Archive for the “Hedge Funds” Category

It used to be common practice for hedge funds like 1861 Capital Management, Citigroup’s ASTA/MAT and Stone & Youngberg Municipal Advantage Fund to tout the promise that first built the hedge fund industry: to produce profits even in tough markets. Now it’s a different story altogether. The hype is faded, and the credit crunch has caused more banks to pull credit lines from hedge funds and investors to shun this once-popular-but-secretive corner of the investing world.

For hedge funds that invest in the $2.6 trillion municipal bond market, troubles are even more pronounced. As reported March 1, 2008, by the Wall Street Journal, turmoil in the municipal-bond market has forced a number of hedge funds to unwind complicated bets and in the process unload billions of dollars worth of securities. Among those hedge funds: New York-based 1861 Capital Management.

Municipal bond arbitrage is considered a complicated, risky investing strategy that involves trades of municipal bonds, short-term notes, and interest-rate derivatives. In recent years, a growing number of hedge funds, including 1861 Capital Management, began to employ municipal arbitrage, buying long-term municipal bonds that had slightly higher yields and pocketing the difference. The funds then hedged against large fluctuations in interest rates by essentially reversing that trade, using taxable securities. 

Municipal bond arbitrage also entails additional risk because in order to bolster returns, hedge funds must pile on the leverage.

Signs of trouble first appeared at the beginning of 2008, when municipal bond yields became hammered from the downturn in the markets. As a result, many hedge funds suddenly found themselves forced to liquidate their leveraged positions. 

It’s these two facts - risk and leverage - that have become a bone of contention for many investors in municipal arbitrage hedge funds. As reported in a January 2009 study from the Securities Litigation and Consulting Group (SLCG) on the recent failure of leveraged municipal bond hedge funds, some 36 hedge funds - 1861 Capital Management among them - were marketed and sold to investors as “high yield, low-risk alternatives” to traditional municipal bond funds.

In reality, nothing could have been further from the truth. All of the hedge funds featured in SLCG’s study contained considerably more risk than investors ever realized. They also produced significantly lower-than-expected returns. In the end, investors suffered to the tune of billions of dollars in losses.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Times are tough for hedge funds, and they’re likely to get even tougher. Taking their lead from Capitol Hill, Connecticut lawmakers have proposed three new bills designed to dramatically shake up hedge fund business in that state with stiffer rules governing hedge fund transparency and oversight.

For years, Connecticut - which is home to hundreds of hedge funds - has taken a hands-off approach to hedge fund regulation. Until now that is. As reported Feb. 23 in the Hartford Business Journal, Connecticut’s proposed legislation would require hedge funds to obtain a state license, provide annual financial audits and disclose fees and any changes in management or investing strategy.

The plan also would bar individuals with less than $2.5 million and institutions with less than $5 million in assets from investing in a hedge fund. Stricter rules to promote transparency for hedge funds that hold investments from pension funds are an integral part of the Connecticut legislation, as well.

Connecticut’s hedge fund legislation comes on the heels of similar recommendations currently being touted in Washington. The Hedge Fund Transparency Act of 2009, which was introduced in the Senate on Jan. 29, would impose stricter regulatory oversight of hedge funds.

For years, hedge funds have operated in what many call a regulatory black hole. Despite the fact that more than 9,000 hedge funds exist today, the industry remains largely unregulated. There are no mandatory requirements for hedge fund managers to register with the Securities and Exchange Commission (SEC) or to provide detailed financial disclosures about their investing strategies.

This laxness may in part be responsible for the record number of hedge funds that shuttered in 2008. According to Hedge Fund Research, 920 funds closed down this past year. Of the survivors, the majority posted dismal performances. On average, hedge funds lost more than 18% in 2008.

Hedge funds also have been in the hot seat for their role in short selling and credit-default-swaps, both of which are at the core of the nation’s credit meltdown.

The arrest of hedge fund manager Bernie Madoff added further tarnish to the reputation of hedge funds, with many people citing the industry’s lack of transparency as the reason Madoff, who is accused of running a $50 billion global Ponzi scheme, went undetected from federal authorities for so long.

The bottom line: Heightened vigilance of hedge funds isn’t just a good idea, it’s critical if we want to protect investors and mitigate further risk to the nation’s already troubled financial system. For too long, this once-secret-but-powerful financial sector has operated under a veil of secrecy. It’s time to lift that veil.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The Ospraie Fund. 1861 Capital Management. ASTA/MAT. Tontine Partners LP. The freewheeling world of hedge funds has crashed and burned in recent months, its fate tied to the financial crisis, investor redemptions and illiquid assets. As a result, thousands of individual investors, charities and pension fund holders are now facing unexpected and unprecedented financial losses.

