Louis Bacon Listed as UK's Richest Hedge Fund Manager

An American hedge fund manager has claimed the top spot on the London's Sunday Times August "rich list." Moore Capital Management manager Louis Bacon’s is the UK's richest hedge fund manager with an estimated $1.6 billion fortune.

Moore Capital Management chief Louis Bacon’s £1.1 billion fortune placed him atop the list of the U.K.’s richest hedgies, edging out Sail Advisors’ Robert Miller, who took the top spot last year. Bacon’s wealth increased by 69% last year from £650 million; Miller’s horde rose 27% to £950 million from £750 million.

Bacon ranked 49th on the overall Times list, which included “the most” hedge fund managers “in recent years,” according Sunday Times editor Ian Coxton. In March, Forbes ranked Bacon as the 655th-richest man in the world, tied for 36th among alternative investments billionaires.

The head of the largest hedge fund in Europe enjoyed the largest percentage increase in his fortune last year: Alan Howard, founder of Brevan Howard Asset Management, saw his wealth more than double to £875 million, up from £375 million, good enough for 66th place on the overall Times list.

Source: www.finalternatives.com

London and Paris Square Off Over Hedge Fund Regulation

The UK, particularly its capital city, has been a staunch ally of hedge funds in the push back against regulation while other European Union countries such as France have been pushing for tough regulations on the industry. Now, the two countries are set to face off over the regulations--all within weeks of UK elections--and neither side looks willing to compromise.

Such a move is likely to escalate a long-running spat between Britain and France over how to treat foreign funds under the new regime.

Privately, Paris has threatened to use European Union voting rules to push through the law over the objections of Britain, said diplomats.

With London largely isolated on the issue, it would be easy for France to win the backing of a majority of European countries to sign off the law.

But this would break with European diplomatic practice where large countries like Britain are rarely bullied into accepting something they do not want.

Michel Barnier, the French commissioner in charge of an overhaul of financial services across the European Union, has intervened to head off a full-scale row between the two countries.

But at a meeting last week in Madrid, French economy minister Christine Lagarde told Barnier France was standing firm and would not concede to British demands that foreign funds be entitled to a license to do business across all 27 EU countries.

Source: www.reuters.com

Marc Faber – Governments Will “Bankrupt Us”

Current economic policies are not sustainable and the world faces doom because “the governments are taking over”, said Marc Faber, editor of The Gloom, Boom & Doom Report.

“They will all bankrupt us and expropriate us, but it may not happen tomorrow. They’ll give us something to play with, until the whole system breaks down … they’ll just print money and print more money,” he told CNBC.

“What I object to the current government intervention in so-called ’solving the crisis’, (is that) they haven’t solved anything. They’ve just postponed it.”

Source: www.investmentpostcards.com

Paulson May Face Litigation Following Goldman 's SEC Suit

Paulson & Co., the world’s third- largest manager of hedge funds, may face civil litigation for its role in the collateralized debt obligations that led to the fraud charges against Goldman Sachs Group Inc., according to Christopher Whalen.

Billionaire John Paulson’s hedge fund made $1 billion on the CDOs that contributed to the worst financial crisis since the Great Depression. Whalen, a banking analyst at Institutional Risk Analytics in Torrance, California, said that allegations the firm helped shop a package of debt they were actively betting against opened it up to litigation in the wake of the suit by the Securities and Exchange Commission.

“I’m not sure they will escape civil litigation arising from this,” Whalen said in a Bloomberg Radio interview with Tom Keene on April 16. “You can bet the parties who lost money here are going to be seeking redress.”

While buy-side firms don’t often sue their dealers or advisers, the SEC suit will have done most of the legwork and attracted publicity, opening the door for other parties to claim damages, Whalen said.

Paulson & Co. said April 16 it had no authority over the selection of assets linked to the Goldman Sachs mortgage security from whose decline it later profited. Paulson oversees about $32 billion in hedge funds, third in the world behind JPMorgan Chase & Co. and Bridgewater Associates LP.

‘Duty of Care’

Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that Paulson’s hedge fund helped pick the underlying securities and bet against them, the SEC said in a statement today. Goldman told investors that ACA Management LLC, a firm that analyzes credit risk, selected the portfolio and didn’t disclose that Paulson helped pick the underlying debt, according to the SEC.

The banking system has too many firms with conflicts of interest such as Moody’s Investors Service Inc. and other credit rating companies that signed off on the CDOs, Whalen said.

