“A Penny For the Guy?”

FPM have strongly advocated the rolling back of the private sector excesses and greater Government planned, controlled and implemented initiatives to rejuvenate a corrupt and festering economic wound. This is indeed sea-change in Government policy we are calling for globally. A reversing of the so called “market liberalisation” trend started during Ronald Reagan and Margaret Thatcher’s administration on either side of the Atlantic Ocean during the heady 1980’s, is our call.  Instead of the appropriate Keynesian countercyclical fiscal policies; policies developed at the height of the Great Depression in his “The General Theory of Employment, Interest and Money” and published in 1936, we have continuity of monetarist policies, introduced by economist Milton Friedman, yet wholly inappropriate for the circumstance and seemingly abstract to political legislature.

Structural deficits are not advocated by Keynesian economists, only that “deficit spending is desirable and necessary as part of countercyclical fiscal policy”. Maynard Keynes

So we are in a economic milieu where global Government ‘structural deficits’ are actually expanding through monetary expansion (QE / money-printing etc), as extolled by Friedman (see below excerpt from Wikipedia); in vain attempt to kick-start economies from the need to stabilise it after the financial crisis tremors of 2007/08, seems in the main to be showing Wall Street bubbles and disturbingly more ‘creaming-off’ of the wealth of the nations by corporate elite CEOs and directors pretending to work in the name of shareholder and pension benefits.

During the 1960s, Friedman promoted an alternative macroeconomic policy known as "monetarism". He theorized there existed a "natural" rate of unemployment and argued that governments could only increase employment above this rate, e.g., by increasing aggregate demand, only for as long as inflation was accelerating. He argued that the Phillips curve was, in the long run, vertical at the "natural rate" and predicted what would come to be known as stagflation. Though opposed to the existence of the Federal Reserve System, Friedman argued that, given that it does exist, a steady, small expansion of the money supply was the only wise policy. Friedman was an economic adviser to Republican U.S. President Ronald Reagan.              

In a situation of national debt default or other financial or military crisis it would seem an instinct to huddle together for security. That is an early evolutionary social communal ideology for self-preservation. Citation of North Atlantic Treaty Organisation (N.A.T.O.) formation after WWII as vivid example (elaborated below). So it follows that desperate unions and strange bed-fellows are made in stringent times. This is seemingly what's happening in the world order play-book of today: with Russia and Europe vying for that strategically important East-West frontier country Ukraine; Hong Kong Pro Democracy protesters independently resisting China's overlord efforts; Anti-American Arab countries in turmoil between pro-West democracy or theological retrenchment; BRIC Bank set-up to negate bias IMF and World Bank support of established EU and USA economies, and so on. 

Just in case we're talking through our 'hat and hot air', witness the recent "should I go or should I stay" clash between Scottish unionists and separatists, after a 300-years-old marriage. In the Scottish Independent Referendum of 18 September 2014, the pro-union voters tactically won by 55% to 45% majority. An election won by fear because the sizeable conservative elder voters were scared into believing that the 'apple-cart' being disturbed heralds 'worse-before-better' syndrome. Long-term ideals being sacrificed for short-term benefits would not be an accusation but personal reality.  

Towards forming a pivotal and strategic alliance, whether one believes in the “New World Order” with ambitions of elite families controlling One World Government, EU is increasingly under the influence of USA policy diktat. One world government, initially via the spread of ‘Commercial Globalisation’, is seemingly intent in that direction. From missionary-driven European colonialism of pre-World War II through to multinational corporations imposing American economic imperialism; such institutional regimes with exploitation as an aim initially corrupt and ultimately destroy social freedoms, independence of local decisions and control and also individuality of thought and action. FPM principals are collectively and vehemently against Orwellian order of society (of the all-controlling "Big Brother" state), which we are ALL as yet unremittingly or unwittingly embroiled in by degrees already. The great hope and event is that all great movements are eventually checked by unheralded forces which are almost divine in emergence. Bearing such forces, we cite Mahatma Gandhi resisting the military might and nous of British Colonial Imperialism. Another example of an earlier era of unheralded yet almost divine forces resisting a seemingly incorrigible exploitation of slave trade was William Wilberforce and friends. The abolishment of the slavery in the British Empire resulted in the Slavery Abolition Act of 1833. And so on and so on is history littered with such heroes of humanity.

FPM included the above paragraph of social-political economic commentary on our funds and investments forum originated enterprise, because of related phenomenon called Trans-Atlantic Trade and Investment Partnership (or TTIP) coming into our cross-fire sight. This means the global hegemony of today United States of America, whom are descendants of a former Europeans colonists and other diaspora of refugees, want to ally with their old world roots towards greater formidable business partnerships (from our survey, even effect to supersede powers of national Governments!). Clearly a path expected to lead to globalist ambitions. 

