Posted by Larry Doyle on August 10th, 2013 6:02 AM |
What are you doing this weekend?
I hope the weekend allows you to spend quality time with family and friends. While I figure out some plans for today, tomorrow I will definitely set aside an hour to listen to the following:
Nationally Syndicated Business Talk with Jim Campbell.
Sunday August 11th @ 10-11am & 10-11pm EST
Powerhouse Lineup on Insider Trading
Gretchen Morgenson – Assistant Business & Finance Editor, New York Times
Charles Gasparino – Senior Correspondent, Fox Business Network
William D. Cohan – Author, Fall of Bear Stearns and Goldman Sachs
Anita Raghavan – Author, “The Fall of the Galleon Hedge Fund”
Topic: Steven A. Cohen and the Criminal Indictment of SAC Capital (more…)
Posted by Larry Doyle on May 7th, 2013 8:03 AM |
Early last year, the US Attorney for the Southern District of New York, Preet Bharara, in alluding to activities within the hedge fund community asserted that insider trading was rampant and routine. Strong words.
Fast forward a year and a recent survey of those within the hedge fund world unsurprisingly shows that a host of issues remain, and that the “findings are troubling.” Let’s navigate and review the results of this recent survey: (more…)
Posted by Larry Doyle on March 18th, 2013 11:52 AM |
News released late Friday afternoon that the SEC has agreed to a settlement of $616 million with entities connected to SAC Capital is viewed as another indication that our financial police are playing hardball, right?
I mean $616 million is a lot of money, correct? Yes and no. Money is relative and playing hardball is in the eye of the beholder.
Did SAC and its founder Steven A. Cohen, aka “Stevie Boy” Cohen, just enter the realm of Goldman Sachs, JP Morgan, and the other heavyweights on Wall Street who have been defined as “too big to fail, to regulate, and to prosecute?” (more…)
Posted by Larry Doyle on March 3rd, 2010 12:35 PM |
Meeting industry friends and colleagues for dinner, drinks, and market talk is standard fare. In fact, I would say it is good business as it is important to develop relationships within the industry.
That said, the development of these professional relationships and the interaction amongst the professionals should never come at the expense of professional ethics and integrity. I did witness more than a handful of times individuals from different shops on both the buy-side and the sell-side of the industry push the envelope very close and sometimes over that ethical line.
Not always, but very often, the ethical shortcomings involved hedge funds. Why? The revenue model for hedge funds (typically 2% asset management fee and 20% of profits derived) serves as a huge incentive for traders at hedge funds to gain an edge and act upon it as much as possible. The fact that the hedge fund traders and managers have a direct stake and an accompanying vested interest in the profits fuels this crowd like nothing else. (more…)
Posted by Larry Doyle on October 28th, 2009 11:01 AM |
Fraud knows no boundaries.
I strongly believe we will see dozens of hedge funds, fund of funds, and other financial frauds revealed over the coming months. In fact, I addressed this likelihood last April in writing, “Low Tide Will Reveal Rats Scurrying Amidst The Garbage”:
Additionally, do not forget that many hedge funds suspended redemptions in the latter half of 2008. Ponzi schemes, like rats, only thrive given a steady source of food and water in the form new investments. Suspending redemptions is akin to a rat rationing its food supply. While plenty of those suspensions could be legitimate, it would be naive to think that all of them are.
What do we learn today?
Breaking news indicates that a German fund of funds, K1 Group, may very well be the next rat exposed by the global market meltdown. A legitimate fund of funds company allocates capital across a wide array of different hedge funds. We certainly know that did not happen with the funds feeding Madoff. What happened with K1 Group? (more…)
Posted by Larry Doyle on October 20th, 2009 8:49 AM |
How is it that an individual with untold hundreds of millions of dollars in wealth could put himself in a position of risking it all?
Welcome to the world of Raj Rajaratnam, the owner of the hedge fund Galleon and the major kingpin arrested in the most recent insider trading scandal to rock Wall Street.
