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Lo, the Naked Hedge Fund
The July 21 deadline for the hedge funds to register required by the one year anniversary of the Dodd-Frank bill is fast approaching, and the industry is roiling with turmoil. The net result for the rest of us could be shrinking market liquidity and falling asset prices as hundreds of funds shut down or move overseas rather than meet the new, onerous disclosure requirements and the vastly increased legal liabilities they imply.
The new regulations raise the level of disclosure virtually to the same level already demanded by your garden variety, plain vanilla mutual fund. Details will have to be released about assets under management, performance, strategy, risk management procedures, custody, brokerage relationships, soft dollar arrangements, commission discounts and kickbacks, fees, compensation of the managers, types of clients, conflicts of interest, and of course, their largest holding. All of this information must be provided in plain English, filed with the SEC, where it will be available online to the public.
The filings will provide a treasure trove of information about this most secretive corner of the financial markets. Commercial banks and mutual funds have long complained that hedge funds gained an unfair advantage hiding behind the curtains. Previous efforts to register the industry were thrown out of the federal courts, since they do not deal with the public. It took a massive lobbying effort in Washington to bring them to heal once again.
Hedge fund managers feel they are getting a raw deal. They were virtually the only class of financial institution that did not need a government bailout during the financial crisis. The cost of compliance will run many millions of dollars per fund. Even the slightest error in the filings, such as a 0.1% error in performance claims, could open them up to claims of securities fraud. Publication of holdings will allow competitors to game the market against them. The compensation information will provide a ripe target for divorce lawyers and other civil litigants. Frivolous law suits will soar. Kidnappers have also been provided a handy shopping list.
The are few exemptions left. Venture capital funds and family offices need not register. Nor do foreign based hedge funds with 15 or less US clients, less that $25 million in assets raised in the US, and no American based offices.
The largest funds, like Bridgewater ($58.9 billion), JP Morgan $45.5 billion), and Paulsen & Co. ($36 billion) will no doubt register, as they are too big to move and the incremental cost is small. It’s another story for small funds, which may decide to move to foreign centers like Geneva or Singapore rather than undress in public. The net result could be a flight of capital from the US markets and falling prices, as the deadline coincides with the seasonal summer lull.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Onerous disclosure requirements? If the disclosure requirements being suggested had been in place for the past ten years, the following partial list of hedge funds, hedge fund managers and fake hedge fund managers would not have been able to perpetrate billions in fraud. Again, I emphasize that this is a tip of the iceberg list.
Trevor G. Cook, of Minneapolis
Sean Michael Mueller, of Denver
Arthur G. Nadel, of Sarasota
Sam Israel III
Joseph Forte, of Philly
Darren Palmer, of Idaho
Frank Avellino
Cohen and Co.
Keefe, Bruyette and Woods
Kenneth I. Starr
Alexander Trabulse, of San Francisco
Marc Drier
R. Allen Stanford
Paul Eustace and PAAM hedge fund
Jamie Nicholson
Paul Greenwood
Stephen Walsh
Darren L. Palmer and Trigon Group of Idaho
Anthony Ramunno, Jr
Joseph Contorinis, Nicos Stephanov, Michael Koulouroudis and George Paparrizos
Barrett Wissman
J. Jonathan Coleman, pastor of the Christian Assembly Church of Forest Hills, along with Isaac Ovid and 5 other church members
Weizhen Tang, the Chinese Warren Buffett
William Gunlicks
Danny Pang
Francesco Ruscano
Bradley Ruderman, of Beverly Hills
Amit Mathur, and his partner, Rajeev Johar
Philip Baker
Moises Pacheco, of Chula Vista, California
Edward Stein, of Prima Capital Management
Marc Focht, of 3V Capital Management
Tom Petters, originally of Minnesota
Rod Cameron Stringer
Corey Ribotsky and NIR Group hedge fund
That's enough for now. I will end with my personal favorite-
A New York City taxi driver, Alan Fishman, 49, of Brooklyn, and 2 associates, set up, starting in 2002, a fraudulent hedge fund scheme called A.R. Capital Group, claiming to invest in "currency trading, distressed securities, short selling, real estate, market nuetral, special situations, debt obligations, multi-strategy and funds of funds".
They did none of that, bilking investors out of $20 million dollars. They targeted retirees around the country. Mr. Fishman has since disappeared.
piss on 'em. if they can band together..as in Anthony Scaramucci's "Hedge Fund Trade of the Week" book-pump on CNBC...they are in collusion and attempt to manipulate the market in their favor anyway and can afford to be "monitored" by our inept government. Those scoundrels add liquidity, yeah, by screwing the rest of us.
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The big boys changed the rules of the game and stacked the deck in their favor. Not one has paid the price. Do you want us to feel sorry for these guys?
Truly good news! Very nice to hear. Purge the criminal syndicate banks, whatever form they take. It matters not about liquidity, increased unemployment claims, loan shrinkage, financial services outages...it only matters to get them out!
remember to write! see ya in hell.
In 2008 I was working for a money manager who's parent (grandparent, really) company was a TBTF bank. They collapsed and their stock went to near zero while being, as far as I could tell, in full compliancewith every pertinent regulation the entire time.
Madoff was regulated, he was a regulator himself. When his fraud was uncovered and put before the SEC on a silver platter the SEC did nothing.
So, I'm underwhelmed by the idea that more hedge fund regulation will somehow reduce systemic risk. If anything, hedge funds behaved pretty well in this respect ~2008. Some blew up of course but those that did quietly folded up shop, returned what money was left to investors (where it was appropriately re-allocated) with a minimum of fuss and disruption to the wider financial system.
Who really thinks that the quasi-government TBTF bank model with their armies of useless compliance drones is the one we should be rolling out to other financial businesses?
+ Those who can leave will. Everything happens at the margin. Very bad news for New York and Cali, who always think they have permanent ownership of finance. Not anymore. No mas. Kaput ist.
Agree.
I can still remember the letters my firm sent out to Madoff clients the night of his arrest, basically, "Get your money out and get it to Goldman..."
Three clients were instantly BK.
We're up against The Government, Financial Institutions, and the law firms that protect them (mine was/is especially adept at this).
Where have all the...roaches...gone?
http://www.youtube.com/watch?v=f_ptqXqjsZw
Carpetbaggers......