Of course, aside of Britain’s ‘special relationship’ with America, ‘Trans-Atlantic’ indicates closer economic ties between European Union and USA. At a time when the EU itself is having a crisis of existentialism, the megalomaniac globalist drivers are desperate or opportunistic to forge a thin-end-of-wedge shot-gun wedding! As was circumstances and timing of the creation of NATO, which was a military alliance of nations in 1949. Our ‘wet behind the ears’, yet people-elected from selected politicians (viz. Hong Kong Pro Democracy Protests), who visibly, necessarily and intrinsically are not wise like gerontocracy, are being apparently pulled on puppet strings. Corrupt politicians is not new but broken political machine where its members are self-vested puppets manipulated by powerful behind the scenes corporations and lobbyist using bogus statistics from unscientific polls conducted by public relations exercise, is in fact plutocracy i.e. rule of the wealth. Democracy, i.e. rule by the people, equals public relations propaganda.

Just in case FPM are accused of excessive fantasy and bemused ranting about real world events which get relegated to realms of conspiracy (as if bad things don’t actually happen clandestinely!), we cite below an easy to understand example from the venerated Private Eye - No.1377 late October 2014 edition:

Synopsis of Penny for the Guy (From Private Eye - No1377)

As activists in FPM 3-fold enterprise manifestation of 1) critical public relations of reputations, 2) promoting alternative M&A deals and 3) delivering mutual-alternative investment convergence, we are actively peaceful protest marching against unbound capitalism. If adherents of capitalism don't march then we must all be billionaires and super-wealthy!

Indeed we are meeting at 6pm at Trafalgar Square on 5^th November, 2014 to join Climate Revolution as part of the Amonymous organised annual event since 2011.

Notably in the English cultural calendar, 5^th  of November is the day celebrating Guy Fawkes and his group’s failed Gunpowder Plot of 5^th November 1605 to blow-up Houses of Parliament. "A Penny For the Guy?" is the begging bowl chant of children with a Guy Fawkes dummy, collecting money or fund raising to celebrate by burning the Guy Fawkes effigy on a bonfire and while letting off fireworks.

Fund Management Performance (20 Years)

This research note is a preliminary study of listed asset management companies (Amcos). The ultimate aim is a process of selection for “FPM Amco Long/Short Recommendations”. An opportunity to get direct equity exposure to asset management companies (Amcos) during this general market correction in many global equity capital markets, particularly with S+P 500 at 6-month lows is the market timing under consideration. Also, we discuss the costs and benefits of investing in select FPM Amco stocks.

We believe record levels for equity benchmarks such as the S+P 500 closing above 2000 for the first time ever in August, augurs continued economic stability which was initiated by concerted global government stimulus. FPM analysis indicate ‘animal spirits’ will only be slowly painstakingly and enduringly restored. Whether that is a lull in perception about stagnant tepid global economies or an opportunity to exploit the trading volatility, we advise the real-money investors in deciding overall allocation strategies.

FPM’s repeated macro economic view is that we are in a “pause for breath” amid fundamental structural changes in social-ecological political and other spheres (listed in “FPM Risk Assessment Matrix” and also in our “Accumulating Risk Trends – ARTs”); and ultimately in financial landscape, not just regionally but also globally.

”FPM certainly believes in this probability of ‘multiple-dip recession’ cycle started in 2007-08.” From  FPM Jan’13: Investment Sector Outlook for 2013: “Credit is a Lover on the Re-bound?”

The State-driven economic policy and resultant macro fundamentals which have flummoxed many institutional investors (no less the famed and topical Bill Gross of Pimco Advisors!) in their prediction and interpretation ever since the “game-changer financial crisis”. Indicatively we may expect to know what the next seven years are likely to herald from the “easing off” of credit-injection reflation policy; excepting the chaos scenario outcome from extended and unprecedented national debt and global debt accumulation! This is the key to macro economic scenario analysis today. In regards financial capital, as FPM have propounded since July 2009, that we are in an era of equity markets characterised by side-ways trending benchmarks with bouts of volatility and a tentative secular uptrend. Given geopolitical risk considerations, policy manipulated markets, and other downside risks (See FPM Risk Assessment Matrix), FPM believe there is not enough market impetus or volume to send us off a precipice to a lower low in the capital markets benchmark, anytime soon, despite increased uncertainty in high volatility periods.

Before we pick the Amcos for the FPM Amco Portfolio we believe the general partner exposure is as valid as an investment in their underlying limited partner (LP) funds. Selecting appropriate sectors to allocate capital for speculative or investment purposes is shown in empirical research to be paramount to portfolio performance. So we have produced a select ETF constituent proxy of various asset class performances.

