Full List of the "Imploded" Funds:
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2008-12-12:
Okumus Capital
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Value, options income
- 3 fund(s) impacted
Estimated base capital: ~$335M at peak in hedge funds
Estimated loss: down to ~$50M AUM in hedge fundsi; 5-42% NAV lossesOutside coverage: story
Per the above FinAlternatives coverage:
Okumus Capital, a $989 million hedge fund shop, is shuttering its hedge fund and long-only offerings, FINalternatives has learned.
The New York-based firm’s trio of hedge funds and its long-only fund have been burned by the financial crisis this year.
According to public data on its offerings, the $30.8 million Okumus Opportunity Partners, $19.2 million Okumus Diversified Value Partners and $2.5 million Okumus Technology Value Partners are down 42.8%, 23.83% and 5.3%, respectively, through October. Its Long-Only Partners Fund is down 15.02%.
While it would seem based on the above that the hedge portion of Okumus' offerings is less than $50M and wouldn't make our $100M cutoff for listing, a June 2006 Morningstar profile on Okumus states that the outfit had about $335M under management in its hedge funds (concentrated in the Opportunity fund) at the point the long-only fund had just opened. Thus, it would seem in addition to dramatic declines in NAV, Okumus has experienced declines in AUM in the ballpark of 75% or more. That would solidly qualify them for our "implode" ranking.
The Morningstar article states that Okumus is value-centric (including, notably, financials), and makes extensive use of out-of-the-money PUTs (which sometimes accounted for most of the fund's returns in years past).
The Hedge Fund Journal has an article on Okumus from April 2007 entitled The best equity hedge manager in America in the long term? The article states:
Being prepared to argue with markets (positions not paying off and adding to losers) and then receiving a big payoff in returns as the markets recognise the value, usually generates a lumpy pattern of return to value investors. Often a fund run by a deep value investor will have months of dull returns, then a spectacular phase of returns as the market comes into gear for their style
It appears that given withdrawals, this time Okumus could not stay solvent longer than the market was "irrational". This may have combined with a continued strategy of OOM PUTs at a time when the market was falling catastrophically, and generally staying down. It is hard to say without seeing a post-mortem of portfolio holdings.
Okumus was founded in 1997.
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2008-12-10:
ING Diversified Yield, Regular Income, etc.
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CDOs, etc.
- 4 fund(s) impacted
The funds described in our initial writeup, Diversified Yield and Regular Income, will now be wound up, along with two other funds:
ING said it had borrowed NZ$100 million to part pay out investors, while the funds' assets are sold.
"The cash option that ING will be proposing is aimed at helping investors as we sell assets over an extended timeframe," ING New Zealand's chief executive, Helen Troup, said in a statement.
It will now recommend to the funds' trustee and the near 8,000 investors affected that they be wound up.
ING also said it would wind up two other funds, the Credit Opportunities and Enhanced Yield, worth NZ$35 million with 710 investors.
Demand for the two funds had fallen and the downturn had resulted in illiquidity and difficulty in selling assets which could not be easily priced.
When we first wrote about Diversified Yield and Regular Income back in March, the losses were said to be in the range of 25-30%. Now, the four funds (which still seem to consist most of the first two) are valued at around 50%. And the assets are still being sold...
Ailing writeup, March 12, 2008:
ING has been forced to suspend withdrawals from two finds after a minority of nervous investors headed for the exits. The Bloomberg article cited above has more:
Withdrawals from the ING Diversified Yield Fund and the ING Regular Income Fund were halted to protect investors, Marc Lieberman, chief executive officer of ING (NZ) in Auckland, said in an e-mailed statement. About NZ$520 million ($417 million) was invested in the two funds at the end of February.
Since August, rising defaults on U.S. subprime mortgages triggered a global sell-off of CDOs, which are fixed-income securities backed by the loans. The value of the Regular Income Fund fell 25 percent in the year ended Feb. 29 while the Diversified Yield Fund dropped 22 percent, according to the company's Web site.
ING claims "most" of the fund contains higher-quality assets, with only 10% in subprime and 6% in CDOs. Displaying a common paradox, ING is planning on selling some of the higher-quality holdings to meet withdrawal request, which of course will push the prices for those assets down, explaining much of the market action we are seeing. ING like does not want to liquidate the CDOs or subprime because it is hoping the values will come back—or perhaps the quotes on those assets are no so low, they would not be enough to meet investor withdrawals.
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2008-12-04:
Centaurus Alpha Fund
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Event driven fund
- 1 fund(s) impacted
Estimated base capital: $1.2 billion
Estimated loss: 25%Outside coverage: story
Reports have emerged that Centaurus Capital is closing its flagship fund, Centaurus Alpha Fund. The fund liquidation comes on the heels of investors rejecting a restructuring plan that would lock up their capital in exchange for reduced fees. Finalternatives.com reports:
[I]nvestors in the Centaurus Alpha Fund, which had lost about a quarter of its value, refused to accept the new terms, the Financial Times reports. Just a handful of the Alpha Fund's investors are expected to remain with Centaurus.
In October, Centaurus asked investors to accept a new two-year lockup in exchange for the return of 30% of their capital and reduced fees. The firm blamed a "deleveraging spiral" for its losses, which it called "far beyond what can be justified on the basis of fundamentals."
Instead, Centaurus will return most of the $1.2 billion that is left in the Alpha Fund. The firm has imposed a 10% limit on monthly pay-outs, but hopes to wind the fund down as quickly as possible without being forced to sell assets at distressed prices.
Despite this setback, Centaurus Capital expects to continue running its Asia hedge fund and may even launch new funds in 2009.
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2008-12-01:
BlueBay Emerging Market Total Return Fund
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fixed income
- 1 fund(s) impacted
Estimated base capital: $1.2B
Estimated loss: 53% (in 2008)Outside coverage: story
This fund simply got hammered, with the sharp declines in NAV leaving it "not viable" as a standalone fund, according to BlueBay. From the above news release:
“We are operating, as has been the case for some time now, in extremely challenging credit market conditions,” CEO Hugh Willis said. “We remain focused, however, on the cyclical opportunity ahead and on our ability to capitalize on this.”
Meanwhile, the Emerging Market fund’s manager, Simon Treacher, has resigned after violating “internal valuation policy,” BlueBay said. The firm stressed that Treacher’s alleged unauthorized adjustments to the fund’s numbers had nothing to do with its failure.
The foul play appears to have been limited -- but we would love to see the details.
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2008-11-19:
Trident European Fund (JO Hambro)
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European equity long-short strategy
- 1 fund(s) impacted
Estimated base capital: $240M
Estimated loss: down 25% in Oct; 39% on the yearOutside coverage: story
The Porsche/Volkswagen fiasco was the straw that broke this fund's back:
The $240 million Trident European Fund dropped 25 percent in October, its worst month since starting a decade ago, mainly after a bet on a drop in Volkswagen shares went awry, said the people, who declined to be identified because the firm doesn't disclose returns. The fund has slumped 39 percent this year after posting average returns of 8.4 percent annually since its inception.
Poor performance, dollar gains sapping European investment returns and investors moving assets from medium-sized companies all contributed to the fund's closure, Suzy Neubert, a spokeswoman for JO Hambro in London, said in an e-mailed statement.
Check out the Bloomberg article for more. It notes that EuroHedge's index of Long-Short European equity hedge funds (the fund class of Trident) dropped 1.7 percent in October, suggesting that the Hambro fund did indeed stand out from the crowd-- in a bad way.
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2008-11-11:
Tontine Partners
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Global macro hedge fund
- 2 fund(s) impacted
Estimated base capital: $10 bn (Total across all funds?)
Estimated loss: 78% for Tontine Capital; ? for Tontine PartnersDavid Faber at CNBC is reporting that Tontine Partners ("Tontine") is liquidating two of its funds, Tontine Capital and Tontine Partners, over the next year and a half.
Of two funds being liquidated, Tontine Capital is down nearly 78%; we have not been able to determine this figure for Tontine Partners.
Interestingly (oddly) enough, Tontine is not liquidating Tontine 25 (down almost 54% YTD) or Tontine Financial (down 83% YTD).
Original ailing/watch listing: 2008-10-15
Stockpickr reports that Tontine Partners may be in trouble having expected losses on the year of some 65%. According to the article on this "global macro hedge fund":
The fund, founded by former Smith Barney analyst Jeffrey Gendell, has been known for its concentrated portfolio and large sector bets.
In 2003 and 2005, the fund returned in excess of 100%.
Now there are substantial rumors that Tontine Partners is under complete liquidation, returning money back to its investors and closing its doors for good
If you hear anything about Tontine and whether or not they are going to close up shop and return funds back to investors, please let us know!.
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2008-10-30:
Lancelot Investment Management
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hedge fund ponzi scheme?
- 5 fund(s) impacted
Estimated base capital: $1.8 billion
Estimated loss: 100% — bankruptcyFINalternatives reports that five hedge funds under Lancelot Investment Management are filing for bankruptcy due to beign defrauded by Tom Petters, the fund manager. According to the article:
The five Lancelot funds and their subsidiaries filed for Chapter 7 liquidation in U.S. Bankruptcy Court in Chicago last week. According to court documents, the funds invested about $1.5 billion of their $1.8 billion in assets in Petters' business entities, which, in addition to his hedge funds, include Polaroid and Sun Country Airlines.
Apparently, the funds were forced into bankruptcy as the fund creditors "won't release their assets".
Regarding the allegations of fraud against Petters:
Petters is accused of defrauding victims of some $3 billion, and faces federal charges of mail and wire fraud, money laundering and obstruction of justice.
An by the Star Tribune elaborates on the allegations against Petters, noting that his alleged fraudulent activities occurred over some thirteen years.
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2008-10-29:
Epic Limited Partnership
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Canadian mid-cap
- 1 fund(s) impacted
Estimated base capital: $300M at peak
Estimated loss: $200M left (at last check; selloff not complete)Outside coverage: story
This Canadian hedge fund run by Epic Capital Management is the main fund at that outfit. As they were hit by redemptions, they made a decision to shut down, as the fund would mostly be left with undesireable and illiquid "silt" after selling off the "cream" to meet the redemptions. Additional details follow:
If Epic investors approve the closing, they should get about 80 per cent of the money they are entitled to by early next year, and the remainder as Epic unloads tougher-to-sell investments, Mr. Fawcett said. The firm, which had three partners and six employees, is letting five workers go.
Epic had already sold most of its stocks and moved 75 per cent of its assets into cash.
Regarding performance:
Epic's performance is in line with many of its peers, suggesting other funds may not be far behind. More than a dozen Canadian hedge funds are down over 40 per cent this year - meaning they have had a bigger drop than the country's benchmark stock index.
The declines have undermined the rationale for investing in hedge funds, which were pitched based on their supposed ability to generate positive returns in any market.
Epic's move also affects the $35-million Arrow Epic Fund, which it runs as an external manager for Toronto-based Arrow Hedge Partners Inc. That fund, which plunged 45 per cent this year as of last Friday, is also being wound down.
These points suggest to us there will be more of this.
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2008-10-16:
Highland Capital Management
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Leveraged loans
- 2 fund(s) impacted
Estimated base capital: $40 bn for all Highland Capital funds; >$1.5 bn for Crusader and Credit Strategies combined
Estimated loss: 30% YTD for Highland Crusader; ? for Highland Credit StrategiesOutside coverage: story
Highland Capital Management is officially closing its Highland Crusader Fund (the flagship!) and Highland Credit Strategies after seeing significant losses, some 30% on the year for the Crusader Fund (compared to a 40% gain in 2006 and a 4.5% loss last year) according to a recent Bloomberg article.
Per the article:
The Highland Credit Strategies fund suffered from "unprecedented market volatility and disruption," according to a letter to investors that was obtained by Bloomberg News. Barclays Capital Inc. seized $642 million of leveraged loans from Highland yesterday and is offering the debt for sale in an auction today, according to a person with knowledge of the situation.
Highland Capital was the world's "largest non-bank buyer of leveraged loans" in 2007.
Original Ailing/Watch Write-up, 2008-03-06:
The Texas-based highland is in choppy waters, but has not yet gone as far as suspending redemptions, as far as we know. The FT article says:
Like other investors, it has been hammered by the falling prices of leveraged loans. Highland’s main hedge funds, investing in distressed debt and other credits, were down 11.5 per cent to 14 per cent in January. While it is not clear how it fared in February, Highland’s recent performance contrasts with gains of 30-40 per cent in 2006 and 2007.
As a result, Highland executives, led by co-founder Mark Okada, are engaged in an intense dialogue with investors to discourage them from withdrawing their money.
...
Mr Yang said redemptions so far “haven’t been significant” and Highland is seeing inflows as well. Highland officials insist that the size of their holdings remains a source of strength, pointing out that $25bn of their loans are in closed-end funds that do not face redemption pressures.
And more on the general situation:
Highland’s fortunes underscore the rapid changes on Wall Street. At the peak of the buy-out boom, private equity firms worked to keep Highland out of deals because of its reputation for tough tactics. As the credit squeeze worsened, the same funds welcomed Highland’s cash. Now, market participants are monitoring Highland’s health because of its prominence in the leveraged loan market.
Question is how long the "storm" will last in leveraged loans. If it is, as we think, an permanent "gap down", Highland may have to ultimately book losses or shut down funds. Risk premiums on leveraged loans were simply unrealistically low, and that condition is unlikely to come back. Ever.
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2008-10-02:
Gordian Knot - Sigma Finance, Ltd.
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SIV
- 1 fund(s) impacted
Estimated base capital: $27B
Estimated loss: possibly as much as $5BOutside coverage: story
Gordian Knot's $27 billion Sigma Finance SIV is being shut down. The Lehman bankruptcy and surrounding market turmoil was the kicker. According to the WSJ:
Sigma survived in part because it had invested in high-quality securities, and because it had taken precautions to protect itself from being forced to sell its assets if markets turned against it.
The Lehman default, however, proved fatal -- not only because the fund held an estimated $110 million in Lehman debt, but because it had come to depend heavily on the so-called repo market to finance its investments. In a repo transaction, a fund turns over securities as temporary collateral for a loan, then buys them back at a price that includes interest. If the value of the collateral falls below a certain level, the lender can demand added collateral in a move known as a margin call.
Lehman's default on Sept. 15 precipitated a drop in the value of the bank-issued bonds that make up nearly two-thirds of Sigma's investments. That, in turn, led to increased margin calls from lenders and a depletion of Sigma's cash reserves, according to a report from ratings firm Moody's Investors Service.
On Monday, one of Sigma's lenders, J.P. Morgan Chase & Co., terminated its repo agreements, followed by HSBC Holdings PLC and Royal Bank of Scotland Group PLC, people familiar with the matter say. On Tuesday, at least one lender issued a notice of default, according to Moody's. As a result, all of Sigma's lenders are expected to move to seize Sigma's assets if they haven't already, essentially paralyzing the fund.
Regarding the extent of the pain and where it might fall:
The default will likely leave investors in some $6 billion of Sigma's own debt holding paper worth as little as 15 cents on the dollar, and allows banks that lent to Sigma to sell some $25 billion in collateral, consisting largely of bank-issued bonds.
If the banks sell, they could worsen the pain in credit markets, which have suffered in recent weeks on concerns that banks and funds will be unable to honor their obligations. "This doesn't help," said Howard Simons, a bond strategist at Bianco Research in Chicago. "The lending markets that banks rely on were already rattled before this."
Sigma's lenders could choose to keep the fund's souring assets, rather than sell into a weak market. In that case, they could face a total of some $2 billion in write-downs, according to a report from Citigroup Inc. On Tuesday, at least three banks were circulating lists of Sigma assets to potential buyers to get a sense of what they would be worth, people familiar with the matter say.
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2008-09-25:
Modulus Europe (Powe Capital)
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invests in small/medium sized companies
- 1 fund(s) impacted
Estimated base capital: €330 mm
Estimated loss: 21% in 2008Outside coverage: story
The Independent reports that Powe Capital Management's flagship hedge fund, Modulus Europe, has been forced to liquidate. Gates were used in July, August and September to defer redemptions on the fund; however, Rory Power, the fund founder, determined that liquidation provided the most "fair" outcome for investors.
The fund invested in "small and medium-size companies" and lost some 21% of its value on the year.
The liquidation will result in 80% of the fund assets being returned as cash with the remainder being liquidated over time.
Regarding the founding of the fund:
Mr Powe, formerly a star fund manager at Invesco, launched Modulus in early 2002. The fund is up 65 per cent since its launch. He left Invesco after his European Growth Fund's value plunged following the bursting of the dotcom bubble.
Other Powe Capital Management funds include the Principia and Tensor funds.
