventeen of those who made Forbes’ top earners list are hedge fund executives.
The Securities and Exchange Commission continued its volley on Sentinel Management Group, as the firm awaits a bankruptcy trustee to be named Aug. 23. In filing a Temporary Restraining order on Sentinel, Lou Gracia, assistant regional director for the SEC notes in his declaration that the SEC went into the Sentinel offices Aug. 15 — a day after Sentinel’s halt on redemptions was reported in the press — and met with Sentinel President Eric Bloom, CFO Theresa Arana and the chief compliance office J. Matthew Keel. Although Sentinel told clients that the reason for the the redemption freeze was the market volatility, Gracia notes “This explanation is false and misleading. As described below, the clients’ exposure to loss was exacerbated by the undisclosed use of leverage and apparent commingling and misappropriation of clients’ securities. At the time the August 13 letter was sent to clients, the securities reported on account statements provided to clients bore no relation to the actual securities held for clients as reflected in their custodial account records.”Download file
With some 300 fund managers, traders and administrators in the Managed Fund Association audience, Anthony W. Ryan, assistant secretary of the U.S. Department of Treasury for financial markets gave a warning: with $1.4 trillion in assets under management in the hedge fund community, managers need to be vigilant to avoid any actions that could cause a “systemic event.”
Ryan, a former fund manager who joined the Treasury department last December, noted that the President’s Working Group missive release last February came to the conclusion that “stakeholders,” which include fund managers, lenders and counter parties, all those who manage private pools of capital, need strong market discipline, and that mixed with regulatory policy can reduce the chance of a systemic event.
He noted that a “perfect storm” for an event could include a situation that allowed easy credit, highly correlated strategies, connected lenders, inadequate information and undeveloped markets.
Speaking at the Optionetics “Oasis 2007” seminar last week in Santa Clara, Calif., investment guru and commodities bull Jim Rogers provided his insights to a three-year trip around the world he took with his new wife, Paige Parker. He said his biggest return from the trip was his first child, a baby daughter. Rogers noted he never had children before because he didn’t want the bother, but it was his best experience to date and recommended everyone go out and start working on babies right away.
More seriously, Rogers gave his view of the world, stating that China will be the country of the 21st century, just as the United States was in the 20th century and Britain the century before that. He noted China had the “the best capitalists in the world,” despite being a Communistic country. In fact he alluded to moving his family to Asian soon. “China will be the next greatest country in the world, whether you like it or not.”
Other Rogers’ comments:
• Teach kids how to speak Mandarin. He said his nanny is Chinese and speaks only Mandarin to his baby girl, so she already is bi-lingual.
• Right now the Chinese shares market is in a bubble; don’t buy shares right now (although he couldn’t recommend when to buy it). He also noted he has huge amounts of Chinese stocks but wouldn’t say what despite intense audience questions.
• Although U.S. dollar has been the world’s reserve currency, the United States’ is the largest debtor in the world, owing the world $13 trillion, adding $1 trillion in interest debt every 15 months.
• It is terrible policy to debase the $ in the long run, history has showed this.
• Stay away from bonds unless you know how to go short.
• Stocks will be in a big trading range for several years.
• We are in the middle of a bull market in commodities, which is the second largest market in the world (only currency market is larger).
• Oil reserves are dropping. In fact, Indonesia will become an importer of oil by the end of the decade, which means it will be kicked out of OPEC, an exporting cartel.
• Best alternative fuel is nuclear, which is clean if controlled properly (This is a big if…even the United States has had problems in this area; imagine less developed countries control.)
• Biggest danger in the world is the water problem, or lack there of. He did recommend NOT to buy water as if and when it becomes serious, politicians will take it over.
Rogers new book, “A Bull in China” will be released soon. It will be based on his observations of his round the world trip.
