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A continuing trend we have been following is the transfer of professionals from banks to hedge funds. As banks shed more jobs, hedge funds are picking up the talent as the industry continues its recovery and banks face strong regulation.

While investment banks start shedding proprietary trading operations to comply with the Dodd-Frank financial reform bill, the hedge fund industry is continuing to hire and many proprietary traders are crossing over, Illana Weinstein, CEO of IDW Group, an executive search firm, told CNBC Friday.

“The amount of incoming flow to us from folks that were very sticky in the past and very talented is very unbelievable in terms of wanting to leave the prop desk to go to the hedge funds to not have to deal with all of this stuff,” Weinstein said in regards to financial regulation.

“I think it’s turned hiring from the prop desks into a buyer’s market for hedge funds,” she added.

The reason, she explains, is proprietary traders used to have access to capital, access to risks and compensation expectations were higher prior to the passage of the financial reform bill. Source

A U.K. Court of Appeal ruled in favor of hedge funds that maintained their client money, held in the main European arm of Lehman Brothers Holdings Inc., wasn't properly protected when the investment bank collapsed.

The development is the latest aspect of the complex effort to return cash and other assets to Lehman's clients after the bank failed in September 2008. Lehman's bankruptcy, with more than $600 billion in total assets, ranks as the largest U.S. corporate failure.

The European arm had segregated, or ring-fenced, a pool of as much as about $2.1 billion of money for some hedge-fund clients, thus providing protection in the event of bankruptcy. But, for various reasons, the bank failed to ring-fence potentially billions of dollars of additional money for other clients who also believed their money was segregated. Those clients have argued that they should be treated equally; administrators of Lehman's U.K. estate, PricewaterhouseCoopers, sought direction on how to handle the matter.

In December, a U.K. High Court judge ruled against those clients, saying they wouldn't be entitled to the same protection for their money, effectively leaving them as unsecured creditors in the U.K. insolvency case. But three appeals court judges overturned that decision Monday.

The ruling is likely to disappoint other hedge funds whose money had been properly segregated and which now will have to share the $2.1 billion with others. The appeals judges said Lehman's administrators would need to look for funds that ought to have been segregated, but hadn't been, and, where traceable, add those to the pool to be shared. That would be a blow to unsecured creditors, who had been hoping to lay claim to the billions of dollars in such funds.

While there remains no clear timetable for when the client money will be returned, Monday's decision is expected to be a setback. "This is likely to have a significant knock-on effect both on the timing and level of any distribution of client money to LBIE's [Lehman Brothers International (Europe)'s] clients," said Tony Lomas, a partner at PricewaterhouseCoopers. "The proper and prompt return of client money is a key priority for the administration, and we remain committed towards achieving that objective."

Matthew Shankland, a partner at Weil Gotshal, lawyers for Lehman Brothers Holdings, said a decision on any appeal to the U.K. Supreme Court will be made by the end of the week.

—Ainsley Thomson contributed to this article.

Write to Cassell Bryan-Low at This email address is being protected from spambots. You need JavaScript enabled to view it.

The SEC wants to hear what hedge fund managers and investors think of the proposed regulations affecting the asset class that were included in the Dodd-Frank financial reform bill. 

SEC Chairman Mary Schapiro said in a speech Thursday to the U.S. Chamber of Commerce that hedge funds “have flown under the regulatory radar for far too long.” 

“The lack of a comprehensive database for private funds has made it virtually impossible to monitor them for systemic risk and investor protection concerns,” she said. 

Last week, however, in Congressional testimony, Schapiro said she wasn’t sure if hedge fund firms posed a systemic risk to financial systems. 

Schapiro also said in her speech that the SEC had been working closely with the U.K.’s Financial Services Authority on hedge fund reporting requirements. 

Whatever the position the U.S. regulator may take on the systemic risk issue, the public is being encouraged to go to the SEC Web site and fill out a comment form even before the official regulation comment periods are opened. 

Go to SEC public comments page on Dodd-Frank Act 



July 21, 2010, 5:53 AM

Pity the typical hedge fund manager. Sure, he (or occasionally she) had a bad 2008. But the average fund returned nearly 20 percent in 2009. With investors also regaining their composure last year, hedge fund managers would have hoped for the return of some of the money investors took out in late 2008 and early 2009. So far, though, it’s not happening, Reuters Breakingviews says.