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2008-09-03:
Ospraie Fund
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commodities stocks
- 1 fund(s) impacted
Estimated base capital: $2.8B (in the commodities fund)
Estimated loss: 38.6% loss in 2008 (27% loss in August)We have decided to list the flagship Ospraie fund (its commodities fund) as "imploded" despite their "voluntary closure, due to the sharpness of the loss. Fund manager Dwight Anderson wrote to investors:
"As the fund's performance deteriorated, we made the decision -- despite continued confidence in the Fund's positions -- to reduce risk and de-lever the portfolio significantly due to concern of incurring even greater potential losses," he added.
Ospraie is one of many funds that did not fare so well in the recent commodities markets turbulence (we would have been surprised if a few big ones did not croak).
Interestingly, this closure adds to Lehman Bros' current woes, as the broker-dealer had acquired a 20% stake in Ospraie in 2005.
Money will be returned as follows:
The $2.8 billion hedge fund will distribute 40% of its client money by the end of the month, with an additional 40% due at year-end.
Some sources report a full return of capital may take up to three years.
The fund had reportedly returned about 15% a year on average since its founding in 1999, until the present episode. Indeed, the current losses serve to lower that average to more like 8%. Not too shabby in absolute terms, but give high returns to hedge fund investors, and you had better not take them away.
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2008-09-01:
Dalton Melchior Japan Fund
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Japan Equity
- 1 fund(s) impacted
Estimated base capital: ~$1B (as of 2006)
Estimated loss: ~40% value loss YOYOutside coverage: story
We have been on the fence about this Dalton Strategic Partnership fund, but are listing it due to extreme AUM contraction and loss of NAV:
Assets had fallen to around £20 million from a high of above £500 million in 2006, and the fund had lost 39.05% over the year to date versus a benchmark loss of just 4.7%, and following several years of double-digit losses.
Interestingly, it seems the firm was trying to run a long/short strategy, but it failed:
‘It has proved substantially harder than we had anticipated to run a Japanese long/short mandate,’ said Jones. ‘Two Japanese hedge funds began to seem like one too many.
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2008-08-18:
Windmill Management (SageCrest funds)
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"credit opportunity" (art, property, legal lending)
- 2 fund(s) impacted
Estimated base capital: $1b+ in SageCrest II, the largest fund (as of last year)
Estimated loss: SageCrest II reportedly down by half; principal loss vs. withdrawals unknownOutside coverage: story story story story story story story story story
Update, 2008-09-03
For more details on the bankruptcy, see this NYPost article and this one from Dow Jones.
Update, 2008-08-19
FinAlternatives clarifies that both SageCrest funds, SageCrest Finance and SageCrest II had bankruptcy filings.
A source also tells us that Deutsche Bank is not the prime driver moving the funds into bankruptcy, as loans from that bank to SageCrest would still leave them a senior creditor.
Implosion, 2008-08-18
SageCrest has filed Bankruptcy. It is unclear which or whether all of the funds or the entire group are covered.
Original Ailing Writeup, 2008-06-12
This fund group came to our attention due to a lawsuit regarding alleged shady (if not fraudulent) activities:
A US hedge fund manager facing a lawsuit for blocking withdrawals is now being accused by one of its long-standing investors of “siphoning off” money.
Windmill Management, which runs the SageCrest and SageCrest II funds specialising in loans for art, property, and personal injury lawsuits, was sued this week by Westerly Capital on behalf of other investors in its first fund.
The case is unusual in the world of hedge funds, where claims of deliberate wrongdoing by managers are usually picked up first by regulators. Investors are often reluctant to reveal their losses in public for fear of embarrassment, keeping them out of the courts.
The FT article has more about Windmill and the situation it is in with its funds:
More about the fund and the situation it is in:
The first SageCrest fund is relatively small, and the lawsuit is likely to be more of an annoyance to Windmill at a time when it is struggling with an almost halving of the value of the second fund, which reached almost $1bn under management last year.
But it could prompt further concerns among investors in the larger fund, many of whom have already complained about a block on withdrawals and big falls in value. Last month Wood Creek Capital Management, a US fund of hedge funds, sued Windmill for $5.8m it claimed had been promised in repayment but had never arrived. The fund was also pulled into a tangle of legal actions in New York over loans to buy art where Christie’s accused a gallery of trying to rig an auction.
SageCrest II has sold many of its assets at a steep discount to raise cash partially to repay loans from Deutsche Bank and Bear Stearns, and has been trying to secure a $150m emergency loan from fund manager Fortress Investment Group.
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2008-08-14:
Turnberry Capital Management
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distressed debt
- 1 fund(s) impacted
Estimated base capital: $800mm
Estimated loss: 20 - 27% (?)Outside coverage: story
Reuters has reported that Turnberry Capital Management LP (Website turnberrycapital.net) will be liquidating assets and returning money to investors after Labor Day:
"We intend to take a series of steps to liquidate the Fund and redeem all Fund investors at the same pace," fund manager Jeff Dobbs wrote to his clients last week, telling them that most of his clients have said they want out of his portfolio.
Approximately 70 percent of the credit derivative book has already been liquidated, Dobbs said.
"After Labor Day, we will commence a sell-down of the Fund's security holdings in order to raise cash to fund redemptions," he added.
Turnberry Capital apparently was down some 20% for 2007 and as much as 26% for the first quarter of 2008.
Turnberry Capital's website describes the fund's strategy as:
Turnberry's objective is to achieve high absolute returns by investing in, principally, debt securities of companies that have liquidity problems due to loss of capital markets access. The best opportunities arise after a cataclysmic event in the capital markets or a specific industry. Turnberry's strength is identifying companies suffering liquidity problems, but that have the assets, cash flows and motivated managements which allow them to execute transactions ( renegotiation of debt, securities exchanges, asset sales or equity infusions) to solve liquidity problems. Turnberry's portfolio is diversified across 25-40 positions with an individual issuer limit of 15% and an industry limit of 20% of assets. Cash pay debt securities represent 50-80 % of the portfolio, defaulted debt securities 5-25%, and equity 0-20%.
If anyone has further details regarding Turnberry Capital's size (Peak funds under management), returns or could provide us with the letter Turnberry sent to investors, please let us know!
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2008-07-23:
Absolute Capital Management
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equity fund, activist fund
- 2 fund(s) impacted
Estimated base capital: $1.2B as of Dec '07; $3.2B at peak (excluding Argo, for equity fund)
Estimated loss: 25% (equity fund)Update, Implosion of Activist Fund, 2008-10-01
Details are scant, but AbCap has apparently also closed down its activist fund:
Absolute Capital Management has closed an activist hedge fund and expects "substantial" redemptions in four funds nearing the end of a year-long lock-up, writes James Mackintosh.
We'll keep you posted. The above article also states:
Mr Kennedy said the company was "not over". AbCap manages $884m, down from $3.25bn before the crisis hit and the Argo credit division was demerged. "There's still a good chance that we will hang on to something substantial," he said.
Original Writeup, 2008-07-23:
Note: Absolute Capital Management is not the same as Absolute Capital Group, based in Australia, which we also have listed.
While we had listed Absolute Capital Management on September 19, we have since clarified our "implode" categorization, requiring that a fund actually be wound down or bought out, rather than merely having suspended redemptions. So we are re-imploding them (for real) now, as it appears that this is now the case for at least one ACM fund:
Absolute Capital Management has closed one of its hedge funds and shuttered its Mallorca offices in an effort to stabilise the hedge fund group after it demerged its most successful division.
Aim-listed AbCap yesterday reported a pre-tax loss of €32.9m (£26.1m) after writing down €74.1m of goodwill on acquisitions, including Argo Capital, now demerged.
The group also warned that potential legal claims for losses suffered by its hedge funds could leave it without the resources to keep trading.
The article did not say which fund out of the eight or so we believe ACM runs. The shutdown of the offices also strikes us as a bad sign.
The TimesOnline has more detail on the losses and turmoil at the fund outfit.
Original Writeup, 2007-09-19
Bloomberg reports that Absolute, a fund shop based in Majorca, Spain, has suspended redemptions from seven of its funds, and is seeking to freeze redempetions for a year. The moves are coincident with co-founder and manager Florian Homm's departure (Homm apparently managed three of the funds) and attempts by Absolute's investors to withdrawl approximately $100 million. Absolute is seeking to restructure the problematic funds:
Under the proposed reorganization, the illiquid positions will be transferred to a new fund in which investors will get separate shares. Absolute will hire external advisers to value the illiquid assets before selling them, the company added. The other shares would track the liquid portfolio.
Surprisingly, the funds aren't fixed-income/mortgage securities funds, so we're unclear on why they "can't be valued". Clearly there is more to this story; we'll post more as we hear it.
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2008-06-20:
Lydia Capital
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insurance (fraudulent?)
- 1 fund(s) impacted
Implosion, 2008-06-20:
We have been informed that Lydia is now in receivership, which can be confirmed by looking at the company's web site (it has been replaced with a court-ordered information page). Thus it seems the fund itself is certainly operating no more, so we are now considering them "imploded".
Original Ailing Entry, 2008-05-21:
This entry tracks a potential fraud. The Boston Globe article (from back in April 2008) has good preliminaries:
In a complaint filed late Thursday, the Securities and Exchange Commission charged fund manager Lydia Capital sold shares in a hedge fund to clients without disclosing that their investment process could eventually render their hedge fund's assets "either worthless or virtually worthless," the agency stated.
In all the hedge fund called Lydia Capital Alternative Investment Fund LP raised $33 million from at least 57 investors in Taiwan, according to the SEC and Massachusetts Secretary of State William Francis Galvin, who filed a similar action. Galvin also charges that the principals have charged the investors millions of dollars illegitimately.
...
The regulators charge Lydia and its principals participated in a complex scheme whose details still remain under investigation. The heart of the scheme allegedly centered on the funds' investments in "life settlement" securities, or the purchase of life insurance policies from individual holders for less than their face value. Typically these policies are sold when the holder no longer needs the coverage, though some carriers restrict when policies may be resold.
This page has some more perspective on the case:
It sounds open and shut, but it isn't. In fact the question of whether owners of life insurance policies have the right to sell the policies, and under what circumstances, is currently one of the hottest issues being debated by the National Association of Insurance Commissioners (NAIC). Persons who purchase life insurance have a long-recognized right to sell their policies to third parties, proponents of such transactions say. If they have that right, why should the insurers ask whether that is their intent and claim the right to rescind if the answer provided is incorrect? Insurers respond that life insurance is designed to protect the families and businesses of the insured, not to provide windfall profits to investors.
It seems something of a grey area was being exploited.
The High Court has frozen around GBP 500,000 of assets held in the UK belonging to Glenn Manterfield of Sheffield, who the SEC has accused of conspiring with a US citizen to defraud investors in Lydia Capital, a US hedge fund.
It certainly seems the investigation is expanding.
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2008-05-22:
RREEF REFlex Fund
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real estate multi-strategy
- 1 fund(s) impacted
Estimated base capital: $400 mm
Estimated loss: 48% as of Oct 10(no outside story yet)
Back-add — 2008-11-05: An astute reader alerted us to the announced liquidation of the RREEF REFlex Fund, which was according to our tipster, "a multi-strategy hedge fund investing in realestate securities across the full capital structure." The fund announced its plans for liquidation in a letter dated May 22, 2008, which was provided to us.
Our tipster noted that the fund was down "-47.62% YTD" as of October 10th.
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2008-05-09:
Endeavour Capital
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relative-value
- 1 fund(s) impacted
Imploded, 2008-05-09:
This entry is being upgraded (downgraded?) to an implode, as per this Bloomberg article:
Paul Matthews, head of Endeavour Capital LLP in London, told investors last month he would liquidate what had been a $2.9 billion hedge fund after losing money on Japanese government debt. The fund lost about a third of its value in March when the spread on yields between 7-year and 20-year Japanese government bonds ballooned to their widest in nine years.
Original Writeup, 2008-03-19:
Reliable Bloomberg has the story:
Endeavour Capital LLP, the London- based hedge-fund firm founded by former Salomon Smith Barney Inc. traders, has fallen about 28 percent this month because of ``extreme volatility and vast moves'' in Japanese bonds, according to two investors.
The $2.88 billion Endeavour Fund sold ``substantially all'' of its Japanese government debt this week, Chief Executive Officer Paul Matthews said today in an interview. He declined to comment on the March decline.
On the fund's strategy:
Endeavour seeks to profit from discrepancies in the prices of various fixed-income securities and currencies, a strategy known as relative-value trading.
As far as recovery strategies, this gives us pause:
They told investors the fund may borrow as much as $20 for each $1 in capital to boost returns and may experience wide swings in value, according to marketing documents obtained by Bloomberg News. The documents said managers would seek to limit risk so no one position would result in a loss of more than 20 percent.
Doubling down on more leverage amidst global market turmoil not seen in a generation? This should be interesting.
Endeavor says redemption requests have not occurred. The fund gained 11% last year. It was leading other funds in its class until this month, according to Bloomberg.
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2008-05-05:
Old Lane Partners (Citigroup)
-
Alternative investment fund
- 1 fund(s) impacted
Estimated base capital: $600 bn
Estimated loss: $200 bnUpdate, 2008-06-12:
Finalternatives has summary coverage of the Old Lane shutdown.
2008-05-09:
We are re-classifying this as "imploded" as per this article. It seems if anything is salvaged from from Old Lane in a "restructuring", it will no longer be the old Old Lane.
2008-05-05:
Reports have emerged that Old Lane Partners, the hedge fund bought by Citigroup last fall and originally co-founded by Citigroup's new CEO Vikram Pandit, is seeing all unaffiliated investors redeem their investments.
Per Reuters:
Nearly all investors unaffiliated with the fund have requested to redeem their money from the fund, Citi said in a regulatory filing.
Citi bought Old Lane last year for more than $600 million, but the fund's performance has since been disappointing. Citi wrote down $200 million of intangible assets linked to the acquisition in the first quarter.
Citigroup claims that they currently have no plans to shutter Old Lane Partners. We wonder if this
indecision is due to feelings that a vote of "no confidence" by all external investors is considered "good" nowadays or if they are merely trying to save face in light of the fund's history with Citi's current CEO, Mr. Pandit. -
2008-05-04:
Rumson Capital
-
convertible-bond arb.
- 1 fund(s) impacted
Estimated base capital: $570M (2007 peak)
Estimated loss: -13% in NAV and assets down by halfOutside coverage: story
Not much information on this one... from FinAlternatives:
The firm has notified its investors that it is winding down its Navesink Equity Derivative Fund by June 30 because redemptions have cut the fund’s assets in half from a peak of $570 million last year, Hedge Fund Alert reports. The fund was down 13% in the first quarter.
Rumson was founded in 1993 by John Burke, portfolio manager and managing partner. E.J. Werner, head of trading, and Lothar Sroka, head of systems and research, round out the soon-to-be-defunct firm’s management team.
If you can paint some details, please do drop us a line. For instance we are not so sure about there being apparently only one fund tied up in this closure.
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2008-04-03:
Russell Investments (Alternative Strategies Funds)
-
?
- 2 fund(s) impacted
Estimated base capital: $6B
Estimated loss: $4B (less under management)FT reports that Russell (the famed index company) has shuttered two of its hedge funds for underperformance and investor withdrawals: Alternative Strategies and Alternative Strategies 2. On the withdrawals and current rules:
Investors were told recently their remaining funds would be returned in stages, with set withdrawal dates. The two funds had already limited investor withdrawals in the past few months amid heavy redemptions and a decline in the value of the funds.
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2008-03-21:
Cornerstone Quantitative Investment Group
-
futures
- 2 fund(s) impacted
Estimated base capital: $260M or more
Estimated loss: $70M in assets; 15-25% NAV depending on fundOutside coverage: story
We're retroactively adding this fund today (May 6th) as it was brought to our attentioned they closed shop back in March. TradingMarkets.com has more:
According to Barclay Hedge, Cornerstone's International Value Fund, a quantitative global macro approach that launched in 1997, lost 15.2 percent last year, at which time assets totaled about $250 million. In January, the fund lost 8.18 percent, leaving it with about $183 million in assets.
Cornerstone's Real Commodity Analysis Programme, which made global macro trades in different commodities, lost 17.22 percent last year, though it did return 2.86 percent in January leaving it with $10 million in assets, according to Barclay.
On the nature of Cornerstone:
Cornerstone was trading in a number of futures markets, including fixed-income currency, equity, and commodities like metals, energy, grains and livestock, according to published reports.
The article points out that Cornerstone was ailing at the same time most futures funds were doing well, yielding positive returns. You know what they say about trading onesself to a loss even in a rising market...
Which brings us to an ironic closing note:
Cornerstone's two principals, Dunsby and Eckstein, recently authored a book "Commodity Investing: Maximizing Returns Through Fundamental Analysis," which was released last month by Hoboken, N.J., publisher Wiley.
The aphorism "do as we say, not as we do" comes to mind.
