Institutional Investor's Alpha Magazine - March 2008 - (Page 8) ripheral holdings and have more of an Internet presence. Firebrand and Harbinger used a similar tack with computer maker Gateway in 2006. (Harbinger, with $18 billion in assets under management, is the equity half of the partnership.) In the Gateway move, Galloway and partners felt the company’s stock price had fallen below its brand value. After Harbinger and company snatched up almost 11 percent of Gateway’s stock, the computer maker avoided a proxy fight by giving Galloway a board seat. Less than a year later, he helped orchestrate a buyout by Acer, a Taiwan-based PC maker, for $710 million — a 57 percent premium to Gateway’s stock price at the time. John Morton, president of Morton Research, a media consulting firm in Silver Spring, Maryland, isn’t convinced the activist shtick will work with the Times, despite the hedge funds’ having won board seats: “The family controls the board,” Morton says, “and it controls the management.” But he notes that the Sulzbergers “have a legal, and certainly a moral, obligation to listen.” Arthur Sulzberger, the publisher, says he welcomes the new “perspectives and insights.” The 156-year-old paper’s advertising revenues are off; in January alone they were down by 9.8 percent year over year. Its daily circulation has stalled at 1.04 million, lagging the Wall Street Journal ’s 2.02 million but ahead of the Washington Post’s 650,000. In February the Times announced 100 job cuts, but it continues to employ about 1,200 news-side staffers, almost all of whom have union protection. — Jason Skog Securities, Anyone? W Out Foxed o, it probably wasn’t the 17thcentury Quaker hero George Fox who inspired the alias alleged to have been used by then–New York governor Eliot Spitzer in his ill-advised liaisons with prostitutes. It was more likely the Rye Brook, New York–based fund-offunds manager George Fox, a longtime Spitzer friend and supporter. Fox ’s spokesman was swif t to distance him from the governor, saying within hours of Spitzer’s outing on March 10 that Fox acknowledged their 20-year friendship but that “the news that his name may have been used as an alias comes as a great surprise and disappointment. There is absolutely no connection between Mr. Fox and the governor’s alleged activity.” Fox’s company, Titan Advisors, is, according to its Web site, “an experienced asset management and advisory firm focused exclusively on hedge funds.” The site says Titan and affi liates manage more than $3.5 billion and employ “the sound judgment gained from long experience in the investment business on behalf of institutional and high-net-worth clients.” The predecessor to Titan was G. Fox N Eliot Spitzer & Co., founded by Fox in 1992 as a hedge fund consulting firm. It advised on $800 million in assets at the end of 2000, the year it became Titan. That other George Fox? He was an Englishman who moved to America to escape religious oppression after founding the Religious Society of Friends, also known as the Quakers. George Fox University, an evangelical college named for the Brit, has three campuses in Oregon and one in Idaho. — Karl Cates hen the auction-rate-securities market went into seizure in February and early March, it only added to the headaches of hedge funds operating in the municipal bond market, triggering prompt liquidations and $3 billion in losses. Though hedge funds may not have had a large direct stake in the ARS market, the carryover effect from the meltdown caused such a downward spiral in muni prices that it gutted their value relative to taxable securities. This caused liquidations in the hedge funds’ highly leveraged positions in the tender-options bond market. The losses are likely to continue in the muni market, given hedge fund liquidations and the expected f lood of municipal bond refinancing by issuers who have relied on ARSs for short-term fi nancing. What’s also keeping money out of the muni market, say hedge fund managers, is the reluctance of banks to give hedge funds extensive repo lines. Uncertainty over bond insurers doesn’t help. Auction-rate securities — introduced in 1984 and estimated by Bank of America Corp. to be a $330 billion market — are used by municipalities (as well as nonprofits, universities and closed-end muni bond funds) for short-term financing. Though they have nominal longterm maturities, ARSs are priced and traded as short-term instruments because of their interest rate reset mechanism and the willingness of investment banks to provide clearing bids to maintain a market. Until recently, most ARS investors were high-net-worth individuals and corporations, which treated these securities as cash equivalents. But corporations abandoned the market after a March 2007 decision by the Financial Accounting Standards Board to strike “cash equivalents” from cash flow and balance-sheet statements. This left high-net-worth individuals as the primary buyers. For a time, investment banks continued to submit bids to ensure that auctions would clear. But given the banks’ increasingly constrained balance sheets, they could no longer afford to do so; in February, 80 percent of ARS auctions failed. This triggered provisions that in some cases caused yields to reset at as high as 12 percent. 8 • INSTITUTIONAL INVESTOR’S ALPHA • MARCH 2008 HIROKO MASUIKE/THE NEW YORK TIMES/REDUX
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