“The old duty of care, know your customer, suitability, all the rules that made our market the envy of the world have been cast aside,” he said. “We’ve got to go back to the old- fashioned rules and say if you’re a banker and you sell somebody a security, you can’t knowingly work against their interests.”

Source: www.bloomberg.com

Hedge Funds Regain Power in Negotiating with Investors

Investors got used to holding the whip hand during the credit crisis as hedge funds had to hand back hundreds of billions of dollars to clients, leaving managers desperate for assets and in a weaker position to haggle on fees.

However, investors are now finding many funds have both healthier looking client lists after last year's 20-percent returns and long memories when it comes to which investors deserted them during the tough times.

Downward pressure on hedge funds' lucrative fees has evaporated, executives say, and they look unlikely to fall further now that demand and performance have picked up.

"I don't think (that fees will fall further)," said Thames River Capital's Ken Kinsey-Quick, whose portfolios invest in hedge funds. "This is where supply and demand seems to be settling."

The well-known structure of 2 percent annual management fees and 20 percent fees, commonplace before the financial crisis, has come under pressure as investors pulled out $330 billion in the year to June 2009, according to Hedge Fund Research HFR.L.

Source: www.reuters.com

ABS Market and the Great Transparency Myth

As mentioned in an earlier article, rating agencies have taken a huge hit to their reputations because they have been very slow to react to the market and have been outright wrong about their "opinions" as to ratings. So if there is so much dependency that financial institutions have soldered into the rating agencies disclaimed opinions (see how little they trust even themselves), what else can be done to come up with better and more timely quotes for market participants. There's been a lot of press relating to how UN-transparent the market in ABS and mortgage backed securities has been and how this has contributed to the problem. Today's rant is not so much of a rant as a series of things that can be done to provide varying degrees of market transparency and thereby add liquidity to the business of offering prices for ABS securities:

1. Use the CDS on ABS market as a proxy for quotes on cash. Sure, there will be some "basis" (difference between the quotes on ABS CDS and the underlying quotes on cash instruments), but as in the Corporate Bond market, CDS quotes go a very long way to giving one and all a pretty good feel for what the market perceives is the riskiness of these securities. The CDS market is so far ahead of the rating agencies as an indicator as to make the rating agencies almost "redundant" (I'm using the British meaning of the word here). In fact they're so bad, I'd be hesitant to even include them at all, except as perhaps the very "tip of the iceberg" with a big warning sign all over it: "use at risk to your own investment health."

2. Additionally, use the ABX Index market as a secondary proxy. If there are no quotes available for the "single name CDA on ABS" from 1 above, then it's quite possible to find the ABX tranche that the specific bond is "most like" and use that as an approximation of the price. See http://www.markit.com/ for more information on ABX pricing.

3. Use actual trade prices. For all corporate bond trades in the US, it is required that no more than fifteen minutes after a trade, it be entered into the NASD TRACE (trade reporting and compliance engine) system. The counterparties to the trades are anonymous, but you can see the date and time of the trade, the price, the yield and most sizes of transactions. Make it a requirement that all ABS trades (and even ABX trades) be entered into TRACE and published broadly. Just this step alone would increase transparency greatly.

4. Make it a requirement for all dealers to submit daily indicative pricing for all Cusips that they have traded within the last 6-12 months. These need not be "firm" prices, but should obviously be as real as possible and as close to where a firm would trade if required. If all dealers were required to submit pricing daily, then the "bad prices" would be able to be weeded out. Each dealer can be "scored" in some way so as to ascertain the general quality of its routine pricing and these scoring tables could also be kept up to date. Again, http://www.markit.com/ would be an obvious candidate for managing something like this as they're already the "arbiter" for ABX products as well as, to a lesser extent, single name CDS on ABS.

5. To continue further along the "transparency curve", given a dealer, in the absence of known marks from the first three sources above, should be able to search through its database of "bid lists" and "color" data. Doing this for a single bond or retrieving the data for comparable bonds can go far towards assisting with working out what the price should be. This, of course, assumes that each trading desk has had the foresight to actually create and maintain a database of quotes and color historically. I've seen some where the primary source of bid list and related histories are gigantic Excel spreadsheets. These do function, but are very difficult to share amongst the participants of an individual trading desk. Better yet is to provide simple programs for dealing desks to save their quotes away to a real database for use by whoever is permissioned to see those quotes. If you don't have a database already, you're basically still in grade school at this point.

6. Use Bloomberg. Bloomberg has got several very useful functions to assist in calculating price based on spread and vice versa. If a firm doesn't want to commit to a single price/yield, then give a range of prices and yields to as to give at least an idea of price. To make this more detailed, the more information that is given will result in higher quality prices for example, if the CPR rate was disclosed along with the quote. Attribution should be given to indicate that the pricing comes from Bloomberg.