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2007-08-16:
GoldLink Capital
-
gold derivatives
- 2 fund(s) impacted
Estimated base capital: at least $150M (mid-2005 numbers)
Estimated loss: unknown; all but "several cents on the dollar"Just brought to our attention recently (it is now July 2008) are this group of funds managed by GoldLink Capital Asset Management of Australia. In specific are two funds run by the outfit, Incomeplus and Growthplus, which were shut down almost a year ago. From the article linked above:
Lost among the bigger stories yesterday is the effective demise of Richard Kovacs’ Goldlink listed hedge funds.
Goldlink had done nicely out of borrowing the metal and playing the gold options market to its own little formula, but it fell foul of Pascoe’s Law of Inertia: Things and systems that work well tend to continue to work well – until they don’t.
The gold market volatility patterns changed and both Goldlink Incomeplus and Goldlink Growthplus were smashed. Yesterday’s announcement to the ASX pulled the entire plug on the game – the positions are being unwound, investors will be left with several cents in their original investment dollar and the board is trying to think of something to do with that.
According to their profile at MoneyManagement.com.au, the outfit (founded in 2008) was managing about $150M by 2005.
A press release (cached) from IncomePlus dated February, 2005 boasted that they had built "one of the largest gold derivatives portfolios in the world." Note that by the above clipping we can presume they were involved in gold leasing (considered fundamentally a fradulent racket by some). The press release also states the firm, by that point, was controlling more than 14 million ounces in the OTC market. If they were still controlling at least that much gold by mid-2007, that would amount to about $8.4 billion of gold contracts. Assuming the firm's capital base was somewhere between $150 and $300 million by then, that would amount to 25-50 times leverage.
So it isn't all that much of a surprise that the strategy (any leveraged strategy) blew up. And while we wouldn't ascribe this to GoldLink alone, mid-August 2007 is exactly when the gold price began a phenomenal rise to well past $1000/oz. The confluence of these events suggests that August, 2007 was a critical point when many agents lost control of gold to the short side.
Given that a huge large COMEX short position in gold has developed since, we can't help but wonder if catastrophic losses linger for many other speculators (or price managers) should the gold bull continue on fundamentals.
A last supplemental tidbit, in 2003 GoldLink became listed on the ASX. Here is a link to their ASX profile.
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2007-08-09:
North American Equity Opportunities (Goldman Sachs)
-
Quantitative fund
- 1 fund(s) impacted
As a sidenote in an article about Goldman Sachs' Global Equity Opportunities fund, the Financial Times has reported that Goldman Sachs' North American Equity Opportunities fund (NAEO) closed up shop earlier this year:
The withdrawals comes after investors abandoned GEO and two other Goldman quantitative hedge funds, one of which – North American Equity Opportunities, or NEO – was closed earlier this year.
Word had originally come in August that NAEO was in trouble. At this time, we are unaware of the particulars of the NAEO funds closure. Information we could use includes detail on their total losses, any letters to investors, total loss, etc. If you have any information regarding NAEO, please let us know!
Original Ailing post 2007-08-09:
North American Equity Opportunities (NAEO) fund
The WSJ published an article (link $) today noting that the NAEO, which had roughly three quarters of a billion in management earlier this year, is down 15% for the year:
Goldman's North American Equity Opportunities hedge fund had $767 million under management earlier this year. The Fund was down over 15% this year, through July 27, according to investors and was down more than 11% in July alone. It is not known how much the fund has sold in recent days.
...
The North American Equity Opportunities hedge fund is known as a "equity market neutral fund" and relies heavily on computer programs to make market bets. Equity market neutral means the fund buys certain stocks and bet against others, by shorting their shares. The idea is to generate impressive returns in any kind of market. This strategy is seen as relatively conservative, and can generate steady gains, the funds often feel comfortable using leverage, or borrowed money, to boost their returns. Most funds perusing such strategies hope to uncover small price discrepancies and rely on large slugs of borrowed money which magnifies losses when the bets go wrong. It is not known how much borrowed money the North American Equity Opportunities Fund uses.
If you learn more regarding NAEO, please let us know.
Global Alpha fund
Forbes reports that Goldman Sachs' nine billion dollar Global Alpha quantitative hedge fund was down 16% for the year:
It was widely reported in the media on Thursday that Global Alpha, a mega $9 billion hedge fund in Goldman's asset management group, was down 16% for the year. According to people familiar with the matter, the fund has suffered the most in the last few months, when the markets were especially volatile.
...
Unlike the typical hedge fund, Global Alpha is a quantitative fund, meaning that its trades are determined by computers and convoluted mathematical models. Some quant funds are completely computer dictated, while others spew out investment options for a human trader to veto or accept. When the markets follow the laws of probability, quantitative hedge funds can cash out big. Traditionally, quantitative funds are considered low-risk instruments because they use historical benchmarks to analyze trades.
...
Back in its heyday, Global Alpha was one of the bank's best-performing jewels. In 2005, the fund boasted a near 40% return. However, like humans, computers are not perfect--nor can they predict the future. Global Alpha was also engineered to place big, risky bets--one unexpected swing in the market could take a major bite out of the fund. After years of consecutive growth, the fund started to wobble--in 2006 it fell 6%.
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2008-03-27:
Pentagon Capital Management
-
market-timing
- 1 fund(s) impacted
Estimated base capital: $1 bn
Estimated loss: ?Outside coverage: story
A forum user alerted us to this story from the Telegraph on Pentagon Capital Management, a fund run by Lewis Chester.
According to the article, Pentagon is closing up shop now to avoid their creditors do it for them:
Sources said Pentagon had told investors it had decided to close its operations because the fund believes that, on hearing news the SEC had filed a civil complaint, lenders and other counterparties will become nervous about backing the fund and force it to sell assets into a falling market.
The aforementioned complaint is in the amount of a $200 mm civil complaint filed by the SEC.
At this time, we have not been able to attain the letter sent by Pentagon to investors. If you have it, please let us know
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2008-03-18:
Absolute Capital Group
-
mezzanine CDOs, PINs
- 3 fund(s) impacted
2008-03-18:
Apparently the news about Absolute being in administration slipped under our radar last month. In addition, another Absolute fund is being liquidated, this one in packaged income notes (PINs). The first article above has more:
"The liquidation event is a result of it not being possible to effect redemptions in six of the investments within the credit investment portfolio."
The six investments are: Airlie Opportunity Fund Cayman; Carrington Investment Partners (Cayman), LP; NAC European Credit Fund; Absolute Capital Yield Strategies Fund; Horizon Fund, L.; Alcentra European Credit Fund.
The estimated total value of assets in these six funds, as at Friday was $NZ8 million, or 26 per cent of the nominal value of the fund.
More on extent of the loss an exposure:
It said ABN Amro was still committed to repay principal on January, 31, 2013.
The present value of $100 of the securities is estimated at $68.27. The securities had an estimated net asset value of $84.70 per $100.
Absolute was said to have $A400 under management.
We're unclear on the number of distinct funds being liquidated. If anyone can clarify, please drop us a line.
Original Post, 2007-07-26:
Absolute is an Australian shop 50%-owned by ABN Amro. The two funds of concern are Yield Strategies Fund and Yield Strategies Fund NZD, with about AUD 200 million under management. While Absolute claims they have little invested in "subprime" per se, they do invest in mid-tiers of mortgage-backed securities, which are also feeling the pinch as delinquencies rise:
Entwistle said 50 percent of Absolute Capital's two funds is invested in the so-called ``mezzanine'' portions of CDOs, which are typically assigned the second-highest non-investment grade rating of BB by ratings companies.
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2008-03-12:
Drake Management - Global Opportunities
-
global fixed income
- 3 fund(s) impacted
Implosion, 2008-03-26:
Absolute Return magazine confirms that Drake Global Opportunities is a closure.
Ailing, 2008-03-12:
In early January, reports emerged that Drake Management had suspended redemptions from its Global Opportunities Fund (link). The Financial Times noted:
Drake, which had $13bn under management before hitting problems in the autumn, had unsuccessfully appealed to investors to drop withdrawal requests before deciding to pay out only a quarter of the money asked for, investors said.
Drake had enough cash in its $3bn Global Opportunities fund to meet all the redemptions but wanted to maintain a hefty cash cushion to protect remaining investors. Drake was set up by Anthony Faillace and Steve Luttrell, formerly of BlackRock, in 2001 with the backing of Icelandic bank Kaupthing, which holds 20 per cent of the management company.
Apparently, the problems at Global Opportunities spread. Word comes today that Drake Management is considering liquidating all three funds under management. Per a Reuters article:
Drake Management, which last year managed $5 billion in hedge fund assets, told investors on Wednesday that it is considering winding down its three hedge funds, citing "challenging market conditions."
The news came in a letter sent by Drake to its investors. A copy of the letter was obtained by Reuters.
The funds, which invest in fixed income globally, include Drake Global Opportunities, Drake Absolute Return Fund and Drake Low Volatility Fund.
The New York-based firm said in the letter that Global Opportunities has had "sharply negative performance" in the face of "extreme volatility of certain capital markets over the last six months." The fund was down nearly 25 percent in 2007.
We are seeking out the letter sent by Drake to investors. If you have received it and would be willing to share it with us, please email us.
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2008-03-12:
ASAT Finance (Citigroup)
-
municipal bonds
- 3 fund(s) impacted
Citigroup-sponsored hedge funds are dropping like flies (and being given credit lifelines by sugar daddy Citi). In the latest, ASAT Finance and sister fund group MAT Finance have already used up $600M of emergency funding from the parent company, and have just been given another $400M to stay afloat. A Citi spokesman says:
A spokesman for Citigroup said: "Returns have been hurt by one of the most volatile periods for fixed income, in particular municipal markets, in recent memory."
"The investment from Citigroup provides the funds with additional equity capital and enough liquidity to make margin calls, continue to operate and potentially recover a portion of the decline in net asset values," the spokesman added.
Potentially recover a portion of the decline in values—that doesn't sound too optimistic. We're filing these funds under "imploded" as they likely wouldn't have made it this far without the emergency lifelines.
Numerous sources cite the funds as having total capital around $2B and assets around $15B, which would work out to about 7.5x leverage. However, the distribution between MAT and ASAT is unknown to us. If you have more information, please drop us a line.
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2008-03-12:
MAT Finance (Citigroup)
-
municipal bonds
- 3 fund(s) impacted
Citigroup-sponsored hedge funds are dropping like flies (and being given credit lifelines by sugar daddy Citi). In the latest, ASAT Finance and sister fund group MAT Finance have already used up $600M of emergency funding from the parent company, and have just been given another $400M to stay afloat. A Citi spokesman says:
A spokesman for Citigroup said: "Returns have been hurt by one of the most volatile periods for fixed income, in particular municipal markets, in recent memory."
"The investment from Citigroup provides the funds with additional equity capital and enough liquidity to make margin calls, continue to operate and potentially recover a portion of the decline in net asset values," the spokesman added.
Potentially recover a portion of the decline in values—that doesn't sound too optimistic. We're filing these funds under "imploded" as they likely wouldn't have made it this far without the emergency lifelines.
Numerous sources cite the funds as having total capital around $2B and assets around $15B, which would work out to about 7.5x leverage. However, the distribution between MAT and ASAT is unknown to us. If you have more information, please drop us a line.
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2008-03-12:
Blue River Asset Management
-
muni bond fund
- 1 fund(s) impacted
Estimated base capital: $1B
Estimated loss: ?Outside coverage: story
The main Blue River municipal bond fund, which the above article states may have held over $1B in assets at peak, is now liquidating due to market distress. The article suggests the fund may have been highly leveraged, given the assumption that municipal bonds were totally safe. Obviously that assumption was shattered in recent weeks.
If you have more details, please let us know.
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2008-03-12:
Carlyle Capital Corporation
-
Bonds, including CDOs
- 1 fund(s) impacted
Estimated base capital: $900 million
Estimated loss: $30-40 million on $900 million saleUpdate, 2008-03-17:
FT has an article confirming the last formalities with winding up Carlyle and selling of its assets have been completed:
Carlyle Capital Corporation is to be wound up after the $22bn Amsterdam-listed mortgage fund said its shareholders had approved an application for a court appointed liquidator to sell its remaining assets.
The move sounds the death knell for an abortive attempt by the Carlyle Group, one of the world’s biggest private equity groups, to tap public markets for an ill-timed and highly leveraged venture into mortgage-backed securities.
This was all of course no thanks to the Fed, which probably hastened the seizure and selloff of Carlyle assets by creating its TSLF facility last week, allowing banks greater ability to monetize dodgy collateral. Incidentally, this portends ill for other hedge funds that might have been hanging by a thread.
Gary North has a good essay with some Carlyle post-mortem comments here. The list of Carlyle counter-parties is a whos-who of the big banks, who were effectively rescued by the Fed's TSLF.
Update, 2008-03-14:
Stick a fork in CCC: Carlyle fails to save $22bn CCC fund.
Update, 2008-03-13:
Bloomberg is all but calling it over:
Carlyle Group said creditors plan to seize the assets of its mortgage-bond fund after it failed to meet more than $400 million of margin calls, heightening concern about a lending freeze that led to a plunge in the dollar and global stock markets.
...
Carlyle Capital's plea for refinancing on residential mortgage-backed securities failed late yesterday after a pricing service used by some lenders reported a decrease in the value of the assets, the firm said.
Carlyle itself admits that the fund ill-advisedly used 32-times leverage. Other interesting diagnostic comments include:
The fund's losses were caused by ``excessive leverage,'' said Arthur Levitt, a senior Carlyle adviser, in a Bloomberg Radio interview today. ``This did not affect the overall Carlyle enterprise,'' said Levitt, former chairman of the Securities and Exchange Commission and a board member of Bloomberg LP, the parent of Bloomberg News.
``It was a poorly conceived fund launched at the worst time,'' said Toby Nangle, a member of the strategic policy group at Baring Asset Management in London, which manages $55 billion.
and:
``This is not only a problem for Carlyle,'' Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit SpA, wrote in a note to clients today. ``We expect a further flood of downgrades especially of higher-rated securities, putting enormous pressure on the system.''
Update, 2008-03-12:
Timesonline UK has the update on Carlyle's now-well-underway liquidation:
Meanwhile, Carlyle Capital Corporation (CCC), the Dutch-listed affiliate of US private equity firm Carlyle, said yesterday that banks seized and sold another $700 million of assets, bringing the total liquidated to $5.7 billion.
CCC, which invests in mortgage-backed securities, said it was still in negotiations with its banks to prevent them from liquidating the remaining $16 billion of assets.
It had asked the banks to grant standstill agreements while talks were held and said that no further notices of defaults had been received. CCC has already received $150 million in a revolving credit facility from Carlyle Group.
At this point it looks like a foregone conclusion that this Carlyle fund is not coming back.
Original Ailing Writeup, 2007-08-28:
Private equity group Carlyle is working to save its Dutch publicly-listed subsidiary Carlyle Capital Corporation, an investment fund described in this EuroNext press release as a "hedge fund" which invests in various sorts of bonds.
According to the TimesOnline article above, Carlyle has extended about $200 million of credit to the fund in just a week. $30-40 million was lost on a sale of about $900 million in bonds, and Carlyle is apparently hoping to "plug the dike" (the fund is based in Amsterdam).
Around $600 million was raised privately and $300 publicly just a few months ago to start the fund. It is estimated that the fund has around $20 billion in positions, representing a gearing somewhat over 10x.
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2008-03-07:
Tequesta Mortgage Fund
-
Jumbo Mortgages
- 1 fund(s) impacted
Estimated base capital: $150 mm
Estimated loss: 20% or more?Outside coverage: story
From CNN money comes word that Tequest Mortgage Fund has "collapsed" after failing to "meet demands for more collateral from its prime broker ... Citigroup".
The article indicates that Tequesta's implosion was set off by the balance sheet problems of commercial and investment banks:
In July and August of last year, and then again in October and November, the secondary market for jumbo mortgage bonds came to a standstill. At the same time, Tequesta's primary brokers - including Bear Stearns (BSC, Fortune 500), Citigroup, Credit Suisse (CS) and UBS (UBS) - were grappling with balance sheets loaded with billions of dollars worth of subprime mortgages, CDOs and other fixed-income derivatives and loans.
This, in turn, created problems for smaller, less-liquid markets. Jumbo mortgage bonds, for instance, saw valuations drop as dealers and rival mortgage hedge funds refused to indicate at what price they would be willing to buy this paper. Lacking bidders, Tequesta's bonds fell in value.
...
Tequesta's portfolio managers watched on the sidelines as banks dumped billions of dollars worth of mortgage bonds to free up capital. Even bonds backed by loans to the wealthiest Americans traded lower.
This raised alarms among Tequesta's lenders. Executives at investment-bank prime brokerage operations saw the sharp drop in the value of Tequesta's holdings and demanded additional collateral. In turn, they forced the fund to make additional sales to meet the margin calls.
As a result, Tequesta lost nearly 20% in 2007.
