The London investment company, Centaur, which launched its Galileo fund to provide investors with the opportunity to generate returns through none other than sports betting has collapsed resulting in what is reported to be a 100% loss with investors holding the bag for about $2.5 million.
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Given the array of exotic alternative investments being sold to the public, it’s logical that many investors often don’t understand what they are buying. What is even scarier is that it is likely their professional investment adviser doesn’t understand the alternative investment either. Investment advisers – 75 percent of them – admit they do not understand alternative investments. Notwithstanding their puzzlement, 50 percent of advisers said they intend to increase their use of them in their clients’ accounts this year. They could use some help, however, because of alternative investments are so confusing. (“Alternatives spur anxiety,” InvestmentNews).
The amount of dollars at stake in FINRA securities arbitrations has grown in recent years. Of the 7,000 claims currently pending, approximately 200 involve claims of $10 million or more. “The claims coming in now are substantially larger than what we had a few years ago,” Linda Fienberg, president of FINRA Dispute Resolution, was quoted as saying. (“FINRA flooded with multimillion-dollar cases,” Nate Raymond, The American Lawyer).
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Federal prosecutors have been putting a full court press on insider trading by hedge funds over the past four years. They recently announced the filing of criminal charges against seven more individuals, including hedge fund executives and portfolio managers, as well as guilty pleas by three cooperating defendants of Level Global Investors LP and mutual fund company Neuberger Berman Group LLC. Prosecutors say the cases show the “culture of greed” that permeates the hedge fund industry. (“Hedge Funds Prove Fertile Hunting Ground For Prosecutors,” Ian Thomas, Law 360).
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One former Wall Street hedge fund executive has just published a book in which he claims that investors would have done twice as well as hedge fund investors by investing in U.S. Treasuries over the past decade. Twice as well. Simon Lack, whose book is titled “Hedge Fund Mirage,” is a former hedge fund executive at JPMorgan Chase & Co. He now runs SL Advisors in Westfield, N.J.
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The Securities and Exchange Commission has implemented a strategy of using computer analyses to identify hedge funds and other firms whose claimed investment performance figures warrant special scrutiny for possible fraud. Working on the theory that, if the performance seems too good to be true, maybe it is, the SEC has commenced lawsuits and investigations into a number of supposedly “outperforming” hedge funds. More than 20,000 funds have or will be screened by the SEC’s new system.
Continue reading "'Serious Fraud' Exists in Hedge Fund Market" »
Promoters of fraudulent investments are targeting the 77 million baby boomers in the U.S. who make up 25 percent of the population, according to securities regulators and prosecutors (“Boomers Wearing Bull’s-Eyes,” Wall Street Journal, Kelly Greene). Regulators expect to file a record number of enforcement actions involving investors age 50 years and older, as financial fraud against boomers is “rampant” throughout the nation, according to the article.
In 2010, there were 1,241 criminal and civil regulatory fraud actions involving investors age 50 and over, versus 506 cases in 2009, according to the North American Securities Administrators Association (NASAA), the association of state securities regulators. Unfortunately, the number of enforcement actions is tiny compared to the number of actual fraud cases out there.
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Wiretaps of hundreds of conversations have led federal authorities to pursue charges against individuals at two well-known hedge funds and an established mutual fund that caters to ordinary retail investors. The targets are former traders at hedge funds Diamondback Capital management LLC and Level Global Investors LP, and an analyst at mutual fund company Neuberger Berman Group LLC. If charges are brought, they would represent a substantial expansion of the insider trading investigations underway. Word is that two former research analysts at Level Global and Diamondback are cooperating with authorities. (“More Charges Set for Insider Probe,” Wall Street Journal).
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A recent Bloomberg Markets Magazine article raises troubling questions about investment corruption at the highest levels of government. In July 2008, as market fears mounted, Treasury Secretary Henry Paulson reportedly met with a group of hedge fund managers (five of whom were former officers of Goldman Sachs, where Paulson was CEO), and described a scenario in which the government would put Fannie Mae and Freddie Mac into conservatorship, thereby wiping out the common stockholders of those institutions, according to a fund manager who attended the meeting (“How Paulson Gave Hedge Funds Advance Word,” Bloomberg Markets Magazine, By Richard Teitelbaum). But earlier that morning Paulson had provided a different message to New York Times reporters and editors (i.e., the public): that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books, and he expected their report would boost market confidence in Fannie and Freddie, according to the article.
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Forty percent of hedge fund investors are dissatisfied with their returns, and eighty percent are considering changing fund managers, but 38% plan to increase the amount of their hedge fund investments over the next year, according to the Wall Street Journal (“Investors Disappointed with Hedge Funds, But Sticking With Them”), citing a recent survey.
