Institutional Investor's Alpha Magazine - March 2008 - (Page 14) says David Shukis, head of hedge fund research and consulting at Cambridge Associates in Boston. Shukis says he knows of one hedge fund manager who recently sent out a revised agreement that included a gate on withdrawals. In such cases, investors are given a chance to exit if they don’t like the new terms. “If the risk seems to be escalating, they’ll get out,” Shukis explains. (For more of Shukis’ thoughts on hedge funds, see “Cambridge Is Watching” on page 36.) UPDATE Jon Wood hat was Jon Wood thinking? Through his Cayman Island – based hedge fund, SRM Global, Wood, alongside London-based hedge fund manager RAB Capital, made a £64 million ($128 million), 9 percent equity investment in British mortgage lender Northern Rock last September after it had signaled that it was in financial trouble. Wood seemed to believe he could push up the sale price of Northern Rock by later taking a 5.8 percent stake in troubled U.S. home loan purveyor Countrywide Financial (as reported last month in Alpha). Instead, his gambit may only have helped spook the U.K. government into nationalizing the bank. Shareholders were “wiped out” (in the words of a rival hedge fund manager), though the government has said it is working on a plan to compensate them. Wood was hardly the only one stung by housing markets. They also proved lethal for London-based hedge fund Peloton Partners, which after successfully shorting housing last year in its Peleton ABS Fund, seemed to believe that the time was right to reverse its bets, going long on Alt-A mortgage loans, which were perceived as being less risky than subprime ones. But this paper has come under pressure, too. Indeed, the managers who seem to be doing the best are those with a more pessimistic outlook. John Paulson, founder of Paulson & Co. in New York, who returned 591 percent last year in his Credit Opportunities Fund by betting on the collapse of the subprime market, agrees with what most economists are saying — that the U.S. is in a recession. Having exited most of his subprime trades, he is now shorting high-yield and investment-grade corporate bonds, particularly in the financial services sector. Of course, for Paulson, when it W comes to thinking about what the Federal Reserve Board might do, it helps to have hired former Fed chairman Alan Greenspan as an adviser. New funds are springing up to take advantage of distressed-investing op- At Old Greenwich, Connecticut–based Ellington Capital Management ($3 billion), it’s shades of the past. Almost ten years ago, over Columbus Day weekend, the firm sold the bulk of its portfolio in response to margin calls by prime brokers. This time the firm hopes to remain in business by blocking withdrawals. In September, CEO Michael Vranos and vice chairman Richard Brounstein told investors they were suspending redemptions to buy time on lower-rated or unrated subprime mortgage securities. The firm has said little since then, and the gate remains in place. James McKee, a hedge fund consultant at Callan Associates in San Francisco, says that barring redemptions is never a good sign. “If you’re putting up gates and increasing lockups, you are certainly sending signals,” he says. “By the time people put up gates, it’s a little too late.” — Frances Denmark Jon Wood of SRM Global Fund portunities. David Sheer, former head of global securitization products at New York–based investment bank Lehman Brothers, plans to launch One Williams Street Capital, which is said to have about $1.5 billion in hedge fund assets and $500 million in a private equity pool, with an eye toward distressed opportunities, especially in the mortgageand asset-backed-securities sectors. As for Wood — who was reported to have been furious when he learned of the Northern Rock nationalization — it is too soon to count him out. His fund was down 33 percent for 2007, its first full year of operation, and the Northern Rock debacle could not have helped. But with Wood taking the lead in challenging the nationalization, it may be the U.K. government that ends up suffering buyer’s remorse. — I.R.-S. 14 • INSTITUTIONAL INVESTOR’S ALPHA • MARCH 2008 EDDIE MULHOLLAND/REX USA Wanted T Help he grim march of bad news from Wall Street has been punctuated by almost daily headlines announcing downsizings. Bank of America Corp. has announced 3,650 layoffs in investment banking, mortgage lending and other areas since October. Citigroup says it will cut 17,000 to 24,000 jobs this year through layoffs, attrition and liquidations. Even Goldman, Sachs & Co., one of the few firms to escape largely unscathed from the credit crisis, has plans to trim about 1,500 positions, though it says the reduction is part of its normal annual culling. Add to that the abrupt collapse of Bear Stearns Cos., which employed 14,000 worldwide, most of whom are likely to be looking for work. “There has been a whole ton of layoffs at investment banks,” concedes Nick Bristol, founder of Bristol Consulting, a New York search firm that specializes in hiring hedge fund executives. Hedge funds, however, are taking a very different tack. Sandy Gross, a principal at search fi rm Pinetum Partners in Greenwich, Connecticut, says that many are fi ring entire teams of analysts and replacing them with new blood. “Many funds have let people go and are looking for new senior management to build a new strategy,” she explains. Gross, who was head of human resources and recruiting at Greenwich-based Amaranth Group before founding Pinetum in July 2004, says there are many opportunities, abroad in particular. “We’re seeing a lot of interest in Hong Kong, Singapore, India and Latin America,” she adds. “A number of searches we’re doing are truly global, where people are looking for somebody who might already be on the ground in one of those places.”
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