Amcos As Investment Fund Proxies

For all the greater transparency mandated by SEC regulation (such as expanded Form ADV and the exhaustive Form PF); yet NAV i.e. price history, particularly of alternative investment funds (AIFs) such as hedge funds and private equity funds, remain opaque. As might be expected for essentially still an over-the-counter OTC product structure, as compared with the long established staple of 401(k) pensions plans, the humble mutual fund. Aside of AIFs’ price-discovery issues, mutual fund prices do have greater price visibility and accessed via their ticker / monikers from public websites such as Yahoo Finance and Nasdaq.

For FPM’s 3-fold enterprise manifestation[1] agenda, we decided to take a proxy for the gamut of investment funds through their listed management companies – for which there is access to financial accounts and statements, as well as database of price history for research analysis.  While AMCOs maybe categorised as either predominantly applying “passive” or “active” management for the sake of broad distinguished identity. FPM enunciates the “convergence’ force as powerful. Then into further meaningful assessment of whether the management company is considered primarily as “traditional long-only”, “alternative investments” and / or “index trackers”  

1) Long Term (Established Amco) - Hold / Buy

For this ‘top-down’ recommendation analysis of the listed AMCOs for buy-and-hold portfolios we selected those with pre-2000 vintage (i.e. those managers publically trading before and after Asian Financial Crisis of 1997-98 and TMT-Bubble of 2000).

Fund Management Performance (20 Years or Inception History)	Compound Return %	Annual Return %
Eaton Vance Corp. (EV) (Oct 1994)	3094.8%	18.9%
Aberdeen Asset Management PLC (ADN.L) (Oct 1994)	2969.1%	18.7%
T. Rowe Price Group, Inc. (TROW) (Oct 1994)	2443.9%	17.6%
Franklin Resources, Inc. (BEN) (Oct 1994)	1430.2%	14.6%
Legg Mason, Inc. (LM) (Oct 1994)	1119.4%	13.3%

2) Long Term (Established Amco) – Watch List

AllianceBernstein Holding L.P. (AB) (Oct 1994)	787.2%	11.5%
Invesco Ltd. (IVZ) (Aug 1995)	753.4%	11.8%
BlackRock Inc. (BLK)	See Full Research	See Full Research

3) Specialist Strategies (Noveau Aimco) – Hold / Buy

Fund Management Performance (20 Years or Inception)	Compound Return %	Annual Return %
Virtus Investment Partners, Inc. (VRTS) (Jan 2009)	2694.9%	78.5%
Affiliated Managers Group, Inc. (AMG) (Nov 1997)	1072.2%	15.7%
Gamco Investors Inc (GBL) (Feb 1999)	534.8%	12.5%

4) Established and Noveau Amco - Watch / Sell

For the ‘all-in’ SELL list we selected only those poor performing managers with over 5-years’ listed-price record. Again here we stress that this preliminary work is only intended as a top-down recommendation. Noticeably and unspectacularly the resulting list includes those managers specialised as alternative investment management companies - “AIMCOs”. The reasonable explanation for most of these alternative managers’ underperformance perhaps stems from the partial public listing e.g. Blackstone Group have only a 10% public float. This is in “FPM Alt Kind - M&A” terms due to distribution rights priority of founding managing partners over shareholder distributions on operating profits.

Fund Management Performance (20 Years or Inception)	Compound Return %	Annual Return %
Fortress Investment Group LLC (FIG) (Feb 2007)	-73.4%	-15.9%
Man Group plc (EMG.L) (Oct 1994)	-77.2%	-7.1%
Och-Ziff Capital Management Group (OZM) (Nov 2007)	-29.0%	-4.8%
Calamos Asset Management (CLMS) (Oct 2004)	-24.5%	-2.8%
Blackstone Group, L.P. (The) (BX) (Jun 2007)	55.9%	6.2%

A prudent investor may suggest theses me-too newcomer ‘alternative’ listings are mainly a strategic phase acting mainly as an opportunity for the founders to cash-in a stake in their company via the initial public offering - IPO (and often a subsequent phase after a private stake sale for price discovery and market valuation purposes).

So the eventual or initial market price trading history having little reflection to overall book value or performance expectations of the firm. In fact, Blackstone Alternative Asset Management (BAAM), the division of the Blackstone Group (BX) which manufacture hedge fund investments confirm in their February 2014 presentation that “Valuations for hedge fund GPs do not reflect long‐term value”. This can be interpreted in two-ways: 1) no long-term value in investing in a hedge fund Aimco or 2) Markets’s valuation of Aimcos doesn’t reflect future expectations.