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When world markets move significantly in apparent response to major macroeconomic news, even supposedly “uncorrelated assets” move in unison with them, according to Jason Zweig’s Wall Street Journal article, “Caging Raging Contagion.” Such a significant move occurred last week when the Italian government and bonds collapsed over its fiscal problems, and everything else fell, too.
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Hedge funds are winning the fight against transparency. While hedge funds with more than $1.5 billion in assets will be required to report certain information to the Securities and Exchange Commission under new rules, after intense lobbying, no hedge funds will be required to report “position information,” or details on individual investment holdings; they will not bear the penalty of perjury for misleading reports; the reports will not be public (only regulators will have access to them). All of this assumes the rule, which was approved by the SEC, is also approved by the Commodities Futures Trading Commission, as expected.
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Unfortunately, many investors are experiencing first hand the truism that hedge fund managers rarely outperform the market on consistent basis.
John Paulson, the hedge fund manager who made a killing when Goldman Sachs let him select bad CDO assets, which he turned around and bet against, is having a tough time in 2011. His hedge fund has declined nearly 50% this year as a result of a massive positions in Bank of America, which had lost half of its value by October, Rupert Murdoch’s scandal-plagued News Corp., which owns Fox News, and Sino-Forest Corp., which imploded after an accounting scandal.
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Bloomberg reports that Citigroup invested approximately $800 million of shareholder’s equity in its own private equity and hedge funds during the third quarter, despite knowing that regulators are busy drafting the Volcker rule, which would curtail the practice. Citigroup reportedly classified the $800 million as Level 3 assets, which are illiquid assets that are valued by in-house models.
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As recently reported by InvestmentNews, The Securities and Exchange Commission (“SEC”) and the North American Securities Administrators Association, Inc. (“NASAA”) jointly issued an investor alert warning about risks associated with self-directed IRAs. These IRAs differ from traditional IRAs in that they allow owners to invest their retirement savings in a number of unusual and sometimes risky investment vehicles, including real estate, life settlements, limited partnerships and private placements.
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Many commentators have noted recently that the Wall Street meltdown of 2007-2008 was not a “black swan” – that is, an unprecedented and therefore unpredictable occurrence. Named for an influential 2007 book titled The Black Swan by investment fund manager Nassim Nicholas Talib, the black swan was used as a metaphor to explain why humans rely too much on the past to predict future events, and it has since been used as a defense by Wall Street to justify its inability to predict the 2008 crash. Talib himself maintains that the 2008 crisis was not a black swan event because, unlike the avian rarity of nature, it was predictable. The crisis was not only predictable, but it was actually predicted by many analysts whose voices were either ignored by the firms that employed them, or drowned out by the exuberant hype of brokers pushing the firms’ latest financial products without regard for their soundness.
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The Securities and Exchange Commission has unanimously approved regulations designed to provide regulators with better information about hedge funds’ leverage, investments, valuation and trading practices in order to help policy makers better manage the systemic risk to the whole financial sector posed by hedge funds. But some, like AFL-CIO president Richard Trumpka think it falls short and more disclosures are needed. “The fact that opaque, highly leveraged pools of capital - - or ‘shadow banks’ - - can pose systemic threats is well acknowledged,” Trumpka was quoted as saying.
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Many investors in alternative investments are in for unpleasant surprises. Alternative investments are very popular these days, as traditional stock and bond investments are not doing well. Alternative Investments include a wide variety of investments that fall outside the traditional stock and bond categories. Examples include structured products (such as principal protected notes and reverse convertibles); hedge funds; private equity; nontraded REITs; niche, leveraged, inverse leveraged, and synthetic exchange traded funds; and many others.
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Hedge funds lost $85 billion in the third quarter, the worst quarterly performance since the fourth quarter of 2008 and the fourth worst ever, according to CNNMoney. The article contains a chart depicting a stomach-churning ride for hedge fund investors: down 19.03% in 2008, up 19.98% in 2009, up 10.25 in 2010, down 5.44 so far this year. With all that volatility, investors (if they rode it all out) have a net 5.76% gain since 2008, which is 1.54% per year. Investors would have been better off buying a 10-year treasury bill yielding 3.66% per year in 2008.
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Wall Street is its own worst enemy, according to Tom Petruno of the LA Times (“Biggest Threat to Wall St. is the Enemy Within”). The enemy is not the occupiers of Wall Street or the regulators but the high-frequency computerized trading firms that comprise 70% of the market and cause the extreme volatility that is scaring off investors.
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