7. Use Intex. Intex has an "applications programmer's interface" which can be utilized to produce a wide range of complex scenarios. Some of the ways these can be analyzed are as follows:

-CPR's
-CDR's
-Loss Severities
-Collateral can be "bucketed-up" into various groupings such as "Fixed", "ARM" and further into "2/28", "3/27" and further still with "2/28 with a 2 year preempt penalty", etc. Each of these collateral groupings can have separate CPR, CDR and Loss Severity curves applied to them.
-Interest Rate stresses

Creating standard ways of stressing the above and providing matrixes of results for "Px/Yield" tables could go far towards assisting with determining the variability of any given bond to a wide variety of scenarios. The Intex API is quite complex but with some effort and education, the above can be made into a valid means of providing quotes to clients and to the public. Bottom line is that the above presents a fairly wide range of options for giving quotes in the market place. To the degree all of them are used determines the quality of any single dealer. The dealers should be scored according to their ability to not only do the above, but publish the above with the necessary information for other market participants to see how the results were arrived at. So what's all this about lack of transparency? With the above raft of solutions things should get quite a bit clearer. Let's hope it's not too late.

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Jack Broad is the CEO of Thetica, LLC. Thetica's ABS Trader Tools allows you to price bonds faster and easier. You can analyze data across many deals at once, from multiple vendors and run many scenarios at the same time with rapid results. Integrated into your own systems for easy and fast customizable access to the data you need.

Source: www.theticasystems.com

Mortgage Grading (Quality)

Residential Mortgage Backed Securities (whether Agency or Non-Agency) are also called RMBS or simply MBS. MBS are a type of "security" called a "bond" whose coupon and principal payments are paid for by the cash flows of a pool of individual mortgages. The individual mortgages "back" (or "support") the payment on the bonds therefore they are called "Mortgage Backed Securities".

Mortgages and the MBS related to them are graded as to the quality in a vareity of ways. For example, "Prime", "AltA" (short for "Alternative A") and "Sub-Prime" (this last category has beenn in the press a lot recently).

The person's "FICO score" is one primary method of trying to work out how much of a credit risk any given individual is. The word "FICO" comes from the names of two men (an engineer, Bill Fair and a mathematician, Earl Isaac) who teamed up and created a corporation. These guys developed a system for coming up with a "credit score" for borrowers, which incorporates a wide variety of financial information about an individual's income and expenses resulting in the individual's FICO score. This score is widely used in the industry to assist in determining any individual's "credit worthiness" and this assists the lender in knowing what interest rate to charge the borrower. In general, the lower your FICO score, the higher the interest rate the lender will charge you to offset the perceived credit risk of lending to you. After all, the lower the FICO score, the greater is the risk that you may not be able to pay back the lender.

FICO scores range from 300 to 850. a score of 660 and above categorizes a person as prime quality. the "Prime Rate" is defined as the interest rate banks charge their best customers.

From 620 to 659 is "Sub-Prime" - if you are a sub-prime borrower you will have to pay higher than the prime rate by some negotiated amount.

The word "credit" means "belief in a person's ability to repay principal and interest." Determining a person's "credit-worthiness" is a key goal when deciding whether or not to give them a loan - whether it's for a car, a mortgage, whatever - any kind of loan.

Another way of roughly grading mortgages is basically "A" (Prime); AltA (a variation of or alternative to "A") and "B/C" (Sub-Prime). Down at the very bottom of the barrel is the lowest grade "D" - this can also be called "Scratch and Dent" (S&D).

Reccently we've been doing extensive work for a major Wall Street client in their Scratch and Dent area. Basically, these loans are normally in a "distressed state" - meaning the borrowers are, to a greater or lesser degree, delinquent on their payments. For example, if the client can purchase those delinquent loans from another for really cheap and then tirn the borrower around so that they are no longer delinquent, the client can themselves then sell those loans at a much higher price than they originally bought them. Thetica, LLC has used its software components to create versatile software that assists the client to capture information relating to Scratch and Dent loans, price them then analyze the performance of pools of these loans across time.

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Jack Broad is the CEO of Thetica, LLC. Thetica's ABS Trader Tools allows you to price bonds faster and easier. You can analyze data across many deals at once, from multiple vendors and run many scenarios at the same time with rapid results. Integrated into your own systems for easy and fast customizable access to the data you need.

Source: www.theticasystems.com