For Further Qualitative And Bottom-up Analysis:

Conclusion of our quant based preliminary ‘top-down’ recommendation of a select asset management companies and their fortunes for an investor in them.

FPM brand of fund analysis shows that an investment in traditional long-only asset management companies (Eaton Vance Corp. et al.) outperform those of relatively newly listed ‘alternative vintage’ of Och-Ziff Capital Management Group (publically est. 2007) and their brethren over the long term. Listed alternative investment management companies (“Aimcos”) are the relatively poor performing subset in the asset management industry. Och Ziff (OZM) is down 29% in dividend and split adjusted price terms from its public inception. While Eaton Vance (EV) is annualising comparable returns of 19% over the past 20 years.

“Public Inception” of an Amco is of grave strategic concern when essentially boutique businesses seek that trepidation of growth-obsessed to institutionalise. These concerns in considered the FPM’s Product Convergence Story (a.k.a. “Product Convergence or Incestuous Orgy in Alternatives”). When the premise of something changes one should change their opinion about it in equal measure!

Since not all breeds are made equal, of the Aimcos we noticed from our preliminary ‘top down’ survey of their quantitative metrics, we researched anew Virtus Investment Partners, Inc. (VRTS). This new Amco, which only publically listed in January 2009, had unbelievable (‘Green for Go’ Highlighted) total returns with dividend re-investment of 2,695% or 78.5% annualised. This naturally seemed bizarre when compared to other definitive Aimcos in that table above returning 15.7% and 12.5%, such as Affiliated Managers Group - listed Nov 1997, and “Gabelli”.

FPM already had coverage knowledge of Affiliated Managers Group and Gamco Investors Inc (GBL) (Listed Feb 1999).

Virtus Investment Partners, yet without the veritable ‘VIP’ ticker! is new on FPM coverage radar as a vivid example of how relevant bottom-up understanding complements top-down quant estimation. Virtus was founded in 1988, perhaps a phoenix rising out of the Black Monday Market Crash of 1987, but like Affiliated Managers Group, they maybe considered ‘Amco’ management company not unlike a multi-manager but with general partner relationships i.e. a platform for other affiliated managers under an umbrella label. For our full research report we reveal if Virtus are a business development company (BDC) category; like the coverage we initiated on Ares Management L.P. (ARES) of Ares Capital Corporation (ARCC)…

In FPM humongous SELL Recommendation[2] of Aimcos headed “Specialist Strategies (Noveau Aimco) – Switch / Sell”, we targeted Blackstone Group due to FPM coverage of their reputation risk from investor association with ‘guilty verdict’ institutions such as insider-trading Steven A. Cohen’s firm S.A.C. Capital (since re-branding as a family office renamed Point72 Asset Management).

  

“We were concerned that Blackstone, now an AIM category behemoth and industry bellwether, is not adhering to its founding reputation risk principles. A seemingly ardent principle to the partnership co-founder Stephen A. Schwarzman, from the days of his office-next-door association with Dennis Levine; a former Lehman Brother’s colleague who was central to the mid-1980’s insider trading crackdown. “Blackstone is sensitive to reputation”, was recited as a holy mantra to the author of this investigative research during a due diligence meeting in 2007 with the then head of asset allocation.” (Source: FPM’s No Smoke Without Fire! 22 April 2013)

Also, we were less than impressed with Blackstone’s total returns figures, up 55.9% since public inception in June 2007 or only 6.2% annually. Despite Blackstone’s division Hedge Fund Solutions or BAAM (mentioned above), reporting in their February presentation in Florida of 22% CAGR in economic income; we believe the predominantly private equity advisory business is reeling from low transactional flow, perhaps hampered by easy money preventing corporations from needing their buyout contravention…

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[1] 3-fold manifestation: No Smoke Without Fire – Reputation Risk, M&A of the Alt Kind and Alternative-Mutual Convergence 

[2] An analysis based cautiously on preliminary top-down quant observation of a select Amcos

European Independence By The Bravehearts

FPM envision European countries liberated and disbanded from recent 'monetarist' union towards forming re-newed independent national identities, and eventually forming newly grouped nation blocs, viz BRIC Bank. 

