Wednesday, October 04, 2006

Hedge Fund Manipulation Persists, But It Seems To Be Catching Up With Them

Pehaps you have noticed a correlation between the forced liquidation of Amaranth Hedge Fund and plummeting oil prices. If so, this will help you understand the dramatic rise of costs at the gas pump for unassuming consumers, which occurred seemily unrelated to demand. A similar series of events occurred when Enron traders manipulated the electricity market, and you remember what happened to them. Momentum hedge funds play with loads of leverage, which works great if thing are going in the right direction. I only mention this (again) because there are plenty of highly leveraged shorts in the satellite radio sector. As hedge funds begin to falter, as highlighted in the Wall Street Journal today, these positions will have to be covered.

Despite Blue-Chip Gains, Hedge Funds Increasingly Are Faltering and Closing
October 4, 2006; Page C1, The Wall Street Journal

As the Dow Jones Industrial Average climbs to record heights, many hedge funds are stumbling and more than ever are closing shop.
The latest to falter: Vega Asset Management. One of the world's largest hedge funds a few years ago, Vega has suffered losses from a bad bet against U.S. bonds, and is now down roughly 75% from its peak two years ago to about $3 billion in assets. The firm says it has no plans to cease operations.
New figures show that more than 1,000 hedge funds have shut in the past two years, as competition has squeezed profits. Even some veteran managers, in a bid to boost returns, have made concentrated bets that have backfired. All this has set up the $1.23 trillion industry for its first meaningful consolidation, Wall Street executives say.
In just the past few weeks, Amaranth Advisors LLC announced plans sell to its investments after losing $6 billion, mostly in the energy markets, heightening the prospects it will close its doors. Narragansett Management LP in New York recently said it will return $800 million to investors. And two European-based hedge funds recently have told investors they are shutting down one or all of their funds.
Vega, which has offices in Spain, London and New York, managed about $12 billion a couple of years back and about $6 billion as recently as January. It once was seen as a winner in the growing popularity of hedge funds among large institutions.
But Vega has suffered a series of losses in various markets in the past few years. Most recently, Vega placed a big wager that the price of U.S., European and Japanese bonds would fall, a Vega executive says. Instead, the bond market has rallied sharply in recent weeks, amid signs of slowing global economic growth, leading to losses as bond prices rose. Vega's largest fund, Vega Select Opportunities fund, which manages about $1.4 billion and is run by star trader Ravinder Mehra, lost about 11.5% of its value in September -- much of it coming in the last week of the month -- and is down about 17.5% so far this year.
"We're obviously not pleased about the deep losses but to make money you have to take risk," says Benjamin Mann, a marketing executive at Vega.
Vega's misstep comes as a number of hedge funds -- investment pools catering to wealthy individuals and institutions -- have closed their doors for business. The shutdowns are noteworthy because they include a couple of funds run by managers with sterling pedigrees. Among them: two funds set up by Hans van Hoof, the former Europe chief of Soros Fund Management and another fund run by Thierry Serero, a former manager at Fidelity Investments' Fidelity Europe mutual fund.
"The number of hedge funds will go down as there is consolidation among players in the industry and some funds go out of business," predicts Jamie Dimon, chief executive of J.P. Morgan Chase & Co., which bought a majority stake in hedge fund Highbridge Capital Management in 2004.
The fund closures, which stem from a variety of reasons, underscore a numbing fact about the hedge-fund business: Even though new hedge funds seem to be popping up every day, almost half as many funds have been closing their doors since 2005.
Since January 2005, a total of 2,622 new hedge funds have been launched, according to Chicago-based Hedge Fund Research Inc., which compiles data on the industry. But 1,071 funds closed during that time. In 2005 alone, 848 funds closed, representing 11.4% of the funds in operation at the start of that year. This is more than double the closure rate of 2004, when 296 funds shut, or 4.7% of the funds in business at the start of that year....READ MORE: HERE

10/04/2006 10:27:00 AM

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