Posted on 02/18/2008 7:30:22 PM PST by B-Chan
Citigroup has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 percent in its first three months, the Wall Street Journal reported Friday. Citigroup Headquarters
The largest U.S. bank suspended redemptions in CSO Partners, a fund specializing in corporate debt, after investors tried to pull more than 30 percent of its roughly $500 million of assets, the newspaper said. Citigroup injected $100 million to stabilize the fund, which lost 10.9 percent last year, the newspaper said.
The fund's manager, John Pickett, left following a dispute with Citigroup executives and complaints from investors after he tried to back out from committing more than half the fund's assets to buy leveraged loans tied to a German media company, the newspaper said. That matter was settled when CSO agreed to buy $746 million of the loans at face value, though they were trading at 86 percent to 93 percent of face value, it said.
Meanwhile, Falcon Plus Strategies, launched Sept. 30, lost 52 percent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and U.S. Treasuries. Some collateralized debt obligations in the fund trade at 25 percent of their original worth, the newspaper said.
Both funds are run in Citigroup's alternative investments unit. That unit was briefly headed last year by Vikram Pandit, who in December replaced Charles Prince as Citigroup's chief executive. Old Lane Partners, a hedge fund that Pandit founded and sold to Citigroup last year, has also had weak performance, falling 1.8 percent in January, the newspaper said.
Since June, Citigroup has disclosed some $30 billion of write-downs and losses tied to subprime mortgages, complex debt and deteriorating credit. The problems contributed to a record 9.83 billion fourth-quarter loss. Profit that quarter in the alternative investments unit fell 89 percent to $61 million.
Citigroup was not immediately available for comment. A spokesman told the newspaper that CSO and similar hedge funds are subject to comprehensive risk oversight, and that Falcon Plus's returns suffered from volatile fixed-income markets.
Most large hedge funds have all sorts of covenants respecting the disposition of committed and contributed capital.
There really is nothing to see here. Sure, the fund's doing lousy, but halting withdrawals is its legal prerogative, and it's nothing novel.
There are good reasons for this and bad. But it seems like the hedge funds got to dictate the terms after a while, what with so much money chasing the returns.
For a while, I was sarcastically writing “bullish” as each new tremor in the economic landscape was revealed. It’s no fun anymore and I can’t even bring myself to joke about this anymore. The pain for many people is going to be severe. For the rest of us, it will still be uncomfortable, taxing and nerve racking.
Nothing to see, indeed. Move along... Ouch.
me thinks hedgefunds are a good example of the ol’ “feast and famine” syndrome.
Hedgefunds are the gold rushes of today.
How did John Edwards do? Did he get out in time? Or, is he taking a licking?
The wheels grind slowly, but the do grind.
Hedge funds are great. It's too bad too many entities that had no business buying them in such large quantities did.
But gold rushes are nothing new and nothing old. No one who's been around for any length of time is surprised by what's going on; many called it years ago.
RUT-RO...
Gore tried the other day to negatively affect “carbon” fueled industries:
http://www.freerepublic.com/focus/f-news/1970645/posts
UNITED NATIONS (AP) - Al Gore advised Wall Street leaders and institutional investors Thursday to ditch businesses too reliant on carbon-intensive energy—or prepare for huge losses down the road.
“You need to really scrub your investment portfolios, because I guarantee you—as my longtime good redneck friends in Tennessee say, I guarandamntee you—that if you really take a fine-tooth comb and go through your portfolios, many of you are going to find them chock-full of subprime carbon assets,” the former vice president said.
Citi hedge fund’s disastrous loan investment: ProSieben?
Can banks run hedge funds? More specifically for now, can Citi run hedge funds?
The bank has now suspended redemptions in CSO partners - a $500m fund it runs specialising in corporate debt. Not the biggest fund in the world, but still part of a trend:
CSO joins fellow Citi fund miscreants Falcon Strategies - 30 per cent down in 2007 - (invested in credit) and Old Lane Partners (alma mater of one V. Pandit) - down 1.8 per cent in January alone. Poor performance across the board for Citi's funds contributed to a 89 per cent decline in Q4 figures at the bank's alternative investment unit.