Witness Crimea liberated from Ukraine towards rejoining a Russian block alliance. Also, consider possibility in September 2014 of Scotland breaking away from England and that historical complex union known as the United Kingdom. This probable break-up scenario and redrawing of political and/or  socio-economic divides is perhaps reversing the recent trends towards fostered through globalisation. FPM initially provide partial anecdotal joined-up evidence to conclude that: under certain conditions de-centralisation of socio-economic  political powers is inevitable and perhaps a positive end at the turn of this milieu. The time frame for these speculated national defragmentation outcomes varies. The very quick decisive unchecked invasion and consensus formed by Russian land-grabs such as Crimea and Chechnya differs from that of  long-drawn regime-change in Afghanistan, Libya, Iraq, etc

Relevantly, capitalistic imperialism is under review in socio-economic-political regimes all over the world. Not least in the U.S.A., home of global hegemony, but where populist protests have been quashed but not as yet rescinded in human memory. Take a multi-nationally sourced cross-section of news websites or television channels to see populist or agent provocateur stirred strife bubbling over into vivid street demonstrations and protest regarding status quo factors. Protests happening all over the globe no less! More importantly, how these events are slanted as serving some national interest and literally serving an agenda with platitude propaganda to some as yet unknown Black Swan future. So the unsuspecting public are the last to understand the truth behind world events and politics affecting them and their progeny. The mismatch between reality and rhetoric via mainstream media is an intriguing political science.

FPM asks to what end are these pockets of people protests and upheavals aimed at. Protests which seemingly have coincided with the onset and ongoing global financial crisis started in 2007-08. In the not too distant past, economic crisis  has been the main catalyst for dissenting revolt against status quo establishment. Witness the grand exemplar The French Revolution of 1789-99. In a trend of globalization through  economic democracy the international grab for land and its resources is the Earth's competitive political hot kitchen of today! 

These national situations featuring military intervention is uncomfortably verging on civil wars, so not merely hot kitchen but war-torn lands.  As this this is a financial investments blog, geopolitical risks are the game-changer events for capital markets to chew over. For instance, Deutsche Bank has a team to research and analyse theses geopolitical impact on capital markets and investment strategy. Current news featuring Ukraine politics embodies geopolitical risks on a global scale affecting national interests in regards to former super-power led by Russia. FPM has propounded the capital market volatility in reading between the lines of the situation in macro strategic posts. This Ukraine crisis on the back of the European Union's financial crisis and that of its existentialism in 2011 follows too quick in human memory. That crisis was ignited through Greece's national insolvency problems. 

To be clear socio-political economics motivated protests are happening globally. Which ultimately impacts on country's economic prospects and therefore produces capital market bouts of stagnation and volatility from uncertainty and instability regarding the future. Added to the  heady mix of turbulence mentioned, FPM identify a real and pressing concern about the global ecology and climate change...

The above article was written before the Scotland Independence Referendum and is incomplete due to FPM active involvement in the YES campaign.

Posted as reflection of YES POSITIVISM and after the truly democratic yet politicised referendum of 18 Sept 2014 with a 55% to 45% win for the "NO" campaign.

Somethings got to give: Mr Martoma’s Family Cannot Bear Burden Alone

In all sense of U.S. Justice Mathew Martoma CANNOT BE SERIOUSLY given nine years prison sentence for his insider trading securities fraud when the man Steven A. Cohen and his eponymous firm S.A.C. Capital that he committed these crimes for walks free after grease-palming the justice system of the Americas! “Something surely gotta give!”, seems an appropriate declaration to suggest that this is NOT THE END of the SAC-saga. A saga very much degraded as much as it was chronicled by institutionally pandering mainstream financial press; but veritably recorded and actively disseminated by Fund Portfolio Management –FPM. Principals at FPM have focused on insider trading protagonists at SAC Capital, and its reputationally smeared investor Blackstone Group under our “No Smoke Without Fire: Of Reputation Risk”. See our first blog post “No Smoke Without Fire!”. 

Mr Martoma must be utterly devastated and wholly indignant with the penultimate outcome (he is naturally appealing the sentence!), after multi-years judicial proceedings. And it is that bitter emotion and pervasive discontent feeling that should consume him inside-out through the sentence appeal and ultimately towards righteous and natural justice prevailing in the end. No! FPM are not evangelical preachers, but as an aspiring and integral high priest class of financial investments.

For integral justice to prevail and for restoration of real ‘animal spirits’ i.e. confidence (as opposed to smokescreen and mirror tricks of pump-&-priming from QE et al) in the crooked financial and judicial systems are vivid evidence of enforcement and punishment for wrongdoing. Mr Martoma should cut a deal with prosecutors towards humbling beyond-everyday-justice billionaire Mr Cohen. FPM are heeded from our previous announcement in early June via a post entitled “The Calm Before The Storm: SAC Takeaways – Part 1”:

“…Mathew Martoma’s sentencing could yet herald a fault line of tremors for Mr Cohen personally and set a precedent for the hedge fund industry…

…FPM expects the severity of the formulaic and deterrent-message in the sentencing to be significantly monumental…

…additionally, to induce Mr Martoma to co-operate with US prosecutors given the 6-8 years sentencing we expect...