Citigroup's involvement in Tequesta's implosion is particularly interesting:
Making matters worse: Unlike other lenders making margin calls, Citigroup was willing to liquidate inventory below loan values - the value it had assigned the bond when they initially provided the fund its margin - and recognize losses just to get the bonds off its books. A Citigroup spokeswoman declined comment.
In one case, Citigroup seized collateral from Tequesta and put it up for sale in a bid-list auction. According to a trader at another firm, however, Citigroup's mortgage trading desk offered to sell Tequesta's bonds to regional brokerage firms at prices even lower than listed prices. In another instance, Tequesta's portfolio managers were told by Citigroup rivals that its seized bonds had been offered to other hedge funds for more than $25 below where they had been trading in the previous days.
It was under these sustained pressures that Tequesta decided to close the fund down just days ago.
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2008-03-04:
Focus Capital
-
Small cap equities (Swiss-centric)
- 1 fund(s) impacted
FT has the story on another fund apparently pulled down in the undertow of deleveraging:
Focus Capital has sold its entire portfolio of Swiss mid-cap stocks after the New York hedge fund - which had $1bn at the start of this month - missed margin calls and was forced to sell by its two biggest banks.
Focus is said by people familiar with its operations to have lost about 80 per cent of its value, although the London-listed Psolve Niche Opportunities Fund, an investor, said in a statement it had written off its entire holding.
... it is rare for an equity fund to have problems meeting margin calls, as typically equity investors are far less leveraged.
In a letter to investors Focus said it was hit by “violent short-selling by other market participants” which meant it could not meet margin calls. On February 26 its two largest counterparties “forced it to sell”, the letter said.
It seems no asset class is safe. Which, of course, was exactly our point in founding this site. A credit collapse hurts most in paper assets; but leverage makes anyone who uses it much more vulnerable.
The article also states "The firm, founded in early 2005 by Tim O’Brien and Philippe Bubb, had generated strong returns until this year" and that it will now be shut down. The Telegraph article points out that Focus even won a "coveted" EuroHedge award after returning over 100% in 2006. Apparently, it was not so well hedged, leading us to wonder what EuroHedge is doing giving out awards to outfits like this. Or maybe the whole "hedging" aspect has been completely done away with, in favor of impressive short-term gains with a much greater "wow" factor.
Focus' investors, on the other hand, are likely not very "wowed" anymore. Assuming they did lose about 80%, in theory they'd need more than two years of those 100% returns to get back where they were just before the fund's collapse. And that is a tall order for anyone to fill.
If you have more gory details, don't be shy—send them over.
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2008-02-28:
Peloton ABS Master Fund, Multi-Strategy Fund
-
ABS Fund
- 2 fund(s) impacted
Update: 2008-03-25:
Richard Wilson forwarded us some funny, educational material on Peloton.
Update: 2008-03-05:
The Times Online has reported that Peloton Partners will also be liquidating the Multi-Strategy Fund, which had been heavily invested in the ABS Master Fund. Per the Times:
Peloton Partners, the London-based hedge fund, is liquidating its two funds and shutting up shop.
The stricken firm last week admitted that it was being forced to liquidate its $2 billion (£1 billion) mortgage-backed ABS bond fund.
But it was hoped that a deeply discounted firesale could salvage its second, $1.6 billion Multi-Strategy Fund, despite the fact that almost half of that fund's assets were invested in the ABS Fund.
However, a source familiar with the matter said that the fund will be liquidated in the coming days.
2008-03-02:
TimesOnline has the graphic details of Peloton's implosion:
All mortgage bonds began to plunge in value. With Wall Street’s major banks still writing off bad debts at unprecedented rates, credit committees were looking for excuses to rein back their lending.
...
In the first few weeks of the year, Beller began to receive twitchy calls from his bankers.
With the value of the assets he held in his portfolio in free fall, the banks were tightening his credit terms. They were also demanding that the fund should put up more collateral to support its positions.
To meet these new terms, Beller began to sell some of the AAA mortgages in his portfolio...
The lesson seems to be that you should never underestimate an Austrian debt deflation... it's never just in one area; it is perfectly capable of extending to all credit markets. That, incidentally, includes the market of one's own margin debt.
Original Writeup, 2008-02-28:
From FT - Alphaville comes reports that Peloton Partners' ABS Fund has suspended redemptions and is being liquidated after seeing NAV values fall. The extenct of the losses at the ABS Fund have yet to be disclosed. From FT:
The fund, run by former Goldman Sachs partners Ron Beller and Geoff Grant, was known to be highly volatile, and posted an 87 per cent return last year on the back of a tough 2006. Peloton's $1.6bn multi-strategy fund was also up 27 per cent, thanks in part to its large investment in the ABS fund.
But 2008 has not been so kind. And prime brokers have tightened the vice. As a result, Peloton has also suspended NAV calculations and redemptions from the multi-strategy fund - the future of which also sounds in doubt. Judging by the tone taken below, there's more than a little bad feeling harboured against their bankers.
The article further includes a letter from Peleton Partners to investors of the multi-strategy fund (The one invested in the ABS fund being liquidated). In Peleton's own words:
As you may also be aware, the Peloton ABS Fund, which has delivered excellent performance since inception, has recently experienced difficulties in the challenging credit markets. Although there has not been any material deterioration in the credit quality of the Peloton ABS Fund’s assets, given the current liquidity situation in the asset backed securities market the Peloton ABS Fund has experienced severe NAV declines. In addition, because of their own well-publicized issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms which has compounded our difficulties and made it impossible to meet margin calls.
We have been working night and day exploring every feasible option to alleviate the situation. In the end the best solution has been to seek buyers and we have been actively pursing this option and many others in an effort to stabilise the situation.
The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund and we are currently assessing our options.In order to protect the interests of stakeholders, the Directors have determined to suspend the calculation of Net Asset Value, subscriptions and redemptions with immediate effect and until further notice.
Finally, we have some anonymous commentary with regard to Peloton Partners' choice to suspend NAV calculations on the ABS Fund:
You know the most interesting thing to me about this blow up is that they are suspending calculation of NAV, which I've never seen before. It is not that it hasn't happened much (don't know), it's just that it effectively screws your limited partners big time, since they in turn can't calculate their NAVs either, and it forces them to side pocket the investment. It essentially guarantees the fund management company is going out of business on ALL funds, since no one will ever invest with you again after you do that.
It will be interesting to see if our tipster's prediction holds true. If you hear more, please let us know!
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2008-02-20:
Falcon Strategies (Citigroup)
-
Hedge Fund - Mortgage Backed Securities
- 2 fund(s) impacted
Citigroup has decided to bail out Falcon, extending a $500M credit line, and taking its ~$10B in assets and liabilities back onto their books.
It seems at least two funds were involved; Falcon Plus and a more recent, highly-levered fund (which is said to have lost more than 50% in its first three months of trading). There were likely more funds part of the group. Please let us know if you have additional details.
Original Writeup, 2008-02-15:
Further to an article on Citigroup's hedge fund CSO Partners, another Citigroup hedge fund called Falcon Plus Strategies lost 52 percent of its value in the fourth quarter. According to the article:
Falcon Plus Strategies, launched September 30, lost 52 percent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and U.S. Treasuries. Some collateralized debt obligations in the fund trade at 25 percent of their original worth, the newspaper said.
We are looking for further information on Falcon Plus Strategies. In particular, if you have any correspondence from Falcon Plus that you would be willing to share with us, please let us know.
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2008-02-16:
CSO Partners (Citigroup)
-
Corporate debt
- 1 fund(s) impacted
2008-02-16:
This entry is being upgraded (or downgraded, if you please) to an implosion, as Citigroup had to throw the fund a lifeline:
Citigroup has been forced to bail out one of its best-known hedge funds with a $100 million (£51 million) capital injection, in another setback for the world’s biggest financial services operator.
The banking giant has also shut the door on redemptions from CSO, a $500 million hedge fund based in Berkeley Square, London, after investors tried to withdraw almost a third of the funds. CSO specialised in the corporate credit markets.
The capital injection, which will also involve Citigroup offering new and existing investors a fee waiver to take part in a further fundraising, came after the conclusion of a dispute lasting nearly six months between the Wall Street bank and a seven-strong group of investment banks.
Read more at the TimesOnline UK article. This is needless to say not a happy turn of events for Citigroup, already reeling and in a cash crunch due to massive losses throughout the credit spectrum. While its possible CSO may continue and recover, the fact that it is doing so now back on the balance sheet of Citigroup means the fund as it once was is "imploded".
2008-02-15:
Reuters reports that Citigroup's CSO Partners, a hedge fund with approximately a half billion in assets, has suspended redemptions after investors attempted to pull approximately 30% of the fund's capital.
CSO Partners invests in corporate debt. From the article:
The fund's manager, John Pickett, left following a dispute with Citigroup executives and complaints from investors after he tried to back out from committing more than half the fund's assets to buy leveraged loans tied to a German media company, the newspaper said. That matter was settled when CSO agreed to buy $746 million of the loans at face value, though they were trading at 86 percent to 93 percent of face value, it said.
We are looking for further information on CSO Partners. If you have received any correspondence from the fund, or have any information that you could share with us, please let us know.
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2008-02-13:
Sailfish Capital Partners
-
Multi-Strat Fixed Income, ...(?)
- 1 fund(s) impacted
While details are still sketchy, it appears certain that Sailfish did shut down as of today (via New York Times). We're unclear on how many funds there were (we know of at least one "Multi-Strat Fixed Income fund").
At peak, mid-last year, Sailfish managed almost $2B of funds. From a FINAlternatives article dating Jan. 18 comes a bit more background:
The Stamford, Conn.-based shop’s Multi-Strat Fixed Income Fund declined 13.5% last year, losing more than 12% in August alone, as the credit crisis peaked. Worse still for the hedge fund, the two-year lockup period for its initial investors expired that very month, precipitating a rush for redemptions.
Last month, investors yanked about $400 million from the fund, after the credit market weakness spiked in November. The fund’s performance tumbled another 4.8% in December.
The fund, which had about $1.9 billion in assets as recently as July, now manages just $980 million, a pair of investors told Bloomberg News.
“[Sowood and Bear] lost money primarily through market action, but these were redemptions that were planned to occur when the lockup period ended,” he said, adding that that is where the majority of the assets have gone.
It would appear appropriate then to say that Sailfish imploded through market inaction (lack of liquidity when redemptions came on).
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2008-02-13:
Polar Capital - Lotus, Tech. Absolute Funds
-
Long-short funds
- 2 fund(s) impacted
London-based Polar capital has apparently shut down two funds so far this year. The first, back in January, was the Technology Absolute Returns Fund, which fell about 27% in 2007 and had assets under management dwindle to about $30M. Further, the pincipal investor, who owned 60% of the shares of the fund, expressed the desire to cash out, certainly putting the kibash on any notion of continuing.
Today comes word that Polar has also shut down their Lotus fund. Details of that fund aren't available to us at this time, but apparently it had fallen about 12% last year, and had assets dwindle to about $54M. At that size, Polar says the fund wouldn't be worth managing.
Polar reportedly manages over $3B of assets. In fact, last month they reported holdings were up 6.2% to $3.62B on the year, as of December 31.
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2008-02-12:
Standard Chartered - Whistlejacket SIV
-
Bank SIV
- 1 fund(s) impacted
Estimated base capital: ?
Estimated loss: 59%Outside coverage: story
This vehicle is now in receivership, after being dramatically downgraded:
Moody's Investors Service on Tuesday slashed its ratings on Standard Chartered's $7 billion Whistlejacket structured investment vehicle (SIV) after a plan to provide liquidity fell through.
Deloitte also said on Tuesday it had been appointed as receiver for the SIV, a step Standard Chartered was forced to take after the vehicle breached triggers that meant it had to be wound down.
The capital value of the fund fell to about 41%, triggering the 11-notch downgrade to Ba2.
More details:
Standard Chartered had been planning to provide $7.15 billion of liquidity support for Whistlejacket, but had placed conditions on that funding -- including that the SIV not be in enforcement. The bank said on Monday it would discuss alternative liquidity arrangements with the receiver and said the assets held good long-term value...
Moody's said there were now several options, including early repayment of the senior debt, repayment of senior debt as it falls due, and completion of Standard Chartered's liquidity plan.
It said 64.4 percent of Whistlejacket's portfolio was rated Aaa, 32.8 percent in the double-A category, and 2.8 percent in the single-A category. It said there had been no credit losses on the portfolio.
Pretty astounding that this all happened without actual credit losses—this implosion was purely driven by market valuation pressures, it seems. Will participants be able to get their money out without losses in the process is the next question.
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2008-01-31:
Deephaven Event Fund
-
M&A, Takeovers
- 1 fund(s) impacted
Estimated base capital: $2.1 billion (peak)
Estimated loss: 6%Outside coverage: story
According to a Bloomberg article titled, Deephaven Shuts Hedge Fund After Redemption Requests, Deephaven Capital Management's "Deephaven Event Fund", which tried "to profit from takeovers" halted redemptions after investors had requested to withdraw 70 percent of the fund's capital. Per the article:
The firm froze redemptions from the Deephaven Event Fund after clients requested to withdraw 70 percent of capital, according to a letter sent to investors today by Chief Executive Officer Colin Smith. Minnetonka, Minnesota-based Deephaven, a unit of stockbroker Knight Capital Group Inc., will sell assets and start returning money to investors in February.
Deephaven, which oversees $4 billion, couldn't find enough opportunities to profit from U.S. acquisitions as investors shunned bonds and loans used to finance deals, Smith wrote. The fund, which also bet on companies going through restructurings and other changes, was little changed last year and dropped 6 percent this year through Jan. 25, according to an investor, who asked not to be named because the returns are private.
"Managers' ability to know where to place a bet has been extremely difficult in this market, with all of these announced transactions that appear as if they aren't going to get done," said Geoffrey Bobroff, an independent investment consultant in East Greenwich, Rhode Island, who isn't a Deephaven client.
Bobroff's comment alludes to the difficulty in completing deals amidst the ongoing credit crunch, which is driving up the cost of corporate debt, thereby putting a stranglehold on the previously booming M&A market.
Further to Bloomberg's reporting, investors in the Deephaven Event Fund can only expect to receive half of their money by May.
Deephaven is a unit of Knight Capital Group, Inc. Per the article, other Deephaven funds will remain open.
We are still trying to piece together the details of this closure. If you have any further information regarding Deephaven Event Fund, in particular with regard to the losses sustained by the fund leading up to this liquidation, please let us know.
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2007-11-12:
Rhinebridge Plc (IKB)
-
SIV (with sub-prime MBS exposure)
- 1 fund(s) impacted
This EUR $2.3 billion (at peak) conduit/SIV fund parented by IKB Deutsche Industriebank AG was put into receivership on or about October 23, 2007, which qualifies it for "implosion" in our book.
The first article, from October 18, points out that the fund had breached a major covenant:
Rhinebridge suffered a ``mandatory acceleration event'' after IKB's asset management arm determined the SIV may be unable to pay back debt coming due, the Dublin-based fund said in a Regulatory News Service release. Rhinebridge had $1.2 billion in commercial paper outstanding as of Oct. 5, according to Fitch Ratings.
...
Rhinebridge said Oct. 12 that it breached a ``major capital loss test'' because its net assets fell to less than half the amount it owes holders of its subordinated capital notes after repaying senior debt. The company had five business days to remedy the breach before the enforcement event took place.
Even before that, the IKB fund was distressed:
In August, Rhinebridge had to sell $176 million of its assets to cover obligations, and as much $320 billion of holdings by SIVs worldwide may be dumped if the market doesn't improve.
Rhinebridge was then put into receivership about a week later. A few days later, the receiver (Deloitte) stated that the fund's assets would not be sold off "fire-sale style"; though it isn't clear how much delaying a sale will actually help. Maybe they're waiting for professor Paulson's fantastic M-LEC to save the day?
Interestingly, Rhinebridge was formed only in April of this year, and this press release sings the praises of SIV-based structured finance at the time. It all seems so quaint now:
The impending launch of Rhinebridge and the expectation of more SIVs to hit the market is a result of the current spread environment combined with the vehicles' structure, according to Douglas Long, evp business strategy for Principia Partners. "From the SIV manager's point of view, because it's a leveraged business they are better positioned to take advantage of tight spreads than someone who doesn't have leverage and has to utilise capital."
He continues: "Obviously, it is harder getting returns than in a wider spread environment, but the SIV model allows you to outperform other investments if you have the appetite, experience and can source the right assets. At the same time, in a tight environment it's generally easier to find capital investors because a SIV is a proven conservative structure but, again, the leverage provides good returns relative to other products."
These factors, coupled with the fact that the market has more recently begun moving to three-tier capital structures, means that there is also a broader pool of investors who are now investing in SIVs. Although the barriers to entry are still high, launching such a vehicle is an increasingly attractive proposition.
To which we can only reply: where do we sign up?!
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2007-10-10:
Niederhoffer Matador Fund
-
US Equities (trading-centric)
- 1 fund(s) impacted
Estimated base capital: ?