CSO lost 11 per cent in 2007. And Citi has only just injected $100m in capital in an effort to stabilize affairs. The fund's manager, John Pickett (ex Salomon), has just left after what the WSJ calls a "bitter dispute" with Citi execs.
The gist of which, must surely have revolved around Pickett's massive and singular mistimed bet on a leveraged corporate loan. The Journal writes:
Mr. Pickett's big order last June was for several hundred million dollars of leveraged loans that a group of banks was selling in a private auction on behalf of a German media company, according to people involved in the transaction. At the time, CSO had roughly $700 million in assets, meaning that Mr. Pickett wanted to commit more than half of the hedge fund's assets.
Could that make the investment in ProSiebenSat1?
Citi had a €1.25bn chunk of ProSieben's €7.2bn leveraged loan to syndicate in July. And it was having trouble doing that, so - hypothetically speaking of course - perhaps that's why Citi waived internal trading limits. Trading limits that the WSJ reports Pickett broke in bidding for the paper.
ProSieben is currently trading down 27 from par at 73.
If, as the Journal states, CSO invested roughly $350m - and assuming it was in ProSieben - that single bet would have lost just over $100m. Curious that that corresponds with the money recently injected by Citi.
ProSieben is a commercial television station in Germany distributed to a large extent via cable and satellite along with DVB-T (Digital Video Broadcasting - Terrestrial) in larger population centres. It began operations on 1 January 1989. Since 2003 the station, as part of the ProSiebenSat.1 Media AG, is owned by a group of investors lead by Haim Saban. ProSieben is Germany's second largest privately owned television company. Although some of ProSieben's programming is self-produced, it is largely known for its heavy dependence on British and American copyrighted series and films, shown throughout the week during prime time.
Their motto is "We love to entertain you." Media stars, some German and many American (e.g. Tom Cruise, for the channel's broadcast of Minority Report and cast members of such shows as Lost, Desperate Housewives, or The O.C.) say the motto as part of the station's campaign, these promos being shown as lead-ins to programs.
The "ProSieben Star Force" lead-ins show the German stars of ProSieben as they are involved in tongue-in-cheek funny moments as the station's "Entertainment Agents", with Stefan Raab (TV total), Christoph Maria Herbst (Stromberg), and Michael "Bully" Herbig (Bullyparade) in a more recent promo as an agent.
The fund’s manager, John Pickett, left...
saying “My work is done here.”
Given our government's penchant for bailing out the "risk takers" and "entrepreneurs", it will be mostly taxing for the rest of us.
Could someone on this thread please explain to me in layman’s terms, what’s going on here? I don’t get it. I need a simple definition of hedge funds and how they operate, and what connection does CitiGroup have with hedge funds, do they own them, or are they affiliated with them? And why is what is happening here bad? I want to understand and I don’t. Help.
Hedge funds are like mutual funds for very, very wealthy people and individuals and institutions. However, unlike mutual funds, they are largely unregulated and a minimum “deposit”/investment is in the millions. A typical huedge fund controls hundreds of millions of dollars.
Also, unlike mutual funds, they can and do invest in things other than stocks. They invest in commodities, stock futures, entire companies, and even R&D technology efforts etc. Needless to say, some of these investment strategies are extremely risky.
The hedge fund managers are paid — at least in part according to how much money they earn.
The initial concept of a hedge fund was to “hedge” a bet on a stock by making a smaller bet on an option. On the one had you bet $100 the stock will go up and on the other hand, you make a smaller $5.00 bet the stock will go down. If the stock goes down, then the $5.00 (which was extremely high odds eliminates much of the loss of the $100 bet. If the $100 bet pays off, then you don’t worry about the $5.00 bet.
That definition has largely been lost. Hedge funds now do all kinds of wacky investments without hedging. A decade ago there were something like 500 hedge funds. Now there are 6,000. And they control something like a trillion dollars.