Mr Martoma would proffer the main cull for the baying public anger and show some moral rectitude rather than be the sacrificial lamb for Mr Cohen.”

That Judge Paul G. Gardephe exceeded sentencing guidelines of the U.S. Government’s probation department DOES INDEED send a signal to would-be corrupters of the capital market integrity. However, the message is largely diluted because the head of “web-of-securities-fraud” Mr Cohen has evaded ANY sort of punishment. Americans used to say the “The Buck stops here!”; if blame is not laid at the helm of S.A.C. Capital then the message of the severe sentence, full confiscation and its exemplification suggests “don’t get caught if you cheat” or worse still, “don’t cheat unless you can afford it”. The old English adage that has gotten corrupted by revisionist colonists reacting to “chip-on-shoulder” syndrome, with incorrigible migration from developing nations, is “If you can’t do the time don’t do the crime!”

The risk of getting caught is increasingly seen as “cost of doing business”, yet hedge funds and banks do not set aside capital for ‘risqué practices’, though executive heads knowingly and publically take “the three-wise-monkeys” attitude. In FPM’s “NSWF: Of Reputation Risk” enterprise this is one of the hedge fund due diligence aspects of operational affairs. Judge Gardephe aptly sensing that any financial confiscation from Mr Martoma via forfeitures would be reimbursed by Mr Cohen, has accordingly set a high watermark in sentencing. Philosophically speaking, can Mr Cohen compensate Mr Martoma, his beautiful wife Rosemary (one for Mr Martoma's wall!), and their three children for a father and his 9 years’ absence from family?   

Mathew's Martoma Beautiful Wife

This above article is FPM integral views on capital market for the new millennia. Please contact kks@fundportfoliomanagement.com for advisory services on our “NSWF: Of Reputation Risk” enterprise.

Before The Proverbial Hits The Fan: Of Private Equity Exits

FPM cite here two examples of using exit doors and what they actually augur. First is news of three giant private equity firms settling with US prosecutors before potential massive fallout from the PE collusion lawsuit.  

“The agreements [settlements] still need court approval, but KKR, Blackstone and TPG were keen to reach settlements before September 4, when a district court judge will make a preliminary ruling on whether the case merits class-action status.” FT, August 7, 2014 4:47 pm

And the second example is a traditional exit strategy used by private equity firms for constituent companies in their portfolios, i.e. carrying out an initial public offering or IPO.

“Hedge funds are building up multimillion pound bets against companies recently listed by private equity after a number of high-profile flotations this year have fallen sharply in value, leaving institutional investors nursing large losses.” FT, August 5, 2014 1:06 pm

Discussing the first example. The timely settlement of the collusion lawsuit by three renowned buyout specialists is intended to precede possibly larger settlements amounts as the prosecution case escalates. The next event date in this issue is 4^th September in one month.  should indicate whether the cases against PE firms conspiring to not compete on buyout deals which results in company shareholders not realising maximum value from being taken private i.e. delisted, is against the public interest. Therefore the class action suit with lead plaintiff/s and any number of class action members could lead to bigger litigation payouts. Remember the “Big Tobacco Guilty as Charged” cases with numerous claimants and payouts.

And then there was one! All 7 of the defendants have settled their cases to date, except The Carlyle Group. We wonder which of the politically connected PE executives knows more about how the PE conspiracy lawsuit will run? With the above mentioned three PE firms reportedly settling for collective total of US$325 mn. And with recent settlement by the other three defendants Bain Capital, Silver Lake and Goldman Sachs, for a combined US$150.5 mn, we are still nowhere near the multi-billion dollar compensation sought by pension funds and individual investors as plaintiffs.

The crux of this matter is which litigation side’s lawyers, defence or prosecution, has outwitted the other and whether the US Justice Department’s step forward serves the public interest or recoups from big corporate finance. While the people’s campaign for “cleaning up finance” gains momentum, all too often the wider public interest is understated by its representatives in state legislation and administration i.e. justice and politicians respectively. See FPM-followed SAC-saga in prosecuting Steven A. Cohen and his eponymous firm so far reaching a global multi-billion dollar settlement.  Watch this space September 4, 2014.

In the second example of ‘exit doors’ FPM sees a sinister trend towards hedge fund executives exploiting their bretheran PE firm’s mismanagement or asset stripping of their buyout companies. The added-value represented by the PE management’s involvement in the firms it takes private are suspiciously questioned at IPO. If this was the intended result then FPM recommends that PE and hedge fund activities need to be curtailed. As was when Chinese Walls were implemented at investment banks to prevent conflicts of interests between its trading operations and its advisory businesses. One cannot help but draw comparisons on how the mega-banks are proceeding to settle lawsuits for acting as double-agents in the subprime CDO collapse that bought the entire capital markets to its knees in 2007/08. High water marked by Lehman Brothers’ demise.   