Who is Raj Rajaratnam and why would he take such professional risks? We learn about Rajaratnam from a London based financial site, Here Is The City:
He was born in Sri Lanka, attended S. Thomas’ Preparatory School, Kollupitiya, then moved to England to complete his schooling, and studied engineering at the University of Sussex. Rajaratnam earned an MBA from Wharton in 1983. He is married with three children.
Rajaratnam, a Tamil self-made billionaire hedge fund manager, is the 236th richest American according to Forbes (2009), with an estimated net worth of $1.8 billion.
The hedge fund manager started his career as an analyst at the investment banking boutique Needham & Co., where his focus was on electronics. In 1991, he became the President of the bank at the age of 34. At the company’s behest, he started a hedge fund, Needham Emerging Growth Partnership in March 1992, which he later bought and renamed ‘Galleon’.
Initially invested in technology stocks and healthcare companies, he says his best ideas come from frequent visits with companies and conversations with executives who invest in his fund.
He has made more than $20 million in charitable donations in the last five years. In September 2009, Rajaratnam pledged to donate $1m to help the Sri Lankan government with the rehabilitation of former LTTE combatants. He has also donated generously to clear land mines in the war-affected areas in Sri Lanka, and was also a contributor to various causes that promoted development in the Indian subcontinent and programs that benefited lower income South Asian youth in the New York area. (more…)
Posted by Larry Doyle on October 16th, 2009 3:16 PM |
Trust but verify.
How does one verify representations for an industry that has traditionally been anything but transparent? Serious due diligence. Why should individuals be extremely cautious prior to investing in a hedge fund? The lack of transparency and the challenge of being able to employ real due diligence.
To that end, the hedge fund industry has largely operated on a trust basis and marketing which employs a lot of ‘word of mouth’ introductions. Against that backdrop, this corner of the investing universe is exceptionally challenging.
Without the ability to truly verify assertions made and returns generated by hedge funds, investors in hedge funds allocate capital with greater risk. In spite of these risks, the hedge fund industry has amazingly been able to operate under a fee structure in which investors annually pay 2% of assets and 20% of profits.
I know plenty of individuals who work at hedge funds. As with any undertaking, it would be irresponsible of me or anybody to impugn an entire industry. That said, I have always thought the lack of transparency and lack in the ability to truly verify investing styles and returns as being a significant reason not to invest.
From that standpoint, I was particularly interested to review a research report, Trust and Delegation, recently released by a number of graduate professors in finance:
Stephen Brown is the David S. Loeb Professor of Finance at New York University Stern School of Business; William Goetzmann is the Edwin J. Beinecke Professor of Finance and Management, Yale School of Management; Bing Liang is Professor of Finance, Isenberg School of Management, University of Massachusetts; Christopher Schwarz is Assistant Professor of Finance at the University of California at Irvine. We thank Bob Krause, Hossein Kazemi, and Andrew Lo for helpful comments. We are grateful to HedgeFundDueDiligence.com for providing their data for this research (http://www.hedgefundduediligence.com/).
What did this extensive research report highlight?
Due to imperfect transparency and costly auditing, trust is an essential component of financial intermediation. In this paper we study a comprehensive sample of due diligence reports from a major hedge fund due diligence firm. A routine feature of due diligence is an assessment of integrity. We find that misrepresentation about past legal and regulatory problems is frequent (21%), as is incorrect or unverifiable representations about other topics (28%). Misrepresentation, the failure to use a major auditing firm and the use of internal pricing are significantly related to legal and regulatory problems, indices of operational risk. Due diligence (DD) reports are costly and are only performed when a fund is seriously considered for investment. It is important to control for this conditioning which would otherwise bias cross-sectional analysis. We find that DD reports are typically issued on high return funds three months after the historical performance has peaked. DD reports are also issued at the point of highest cash flow into the fund. This pattern is consistent with return chasing behavior by institutional hedge fund investors.
Wow. Misrepresentations have occurred in 21% to 28% of the hundreds of hedge funds studied.
Honestly, I am not surprised. If hedge fund managers lie about one part of their business, do you think it is all that difficult to lie and misrepresent returns, investment valuations, and other critical parts of their business?