Here are some links:
http://www.investopedia.com/articles/mutualfund/05/HedgeFundHist.asp
http://www.capmgt.com/brief_history.html
Today "hedge fund" usually means a special investment fund that is not regulated by the government. Full description here.
For example, I declare that I created a new fund (without any money in it yet), here is my prospectus and fund rules. You decide to give me some cash (invest) [if you are allowed to, there are some restrictions on who may invest.] I start playing with your money way outside of what a typical fund does, limited only by my rules that you read and accepted. This is a large risk, that's why not everyone is permitted to join - a small time investor wouldn't even understand the rules.
First, a big difference between hedge funds and mutual funds--are that hedge funds are PRIVATE funds, not public, thereby avoiding government regulation.
Second, they are usually made up of very high income people looking to generate additional income over what they could normally expect from owning a stock, bond, or any other investment vehicle.
Third, the very concept of a 'hedge fund' is exactly that--to HEDGE, or REDUCE risk. However, because of the myriad of strategies used (they are unlimited)--they all operate somewhat differenly--with the same goal listed above. As a rule of thumb, however, they almost ALL have deviated from the initial goal of REDUCING risk--to the point where they are now VERY risky (as would be expected if looking for above market returns regardless of whether the market goes up OR down by using creative strategies).
One simple example I can give. Let's say you own 100 shares of Exxon-Mobil (XOM). You like the dividend it pays, but would like to increase your 'total return'. So you sell options on the stock (both puts and calls) to generate additional revenue over what you would receive by just holding the stock. Now there are many, many ways to structure those options sales (spreads, straddles, etc.)--but the point is that you are using 'creative market means' to increase your return. Of course, if the stock moves in a huge direction one way or the other--it is possible (if the strategy did NOT allow for a big move either way)--to lose a lot of money. This is best example I can give without getting too involved.
The bad part of hedge fund trading for the rest of us--is that hedge fund trading can grossly magnify up and down moves in the market--especially on days of 'option expirations' (as positions are either closed or swapped). Extreme moves in stocks or the market as a whole--can scare average investors who cannot deal with the added volatility.
Two of the more famous Hedge Fund traders are George Soros (who made a fortune with his currency hedge fund trading)--and Jim Cramer of Mad-Money (whose books explain how risky and stressful hedge fund trading can be).
Not sure this helped, but it's a start.
...and those 20% returns on investment sure were nice, while they lasted.
Thank you. Most helpful.
Thank you. It’s nice to have the links both you and Durasell put in your replies. I’m learning fast here.
The big catch-phrase on Wall Street now is “Sovereign Funds.” These are pools of billions of dollars that actual countries invest in stock markets and other investment vehicles. Huge money — much more than hedge funds.
If you don’t think these have been raising an eyebrow or two, try imagining China with a 10% stake in a defense manufacturer like Boeing.
“Not sure this helped, but it’s a start.”
It helped a lot. I watch Jim Cramer on CNBC periodically. By the way, for those that also now have Fox Business Channel, which is better, CNBC or Fox Business? Anyone done a comparison yet? Viewpoints?
What I don’t understand is how these hedge funds were allowed to start up without any gov’t regulation, like the stock market is. How is it that the gov’t stayed out of this? Is it a good idea, as the hedge funds seem to have gone wild and far off the mark from the original intention of the funds. I always wondered why they were called hedge funds when the risks they took seemed so great. It confused me, but now you all have cleared that question up. However, I am surprised, seeing as how the hedge funds can have such a direct effect on the volatility of the gov’t regulated stock market, that they are allowed to muck around so much, often to the detriment of the regular stock market, and, as one of you said, thereby scaring away small investors from the stock market. Questions just keep popping up into my peabrain. Some answers to the above two questions?
A) Hedge funds are typically not incorporated in the U.S. They legally reside in places like the Cayman Islands or Bermuda. Legally, they are “foreign investors.”
B)Our stock market is pretty much open, anyone can invest as much as they want. This wasn’t such a big deal when only 10% of the American population owned stocks. Now the majority of U.S. citizens own stocks either directly or indirectly through pension funds, etc.