Unwinding Risky Hedge Funds

FPM have been active in and monitoring the hedge fund seeding and stake-buying investments. Alternatively we refer to this business line as simply asset management finance.  Specifically to understand the life-cycle phase of the hedged fund industry through tracking asset management finance activity . An FPM principal has participated in a 2007 stake-buying club deal arranged by the now virtually defunct Lehman Brothers. With our financing credentials in hedge fund operations we identify and interpret trending ideas for institutional investors to be wary of. The sell-off or unwinding we discuss refers to the hedge fund asset class. This is not the same as “unwiding risky hedge funds” in a portfolio. In this article, FPM analyze yet another re-structuring phase in hedge fund investments.

The crux of our observations is that leading Alternative Investment Brand (“AIB) shops like Blackstone Group, TPG Capital, KKR & Co and Man Group are at varying stages in their re-structuring of hedge fund seed-stake activities. We understand from resourceful relationships that the multitudinous risks building on investment bank books since the financial crisis means exit doors have and are being sought by them, while other asset management entrants seeking to open new doors! A matter of timing is difficult to predict but the context of restructuring is clear to FPM associates.  AIBs and their select investors don’t seem to want to wear the expected hedge fund proposition implosion risk or in industry parlance known as ‘blow-up risk’, anymore. So this week, the AIB bellwether Blackstone floated the idea of offloading its holding of risky vehicles via an initial public offering:

“…Blackstone executives have told clients that taking stakes in hedge fund firms is a good opportunity for yield and raised the possibility of an IPO of a diversified portfolio of stakes…” WSJ MoneyBeat, 04 Jul 2014

By inference the multitude of risks festering in external hedge fund investments are greater than the promised return of finding and owning a piece of the next mega institutional asset manager, emerging from the new millennium fandangle ‘alternatives’ brand. FPM’s dissection of this product cycle is entitled “Product Convergence or Incestuous Orgy in Alternatives”. Our long-memory reminds our readers of the once poor reputation hedge funds had as highly risky institutional investments, as distinct from their regulated listed counterparts, the humble mutual fund. While that perception of hedge funds has changed with better reputation for them, the blow-up risks have not gone away due to their traditional modus operandi. A handful of institutionally evolved AIB managers with their polished-up financial public relations communications, clearly does not indicate that emerging new managers are not susceptible to blow-ups, whomever their reputable AIB sponsor maybe.

Hence why leading private equity group Blackstone, educated by its 30-years hedge fund investments experience and transparency from stake-seed investing, are now laying the IPO-foundation for arms-length engagement with external hedge funds. Passing the buck to unsuspecting institutional and retail investors eh! Also, partly explains why Blackstone is building its internal hedge fund offering and why FPM believe it is consequently internalising massive operational risk from its insider-trading association reputation alone:

"In one way, Blackstone's model resembles SAC Capital Advisors LP, the fund led by Steven Cohen Blackstone's trading teams will pitch their best ideas to a group... If it likes the ideas, Blackstone will give the team additional cash to piggyback on the trades or use the ideas in other firm products... SAC returned external money earlier this year in the wake of an insider-trading scandal."

Blackstone Readies Big-Bet Hedge Fund, WSJ 29th June 2014

Blackstone Group, Soros Fund Management and few others like Pequot Capital before it scandal-ridden closure, have long been vocal forerunners and ardent supporters, establishing the highly risky and questionable hedge fund strategies as an mainstream investment asset class. Since Blackstone’s formation in 1985 it has invested in hedge funds. Creating rumours that its Chinese Wall were breached, since it is a leading corporate deal-maker or private equity manager, which provided executive level ‘heads-up’ for the external hedge fund traders it backed. The famed George Soros and his management firm are also not without insider trading reputations. (See more in FPM’s “No Smoke Without Fire: Of Reputation Risk”, a case-study enterprise report of Blackstone Group’s sponsorship of systematic insider trading at Steven Cohen’s eponymous SAC Capital – a manager now renamed 72Point Asset Management and shuttered to external money)

The public offering of emerging managers FoFs proposition implies that the hedge fund convergence and implosion risks will increasingly be widely born by public pensions. Also, the IPO move suggests existing investors backing the Blackstone emerging managers’ funds are reigning-in their search for the ‘illusory and mythical’ alpha managers. Despite it being reported that J Tomlinson Hill, chief of Blackstone's hedge fund business, was quoted as intending to "dominate" the hedge fund seed-staking business.

