Alpha - September 2007 - (Page 14)

Take Stamford, Connecticut–based Bayou Management. In 2005 the hedge fund firm’s top two executives were caught defrauding investors out of roughly $450 million by withdrawing money earmarked for investment, hyping investment returns and ﬁling misleading ﬁnancial statements to hide their actions. First Advantage’s Shain says a simple look at the court records of the firm’s founder, Samuel Israel III, would have been enough to keep most investors away from the fund. “Sam Israel was arrested for drunk driving, and drugs were found in his car,” he says. “Also, there was a $2.6 million judgment against him in California.” Christopher Bittman, chief investment officer for Denver’s University of Colorado Foundation, turns to specialty investigators whenever his $700 million fund plans to make a signiﬁcant investment. “We take the management of our endowment very seriously, and the work of our outside private investigators is an important component,” he says. “I’m not suggesting we’re going to pick through a manager’s garbage before we invest with them — but we reserve the right to.” — William Freedman As Alpha Reported I t’s hard to get good help these days, particularly at college and university endowments. That was Alpha’s ﬁnding when we examined the topic in “Making the Grade,” in our July/August 2007 issue. Still, no one expected Mohamed El-Erian to exit the revolving door of endowment CIOs so soon after his October 2005 arrival at Harvard Management Co. In his short tenure at Harvard, El-Erian spent a lot of time interviewing and hiring investment professionals to rebuild the management office after the September 2005 departure of his predecessor, Jack Meyer. Like many before him, Meyer left to launch a hedge fund — in his case, Boston-based Convexity Capital Management — taking 33 of his employees with him. El-Erian was left to contend with a $350 million portfolio loss in July stemming from hedge fund firm Sowood Capital Management, a Meyer-era investment. Yet he still managed to generate a 23 percent return for the endowment’s ﬁscal year, ended June 30. In January he returns to his former employer, Newport Beach, California–based Paciﬁc Investment Management Co., where he will ﬁll the newly created post of co-CEO/co-CIO. — Frances Denmark Frank Assessment Massachusetts Representative Barney Frank: Looking at how to close the regulatory gap. or Massachusetts Representative Barney Frank, the lesson of the subprime mortgage crisis is simple: Financial markets need more regulation. “We have had the worst of both worlds — great innovation accompanied by deregulation,” Frank told Alpha in an interview last month. “You get real regulatory gaps, and the time has come to think about how to close them.” Hedge fund managers have no choice but to take Frank seriously. The 14term Democratic congressman took over as chairman of the House Financial Services Committee in January, when his party attained the majority. But how much he really threatens the lightly regulated status of alternative investments is unclear. “I’m not after hedge funds in particular,” Frank says. “This issue is the new instruments in the market — and the enormous leverage — not who is doing the trading.” Frank recognizes that hedge funds, which are designed for institutions and other sophisticated investors, require less oversight than mutual funds marketed to the general public. But given hedge funds’ role as buyers and ROGER L. WOLLENBERG/UPI NEWSPICTURES/DIGITAL RAILROAD F sellers of toxic subprime-backed securities, he says, “the needle has moved to where we want, at the very least, more information.” Further than this the chairman will not go — for the moment — and staffers say his team has yet to thrash out details on hedge fund disclosure. A September 5 hearing Frank held on Capitol Hill to address subprime fallout proved anticlimactic, at least for fund managers. Four federal ofﬁcials, led by Treasury undersecretary for domestic ﬁnance Robert Steel, were chided by committee members for their purported laxity on “liar’s loans,” “predatory lending” and other now–household terms. The U.S.’s broader ﬁnancial architecture, including hedge funds, was not touched. Frank struck a mild tone in his opening statement, asking, “Can we come up with regulation that will diminish the harm without killing the whole operation?” His only public conclusion after the panel was to call on the Federal Reserve Board to enact a “meaningful interest rate cut” — a position with which most of Wall Street presumably would not quarrel. (On September 18 the Fed granted Frank’s request by cutting the federal funds overnight lending rate 50 basis points, to 4.75 percent.) Based in the deep-blue suburbs of Boston, Frank has a reputation as an unabashed liberal. Yet “he also has a libertarian streak,” says hedge fund manager Phillip Goldstein, principal at Bulldog Investors in Pleasantville, New York, and a self-styled libertarian who won a court battle in June 2006 against a Securities and Exchange Commission regulation requiring hedge funds to register. Frank was one of the few legislators last year to oppose outlaw- 14 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.