Top Hedge Fund News: August 6-10

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Hedge Funds Up 1% in July

Hedge funds rose a little over 1% last month as market conditions improved.

This well-followed statistic received widespread coverage in the major news and business publications and the trades. Notable was The Wall Street Journal, reporting an increase of 1.1% via Chicago-based Hedge Fund Research. According to the HFRI Fund Weighted Composite Index, hedge funds gained 1.05% in July. (via FINalternatives.)

Although the increase is welcome, it is still seen as disappointing given the fact that it underperforms relative to the broader market.

Knight Capital’s $440M Trading System Malfunction

Knight Capital on the brink of bankruptcy after trading system malfunction causes $440 million loss then comes roaring back to life on the backs of six investors agreeing to $400 million bailout, all in a week.

The numbers are important; the $440 million lost by Knight and the $400 million out of pocket bailout. But the key was the exchange of 73% stake in the company, now belonging to the consortium of investors.

Knight is the largest U.S. provider of retail market-making when combining New York Stock Exchange-listed and Nasdaq-listed stocks and OTC securities. After the bailout, Jefferies will represent a 22.8% piece of the pie, Blackstone and Getco each received 16% stakes, TD Ameritrade 7.3%, and Stifel and Stephens each got 5.5%. (via Reuters)

Getting a deal done and staying out of bankruptcy was only the first step for Knight Capital. Now we wait and see what happens.

Some additional information and thinking outside the box:

  • Rival Citadel LLC’s prospective offer of $500 million to Knight was turned down faster than we can hang up a call from a telemarketer. The Wall Street Journal unfolds the drama.
  • Perhaps the “Knight Capital Moment” dubbed by The Wall Street Journal is foreshadowing for some catastrophic technological malfunction in the foreign-exchange market. Or maybe it was an isolated incident. But we’ll bet you will want to read the article for yourself to decide.
  • Negatives aside, Forbes takes Knight as a case study for a proper bailout: You can make mistakes on Wall St. but keep taxpayers and clients out of harm’s way.
  • The blame game has been around since, well, forever. The New York Times explains the technology and helps you walk away with a bit more respect for coders and engineers OR, WALK AWAY SCARED ABOUT FINANCIAL TECHNOLOGY.

Bigger Isn’t Always Better

Smaller hedge funds are besting their bigger and bulkier older brothers.

Louis Bacon made headlines last week when he announced his plans to give back $2 billion (25% of his main hedge fund) to investors. (via Bloomberg)

That news shouldn’t have come as a surprise to experienced financial professionals; for years, academic research has shown that smaller funds, often with younger and hungrier managers at the helm, have outperformed their bigger peers because they can be more nimble. (via Reuters)

So, now this week’s editorial eye has turned towards scrappy managers like Mick McGuire of Marcato Capital Management, Jason Mudrick of Mudrick Capital and Mark Carhart of Kepos Capital.

Should You Avoid Hedge Funds Altogether?

Rebutting the AIMA’s Rebuttal of “The Hedge Fund Mirage”

Felix Salmon of Reuters takes on the AIMA, skewering the industry organization’s answer to The Hedge Fund Mirage by Simon Lack. This story provides an interesting case study in how big headlines with a lack of credible support behind them can do more damage with a jaded financial services bloggers than saying nothing at all.

Carlyle Posts Q2 Loss

Carlyle Group, the world’s second largest alternative asset manager posted second quarter losses after reporting first quarter profits.

If you take the pros they seem to outweigh the cons. But when the negative is that big “L” word – loss, investors tend to forget the good and focus solely on the bad.

Carlyle reportedly raised $3.9 billion in Q2, nearly double the $2.1 billion they raised in Q1. They also reported that total assets under management reached $156 billion, up from $108 billion last year. (via Bloomberg)

But these pros are overshadowed by the fact that Carlyle reported a Q2 after-tax loss of $59 million, compared with a profit of $401 million in economic net income (ENI) in Q1 of 2012. (via Reuters Reuters)

In addition to hedge funds, Carlyle Group also deals in private equities, corporate credits and real estate.

Are Hedge Funds the Key to the Future of the Real Estate Market?

Foreclosed homes are being bought in bulk by hedge funds and rented out for increased returns.

Paying rent on a monthly basis isn’t a walk in the park so to speak. It’s pretty safe to say, the tenant and landlord relationship is quite jaded and unpleasant. Now imagine those dynamics changing even more and all of a sudden you have a hedge fund collecting rent from you. You might think this is crazy and unlikely, but the truth is, it’s already happening.

In what looks like a short term solution, hedge funds are tackling the real estate and housing market by purchasing foreclosed homes and renting them out after extensive renovations. Forbes gives us the inside scoop and reports that critics of this strategy are concerned with the tenant/landlord relationship and priorities: the bottom line and profit vs. rebuilding communities.

Spotlight:

  • Bloomberg highlights Apollo Global Management LLC as they take initiative to raise capital and push into the Asian real estate market.

Porsche Hedge Fund Lawsuit

Porsche’s motion to dismiss $1.4 billion lawsuit brought by 26 hedge funds is rejected by New York state court.

The case: Glenhill Capital LP v. Porsche Automobil Holding Se, 650678-2011, New York State Supreme Court (Manhattan). (via Bloomberg)

The issue: 26 hedge funds, led by Glenhill Capital LP sued Porsche (now owned by Volkswagen) for alleged fraud and unjust enrichment stemming from its trading in Volkswagen’s shares four years ago. Porsche filled a motion to dismiss which was rejected by New York State Supreme Court Justice Charles Edward Ramos. “The court rejects Porsche’s characterization of the ussues in this action as the manipulation of the German stock market and the trade of German securities…New York clearly has a vested interest in such an action.” (via Bloomberg and Reuters)

It’s safe to say that this is the end of the beginning for the Porsche lawsuit.
Expect to see more on this in the months ahead.

Doug Whitman Insider Trading Case Updates

Roomy Khan and Wesley Wang, both of whom have pleaded guilty to charges of insider trading, testify in Whitman case.

Roomy Khan, former employee of Doug Whitman, founder of Whitman Capital LLC, continued to cooperate and testify in court regarding her involvement in the insider trading case accusing Mr. Whitman of conspiracy and securities-fraud. She has already pleaded guilty and is a key witness, admitting that she passed him illegal tips on Google and Polycom Inc. She has a history of passing confidential company information along in two previous Intel incidents. (via Bloomberg Businessweek and The Wall Street Journal)

Wesley Wang, former intern of Mr. Whitman has already pleaded guilty to two counts of conspiracy to commit securities fraud. Like Khan, he told the jury during Whitman’s trial in Manhattan that they exchanged tips on Cisco Systems Inc., Polycom Inc. and Marvell Technology Group Ltd. Another key witness checked off the list. (via Bloomberg Businessweek and The Wall Street Journal)