Estimated loss: ?Outside coverage: story
Famed trader Niederhoffer has closed his company's Matador fund, after steep losses and withdrawals. We believe the fund managed a few hundred million dollars worth of assets, but have not received a specific figure. Here are some excerpts from the WSJ article on the implosion:
Last month, Mr. Niederhoffer's largest hedge fund, Matador Fund Ltd., was liquidated after suffering losses of more than 70%, according to people close to the matter. Adding to Mr. Niederhoffer's problems, according to a person close to the firm: Swiss-based Octane, a fund-of-funds firm that invests in hedge funds, pulled a significant amount of money from the firm.
...
In recent years, Mr. Niederhoffer, 63 years old, had staged something of a comeback, relying on a trading style that generally bets on rising markets and quick trades and is characterized by wild swings. Last year, for example, he saw the Matador Fund, based in Weston, Conn., lose 30% of its assets early in the year, but stage a rebound to finish with gains by year's end.
The turndown was sudden. As recently as Aug. 26, Mr. Niederhoffer, who earlier this year managed almost $300 million, said Matador was stable, despite traders' speculation that losses were heavy and investors were fleeing. "We have accomplished what we intended to do in connection with recent [withdrawal] requests and have an ample surplus in all respects," he said in an email at the time.
We are also unsure if other Niederhoffer funds were effected. If you have any additional information, please let us know.
An extensive background article on Niederhoffer is available here.
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2007-10-02:
Cooper Hill Partners
-
CLSP Healthcare hedge funds
- 3 fund(s) impacted
Estimated base capital: $300M
Estimated loss: about 10%Outside coverage: story
We're posting this entry retroactively on Feb. 13, 2008. FinAlternatives has more on the state of the $300M worth of funds at Cooper Hill when they were closed last October:
Since inception more than 10 years ago, the firm’s funds have trounced the Nasdaq Biotech Index and the Russell 1000 Healthcare Index, with annualized returns of 26.1% through August. But 2007 has not been kind: Through Sept. 11, the firm’s CLSP, CLSP II and CLSP Overseas funds are down 10.9%, 10.8%, and 10.3% respectively year-to-date. All three funds are estimated to be down 1.5% in September.
The hedge fund world can be merciless: 10 years of 26% average returns, then down 10% and clients withdraw in droves. We're not sure how "hedged" this fund actually was—perhaps more modest returns in up years would have given investors more cause to stick around for a mild downturn. However we lack significant details (another being whether the three CLSP funds were the only ones shut down with the closure), so take that analysis with a grain of salt. Below is more from the same article on the circumstances of the implosion:
“Our poor performance this year generated significant withdrawals, with redemptions of roughly 15% of assets in the September quarter-end, constraining our ability to fund and execute on our fundamental investment ideas,” said Alexander Casdin, portfolio manager, in a letter to investors. “The decline in our assets has caused a significant strain on our infrastructure that was built for a much higher asset base. The volatility caused by our down performance combined with our heightened awareness of the funds’ quarterly liquidity detracted from our goal of finding and maintaining significant positions in winning multi-year ideas.”
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2007-09-11:
Pirate Capital (Activist Funds)
-
Equities Activist
- 2 fund(s) impacted
(This is a retroactive addition on October 2, 2007). Not much more to say than the key portion of the Sept 11. Bloomberg article above:
Pirate Capital LLC, the hedge-fund manager run by Thomas Hudson, barred withdrawals from its two Jolly Roger Activist funds after the firm's assets declined by almost 80 percent in the past year.
Pirate designated the four stocks held by the funds as ``special investments,'' meaning that clients won't be able to get money back until they are sold, according to an Aug. 31 letter to investors.
As the article points out, Pirate's assets under management have fallen from about $1.8 billion at the peak a year ago, to about $375 million now. The activist funds have fallen from about $150 million to less than $100 million. The Sept. 13 Bloomberg article points out that the declines in the activist funds had been in the 17-19% range, year to date through July. Interestingly, with the exception of Aquila, all of the main activist stocks are lower since that time. So it appears the withdrawal suspensions have not done much (yet?).
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2007-09-04:
Synapse High Grade ABS Fund
-
fixed income (non-subprime)
- 1 fund(s) impacted
Estimated base capital: 500 million Euros
Estimated loss: ?Outside coverage: story
From the story:
Synapse Investment Management LLC, the hedge-fund manager that oversaw money for German bailout recipient Landesbank Sachsen Girozentrale, shut one of three fixed- income funds because of ``severe illiquidity'' in the market.
...
Synapse had 500 million euros ($681 million) under management in three funds at the end of July, and now oversees about 300 million euros in the two that remain.
...
The Wall Street Journal reported earlier today that Synapse was forced to shut the ABS fund after SachsenLB asked for its money back. The Journal cited unidentified people familiar with the situation.
And from the "be afraid; be very afraid" department:
``We are going to look at starting new funds,'' Holman said in a phone interview from London. ``There are enormous opportunities in the ABS market caused by this enormous deleveraging and we intend to return with a fund that can exploit them.''
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2007-08-29:
Cheyne Finance LLC (Cheyne Capital Management)
-
MBS fund (SIV)
- 1 fund(s) impacted
Estimated base capital: 4.35 billion UK
Estimated loss: assets receiving 62.9% of face value (July '08)Update, July 26, 2008:
Cheyne's assets are reportedly receiving only about 62.9 cents on the dollar. Moody's downgraded the SIV by five levels in response. This Bloomberg article has more details.
Update, Oct 30, 2007: FT reports on troubles with refinancing Cheyne:
A critical deal for troubled credit markets faced fresh uncertainty on Tuesday when doubts emerged over the proposed refinancing of the $6.6bn Cheyne Finance structured investment vehicle.
Deloitte & Touche, acting as receivers for the SIV, said that an exclusivity period for Royal Bank of Scotland to arrange a deal between new investors and current creditors had lapsed without success. Deloitte said it would continue to discuss with RBS a viable refinancing solution.
However, one person familiar with the situation said that senior creditors were holding out for a better price after an initial offer that would have led to them losing some money.
Which would mean, of course, Cheyne's creditors are doing what just about everyone else in high finance is doing right now, in reaction to this credit crunch. As that phenomenon is in our opinion chiefly a solvency crisis, many may find themselves holding their breaths 'till kingdom come.
The article has further comments on how the Cheyne situation would appear diagnostic for troubled SIVs in general:
Failure to strike a deal on Cheyne Finance could be a blow to the more than $40bn worth of creditors in the handful of similarly troubled vehicles, say industry observers. Cheyne had appeared to be the first SIV close to completing a full refinancing.
“The proposed restructuring of Cheyne appeared to be a good solution for senior investors,” said Paul Kerlogue, analyst at Moody’s. “If it does not succeed I would expect that senior investors in other troubled SIVs will be disappointed as it seemed to give some hope should their SIV also go into enforcement.”
Update, Sept 6, 2007: The TimesOnline article points out that Cheyne Finance has now been put into receivership:
An $8.8 billion (£4.35 billion) investment fund managed by the London-based Cheyne Capital Management was put into receivership yesterday as the short-term credit famine looked set to intensify.
Control of Cheyne Finance (CF), a special investment vehicle (SIV) financed by short-term borrowings and invested in sub-prime mortgages and other assets, was handed over to Deloitte.
Neville Kahn, one of the receivers, said: “We are trying to bring some stability to the situation while we see what the refinancing options are.”
He denied a report from Moody’s, the rating agency, which said that the fund was in “irreversible wind-down mode”. Mr Kahn said that one option was to find an investor prepared to pump in fresh liquidity.
Original post: Cheyne Capital Management released a notification yesterday that they had breached the Major Capital Loss Test, which appears to be a covenant that essentially forces the fund to wind down. The letter Cheyne sent notifying the rating agencies and banks has been published by Financial Times and is included below in its entirety:
NOTICE
CHEYNE FINANCE PLC
CHEYNE FINANCE LLC
CHEYNE FINANCE CAPITAL NOTES LLC
CHEYNE CAPITAL MANAGEMENT (UK) LLP
28 August 2007
To: Moody's Investors Service Limited, Standard & Poor's Ratings Services, Morgan Stanley & Co. International plc, Morgan Stanley & Co. Incorporated, AIB/BNY Fund Management (Ireland) LTD, Danske Bank A/S, Merrill Lynch Capital Corporation, The Bank of New York, The Bank of New York, London Branch, Barclays Bank PLC, Barclays Capital Inc., Lehman Brothers International (Europe), Lehman Brothers Inc., Merrill Lynch International, Merrill Lynch Money Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated
We refer to the Investment and Funding Management Agreement (the "Management Agreement") dated 3 August 2005 among Cheyne Finance PLC, Cheyne Finance LLC, Cheyne Finance Capital Notes LLC (collectively, the "Investment Vehicle"), Cheyne Capital Management Limited (now Cheyne Capital Management (UK) LLP, the "Manager"), Cheyne Capital International Limited and The Bank of New York as Custodian, Security Trustee and U.S. Security Agent. Unless otherwise specified, capitalized terms not otherwise defined shall have the meanings ascribed to them in the Management Agreement.
Due primarily to mark-to-market losses experienced in its Investment Portfolio, today, 28 August 2007, the Investment Vehicle experienced a breach of the Major Capital Loss Test, as described in Section 2.1(b) of Schedule 8 to the Management Agreement.
In accordance with our responsibilities as Manager under Section 16.1(a) of the Management Agreement, this notice is to inform you that due to the breach of the Major Capital Loss Test, an Enforcement Event has now occurred.
As a result of this Enforcement Event, in accordance with the terms of the Investment Vehicle's Operating Manual (the "Operating Manual"), today is also a Defeasance Date on which the Investment Vehicle will enter into the Defeasance Process.
As required by the Operating Manual, among other actions, the Manager has now on behalf of the Investment Vehicle drawn down on all Committed Liquidity Facilities and expects to receive the proceeds from such facilities today, and is also prepared to draw on its Money Market Funds and Breakable Deposits as they become needed.
Beginning tomorrow, 29 August, the Manager will commence a gradual orderly sale of the Investment Portfolio as described under the General Preferred Order of Sale (as defined in the Operating Manual). By Thursday, 30 August, the Manager will estimate the total potential proceeds from the sale of the Investment Portfolio over time, and determine the Defeasance Strategy (as defined in the Operating Manual).
The Investment Vehicle currently has sufficient cash, proceeds from Liquidity Facilities, Money Market Funds and Breakable Deposits to cover its scheduled maturing liabilities into November 2007. We will continue to work on re-capitalization alternatives or other funding solutions.
Finally, we also note that the Investment Vehicle has undergone a Restricted Investments Event today, the consequence of which is that additional investments may not be made.
By: Cheyne Capital Management (UK) LLP, the Manager
A Bloomberg article reports that Cheyne Capital Management may be "forced to liquidate $6 billion in assets backing a commercial paper program." The article notes:
The Cheyne Finance LLC fund, which can hold as many as $20 billion in assets, breached a test based on losses in the portfolio, S&P said in a statement. Cheyne Capital also runs Queen's Walk Investment Ltd., a fund that invested in mortgages and which reported in June a loss of 67.7 million euros ($92 million) in the year ended March 31.
"Even though you are a well-regarded investment vehicle, if you can't roll over your paper and the market is concerned about the asset value of rolling over that paper, investors are not going to refinance you in this environment," said Craig Saalmann, credit strategist at JPMorgan Chase & Co. in Sydney.
Commercial paper conduits have faced funding shortages as investors balk at buying asset-backed, short-term debt after losses on U.S. home loans to risky borrowers caused turmoil in global credit markets. The retreat has caused commercial paper yields to soar to five-year highs.
Cheyne also runs the Queen's Walk Investment fund, which has suffered steeps losses in the credit turmoil and is currently listed as "ailing" on this site. We have not heard more on the fate of that fund since listing it.
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2007-08-29:
Geronimo Multi-Strategy, Sector Opportunity, and Option & Income
-
absolute return funds; various hedging strategies
- 3 fund(s) impacted
Estimated base capital: ?
Estimated loss: ?Outside coverage: story
Geronimo Financial has abruptly closed up its absolute return hedge funds (all started Jan. 2006), apparently finding they didn't achieve much in the way of hedging when the financial markets actually became challenging. A lovely self-referential explanation for the closure was given in the story (above):
No reason was given for the closings, other than saying that the fund's investment adviser, Denver-based Geronimo Financial Asset Management, "no longer plans to continue managing the funds."
We'll take that as an "if you have to ask" kind of answer, especially if you have seen the funds' year-to-date returns:
The funds have had a rough year. The Geronimo Multi-Strategy Fund (Class I) (GPHIX) is down 9.55 percent year to date, while the Geronimo Sector Opportunity Fund (Class I) (GPSIX) is down 5.28 percent and the Geronimo Option & Income Fund (Class I) (GPOIX) is down 2.44 percent so far this year.
Someone more nit-pickey than us might note that these declines are equivalent to nearly -14%, -8%, and -3.6% annualized. Maybe Geronimo's investors should find some sort of "hedged" investment "fund" to put their withdrawn cash in—oh wait—maybe hard assets would be a better bet?
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2007-08-29:
Basis Capital Fund Management, Ltd. - Basis Yield Alpha
-
Structured credit (inc. subprime CDOs)
- 1 fund(s) impacted
Estimated base capital: recently $1 billion
Estimated loss: unknownUpdate 2007-08-29:
It's official: the fund is bankrupt. From the Reuters article:
In court papers, Basis Yield said it had in June begun to suffer a "significant devaluation" in its asset portfolio, following market volatility related to U.S. subprime lending defaults.
It said the devaluation led to margin calls, which it was unable to meet, and the issuance of several default notices by counterparties seeking to close out trades or seize assets.
Update 2007-08-15:
Bloomberg reported today that Basis Capital has told investors that one of their funds may have losses that exceed 80%. The article notes:
Basis Capital is unable to ``accurately estimate'' the value of units in its Yield Fund, the hedge fund said today in a letter sent to investors and obtained by Bloomberg News. The losses have worsened since a month ago, when it said the fund may decline more than 50 percent. The firm managed $1 billion in March.
"Any fund with securities backed by lower quality U.S. mortgages is having trouble finding prices and valuations," said James Alexander, who helps manages the equivalent of $9.9 billion at AllianceBernstein Holding LP in Melbourne.
Original 2007-07-19:
Basis Capital Fund Management suffered substantial losses due to the fall-out in CDOs. As a result, the fund suspended redemptions. Bloomberg reports:
In a letter sent to investors July 6, Basis Capital said its investments in collateralized debt obligations, or CDOs, had been tarnished by "guilt by association."" Less than a week later, the Sydney-based hedge fund, which had assets of $1 billion in May, said its two funds lost 9 percent and 14 percent last month. Withdrawals from the funds have been frozen and some margin calls have been missed, research firm Zenith Investment Partners Ltd. said in an e-mailed note today.
Basis Capital is the first Australian hedge fund to report losses from the shakeout in the U.S. subprime market. Most of the pain may be borne by individuals, who are allowed to invest in Australian hedge funds, unlike in the U.S. where the largely unregulated pools of capital are off limits to retail investors.
"There will be a flow on in the marketplace surrounding the problems experienced by Basis and its investors, but it's too early to say exactly how that will pan out," said Bill Entwistle, chief investment officer at Absolute Capital in Sydney, who invests in the rated portions of CDOs.
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2007-08-20:
Solent Capital Partners LLP, Mainsail II
-
MBS, CDOs (SIV-lite)
- 1 fund(s) impacted
Update, Sept. 9, 2007: We are moving Mainsail II to "imploded", as per the Marketwatch article and other sources pointing out that the fund is being wound down. The article points out that the $500 million+ in emergency funding provided by Barclay's expired in July, and it wasn't clear if it was extended.
Original post. Mainsail II, a fund under Solent Capital Partners LLP based out of the U.K., has reportedly been forced to sell assets according to a Bloomberg article:
Solent Capital Partners LLP, the U.K. manager of $8.8 billion in hedge funds, may be forced to sell assets in a unit that buys mortgage-backed securities after lenders refused to provide short-term funding.
Solent's Mainsail II Ltd. fund joins issuers including Countrywide Financial Corp., the biggest U.S. mortgage lender, and Toronto-based Coventree Inc. that have been denied financing as rising defaults on subprime loans erode investor confidence in securities backed by mortgages. Yields on the debt soared on Aug. 17 by the most since the Sept. 11, 2001, attacks.
Mainsail II is drawing on emergency bank loans after failing to sell asset-backed commercial paper, or short-term IOUs, the fund said today in a statement. Mainsail II, which was set up by London-based Solent last year, issues the debt to invest in longer-dated assets such as mortgage-backed bonds.
Companies are finding it "difficult to get the cheap funding they're used to," said Priya Shah, a structured credit analyst at Dresdner Kleinwort in London. "We will see more of these."