The past year has seen hundreds of hedge funds go out of business. In 2008, some 920 funds were shuttered - a figure that eclipses the prior record set in 2005 when 848 hedge funds closed down. On average, hedge funds lost more than 18% last year. The previous worst performance by hedge funds occurred in 2002, posting a loss of 1.5%. In 2007, hedge funds returned 9.9%.

As hedge funds literally fought for survival in 2008, many would lose the battle altogether. Among them: The Ospraie Fund, which posted nearly a 40% loss in 2008. An even worse performance came from the Tontine Partners LP hedge fund, which ended the year down an astonishing -91.5%.

Other funds such as Tudor Investment Corp. and Citadel Investment Group LLC have been forced to limit investor redemptions or risk implosion. Earlier this month, Citadel, whose flagship hedge fund lost 55% in 2008, announced plans to resume payouts to investors. Investors’ access to their money, however, will occur no sooner than April 1.

Hedge funds that trade municipal bonds also are experiencing a rough time these days. As reported Feb. 29, 2008, by MarketWatch, problems with bond insurers and other disruptions borne out of the global credit crunch have pushed yields on municipal bonds close to, or above, those of comparable Treasury bonds. For hedge funds that try to make money from the difference, called the spread, between the yields, the end result translates into the likelihood of margin calls.

That’s exactly what happened to hedge funds like Citigroup’s ASTA/MAT hedge funds. In using a municipal arbitrage strategy, the funds ultimately were forced to sell their positions at fire-sale prices, causing significant losses to investors. 

The dismal performance of hedge funds has continued into 2009. One of the most recent hedge funds to shutter is the Highland CDO Opportunity Fund, which encountered massive losses from its holdings of high-risk collateralized debt obligations (CDOs). In October, similar circumstances forced Highland to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund.

The shocking upheaval in the hedge fund industry is casting new light on the largely unregulated world of hedge funds. Registration with the Securities and Exchange Commission (SEC) is done on a voluntary basis only. At the same time, investments in hedge funds have grown astronomically. At their peak, approximately 10,000 hedge funds managed nearly $2 trillion in assets. Today, the figure is closer to $1 trillion.

On Jan. 29, 2009, a new bill was introduced in the Senate designed to improve oversight and transparency of the hedge fund industry. Described by Senators Chuck Grassley and Carl Levin as an “attempt to address securities law loopholes that enable hedge funds to operate under a cloak of secrecy,” the Hedge Fund Transparency Act of 2009 (S. 344) would make it mandatory for hedge fund managers to register with the SEC and open up their books to government examiners.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Another hedge fund bites the dust and wipes out investors. This time, massive losses on high-risk collateralized debt obligations (CDOs) have forced Highland Capital Management LP to close the Highland CDO Opportunity Fund. It is the third fund to shutter under the Dallas-based investment group since October 2008.

At one time, the Highland CDO Opportunity Fund ranked among the top 50 hedge funds, placing third in an October 2007 report by Barron’s magazine. The notoriety ended last year, however, when the fund - which previously achieved an average annual return of about 44% for three years straight - and the CDOs it invested in plunged in value.

As reported Feb. 20 by Bloomberg, Highland Capital is the largest shareholder in the Highland CDO Opportunity Fund. The firm also is considered one of the biggest players in the CDO world itself. That position, however, has suffered in recent months, as the value of CDOs continues to crumble dramatically.

In October, losses on high-risk loans and other types of toxic debt caused Highland Capital to close two other hedge funds: the Crusader Fund and the Credit Strategies Fund. Together, the funds had assets totaling more than $1.5 billion.

Now, Highland Capital is facing more problems. On Jan. 23, the Mary E. Bivins Foundation sued Highland on charges that the company reneged on a $1.8 million redemption request filed before the closing of the Highland Credit Strategies Fund. According to the lawsuit, the Amarillo-based not-for-profit invested $1.75 million in the Highland Credit Strategies Fund in 2006. Two years later, when the foundation wanted out of the fund, Highland accepted its request but reportedly delayed the foundation’s payout (valued at $1.9 million). In October, Highland announced plans to wind down the fund entirely. 