The roughly $1.5 trillion hedge fund industry returned 0.6 percent in the first half of the year, measured by the broad Dow Jones Credit Suisse index — or lost 0.2 percent according to data from Hedge Fund Research. Call it flat. That’s despite a tricky second quarter in which many funds, including some run by big names like John Paulson, lost value. Global stock and commodity indexes lost roughly 10 percent in the first half and global bonds were roughly flat, so hedge funds performed respectably over all, Breakingviews suggests.

But investors don’t seem to have been impressed, the publication notes. Credit Suisse calculates a tiny outflow — some $1.4 billion — from hedge funds in the first half of 2010, though Hedge Fund Research reckons there were inflows of $23 billion. Even at that kind of modest pace, though, there’s no sign that the well over $200 billion investors withdrew between mid-2008 and mid-2009 is on its way back any time soon.

There are good reasons, Breakingviews says. First, after the 2008 debacle, retail investors, who once were eager hedge fund customers, at least outside the United States, have lost enthusiasm. Institutions, meanwhile, are taking their time setting strategy. Second, hedge fund clients still haven’t forgotten that many managers locked up their assets at the height of the crisis, Breakingviews notes. Credit Suisse estimates that about a third of the $174 billion of assets frozen in that way still haven’t been thawed by their managers.

Third, recent market gyrations have left investors uncertain. After losing big as asset values plummeted in the crisis, plenty of investors see the merits of hedge-fundlike strategies that employ both long and short bets. But they have no reason to hurry with markets volatile and seemingly in limbo, Breakingviews suggests. The problem for hedge fund managers is that those same conditions, along with intensifying regulation, force them to be cautious, reducing the likelihood of big returns. So until markets turn friendlier, the industry may struggle to grow much.


Traders work at their desks in front of the the DAX board at the Frankfurt stock exchange
Hedge funds are preparing to profit when bank stress test results are published on 23 July, whether they spark a jump or a plunge in share and bond prices. Photograph: Michael Leckel/Reuters

Hedge funds and other investors are preparing to profit from the latest chapter of the European sovereign debt crisis: the publication of the results of bank stress tests on 23 July.

Investment banks have been compiling research notes designed to ensure speculators get the most out of the uncertainty, regardless of the test results. These may underline the soundness of the European recovery and trigger a jump in bond and share prices, or indicate a gloomier scenario and cause a plunge in value.

Analysts and investors reckon the tests will also challenge government officials and their willingness to support their weakest financial institutions.

"The real test is of the official sector itself," said Credit Suisse in a recent note. "Our best case would be one in which it was demonstrated the resources of the European financial stability facility were available to fund bank bailouts; our worst case would be one in which no evidence was given of available funding."

Investors perceive the tests as being too little, too late. The US carried out a similar check on its banking system last year, concluding that banks needed a recapitalisation of $75bn (£50bn). US banks have subsequently enjoyed a period of stability – despite the fact that some of them are still battling with the effects of the credit crunch.

In Europe, speculation about the exposure to volatile southern European bonds has hit the share price of banks such as Santander. The tests are expected to show banks' exposure to sovereign debt, but may leave out bigger parts of their balance sheets, such as loans or other fixed income products, a hedge fund manager said.

"I think this is all nuts, an over-simplification of what's going on," he said. "But it could happen that the market calms down for a few days, and it falls again."

Investors are focused on regional lenders in Spain and Germany. The cajas – Spain's regional non-profit savings institutions – have attracted much recent attention, despite the government's attempt to overhaul the sector. The cajas will now be allowed to issue a certain type of equity, as well as to reduce the number of political-appointees to their boards. The government is also pushing for mergers within the sector, hoping to reduce the number of cajas from 43 to about a dozen. A fund has been established to help finance those mergers - under some stringent conditions. According to a document seen by the Guardian, the cajas will have to cut their number of branches by an average 25%, and their workforce by as much as 18%, to access the funds.

In Germany, the publicly owned Landesbanken are also under scrutiny after booking more than $34bn in credit losses and writedowns during the credit crunch, according to Bloomberg data. The Landesbanken may need a recapitalisation of as much as €37bn (£31bn), compared with €12bn for the cajas, according to estimates by Credit Suisse.

Any figure above or below market estimates may determine the market reaction to the results in the short term – more than the actual health of European banking system in itself.

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