The previous case of such large scale packaging and dumping was marketed as “collateralised debt obligations” investments.  Basically, CDOs were varying risky debt papers, which were securitised with enhanced ratings, packaged and offloaded by investment banks to unsuspecting global institutional investors. We know the aftermath of that folly! The structured product bubble exploded with the unravelling of the subprime mortgage debts constituting theses ‘diversified’ investments. Then, voila! global financial crisis. Similarly, FPM have tracked the incestuous cross-holding and ‘farmed’ investments in hedge funds by sponsors of the alternative investment universe. This deep knowledge database serves FPM to analyse FOFs constituting dodgy me-too hedge fund brands. By which we do not just mean beta funds masquerading as alpha investments, but those hedge funds that engage in sharp practices for their edge with inherent operational risks.

Lest we make the error known as “problem of induction” by citing one major example of Blackstone Group to generalise our point that re-structuring private equity of hedge funds is a cause for concern and opportunistic trend, we discuss a few other examples. Such as Man Group reportedly stating its intention to withdraw from further hedge fund seed-stake investments:

“Man Group is winding down its hedge fund-seeding business. Via its 2012 purchase of FRM, Man inherited a seeding vehicle that launched in 2007 with $400 million but is now in run-off mode following a recent restructuring…” HFAlert.com, 04 June 2014  

Also, note that KKR & Co, a US private equity pioneering giant with over US$100 bn assets under management (AuM) announced closure of an internalised equity strategy hedge fund last month June. For the KKR Equity Strategies wind-down, their public relations cite mediocre performance of average 5% annualized since its inception in August 2011. However hedge fund analysts understand that an operational scale of only AuM US$510 mn for a behemoth asset manager outweighed costs of its Goldman Sachs lifted prop' traders. As well as poor critical mass in assets managed KES only had 20 external investors. KES was reportedly started with US$100 mn from KKR. This is another blow-up risk in hedge funds, when the main sponsoring investor pulls out leaving a funding gap or forcing liquidation into premeditating 'short-squeeze' market. Such funding gaps are an opportunity fund manager transactions facilitated by FPM.

Despite above example, the crux of the matter is that early-stage ‘baby’ hedge funds, i.e. 3-5 years of existence and less than $1 bn AuM, are generally the hallmark of better alpha investments. They apply traditional hedge fund models such as strong performance, key-man operations, outsized bets, scaled capacity and innovative risk allocation including ‘dubious risky’ practices, all contributing to enhanced risk-reward payoffs. As early-stage managers get operationally significant with wider institutional investors base they become convergence story beta plays. Hence, one reason of many why established hedge fund managers, after being effectively incubated by their larger backers, for say a 5-year period, are ripe for strategic exits or IPO. Courting, marriage, honeymoon, separation and divorce are the allegoric conventional business transactions of private equity managers, historically a.k.a. corporate financing cycle.

Man Group and other AIB managers consolidated their own business FOFs model through acquisition. (Man Group acquisition of FRM); and then by in-housing direct investment hedge fund strategies (Man Group bought GLG). And when these AIBs wanted to expand their alternative universe and diversify their performance-related income with external operational revenue-sharing through a network of investment managers they undertook seeding and stake businesses. As the benefits of owning hedge funds outweigh the perceived, potential and real reputation risks its time to bolt for the hills. Analogous to investigative expose news, hedge funds are beyond the “scoop and splash” stages and have entered the “mature and decline” stages. Don’t take FPM’s “M&A of the Alternative Kind” enterprise exposition for it, look at TA Associates, an AIB private equity firm with a 46-year history of transactions including the financial institutions space. Last month in June Man Group had entered into a conditional agreement to acquire Numeric Investors from TA Associates. Numeric Investors have US$ 14 bn AuM and was established in 1989. This exit deal is still unconsummated but TA Associates held the Numeric Investors stake for 10 years.

The mentioned triumvirate enterprise execution themes of FPM[1] are encapsulated in exploring the difficult circumstances of DE Shaw’s 20% stake sale by Alvarez & Marsal, the financial practice liquidating the Lehman estate. The liquidators of Lehman have had challenges selling the hedge fund stubs since the investment bank’s acquisition of the stake a year before its bankruptcy in September 2008. Also, within fund manager transactions we noticed another private equity giant TPG Capital venturing further afield into the Asian hedge fund seed-stake business. Remember it was only recently in the evolutionary cycle of hedge funds that investment banks were forced to offload hedge funds under Volker Rule related to risk-weighted capital. Some investment banks hived their fund portfolio into client portfolio within their asset management divisions.

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[1]FPM Three Themes: 1) Product Convergence or Incestuous Orgy in Alternatives, 2) No Smoke Without Fire: Of Reputation Risk, 3) M&A of the Alternative Kind