Hedge Fund News Wrap: Week Ending 1/24/14

Hedge Fund Manager, Singer, Issues Derivatives Warning


Paul Singer, who is known for his outspoken manner, issued his opinion on derivatives at the World Economic Forum in Switzerland on Wednesday.

The hedge fund manager of Elliot Management asserts that unregulated derivatives will cause the next economic crisis. However, he still loves them.

“I love trading them,” Singer said on derivatives. “To the extent they represent trading between financial institutions, these derivatives books in particular have been allowed by regulators, lenders and customers to be established with little or no initial margin, thereby removing the presumptive aura and reality of safety and soundness from the entire universe of financial institutions.

Singer added that derivatives increase leverage and the complexity of balance sheets, which ultimately outweigh the benefits of hedging.

Singer believes that regulation has yet to address the need for more publicly available information that would enable customers to “stay or run from the institutions in which they have assets.”


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Europe’s Largest Hedge Fund Apologizes for Poor Returns 

Europe’s largest hedge fund, Brevan Howard, surprised many investors in its year-end letter.

In an usual move, co-founder Alan Howard issued an apology to investors for a “disappointing year.”

“We are fully aware that 2013 was a disappointing year in terms of returns and we are determined to deliver a more satisfactory outcome for 2014,” Howard wrote in the letter.

In 2013, the hedge fund was up only 2.6 percent for the year. This is a stark contrast to the broader market—the S&P 500 was up almost 30 percent last year.

In the letter, Howard asserts that the Fed “triggered substantial turmoil in financial markets” with Chairman Bernanke’s taper talk.

However, Howard looks forward to a prosperous 2014:

“Now that the Fed has finally started to exit its extraordinary asset purchase programme in the US, we expect the opportunity set to trade both US rates and the US dollar to markedly improve.”


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Witness in SAC Trial Names Cohen as Real FBI Target

Dr. Sidney Gilman, the key witness in the insider trading case against SAC trader, Mathew Martoma, testified in court that the FBI’s real target is SAC Capital founder Steven Cohen.

According to Gilman’s testimony, in 2011, an FBI agent told him that he and Matoma are “only a grain of sand,” as their end goal is to prosecute Cohen.

Martoma’s attorney, Richard Strassberg, tried to paint Gilman as a person interested in helping the government. Gilman testified under a non-prosecution agreement.

However, Gilman fired back, “My obligation is to tell the truth, not to help the government do anything at all. If I tell a lie here, the non prosecution agreement is null and void.”

Cohen has not been charged with any criminal wrongdoing. However, his firm pled guilty to securities fraud and agreed to pay $1.2 billion in penalties.

Martoma, who has pled not guilty, could face prison time if convicted, unless he seeks a deal with prosecutors.


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Bloomberg BusinessWeek


USA Today




Morgan Stanley to Discuss Puerto Rico Deal with Hedge Funds

Puerto Rico, the debt-ridden U.S. territory, is struggling to show investors and credit-rating agencies that it can still borrow money from capital markets.

According to Bloomberg BusinessWeek, Puerto Rico is “graded one step above junk,” and needs to “borrow through the financial markets or face a possible cut to speculative grade.”

As a result, bankers at Morgan Stanley have approached hedge funds and private-equity firms in hopes of helping the struggling territory.

According to DealBook, the bankers are seeking to provide $2 billion in financing to Puerto Rico.  However, Puerto Rico could pay yields of up to 10 percent, which is twice the current rate in the municipal market for highly rated governments.

As a commonwealth, Puerto Rico cannot file for Chapter 9 Bankruptcy protection.


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Bloomberg BusinessWeek