The article goes on to note that Barclays has committed to provide around a half a billion in emergency funding to Mainsail II.
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2007-08-17:
Sentinel Mangement Group
-
Money market fund
- 1 fund(s) impacted
Sentinel is one of the money market firms which holds collateral for futures trading. In this capacity, it invests funds in fixed-income securities, similar to a bank conduit or SIV. Last week, credit market turmoil hobbled Sentinel, and it halted client redemptions. Then, on August 17th, it filed for bankruptcy.
Sketchy things seem to have been afoot. Sentinel claimed to its depositors that it had approval from the CFTC to halt redemptions, but the CFTC claims it makes no such calls:
Sentinel is regulated by the CFTC, National Futures Association and U.S. Securities and Exchange Commission, according to its Web site.
``The decision whether to halt redemptions appears to be a business decision by Sentinel pursuant their contract with their customers and not a regulatory issue,'' Dan Driscoll, the future association's chief operating officer, said in a telephone interview.
Thus it appears Sentinel was attempting to pass the buck to regulators for the suspension. Also, Sentinel was apparently attempting to sell positions to Citadel, causing brokers Farr Financial Inc. and Velocity Futures LP to sue to regain their assets. The latest article says a judge has sought to halt any asset sales.
At this point, it seems safe to say Sentinel is done for.
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2007-08-08:
Sachsen LB: Ormond Quay conduit fund
-
SIV/conduit with US MBS exposure
- 1 fund(s) impacted
Estimated base capital: EU 17.3 billion
Estimated loss: ?Outside coverage: story
This fund, a conduit fund run by Germany's Sachsen LB state bank, rapidly fell apart due to its exposure to US mortgage securities. The fund role (as with all such funds) was to serve as a related entity (off balance-sheet, presumably) to produce low-risk earnings on short-term deposits by using them to fund higher-interest longer-term investments.
The German savings bank association bailed out the fund:
The rescue was triggered when commercial paper investors refused to refinance Ormond Quay and Sachsen LB was unable to provide the credit facility it had pledged.
Notably:
The rescue was an embarrassing step-down for the bank, which only one week ago publicly reassured investors of its position in the market, following speculation about Ormond Quay. On August 10 Sachsen LB said it saw "no indications" for increased probability of default for the ABSstructures managed by its subsidiary.
We are unclear at this time how much leverage was involved in the Sachsen fund (this Economist article, which mentions Sachsen with prescience shortly before the swoon, discusses the basics of conduits and SIVs).
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2007-08-09:
Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia (BNP Paribas)
-
Subprime
- 3 fund(s) impacted
BNP Paribas SA has suspended three funds, Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia, in light of an inability to value the funds assets in mortgage securitis. Per an AP article:
The bank said it was suspending three funds worth a total of euro 2 billion ($2.75 billion): Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia. All funds combined at BNP Paribas Investment Partners are worth more than euro350 billion ($482.79 billion).
"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," BNP Paribas said in a statement.
"The situation is such that it is no longer possible to value fairly the underlying U.S. ABS assets in the three above-mentioned funds" and "therefore unable to calculate a reliable net asset value, NAV, for the funds," the company said.
Marketwatch further reported that the funds lost 20% of their value in less than two weeks and that their subprime exposure was roughly 700 million euros.
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2007-08-03:
Union Investment Asset Management Holding AG
-
ABS fund (6% US subprime)
- 1 fund(s) impacted
Outside coverage: story
From the article:
Union Investment Asset Management Holding AG, Germany's third-largest mutual fund manager, halted redemptions from a fund holding subprime mortgages after clients withdrew about 10 percent of the assets in the past month.
Investors redeemed 100 million euros ($137 million) from the 950 million-euro ABS-Invest Fund, spokesman Markus Temme said today. The fund, sold to institutional investors across Europe, has about 6 percent of its assets in securities related to subprime mortgage loans, Temme said.
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2007-07-31:
Oddo: Cash Titrisation; Cash Arbitrages; and Court Terme Dynamique
-
Subprime
- 3 fund(s) impacted
Outside coverage: story
Oddo & Cie is closing three hedge funds with a billion euros in assets. The culprit for closing? U.S. Subprime. Per Bloomberg:
Oddo said it will wind down the funds within the "shortest possible time frame" because of a plunge in prices for collateralized debt obligations, notes backed by other bonds, loans and their derivatives.
...
"Like many actors, we have tried to revitalize the performance of our funds by investing in CDOs," Arnaud Ploix, a spokesman for Paris-based Oddo, said in an interview today. "Like others, we noticed recent problems with short-term liquidity and were caught out by the subprime dilemma."
...
Oddo oversees 22 billion euros of investments excluding the three funds being closed. The funds, called Oddo Cash Titrisation, Oddo Cash Arbitrages and Oddo Court Terme Dynamique, held some 15 percent of investments in U.S. CDOs.
The manager will sell the securities least affected by the credit rout immediately, if the plan gets French regulatory approval, and will reimburse investors in September, the statement said. It may take "several months" to offload assets worst affected, the company said in the statement, published July 27. Le Figaro reported the company's plans earlier today.
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2007-07-29:
Sowood Capital Management
-
General
- 2 fund(s) impacted
This fund lost approximately 50% of its value, or $1.5 billion in the month of July, amidst a credit crunch and general market turmoil. The firms two funds, Alpha and Alpha LP, were the key ones impacted. The company is being shut down and its positions sold to Citadel.
Sowood was run by Jeff Larson, who was formerly an endowment manager at Harvard. The university had about $500 million invested in Sowood funds and lost about $350 million of that. Oopsie!
Interestingly, the funds had no subprime mortgage exposure, per se. They were nabbed by a general drain in liquidity.
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2007-07-06:
Galena Street Fund
-
Subprime
- 1 fund(s) impacted
Galena Street Fund, a hedge fund under the Braddock Financial Group that held $300 million in assets, is set to be liquidated after realizing significant losses on subprime investments. On July 6th latimes.com noted:
Galena Street lost 3.5% in the first five months of this year, followed by a loss of 6% to 8% in June, as increasing defaults on mortgages issued to the riskiest borrowers reduced the value of the fund's holdings, said Harvey Allon, chief executive of the Denver-based company.
The decline in prices of sub-prime mortgage bonds accelerated in June as two hedge funds run by Bear Stearns Cos. collapsed. Galena Street had $500 million at its peak in 2005. Unlike the Bear funds, it has no debt, according to a July 2 client letter. Braddock is considering starting a new fund to wager on volatility in mortgage-backed securities, Allon said. ...
Galena Street clients will receive cash representing about 20% of their stakes this week. Additional refunds will follow as managers sell assets, the investor letter said.
The fund, which was started in 2002, returned 6.85% last year. Hedge funds globally returned an average of 13% in 2006, lagging behind the 15.8% gain of the Standard & Poor's 500 index, according to Chicago-based Hedge Fund Research Inc.
The New York Post noted that as of June 30 nearly 60% of Galena's investors had requested redemptions. Further, due to Galena not using any leverage, the liquidation is not forced.
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2007-07-02:
United Capital Markets Holdings Inc.: Horizon Funds
-
Subprime ABS
- 4 fund(s) impacted
Update, 2008-07-11
Devaney has closed down all his funds. These are Horizon Fund, Horizon ABS Fund, Horizon Fund III and Horizon ABS Master Fund. According to the Miami Herald article:
According to a letter Devaney sent to investors Wednesday, the ultimate blow came at the end of June when Deutsche Bank, the funds' key lender, issued a margin call -- or demand for additional collateral -- after deciding the existing securities had declined in value.
When his funds could not ante up the additional collateral, the bank declared the loans in default and auctioned the bonds. Devaney said the funds' other lender, Pershing -- a unit of Bank of New York -- then cut off lending to the funds.
''The recent actions of our lenders have now permanently ended any recovery that might have been available to the funds,'' he wrote.
The banks were sure very generous for a very long time.
The New York Times article has more detail on Devaney and his situation. It also mentions that United Capital Markets Holding is still in business as a broker-dealer.
Original Writeup, 2007-07-02
Bloomberg reported on July 2nd that United Capital Markets Holdings (or "UCMH") had halted redemptions on certain hedge funds residing in their Horizon Strategy group. The article reports:
The funds are within the company's Horizon Strategy group, including the Horizon ABS Fund LP, said Michael Gregory, a spokesman for the Key Biscayne, Florida-based firm.
"We did that as a defensive move because we had an unusually high number of redemption requests and we didn't want to be a forced seller in this market," Gregory said in a telephone interview. One of the redemption requests was from an investor who had put up about 25 percent of the funds' money. ...
The Horizon ABS offshore fund lost 5 percent from March 31 through the end of May. The fund gained almost 40 percent last year. ...
Based on what we were hearing about the lack of liquidity and absence of bidders in the market, it's hard to fathom that these securities weren't worth less back in March, April and May," Parker said. "These positions didn't get marked down until June. Nobody's hand was forced in the market until then."
Update, August 18, 2007: A MarketWatch article lists the effected funds as Horizon Fund L.P., Horizon ABS Fund L.P., Horizon ABS Fund Ltd. and Horizon ABS Master Fund Ltd., and has more background on Devaney's shop.
We also found this article (there are many others like it) which points out that Devaney, who had significant amounts of money invested in the funds (to his credit), has had to put up many of his personal luxury assets for sale (helicopter, 142-foot yacht, mansion in Aspen, etc.). Will Devaney be able to bail out his funds with his (his family's?) own money? Stay tuned to find out.
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2007-06-28:
Caliber Global Investment
-
Subprime ABS
- 1 fund(s) impacted
Caliber Global Investment, Ltd., a London-listed fund managed by Cambridge Place Investment Management is to be shutdown amidst losses related to their nearly billion dollars in mortgage assets ($908 million). On June 28th Bloomberg reported:
Caliber is the second U.K. fund this week to report fallout from rising defaults by American homeowners, following a $91 million annual loss for Queen's Walk Investment Ltd., run by Cheyne Capital Management (UK) LLP in London. ...
"The losses are going to be phenomenal" for funds worldwide holding subprime debt, said Peter Schiff, president of securities brokerage Euro Pacific Capital in Darien, Connecticut. "My guestimate in the subprime world is that the majority of loans are going to go into default. Not just 5 or 10 percent, but the majority."
As of March, about 11 percent of the subprime mortgages included in bonds were delinquent by at least 90 days, in foreclosure or already turned into seized property, the highest since 1997 and up from 5.37 percent in May 2005, according to a June 1 report from Friedman Billings Ramsey Group in Arlington, Virginia.
Caliber will seek an "orderly return of all of its capital to investors over the next 12 months in order to maximize value for shareholders," Caliber said in its statement. "There is insufficient demand currently for investment."
The Bloomberg article goes on to note that Caliber had reported a $9 million loss for Q1 operations but had not yet been subject to any margin calls. Notably, Deustche Bank purchased 11 percent of Caliber in March.
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2007-06-28:
Lake Shore Asset Management
-
Commodities
- 1 fund(s) impacted
Lake Shore Asset Management, a hedge fund chaired by Laurence Rosenberg, who was former chairman of the Chicago Mercantile Exchange, has had $228 million in assets frozen by federal court at the request of the Commodity Futures Trading Commission (or "CFTC") for failing to comply with requests by the CFTC for information. Further, the hedge fund has been accused of hiding behind Swiss bank secrecy laws.
The fund held under management around $1 billion in assets trading in commodities futures. Bloomberg reported on June 28th:
Chicago-based Lake Shore purported to manage $1 billion for investors and traded in U.S. commodities futures contracts, according to the Commodity Futures Trading Commission. A review later showed the fund had about $466 million. Lake Shore barred regulators from inspecting its accounts on June 14, a violation of the Commodity Exchange Act, according to the CFTC's complaint.
"The message here is we're not going to sit by and wait to connect all the dots before we go in and freeze" accounts, said Geoffrey Aronow, the former head of enforcement at the CFTC and now a partner at Heller Ehrman LLP in Washington. "Whether it's conscious or not, everyone is more attuned to concerns to what's going on with hedge funds." ...
The CFTC froze $228 million in investor money at Lake Shore, according to agency spokeswoman Ianthe Zabel. ...
"The commission's ability to inspect books and records is a critical regulatory tool that allows us access to a registrant's daily operations," Gregory Mocek, the CFTC's head of enforcement, said in a statement.
Lake Shore is a so-called commodity pool operator, a type of investment group which seeks to aggregate money to trade futures and options on commodities and other financial instruments. There were 1,898 CPOs in 2004 that held $594 billion in net assets, according to the CFTC.
Lake Shore's hearing was set to be held on July 11th. The latest news we have heard regarding Lake Shore is that the CFTC wants the fund held in contempt (July 6 - Chicago Tribune):
In a Tuesday filing, released Thursday, the commission said Lake Shore has not let its representatives inspect the fund's books and records, in violation of a court order. A Lake Shore spokesman did not return a call; CFTC spokeswoman Ianthe Zabel declined to comment.
Lake Shore claims they have only one U.S. client. In accordance with Swiss banking secrecy laws, the fund is not allowed to release the identities of its investors. The Financial Times reported (July 6):
Philip Baker, managing partner, said this week that all investments had been sold and the cash was being held on account. He said Lake Shore hoped to hold on to clients if it could resolve the regulatory problems, although he admitted it would lose many of them.
Stay tuned ...
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2007-06-21:
Ritchie Capital Management
-
Life insurance
- 2 fund(s) impacted
Ritchie Capital Management (website), a fund founded in 1997 by Thane Ritchie, sought bankruptcy protection for two Dublin, Ireland-based funds that lost more than $700 million on investments in life insurance settlements. According to a June 21 Bloomberg article:
The hedge-fund manager asked the U.S. Bankruptcy Court in Manhattan to approve a $17 million interim loan from ABN Amro Holding NV as part of $30 million in financing for the funds. They owed ABN Amro $436.5 million as of April 30, Lisle, Illinois-based Ritchie said in court filings yesterday.
The bankruptcies follow a May 2 lawsuit in which Ritchie accused Coventry First LLC, its partner in the insurance investments, of concealing a government investigation into fraud against policyholders. The firms jointly bought life-settlement plans -- bets that insurance payouts will exceed the premiums. ...
The Chapter 11 filings cover Ritchie Risk-Linked Strategies Trading (Ireland) Ltd. and Ritchie Risk-Linked Strategies Trading (Ireland) Ltd. II. They listed debt of $811 million and an unspecified amount of assets.
The funds were formed in 2005 to invest in life- settlements, where wealthy individuals over age 65 sell their policies for less than the death benefit and more than the cash- surrender value. The buyer continues to pay the premiums, betting that the named-beneficiary of the policy will die soon enough to make a profit.
The Ritchie companies bought policies from Coventry and its affiliate LST I LLC, intending to profit either from a securitization or from collecting death benefits.
Ritchie said it was sold "non-conforming" policies by Coventry and its affiliate LST I LLC, which prevented them from being securitized. That led to a "precipitous decline" in the funds' assets that Ritchie said eventually led to its bankruptcy filing.
Curiously enough, Coventry has filed a request to purchase the assets of the two imploded funds from Ritchie Capital.
-
2007-06-20:
Bear Stearns High Grade Credit Funds
-
Subprime CDOs
- 2 fund(s) impacted
Update, 2007-08-18:
Another Bear fund, Asset-Backed Securities Fund, has been hit. Bear does not, however, plan to shut it down at this time:
The $850 million Bear Stearns Asset-Backed Securities Fund has suspended investor redemptions and expects losses in July. During the first half of 2007, the fund was up roughly 5%... The Bear Stearns Asset-Backed Securities Fund isn't leveraged, which means there's little pressure for the fund to sell positions. The fund also has less than 0.5% of its assets in subprime securities. Most of the assets are higher-rated mortgage-related securities.
Update 2007-08-01
It's now become official that SELF and SF have filed for bankruptcy protection.
Update 2007-07-17
On July 17th Bear Stearns sent out a letter (pdf) to investors telling them more or less what happened in June and that both SF and SELF are essentially worthless and will be disbanded (Reprinted in entirety below, emphasis ours):
Dear Client of Bear, Stearns & Co. Inc.
Let me take this opportunity to provide you with an update on the status of the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds managed by Bear Stearns Asset Management. A team at BSAM has been working diligently to calculate the 2007 month-end performance for both May and June for the Funds. This process has been much more time-consuming than in prior months due to increasingly difficult market conditions.
As you know, in early June, the Funds were faced with investor redemption requests and margin calls that they were unable to meet. The Funds sold assets in an attempt to raise liquidity, but were unable to generate sufficient cash to meet the outstanding margin obligations. As a result, counterparties moved to seize collateral or otherwise terminate financing arrangements they had with the Funds. During June, the Funds experienced signiicant declines in teh value of their assets resulting in losses of net asset value. The Funds' reported performance, in part, reflects the unprecedented declines in valuations of a number of highly-rated (AA and AAA) securities.