The inability to verify returns is always an opportunity for a hedge fund manager to fudge those returns when the numbers are not good.
This report may not be surprising, but it is enlightening. For those who would like a deeper view into this corner of our financial landscape, please click on the report below. ~LD
Posted by Larry Doyle on August 29th, 2009 6:51 AM |
If hedge funds and other financial firms are to be regulated for purposes of reviewing business practices, doesn’t it go without question that a financial self-regulatory organization which has invested in hedge funds should also be required to open its books and records?
In a recent interview, SEC chair Mary Schapiro was asked about the regulation of hedge funds. Wall Street Pit captured the entire interview, SEC Chair Schapiro: The Agency Lacks the Tools to Get the Job Done. This interview is very comprehensive and covers market structures, high frequency trading, derivatives, the Federal Reserve, systemic risk, the future of the SEC, and more.
The segment that jumped out at me was the following:
CLAMAN: How would you regulate a hedge fund?
SCHAPIRO: First of all, we need to have them registered, so we understand who is in the space and what they’re doing. We need information so that, to the extent they could be engaging in manipulative activities, insider trading, we can constrict. Reconstruct trading practices and patterns so that we can bring those cases and enforce the rules against manipulation and insider trading.
So we really need reporting. We need registration. We need the ability to examining their books and records, and understand how they’re conducting business. (LD’s highlight)
My point of this commentary is not hedge funds specifically but that Ms. Schapiro raises the topic of examining books and records and understanding how an entity conducts business.
Just as Ms. Schapiro feels hedge funds should be regulated for these purposes, who in their right mind would not want the same exposure and transparency required of the Wall Street self-regulatory organization, FINRA? That exposure and transparency is the basis for the complaint filed by Amerivet Securities vs. FINRA (Amerivet Complaint Against FINRA Alleges Madoff Investment).
Ms. Schapiro may have to recuse herself from any review of FINRA given her position as head of FINRA prior to heading the SEC.
In fact, given the questionable nature of FINRA’s activities (investment, regulatory oversight, compensation practices), the review of FINRA should be undertaken by an independent investigator.
Although FINRA itself does not want to provide transparency into its activities, transparency for a financial regulatory organization must happen without question.
Posted by Larry Doyle on May 4th, 2009 8:08 AM |
As Obama looks to send a message to the American public that he will clean up Wall Street, hedge funds are “under the microscope.” Who in Washington will be delegated to lead the charge? None other than SEC head, Mary Schapiro. Bloomberg reports, SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules.
Hedge funds have become dirty words. When Washington wants to convey excessive Wall Street greed, politicians and regulators now regularly slip “hedge funds” into their statement.
As with any industry, hedge funds run the gamut in terms of business practices and ethics. It is well documented, though, that Washington solicits and receives excessive campaign contributions from the hedge fund community.
I agree that the hedge fund industry deserves greater scrutiny. A trillion dollar industry unregulated is a breeding ground for problems.
“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”
Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”
President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”
Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.
Does anybody have an issue with increased disclosure and oversight? Transparency is critically important in making sure the playing field for all investors is kept fair and level.
Ms. Schapiro does have experience with hedge funds prior to this engagement, though. As I have highlighted, Ms. Schapiro, as head of FINRA, oversaw investments within FINRA’s internal portfolio which included hedge funds, fund of funds, and private equity.
From the 2007 FINRA Annual Report:
FINRA also has investments in hedge funds and funds of hedge funds that it accounts for under the equity method and includes in other investments in the consolidated balance sheets. As of December 31, 2007, the Company had hedge fund investments of $431.2 million.
Ms. Schapiro should be compelled to share with the investing public in which hedge funds FINRA invested.
Will those funds withstand the rigor of newly proposed SEC regulation? At the very least we may learn whether Ms. Schapiro was a good steward of FINRA funds. Beyond that, we may learn a lot more.
If the Obama administration is serious about developing new regulations for Wall Street, let’s make sure the transparency includes Ms. Schapiro’s tenure at FINRA and details of FINRA’s investment portfolio!!