To date, only $80,000 has been paid to Bivins.

Hedge funds in general are in meltdown mode lately. The financial crisis, de-leveraging, client withdrawals and illiquid assets all have contributed to the average hedge fund losing 18.3% in 2008. About 700 hedge funds closed during the first nine months of 2008, according to Hedge Fund Research. For the entire year, 920 funds may have been shuttered - a figure that eclipses the previous record high of 848 closures in 2005.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Once again, the Securities and Exchange Commission (SEC) is in the hot seat. This time, Harry Markopolos, the former investment manager who tried for years to warn U.S. regulators about disgraced money manager Bernard Madoff, is behind the grilling. On Feb. 4, Markopolos testified before lawmakers that the SEC did nothing to stop Madoff’s alleged $50 billion Ponzi scheme, despite the many red flags that literally were presented at the agency’s doorsteps.

Markopolos is the whistleblower who first lifted the veil surrounding Madoff and his so-called investing business back in 1996. At the time - as well as in later years - Markopolos presented strong evidence of Madoff’s illegal activities to the SEC, but no actions ever were taken. 

House lawmakers are now leveling harsh criticism on the SEC for its failure to stop Madoff and prevent investors from losing some $50 billion. During the course of Wednesday’s testimony, some lawmakers threatened to issue subpoenas to SEC officials who would not answer questions regarding Madoff because of what they said is the agency’s ongoing investigation.

Meanwhile, Markopolos, who is now a fraud investigator, says it is unlikely Madoff acted alone in his crime.

Markopolos also told lawmakers on Wednesday about other Ponzi-type schemes that he has uncovered.

As for Madoff, he remains free on bail, living in his luxury, $7 million Manhattan penthouse. On Feb. 4, the trustee in charge of liquidating Madoff’s businesses said that nearly $1 billion in cash and securities has been recovered to date. Investors have until July 2 to file their claims.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Hedge-fund firm Tremont Group Holdings, which is owned by OppenheimerFunds, could be forced to close its doors later this year after losing more than half of its assets to Bernard Madoff and his alleged $50 billion Ponzi scheme.

As reported Jan 27 by the New York Post, Tremont already has reduced its staff by some 40%, with the remaining employees told to prepare for potential severance packages this June.

Tremont’s Rye Investment Management shuttered its operations last month. The hedge fund group had retained Madoff as the sole manager of its funds, investing some $3.5 billion of client’s money with him.

The Tremont situation is another black mark against parent company OppenheimerFunds, which has faced a slew of problems over massive losses in several of its bond funds. The Oppenheimer Champion Income Fund (OCHCX) has plunged more than 80% in value in the past nine months, following wrong-way bets on subprime mortgage securities and risky credit-default swaps.

The Oppenheimer Core Bond Fund, which is offered by 529 plans in Illinois, Oregon, Texas, Maine and New Mexico, also has recorded big losses recently, falling by more than 40% in 2008. By comparison, similar funds posted 4% gains.

Both funds are the subject of investor lawsuits and state investigations over claims that the funds’ management misrepresented the funds as conservative and low risk when, in fact, they invested in some of the most risky and highly illiquid derivatives possible.   

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The past 12 months have not been pretty for mutual fund manager Ronald Fielding and the Oppenheimer Rochester National Municipals fund he oversees. After losing nearly 50% of its value, the fund ended up as the worst performer in the open-end municipal bond fund category in 2008, according to Morningstar, Inc.

Problems for the Rochester National Municipals fund add to a slew of setbacks for New York-based OppenheimerFunds. In recent months, the company has encountered a lengthy losing streak with several of its bond funds, including the Champion Income fund. After making bad bets on risky mortgage-backed securities, the Champion fund plummeted nearly 80% last year, making it the worst-performing taxable high-yield bond fund of 2008. On Dec. 12, the fund’s manager, Angelo Manioudakis, abruptly resigned from his position with OppenheimerFunds.

Meanwhile, several investors who unexpectedly lost huge amounts of their money in the Champion Income fund have filed complaints with the Financial Industry Regulatory Authority (FINRA), charging that Manioudakis and Oppenheimer failed to disclose the fund’s risks to them.

As for Oppenheimer’s Rochester National Municipals fund, its financial woes began in 2007, following the onset of the subprime mortgage debacle. As of Dec. 31, 2008, the fund had $3.6 billion in assets; three months earlier it was valued at $6.7 billion, according to a Jan. 8 article by Bloomberg.