Fund managers and account executives have been informing the Funds' investors of the significant deterioration in performance for May and June. The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007. In light of these returns, we will seek an orderly wind-down of the Funds over time. This is a difficult development for investors in these Funds and it is certainly uncharacteristic of BSAM's overall strong record of performance.
Bear Stearns has been working to achieve the best possible outcome for investors under these circumstances. On June 26th, Bear Stearns committed $1.6 billion in a collateralized repo line to the High-Grade Fund. At this time, approximately $1.4 billion remains outstanding on this line and we continue to believe there are sufficient assets available in the High-Grade Fund to fully collateralize the repo facility.
In the past weeks, Bear Stearns has taken action to restore investor confidence in BSAM. On June 29th, we announced that Jeff Lane was appointed chairman and cheif executive officer of BSAM. Tom Marano, head of Bear Stearns' mortgage department, ahs been assigned to BSAM to aid in achieving orderly sales of the Funds' assets. The risk management function at BSAM has been restructured so that it will now report up to Mike Aliz, Bear Stearns' chief risk officer, creating an additional layer of oversight. Mike Winchell, former head of risk management for Bear Stearns and most recently with Bear Wagner, has been engaged to consult with BSAM with regard to its hedge fund risk management function.
Throughout this time, we have appreciated the support of our loyal client base and we will work to continue to provide you with the high quality products and services you have come to expect from Bear Stearns. Let us take this opportunity to reconfirm that the Bear Stearns franchise is financially strong and committed to meeting your investment needs.
Our highest priority is to continue to earn your trust and confidence each and every day, consistent with the Firm's proud history of achievement. As always, please contact us if we can be of service.
How it all started:
Two Bear Stearns hedge funds that together managed some $20 billion, High Grade Structured Credit Strategies Enhanced Leverage Fund (or "SELF") and High Grade Structured Credit Strategies Fund (or "SF"), found themselves on the losing side of their subprime bets (Made in the form of investments in CDOs).
Bear Stearns made an attempt to console SELF's creditors by suggesting a plan whereby they contributed some $1.5 billion in capital to the funds. However, major drama unfolded on Wall Street as Merrill Lynch rejected Bear Stearns plan choosing instead to seize control of its collateral (Nominally around $800 million). John Mauldin at SafeHaven elucidates the entire debacle as follows:
There were two funds, with the names High Grade Structured Credit Strategies Fund and High Grade Structured Credit Enhanced Leverage Fund. The first was three years old and had 40 straight months without a loss, and the second was started last August. The first used its $925 million in capital to bet $9.7 billion on the bull side and $4 billion on the bear side of the subprime mortgage market for about a six times leverage.
[SELF] "had $638 million in investor capital on March 31 and borrowed at least $6 billion to make $11.5 billion in bullish bets and $4.5 billion in bearish wagers." That is ten times leverage if your shorts and longs were truly opposite each other, and a lot more if they were not. ...
From January through April, the Enhanced Leverage Fund (which could also be called the Enhanced Loss Fund) was down 23%. The gentle margin clerks at Merrill Lynch decided they wanted some of their collateral back to sell on the market when Bear Stearns refused to pay off the loans. ...
So Merrill tried to sell $850 million in collateral. Except there was a problem. The best stuff was getting bids of only 85 cents or so on the dollar, and others were getting bids as low as 30%. Let's review the math above. At a 15% discount of the assets, the fund would be more than bankrupt, and the lending institutions would be losing money they had lent at very low rates and very high margin on what they thought was investment-grade debt. ...
Some investors in the Enhanced Fund have offered to sell their positions for 11 cents on the dollar. The offer is 5 cents. They should take it. And I will make you a leveraged bet that the offer comes from very litigious fund managers that are betting they can get Bear Stearns to pony up a lot more than 5 cents in settlement.
The dark cloud over Wall Street is that, upon repricing SELF's CDO collateral, a chain reaction will be set off whereby CDOs in the general market are repriced to reflect their current market value. Regarding this predicament, Dan Denning notes on Australia's the Daily Reckoning:
Well, the bonds just aren't worth what most people are carrying them on their balance sheet for. If Merrill sells, it's admitting whole huge chunks of mortgage-backed assets should be revalued to reflect market pricing. "No one in the subprime business wants to ask the question of whether they need to re-mark all the assets. That would open the floodgates," says Janet Tavakoli in the Journal article. "Everyone is trying to stop the problem, but they should face up to it. The assets may all be mispriced."
The SEC is currently conducting a probe into SELF, which has suspended investor redemptions and seems to have been financially abandoned by Bear Stearns. SF, on the other hand, has received $1.6 billion in funding from Bear Stearns. Notably, whereas SELF was net leveraged (netting bullish bets against bearish) around 10 times, SF was merely managing net leverage of close to six times.
The full outcome of the fallout in SF and SELF is yet to be determined. Rest assured the implications will be far reaching. Stay tuned ...
-
2007-05-03:
Dillon Read Capital Management (UBS)
-
Subprime ABS
- 1 fund(s) impacted
UBS' Dillon Read Capital Management, founded a mere two years ago in June 2005 by , has been shutdown after suffering a 150 million Swiss Franc loss in the first quarter of 2007. Regarding the reasoning behind Dillon Read's closure, Reuters reported:
Dillon Read Capital Management ran up losses of 150 million in the first quarter, becoming the latest casualty of the meltdown earlier in the year in the United States subprime mortgage market.
"This was related to the U.S. mortgage securities market, which was obviously weakened by the U.S. subprime sector," Chief Financial Officer Clive Standish said in a conference call with financial journalists.
UBS estimated restructuring costs related to dissolving Dillon Read will be around $300 million.
Subsequent to the shutdown UBS replaced CEO Peter Wuffli with his deputy Marcel Rohner.
Regarding the closure of Dillon Read, the New York times noted:
[T]his year, bad bets in subprime mortgage investments led to losses of $124 million.
UBS was the first Wall Street firm to announce heavy losses in the subprime sector ...
[W]hat shocked some analysts and investors was the $300 million it cost to close Dillon Read. Of that amount, $200 million went to severance payments and other costs for the hedge fund manager and his team.
According to hedgeweek Dillon Read will continue to operate until it is integrated back into UBS, which they expect will be in Q3 2007. Hedgeweek quoted Chairman and CEO of UBS Global Asset Management on the closure:
"Operating a proprietary trading platform outside the Investment Bank and managing client money alongside became too complex and expensive. That, among other reasons, is why we have chosen to reintegrate DRCM into the Investment Bank and to redeem the outside investor funds," ...
-
2006-09:
Amaranth Advisors [historical]
-
Energy (esp. Natural Gas)
- 1 fund(s) impacted
Estimated base capital: $9 billion
Estimated loss: $6.4 billionOutside coverage: story story story story story story story story
Within days Amaranth Advisors lost $4.5 billion in wealth, cutting its $9 billion in assets in half. The eventual losses were in excess of $6 billion. Amaranth's losing bets were on natural gas. Brian Hunter, head of Amaranth's energy trading desk, had been placing large bets on natural gas for quite some time making big returns amidst the booming natural gas prices after Hurricanes Katrina and Rita. According to a WSJ article:
Last December [2005], amid a cold snap, gas soared to a record $15.378 a million British thermal units on the New York Mercantile Exchange, or Nymex. This month, prices fell below $5 in the absence of major hurricanes and with forecasters talking about another warm winter. Yesterday, gas for October [2006] delivery settled at $4.942 a million BTUs on Nymex, off four cents.
Backed by borrowed money and a deep-pocketed fund, Mr. Hunter took on more exposure to certain futures contracts than do some big investment banks employing more than 100 energy traders, say several traders and ex-colleagues. He sometimes held open positions to buy or sell tens of billions of dollars of commodities.
He was up for the year roughly $2 billion by April, scoring a return of 11% to 13% that month alone, say investors in the Amaranth fund. Then he had a loss of nearly $1 billion in May when prices of gas for delivery far in the future suddenly collapsed, investors add. He won back the $1 billion over the summer, only to lose that and much more ...
Although Mr. Hunter had fared well, many traders say he was acquiring positions that were too large to get out of if the market turned -- including a bullish bet on winter gas. Amaranth won't detail its positions or his trading strategy, so it is unclear exactly what hurt Mr. Hunter so badly last week. In recent weeks, people familiar with the transactions say, Amaranth bought MotherRock's gas positions in an attempt to cancel some of its trades and reduce its market exposure.
Late September 2006 Amaranth sent out a letter to investors saying they were shutting down. USA Today reported:
The founder of a hedge fund that lost about $6 billion because of bad energy trades said in a letter to investors this week that the fund is preparing to shut down, according to a published report.
Nicholas Maounis of Amaranth Advisors wrote that the fund is suspending all redemptions for Sept. 30 and Oct. 31 so it could "generate liquidity for investors in an orderly fashion, with the goal of maximizing the proceeds of asset dispositions," ...
Regarding Amaranth's leverage, the Economist notes:
"I've never seen a hedge fund so highly leveraged in energy," says Peter Fusaro of the Energy Hedge Fund Centre. He reckons that the fund held about 10% of the global market in natural-gas futures. "Somebody was not monitoring this correctly."
Amaranth's closure marks the largest hedge fund implosion since LTCM in 1998. Note that Amaranth's website is still up and running.
-
2006-08:
MotherRock [historical]
-
Natural Gas
- 1 fund(s) impacted
MotherRock, a hedge fund founded by former NYMEX President Robert Collins, made a bad bet on natural gas and lost nearly a half a billion of investor money. Per Bloomberg:
"We are in the process of developing a detailed plan for winding down the fund," Collins said in a letter sent today to investors in his MotherRock Energy Master Fund. MotherRock, begun in December 2004, invests in gas futures, seeking to exploit price differences based on the delivery month for the contracts. ...
MotherRock had "significant losses" in July, though a final tally is not yet available, Collins said in the letter, obtained by Bloomberg News. The timing of the shutdown has not been established, according to the letter.
In the first half of this year, MotherRock lost more than 23 percent, with most of the damage coming in June. The fund returned 20 percent to investors net of fees last year.
MotherRock had more than $400 million in customer funds earlier this year. ...
"There is a pretty high rate of mortality among hedge funds," Pirrong said. "When things are good they are very good, but when they're bad they're awful."
Indeed. Regarding MotherRock's beginnings, TheStreet reported:
MotherRock, which was formed in December 2004, opened for business in 2005. Collins founded the fund with John D'Agostino, a former Nymex executive, and former Nymex trader Conrad Goerl. Carol Coale, a former Prudential Equity natural gas analyst, headed up MotherRock's research team. Coale also oversaw the operations in MotherRock's Houston office.
It is believed that MotherRock had been shorting natural gas when prices spiked (Epoch Times). Per the Epoch times article, Steven Schork, analyst and publisher of the Schork Report, was cited as calling for more implosions:
"I actually have clients speculating that MotherRock is not the only fund that's imploded. It's like the cockroach theory: A light has been turned on and MotherRock has been exposed. Just when the light turns on, all the other roaches go scurrying under the refrigerator."
"I wouldn't be surprised if and when -- and it doesn't necessarily have to happen this week -- we find out another fund out there has been mortally wounded.
Schorks' comments seem prescient in light of the Amaranth collapse, which was only weeks away.
For further reading, check out this MotherRock round-up at iTulip. Regarding the leverage of hedge funds, Jon Najarian notes:
Toby [Smith] has continually cited the $1.4 trillion of global equity in hedge funds, and we know these hedge funds routinely leverage that capital to trade as if it were 10, 20 and as much as 100 times larger than it actually is. How do they do that? One popular way is through Joint Back Office arrangements with large investment banks.
Basically, the bank sells a percentage of itself for, say, $10,000. It might only be 1/10,000th of a single percent, but it allows the fund to trade on what's known in our business as "firm capital." This means that, unlike regular Joes and Janes, hedge funds do not have to meet Reg-T requirements, which is what the Federal Reserve Board requires investors to put up as a minimum deposit for their securities purchases.
Reg-T decrees that investors must have available a minimum of 50% of the funds for the purchase of marginable securities, also known as initial margin. Imagine how big you could trade if you didn't have to post 50% of the purchase price. The mind reels!
The reason why I bring up the leverage that hedge funds enjoy is that, like fire, it can be helpful or harmful. Put another way, you can use fire for good, to cook your food -- or you can get cooked instead. And in the investing world, given the massive positions you can put on with minimum dollars, the cooking happens at light-speed!
Back in the day, I would use $5 million to $10 million in capital to take down more than $300 million in positions, so you can imagine what damage a 27-year-old can do with a billion dollars under management!
I'm not sure we'll have to imagine much longer. We all know the saying about "playing with fire" ...
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2006-02:
International Management Associates LLC [historical]
-
Fraudulent/inept fund
- 1 fund(s) impacted
Estimated base capital: $185 million
Estimated loss: $185 millionKirk Wright wanted very badly to be a wealthy and successful hedge fund manager, catering to the niche of wealthly black Atlantans and famous athletes. Actually working to run the fund, however, was not on his agenda. He thus proceeded to use his charisma to defraud what is said to be more than 500 investors (including a number of high-profile athletes) out of some $185 million. In February 2007, Wright (who is now apparently in jail) was hit with a $20 million fine by the SEC, to help recover some of what was pilfered. However, much more money has not been found or was poured into various luxury expenditures of Wright's, or ill-conceived business ventures. The following passage (found at the first story above) gives some of an idea:
Wright left behind real estate worth potentially millions of dollars, investments of about $6 million in development projects, and at least five cars, including a Jaguar, Bentley and Aston Martin, a court record shows.
But a bankruptcy petition filed on behalf of Wright's company also lists debts of more than $100 million.
More, from the AJC article (March, 2006) posted at the same link:
Now those dollars have disappeared—temporarily, at least—along with as much as $185 million belonging to more than 500 other investors with IMA.
A lawsuit filed last month by seven current or former National Football League players, who claimed Wright rebuffed their attempts to withdraw funds, provoked a storm of legal action against him and his fund. About two dozen other investors are suing, along with the SEC, which is alleging five counts of fraud.
On Thursday, the court-appointed receiver in that case filed for Chapter 11 bankruptcy protection for IMA.The filing in federal court in Atlanta indicates there could be more than $100 million in debts owed to as many as 999 creditors. It lists assets as "to be determined."
Also to be determined is Wright's whereabouts. He went underground when a Fulton County judge ordered a lockdown of IMA offices and a freeze on assets.
Wright's lawyer has not been available for interviews, requested several times. Attempts to reach Wright over the past month have been unsuccessful.
It still appears to be unclear how much of the money Wright actually lost "innocently" through bad investing, versus illegitimately pillaging from the fund or pouring into his various business boondoggles.
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2005-10:
Wood River Capital Management [historical]
-
Equities
- 1 fund(s) impacted
This narrative contributed by Ann Logue.
In October of 2005, Lehman Brothers sued Wood River Capital Management, a hedge fund that claimed to have a diversified investment style. The fund owed Lehman $20 million. It turned out 68% of the fund’s assets were in a single stock, EndWave Communications, which declined in price. This was despite the fact that Wood River’s marketing materials promised investors that the fund would hold a variety of securities, and even though the fund’s management had never filed statements with the Securities and Exchange Commission showing that it owned 45% of EndWave. (Any shareholder with more than a 5% stake in a company must notify the Securities and Exchange Commission.)
Wood River’s investors had three warning signs that things were less than perfect. The first was that in 2002, the landlord of its San Francisco office sued the company for non-payment of rent. The second is that the fund’s executives had never presented audited financial statements, despite saying that they would - and despite that being a good practice. Third, Wood River claimed in its offering memorandum that its audit firm was American Express Tax and Business Services. A phone call to that company would have revealed that it does not provide business audit services for hedge funds or anyone else.
Update, Oct 17, 2007:
Whittier is going to jail and will pay back $5.5 million.
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2005-07-27:
Bayou Group [historical]
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Quant. fund turned Ponzi scheme/fraud
- 1 fund(s) impacted
Update, 2008-06-10: Sam Israel, who had just been sentenced to 20 years, has disappeared and may have committed suicide.
Update, 2008-02-01: James Marquez, one of the principals at Bayou, has been sentenced to 51 months as a "co-conspirator" in the fraud. He has been ordered to pay over $6M in restitution. CEO Israel and CFO Marino have not yet been sentenced.
Original Writeup:
Bayou Group LLC, a hedge fund founded by Samuel Israel in the mid-90s, operated a Ponzi Scheme of reporting false returns both to satisfy existing investors as well as attract new investors. The scheme seems to have officially begun around the end of 1998 when Israel brought on Daniel E. Marino as CFO. According to an extensive article in the New York Times, Clues to a Hedge Fund's Collapse:
The 1998 attempt to recoup trading losses at Bayou was to involve two steps, according to the plan outlined in Mr. Marino's letter. First, Mr. Israel would raise fresh funds from investors and trade his way to outsized gains on that money. In addition, the commissions generated by the Bayou funds' trades - almost always executed by Bayou Securities, the brokerage firm owned by Mr. Israel - would be credited back to the funds to help offset the losses. Because Mr. Israel was known for his rapid-fire trading, the commissions would be high, Mr. Marino's letter said.