“If you don’t think these have been raising an eyebrow or two, try imagining China with a 10% stake in a defense manufacturer like Boeing.”
I don’t want to imagine this. It’s already starting. Citigroup for example. It’s not defense but it is a financial institution, and that makes me very nervous. It is because such huge amounts of money are now involved in these hedge funds that they are now a Frankenstein that we created that has gone awry and no one can stop them because of the great quantities of money at play? Did hedge funds initiate in the U.S. and are now played on the international market by all the big money operatives? And is the term sovereign fund used exclusively for countries playing with their money as versus smaller groups of investors? It’s for other foreign govt’s investing? I assume hedge funds invest all over the world in any of the countries of the world, yes? Everyone deals in hedge funds? Lots of questions here.
Sov funds are usually a single country investing its dollars.
Hedge funds invest all over the world. Soros caught hell for crashing the pound a few years back.
Hedge funds don’t really exist in any country at all. Citicorp owns one, but so do banks all over the world. They all operate pretty much the same — without regulation and incorporated in tax havens with few laws.
I believe the first hedge funds was in the U.S. — but it doesn’t matter. They’ve moved so far away from the original model that they would be unrecognized by 1949 standards.
Citi is running the hedge fund, but not investing in itself — at least not that I know of. However, a good chunk of citi is owned by Middle East guys/Saudis through Kingdom Holdings, so is a good chunk of News Corp, which owns Fox.
FROM FORBES
http://www.forbes.com/2008/02/08/cic-jcflowers-china-markets-equity-cx_vk_0208markets1.html
HONG KONG - To avoid being shut out by protectionist sentiment from the bargain sale under way in the Western banking sector, China Investment Corporation may go shopping hand in hand with U.S. private-equity fund JC Flowers.
The Chinese sovereign wealth fund is reportedly close to sealing an agreement with New York-based JC Flowers to set up a $4 billion new fund to invest in ailing financial institutions.
With $200 billion in registered capital, CIC has already left some footprints in Western financial turf. The fund plowed $3 billion into the buyout fund Blackstone (nyse: BX - news - people ) last summer and injected $5 billion into investment bank Morgan Stanley (nyse: MS - news - people ) in the fall. The deals have raised the hackles of Western bankers and politicians, arousing anxiety over the threat that China could gain a dangerous level of sway in the U.S economy.
The possible tie-up with JC Flowers, reported by The Financial Times on Friday, would allow the fund to invest indirectly in the Western financial sector. The alliance reflects growing worry and political backlash after a spate of deals in which Singapore’s Temasek, CIC and the Abu Dhabi Investment Company have taken strategic stakes in subprime mortgage-sapped UBS (nyse: UBS - news - people ), Merrill Lynch (nyse: MER - news - people ), Citigroup (nyse: C - news - people ) and Morgan Stanley (nyse: MS - news - people ). (See: “ We’re From China, We’re Here To Help”)
The influx of money from Asia and the Middle East has set off rumblings in the West that could turn into a protectionist backlash. At the Group of Seven meeting in October, French President Nicolas Sarkozy stressed that his administration had decided not to let the country be sold down the river by opaque, speculative funds. In Germany, Chancellor Angela Merkel has called for the problem of investment by state-backed funds to be tackled “with some urgency.” The European Commission is also examining the impact of sovereign funds on European capital markets.
In the U.S., a congressionally sponsored panel created to consider the national security implications of growing U.S.-Chinese economic ties heard arguments Thursday for tougher scrutiny of sovereign wealth funds. (See: “ Wealth Of Bad Thinking On Sovereign Funds”)
Responding to the backlash, Chinese Premier Wen Jiabao said last month that CIC would invest abroad only $60 billion to $70 billion, about one-third of its registered capital, leaving the remaining liquidities to shore up local lenders.
CIC Chairman Lou Jiwei pledged also that the fund would avoid investing in European countries where it is not welcomed.