The losses are yet another black mark against OppenheimerFunds, which owns the hedge fund firm Tremont Group Holdings. In late December, Tremont revealed it had gambled and lost more than $3 billion in the Bernie Madoff Ponzi scheme.

Now it’s Ron Fielding who’s in the hot seat for his questionable management decisions with the Rochester funds. For years, Fielding made his mark in the municipal bond world by buying up the riskiest and least desirable portions of the bond market, including sectors like tobacco and airlines. His gambles failed to pay off, however, when he bought airport bonds secured with airline company revenue following the terrorist attacks of Sept. 11. Another bad bet included the purchase of municipal bonds backed by a 1998 settlement with tobacco companies. A combination of anti-smoking efforts and lawsuits against cigarette manufacturers later proved to drastically reduce demand for the debt.

As a result, Fielding’s funds took on a lot more credit risk. Oppenheimer’s Rochester family offers 18 different bond funds - many of which have 25% of their assets invested in tobacco bonds. In the case of the Rochester National Municipals fund, its most notable holdings are tobacco and airline bonds. One key danger for the fund is the possibility of heavy redemptions in the future. If that happens, the fund would be forced to sell some of its holdings. And in the current market environment, that means selling at well below par value.

In what may be a sign such action is looming, the fund substantially increased its credit line with Citibank last month from $1 billion to $3 billion.

The bottom line: Fielding took on risk - and a lot of it. His contrarian style in the municipal bond arena may have worked at one time, but market conditions are no longer what they used to be. Now, investors are paying the ultimate price for Fielding’s “misguided” behavior.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Life for Bernard Madoff and the thousands of investors who were duped as part of a $50 billion Ponzi hedge fund scam will never be the same again. Federal investigators arrested the Wall Street financier last week, following a tip from Madoff’s own sons who reported their father to authorities after learning of the multibillion-dollar fraud scheme.

Now FBI agents are uncovering evidence that Madoff also may have operated an unregistered money-management business alongside his firm’s brokerage and investment-advisory subsidiaries. As reported Dec. 15 by Bloomberg, clients of the undisclosed unit are said to include numerous hedge funds.

Clients who trusted Madoff with their money run the gamut, from grandmothers in Florida, to pension funds, to New York Mets owners Fred Wilpon and Saul Katz, to global financial firms such as Nomura Holdings Inc. in Tokyo, to Senator Frank Lautenberg of New Jersey, to the Massachusetts School of Law and charities like the Carl and Ruth Shapiro Family Foundation.

Behind Closed Doors

Over the weekend, investigators continued to unravel sordid details of Madoff’s fraud scheme, as they tried to determine exactly how much money remains in the coffers of Bernard L. Madoff Investment Securities LLC. As of last week, before his Dec. 11 arrest, Madoff told his two sons he had only “$300 million left.”  However, in a January regulatory filing, Madoff listed $17 billion in assets under management.

When federal agents formally arrested Madoff, the 70-year-old apparently confessed that his investment advisory business “was all just one big lie.” Later, according to court documents, Madoff revealed that his company had been insolvent for years, and that he expected to go to jail for his actions.

Other details now coming forth show that Madoff exerted obsessive-like control over the financial statements of his investment-advisory company, which operated on a separate floor from his brokerage units. The “entire advisory business was a mystery to most staff members,” according to Bloomberg.

Also a mystery is whether Madoff had accomplices in his $50 billion investment subterfuge. Madoff’s sons, Mark and Andrew, were senior executives at Bernard L. Madoff Investment Securities LLC. According to the SEC complaint filed against their father, both men say they knew nothing about the scam or the advisory component run by the elder Madoff until last week. Madoff himself apparently made few appearances at the brokerage offices during the day, arriving instead at night when he reportedly inspected employees’ desks for neatness.

Another question for investigators is the role, if any, Madoff’s wife, Ruth, may have played in the alleged fraud. According to SEC documents, Ruth Madoff’s name appears on papers linked to various transactions involved in the fraud. His wife also runs a self-funded not-for-profit organization, with about $19 million in assets, according to IRS filings.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Ralph R. Cioffi and Matthew Tannin, the two former Bear Stearns executives who managed ill-fated hedge funds that cost investors billions of dollars, are scheduled to go to trial in September. Cioffi and Tannin are accused of deceiving investors about the financial status of the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, which were heavily invested in mortgaged-backed securities and losing substantial amounts of money. Both funds eventually collapsed.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.