But hiding a mountain of past losses from investors also meant that the fund's auditor had to be replaced. A new accounting firm - Richmond-Fairfield - was created to oversee the fake bookkeeping, prosecutors contend. Mr. Marino was the firm's principal.
The scheme continued along until mid-2005 when Israel told investors that he would be closing the Bayou funds. It seems that by this time Bayou had little capital left to continue maintaining the illusion of success.
According to a CNN Money article on Bayou Group, the fund swindled around $450 mm from investors, approximately $100 million of which ended up being seized by the State of Arizona.
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2007-07:
GLT Venture Fund [historical]
- 1 fund(s) impacted
Estimated base capital: $14.1 million
Estimated loss: $7.8 millionOutside coverage: story
This narrative contributed by Ann Logue.
Keith Gilabert, who operated the Capital Management Group Holding Company that managed a hedge fund, the GLT Venture Fund, raised $14.1 million from 38 investors beginning in September of 2001. The fund posted losses almost from the beginning, but it reported gains to investors. Gilabert charged his management fees based on the phony profits, and he also received commission kickbacks from one of the brokers with whom he did business. When investors made withdrawals, they received funds from new people coming in, not from the fund’s assets. There is also evidence that he mass-marketed the fund, in violation of the rules requiring unregistered funds to deal only with accredited investors. He is alleged to have been assisted by someone at a large brokerage firm. Gilabert pleaded guilty in April of 2006.
Ironically, as part of his marketing activities, Gilabert issued a press release in September of 2004 noting that hedge funds were not always risky. In it, he suggested that investors look for certain safeguards for their assets, such as funds being held at outside financial institutions and monthly statements listing every holding in the portfolio.
There were two warning signs that might have been uncovered in due diligence. The first is that the fund was not formed until 2000, but it claimed performance dating back to 1997. The second is that in 2003, the California Department of Corporations revoked Gilabert’s investment adviser registration.
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2005-03:
KL Group [historical]
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Equities
- 6 fund(s) impacted
Estimated base capital: $150 million
Estimated loss: $137 millionThis narrative contributed by Ann Logue.
In 1999, Won Sok Lee, Yung Bae Kim, and John Kim formed KL Group, which managed a series of hedge funds. The principals, who lived in Palm Beach, Florida, drove fancy cars and joined the right clubs to convince socially prominent investors of their track records. Between 1999 and 2005, the fund managers collected $81 million in assets from investors [ed. note: some reports give the total funds as twice this amount or more; and claims on KL exceeded $137 million]. They lost all but $11 million of that, but that didn’t stop them from reporting returns of over 125% a year. In early 2005, investors trying to withdraw funds found out that all of their money was gone and that two of the fund’s managers, Won Sok Lee and Yung Bae Kim, had fled the country. The third manager, John Kim, cooperated with investigators.
Three things might have tipped off potential investors. The first is that KL Group’s principals refused to discuss the strategy, holdings, or risk levels, arguing that they were entirely proprietary. Fund investors are entitled to some information about what is going on and what kind of risk the fund has. Second, a 125% return is not sustainable over the long run; it’s possible to make that much money, but only with large risks. That fabulous claim alone should have raised some questions, especially because it was made back to 1997 for a fund that did not begin operations until 1999. John Kim and Won Sok Lee were day trading technology stocks back then, so they claimed that performance for their funds, or at least they claimed the performance that they would have liked to have had. Performance had never been audited.
But there was another sign of bad practice. The fund’s trades were made through an in-house brokerage firm, Shoreland Trading. That made it easier for Lee and the Kims to hide their scheme; most hedge funds work with brand-name brokerage firms.
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2005-01:
Eifuku Master Fund [historical]
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Value equity
- 1 fund(s) impacted
Estimated base capital: $300 million
Estimated loss: $300 millionOutside coverage: story
An excerpt (from the WSJ, via story #1 above):
Eifuku Master Fund, run by a former Lehman Brothers Tokyo-based trader, took huge bets with borrowed money on a limited number of trades that went wrong. Investors in the fund, now facing a loss of their money, may include many wealthy individuals in the U.S., according to hedge-fund managers in both Tokyo and New York. The swift reversal in the fund, which was up 76% in 2002, shows just how volatile hedge funds can be.
This cached prudentbear article (why is it gone?) from 2003 notes earlier losses at the fund in 2003 in the form of a letter from the fund's management. Seems like Eifuku should have quit while it was (less) behind.
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2003-11:
John Hancock Business Services/Epic Investment Capital et al. [historical]
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miscellaneous (Fraudulent)
- 1 fund(s) impacted
Estimated base capital: $3.2 million
Estimated loss: ?Outside coverage: story
This narrative contributed by Ann Logue.
In 2002, Koji Goto told investors that he operated a hedge fund on behalf of John Hancock Financial Services that would generate excellent returns based on his prior investing experience running large portfolios. He had them write a total of $3.2 million in deposit checks to such corporate entities as "John Hancock Business Services", which was a company controlled by Goto and his wife, not by the insurance behemouth. Goto told other investors that he had received the exclusive franchise to operate hot-dog stands in Home Depot stores and needed funds to get up and running, with an expected five-fold return. Naturally, he made all of the stories up and spent the money that investors put up for the hedge fund and the hot dog business as well as the charitable contributions. (Goto did work for Hancock, but not as a portfolio manager, from 1994 to 2001.)
For more information, check out the SEC's press release. And, by the way, this is not the Koji Goto who played for the Yomiuri Giants.
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2003-07:
Lancer Management Group [historical]
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Penny stocks (fraudulent)
- 1 fund(s) impacted
Estimated base capital: $1 billion
Estimated loss: ?Outside coverage: story
This narrative contributed by Ann Logue.
Michael Lauer has the honor of being one of the first hedge-fund fraudsters caught by the SEC. Sure, other funds had blown up over the years, but because of investment problems rather than gross misrepresentation, and most of the early frauds were perpetrated by amateurs. Lauer, by contrast, was an established investment manager who attracted about $1 billion in capital from wealthy individuals and large institutions. Lauer invested the fund's money in penny stocks, which are relatively easy to manipulate. Unfortunately, the manipulation didn't go in the fund's favor.
Lauer took advantage of the thin market for these stocks to claim higher values for them than was reasonable, and both Lancer's auditor and bank went along with it. That allowed the fund to report great gains to customers rather than the losses that were occurring when a more reasonable market valuation was used. When the SEC opened its investigation, investors ran for the gates, which forced the fund to sell its illiquid penny stocks at penny prices. Lauer thus blamed the losses on the SEC, but the commission was not persuaded. Instead, it shut down the fund and held Lauer in contempt of court.
The SEC's discussion of the case is here.
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2002-09:
Orca Funds [historical]
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Currency Futures (fraudulent)
- 1 fund(s) impacted
Estimated base capital: ?
Estimated loss: ?Outside coverage: story
This narrative contributed by Ann Logue.
In January of 2001, Donald O'Neill told investors that he was running a hedge fund that specialized in trading foreign currency futures contracts. He attracted some big institutional accounts, including the Fort Mojave tribe and the Hopi Tribal Housing Authority. Then, he took $10.6 million of the money that he raised and spent it on a lavish house in Florida and trips to Las Vegas. He wasn't much of a gambler, either, losing $800,000 at the casinos. Naturally, O'Neill faked account statements from fictitious brokerage firms rather than admit what he had done. By the summer of 2002, though, the Commodity Futures Trading Commission caught up with him.
The Commodity Futures Trading Commission weighed in on the case here.
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2001:
Integral Investment Management [historical]
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cash equivalents and index options (fraudulent)
- 1 fund(s) impacted
Estimated base capital: ?
Estimated loss: ?(no outside story yet)
This narrative contributed by Ann Logue.
In 2001, trustees at the Art Institute of Chicago reported that Integral Investment Management, a hedge fund, lost $39 million of the then-$667 million endowment that supports the museum and its college of art. Reportedly, 3% budget cuts were ordered after the debacle; in the fiscal year ending June 30, 2001, the Art Institute reported an operating loss of $2.6 million on revenues of $191.3 million, something it has rarely done since its founding in 1866. The investment had been approved by the Art Institute's board of directors, which included many prominent Chicago business people and financiers. They were told that the fund followed a relatively low-risk strategy of investing in cash equivalents and index options. Instead, the fund's manager, Conrad Philip Seghers, invested money in such things as a friend's Internet start up. The National Futures Association charged that Integral made "failed to observe high standards of commercial honor and just and equitable principles of trade and failed to cooperate with NFA in an NFA audit and investigation," in part by making performance claims with no substantiation. Both the firm and Seghers had their NFA memberships withdrawn permanently in March of 2002.
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1998-12-31:
Long-Term Captial Management (LTCM) [historical]
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Swaps, VIX, emerging markets
- 1 fund(s) impacted
Outside coverage: story
The ironically-named Long Term Capital Management (LTCM) was started in 1994 by Salomon Brothers bond trader John Meriwether in concert with academians Myron Scholes and Robert C. Merton. It in fact lasted four years. Scholes and Merton had developed quantitative hedging models for fixed income arbitrage, and the trio sought to implement them proftably as a hedge fund. This all worked beautifully, producing returns of about 40% per year, until late 1998. At this point, amidst the Asian Financial Crisis, Russia defaulted on its sovereign debt, and a cascade of events was set off that destroyed the fund. LTCM was vulnerable because, to profit based on its arbitrage strategy, extremely high leverage needed to be employed (100:1 or more). The fund had a equity of about $4.72 billion at peak, and positions in excess of $1.25 trillion. Thus a small mistake leading to a few percentage drop in the net position's worth could completely wipe out the capital base. This is indeed what happened, and we defer to Wikipedia for the details of the downfall as well as the subsequent bank/Fed bailout:
The company, which was providing annual returns of almost 40% up to this point, experienced a Flight-to-Liquidity. In the first 3 weeks of September LTCM's equity tumbled from $2.3 billion to $600 million without shrinking the portfolio, leading to a significant elevation of the already high leverage. Goldman Sachs, AIG and Berkshire Hathaway offered then to buy out the fund's partners for $250 million, to inject $4 billion and to operate LTCM within Goldman Sachs's own trading. The offer was rejected and the same day the Federal Reserve Bank of New York organized a bail-out of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets. The contributions from the various institutions were as follows:
- $300 million: Bankers Trust, Barclays, Chase, Deutsche Bank, UBS, Salomon Brothers, Smith Barney, J.P.Morgan, Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Morgan Stanley
- $125 million: Societe Generale
- $100 million: Credit Agricole, Paribas
- Lehman Brothers and Bear Stearns declined to participate.
In return the participating banks got a 90% share in the fund and a promise that a supervisory board would be established.
The fear was that there would be a chain reaction as the company liquidated its securities to cover its debt, leading to a drop in prices which would force other companies to liquidate their own debt creating a vicious cycle.
The total losses were found to be $4.6 billion. The losses in the major investment categories were (ordered by magnitude):
- $1.6 bn in swaps
- $1.3 bn in equity volatility
- $430 mn in Russian and other emerging markets
- $371 mn in directional trades in developed countries
- $215 mn in yield curve arbitrage
- $203 mn in S&P 500 stocks
- $100 mn in junk bond arbitrage
- no substantial losses in merger arbitrage
Over the years we have observed many rumors (and some open discussion) regarding a gold connection at LTCM. The fund allegedly had about 400 tonnes of gold held on a lease from the Fed or some other major bank, worth about $4 billion at the time. Apparently a payment of approximately this amount was made to the Fed by the LTCM bailout consortium: was this cash in lieu of LTCM's gold loss? Or was the gold supplied from somewhere else, e.g., the Bank of Italy? If so, the bailout cannot be categorized as "free of public funding", as the public (some public) would still be out the corresponding amount of gold. This article has another interesting observation regarding LTCM and gold:
There is no mention of gold in any form in this book. In response to repeated assertions by Bill Murphy on Le Métropole Café, LTCM's counsel took the extraordinary step in June 1999 of sending an affidavit from LTCM partner Eric Rosenfeld (who seems to have been charged with being fund spokesman - he also answered written questions for Lowenstein) asserting LTCM had never had any dealings in gold "in any ... form whatsoever." Why it was necessary to respond in such a way to a obscure dissident website then only 9 months old, when no litigation was in process, is an interesting question.
Since those early days, Le Métropole Café has greatly extended its network of "Deep Throats" supplying information from all over the world. One of these has reported a conversation between Myron Scholes and a boyhood friend in Hamilton, Ontario to the effect that LTCM was indeed massively short gold, that the position was relieved by the authorities who swore the partners to secrecy for which they were indemnified.
We would love to hear more details if anyone knows anything.
We also note with much dismay that Meriwether was awarded a Lifetime Achievement Award in 2006 by Alternative Investment News. We do agree, however, that producing a total collapse in value, engendering a bailout, and nearly precipitating a broader collapse in global financial markets is an "alternative" outcome.
For further information on LTCM's collapse, see the following:
- Wikipedia: When Genius Failed: The Rise and Fall of Long-Term Capital Management (Book)
- Thayer Watkins case study on LTCM
- Kevin Dowd (CATO): Too Big to Fail?: Long-Term Capital Management and the Federal Reserve
- Ibrahim Warde: LTCM, a hedge fund above suspicion
- Please send in any other great articles on the LTCM implosion!
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1994:
Askin Capital Management [historical]
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Collateralized Mortgage Obligations
- 3 fund(s) impacted
Askin Capital Management owned three hedge funds that sustained significant losses in 1994, Granite Partners, Granite Corporation, and Quartz Hedge Fund. Vinod Kothari details the Askin fund implosion as a "Sad episode of Global securitisation" in his Hall of Shame as follows:
Askin Capital Management is a case of wrong investment priorities by investing in mortgage-backed securities and speculating on interest rates. David Askin was a mortgage trader who had floated investment funds, investing in high-quality mortgage securities. On the promise of liquidity high and leverage low, "risk neutral" investment strategies, investors handed over some USD 630 million to Askin's hedge funds - Granite Partners, Granite Corporation, and Quartz Hedge Fund.
Askin invested in PO strips of CMOs.
However, in 1994, interest rates, especially short-term rates, rose dramatically. As is the feature of PO strips, when interest rates rise, prepayments come down and the value of PO strips falls.
Four Askin funds with $600 million in assets filed for bankruptcy when the rising rates drove down the market values of POs. Investors lost virtually everything, and the collapse stopped the MBS market in its tracks, generating a string of lawsuits, some of which are still pending. Askin was barred by the SEC from the securities industry for two years, and agreed to pay a $50,000 fine without admitting or denying guilt.
For more on PO strips, go here
As alluded to by Kothari, the Askin funds invested heavily in the CMO market bundling up distressed CMO instruments and then selling them off to other firms. A 2003 article titled, An Emerging Danger: Mortgage-Backed Securities Market Could Repeat Its Blowout of 1994, But on a Much Larger Scale, notes the following regarding the Askin implosion:
It should be recalled that in the 1990s, Kidder Peabody investment firm had built up, and took a controlling share in the market for instruments which were the precursors to MBS, called collateralized mortgage obligations (CMO); they worked on similar principles as MBS. Kidder Peabody dominated the CMO market, controlling approximately 25% of it. Kidder Peabody had five smaller firms, that functioned as "satellite firms" to Kidder Peabody, buying CMOs from and selling them to Kidder Peabody, and thus making the market in CMOs. The most important of these "satellite firms" were three hedge funds owned by Askin Capital Management, run by David Askin. Askin Capital Management often bought the most risky of the CMO instruments, which were known as "toxic waste," and packaged them and disposed of them to other firms.
During the first quarter of 1994, the interest rate on new 30-year mortgages had averaged 6.93%; Kidder and its satellites made a financial killing in the CMO market. But then during the second quarter of 1994, the interest rate on new 30-year mortgages jumped to an average of 7.45%, an increase in interest rates from the first to second quarter of half a percentage point. The CMO market, which was heavily leveraged, did not adjust well to the sharp increase in interest rates, even at only half a percent. At the end of March of that year, the three hedge funds controlled by Askin Capital Management were liquidated; but the Askin firms had $2.5 billion in CMOs, much of it on borrowed money. This set off a shock wave, which collapsed the more than 100-year-old Kidder Peabody, and bankrupted the CMO market. The Fed had to intervene to stem the crisis. In 1994, the size of the total CMO market was approximately $150 billion.
The Askin Capital Management implosion is a great example of how a seemingly small change in the markets can lead to a massive market implosion. As noted above, the interest rate change that set off the implosion was a mere 52 basis points. Further, Askin's share of CMOs was less than 2% of the entire market.