Set up by Chris Flowers, a former partner of Goldman Sachs (nyse: GS - news - people ), JC Flowers led a consortium in a failed attempt to purchase 50.2% of the student finance firm Sallie Mae (nyse: SLM - news - people ) for approximately $25 billion. (See: “ Sallie Mae Wants To Be Alone”) Last month, the private-equity fund made an informal bid of 4 billion pounds ($7.8 billion) to acquire the ailing insurer Friends Provident.
I’m going to print out all of the comments being made to my questions (in particular yours, as you’ve answered so many of them). I want them for future reference. Better than a textbook! However, now that I think of it, is there some kind of a layman’s book that answers some of the many questions people like myself who are interested but not that knowledgeable in the ways of the market? I watch a lot of the TV financial markets shows, like Cavuto’s, Forbes on Fox, Cashin In, Bulls and Bears, Wall Street Journal, Journal Editorial Report, and stuff when I get a chance on CNBC (now I’ve got Fox Business too recently). But when it gets more nitty and gritty, I feel out of my depth. Any suggestions above and beyond what I am doing now?
“In the U.S., a congressionally sponsored panel created to consider the national security implications of growing U.S.-Chinese economic ties heard arguments Thursday for tougher scrutiny of sovereign wealth funds. (See: “ Wealth Of Bad Thinking On Sovereign Funds”)”
Well, I hope they come up with some ways of regulating the effects of these hedge funds. Usually I am very anti-regulation of any sort from the gov’t, but, just like at the turn of the century when the robber barrons held sway, and the gov’t finally clamped down on some of the financial shennanigans, I think the time has come now for further perusal of the actions of hedge funds. I believe these funds have very much been behind, more than anything else, the fluctuations in the oil markets which, of course, directly affects our price of gas at the pump. Just not good for the population at large. These hedge funds make their billions at the expense of the rest of us average Joes who are at their mercy, it seems.
I would stay away from getting information from electronic media. They sacrifice depth/knowledge for the sake of entertainment. This is particularly true for that Cramer character. As far as I’m concerned, he’s one step up from a carnival barker.
Then I’d read the classic, John Kenneth Galbraith’s The Great Crash of 29
Benjamin Graham’s books. He was a weird character — and Warren Buffet’s mentor — but also something of a genius.
I’d also follow Crudele in the New York Post. He’s been beating every other news outlet to the punch for a couple years now. He’s obsessed with the Plunge Protection Team, but otherwise he has a good handle on things.
“I would stay away from getting information from electronic media. They sacrifice depth/knowledge for the sake of entertainment. This is particularly true for that Cramer character. As far as I’m concerned, he’s one step up from a carnival barker.”
LOL! Carnival barker, dead on. Thanks for the book tips. Will check out Amazon for prices. One day I may be as knowledgeable as you. Of course, I’ll be dead by then, but every little nugget of knowledge counts up to that time. Thanks again.
I’m not smart. The topic is endless and a lifetime of study. And, quite frankly, I have better things to do with my time.
However, people need to pay attention. This stuff is important because by the time you actually feel the impact in the economy, it’s usually too late. And then the only thing to do is find somebody to blame.
If you want a good laugh (or cry) regarding Wall Street characters, google “Hetty Green.” One of the strangest characters ever to invest.
Like any good concept, it was taken to the limits and beyond, whence its goodness was distorted by hubris.
In the currrent headlines, while you read a lot about hedge funds, they are simply the entities within which this season's renditions of human folly takes place. They are the props.
All the yapping about hedge funds does nothing to explain what an SIV is, and why an entity might want to create one, and why a hedge fund might want to buy one. SIV's, in turn, are a pretty clever structure but again, like every good idea, the concept was tortured in the buying (and selling) frenzy that's been going on for the last 10 or so years.
I actually watch CNBC when the market is open,,,,but I really enjoy the Fox News business shows every Saturday morning.
Its a given that the government will be squeezing another pint from the turnips who a little something left. Maybe I should go on a luxury buying spree so I can declare bankruptcy first and tell the government, “sorry, squeeze some other sucker.”
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