From Volume 4, Issue Number 26 of EIR Online, Published June 28, 2005

World Economic News

Hedge Funds Fear Calls for Regulation on Eve of G-8 Meeting

German Chancellor Gerhard Schroeder said he intends to push for significant regulatory oversight of hedge funds at the Group of Eight (G-8) meeting in early July.

Meanwhile, U.S. Treasury Secretary John Snow said over-regulation should be avoided. Joining Snow in opposition, hedge-fund managers, attending the Reuters Hedge Fund Summit in London June 22, said that if Germany or another country were to introduce new rules, funds would move to financial centers where watchdogs treat them with kid gloves.

"In Europe, I just think it would be counter-productive to have heavy regulation. I don't think anyone is going to go there," said Iain Jenkins, managing director of Hedge Fund Intelligence. "Germany is huffing and puffing," Jenkins said, adding that too heavy regulation there would drive hedge funds to London where the regulatory agency, the Financial Services Authority, is keen not to stifle the market, according to Reuters.

Another Hedge Fund Liquidated: Singapore's Aman Capital

As London's Financial Times reported June 20, "Aman Capital Management, one of Singapore's biggest hedge funds, is closing its operation after significant derivatives trading losses in April, leaving investors with negative returns of up to 22%." In a statement to the FT, the directors of Aman Capital acknowledged that "the fund is no longer trading," and that the management will distribute what ever is left of the capital to investors. According to the FT, the fund was launched in November 2003 to become a flagship of Singapore's hedge-fund business.

Formally, the fund is based in the Cayman Islands. It was managed by former top derivatives traders at Salomon Brothers and UBS in New York. By the end of March, the fund's capital had already fallen to $242 million. UBS is believed to have lost several hundred million dollars which the bank had invested in Aman Capital. Temasek, Singapore's government investment agency, reportedly also lost some money at Aman Capital.

More Hedge-Fund Corpses Surface

British financial media on June 21 reported prominently on the ongoing hedge-fund meltdown, with headlines like "Hedge fund to liquidate itself after bets go sour" (London Times), "UK hedge fund Bailey Coates folds due to poor returns" (Financial Times), "Timely warning over hedge fund risks" (FT), while Bloomberg was running an extended feature "Convertible bond hedge funds get off to their worst start ever."

These reports acknowledge the first corpses that now have surfaced in the hedge-fund business, including Bailey Coates Cromwell, based in London, "formerly a prize-winning hedge fund" with at one time $1.3 billion under management; Marin Capital, based in California, specialized in convertible bond trading, once $1.7 billion capital; and Aman Capital in Singapore.

Furthermore, the problems at GLG Partners in London, the largest hedge-fund operation in Europe, if not worldwide, are intensifying. Not only did GLG's credit fund lose 14.5% last month, but its neutral fund is in a precarious situation. As the Financial Times noted: "GLG last week won a prize as the most respected hedge fund in London. Yet GLG's market neutral fund, one of two convertible bond arbitrage vehicles, fell 9% in May and has dropped 15% in the year to date." The FT adds: "Two of four main funds at Vega, another leading European hedge fund, are also down, as is at least one of the funds of Cheyne Capital."

EuroHedge, a hedge-fund tracking institution, noted that usually 8% to 12% of all existing hedge funds worldwide, currently about 8.000, are quietly being dissolved every year. However, in the past, almost every such liquidation hit just a relatively small hedge fund. "It is very rare to see a fund that was once worth more than $1 billion wind itself up."

'Once High-Riding' Hedge Funds 'Nursing Big Losses'

The Wall Street Journal June 21 gave more details on the crash and burn of the "once high riding" Bailey Coates Cromwell Fund. The fund, initiated in 2003 by two whiz-kids from Perry Capital in London, quickly showed great potential, with an annualized profit of 20% with the first months' figures. Money poured in, and within a year, they had $1.3 billion in their pool. But that was last year. This year, they began to show some losses early, and "investors yanked money out as quickly as they had invested it." When that happens, the "reverse leverage" of quick selling for liquidity, only exacerbates losses. They ended up selling more than $2 billion in just March and April, and now have a scanty $500 million lying around. Their losses for the year are almost 25%. At the end of the month, the original investors will divvy up whatever is left, if anything.

In addition to Bailey Coates and Aman Capital's closing, the Journal mentions that GLG and Vega Asset Management are currently "nursing big losses" on their funds.

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