Thursday, 29 April 2010

Major New York Hedge Funds Join Lawsuit v Porsche

Eighteen investment funds today joined the lawsuit against Porsche Automobil Holding SE asserting fraud and securities manipulation in relation to Porsche SE’s failed 2008 attempt to take over Volkswagen AG. With the addition of the new plaintiffs, the now 35 funds seek to recover more than $2 billion dollars in losses. The 18 funds that joined the lawsuit are part of 6 fund families: Canyon Capital, D.E. Shaw, Greenlight Capital, Ironbound Partners, Royal Capital, and Tiger Global.

The Amended Complaint, filed this morning in Manhattan federal court, explains in greater detail how Porsche SE manipulated the price of VW stock as it secretly cornered the market in VW shares. According to the Amended Complaint, Porsche SE hid that it was cornering the market in VW’s freely traded shares by repeatedly issuing misleading statements about its activities and by spreading purchases of call options around to several counterparties to avoid detection of its increasing control. The scheme induced the plaintiff funds to establish short positions on VW stock. When Porsche SE suddenly revealed the extent of its true control of VW shares on October 26, 2008, a massive short squeeze ensued. The price of VW shares skyrocketed several hundred percent, briefly topping 1,000 Euros. Investors who had shorted VW lost billions covering their positions in the squeeze. Porsche SE collected outrageous profits at the expense of plaintiffs and others by releasing some of its shares into the market at artificial prices.

Today’s filing reveals previously unknown details of Porsche SE’s plan. The new allegations include that:

  • Less than a week before Porsche SE revealed the truth—that it had amassed control of more than 74 percent of VW’s shares— it conducted phone calls with investment advisors in New York during which Porsche SE sought to reassure the New York-based investment advisors that it was nowhere near 75 percent control. Among the false statements Porsche SE made was that although it would acquire a simple majority of VW shares, "going to 75% is not on the agenda." Porsche SE told another fund that it would stop acquiring shares after achieving 50–55% control.  
  • Porsche SE admitted to at least one plaintiff that it was spreading its options trades around to multiple counterparties to avoid detection.
  • Porsche SE’s fraudulent strategy deliberately targeted short sellers. In order to secretly obtain 75 percent ownership in VW, Porsche needed short sellers to borrow stock from owners who would not or could not sell the stock themselves and then to sell it to Porsche or Porsche's call-option counterparties. Without the additional supply created by short sellers, Porsche could never have gained control of 75 percent.  
  • Porsche SE financed its call-option strategy in part through selling put options. As the price of VW declined in the third week of October 2008, Porsche SE’s liability on the puts it had sold threatened to force the company into bankruptcy. It avoided this threat by forcing the price of VW up, which it accomplished by announcing its call-option position on October 26, triggering the squeeze.

The case is pending in the Southern District of New York, where it is captioned as Elliott Associates, L.P., et al, v. Porsche Automobil Holding SE, et al, No. 10-civ-532 (HB)(THK).

The funds are represented by Bartlit Beck Herman Palenchar & Scott LLP (see and Kleinberg, Kaplan, Wolf & Cohen, P.C. (

Wednesday, 28 April 2010

Race for FoF Acquisitions Starts with Thames River Capital

The increasing likelihood of hedge fund M&A has been a theme of this blog since it launched in October last year: the first podcast was on that topic ( and a recent post was on M&A in the fund of hedge funds sector (

The most significant deal in Europe to date was announced today, as Thames River Capital, a stalwart of the London hedge fund industry, is to be acquired by institutional money manager F&C Asset Management plc (F&C). F&C had assets under management of £101.5 billion as at 31 March 2010,a rise of 3.8% over the first three months of the year. Thames River Capital had £4.2bn AUM at the end of the last quarter, a rise of 5.1% from the start of the year.

Some details of the acquisition are given below, and in terms of indications for further deal flow it should be born in mind that the mix of the business at Thames River is now biased towards long-only - the hedge fund element is mostly in a successful (£0.92bn) and growing fund of hedge fund business unit. Thames River also has a very effective sales and maketing team - F&C has potential to make good mileage fron further utlisation of this prime asset of Thames River's if F&C management see it the same way, and if the boutique nature of the target acquired can be broken down some.

The gun really has been fired for fund of hedge fund takeovers.

Release Extract:

F&C Asset Management plc (“F&C” or the “Group”) is pleased to announce that it has entered into a conditional agreement to acquire the Thames River Capital group (“Thames River Capital”) for consideration of up to £53.6 million (comprising initial consideration of £33.6 million and conditional consideration of up to a further £20 million) payable in cash, loan notes and/or F&C shares as described below. Thames River Capital is a London-based, specialist asset management business with an estimated £4.2 billion of assets under management as at 31 March 2010.

Highlights of the Acquisition:

• Acquisition of a UK-based specialist asset management business providing products principally to wholesale and wealth management investors through nine investment teams (the “Investment Teams”)

• Established sales and marketing capability within Thames River Capital comprising a team of 24 individuals with a proven track record of delivering new business flows

• Initial consideration of £33.6 million payable in cash or loan notes at completion and up to a further £20
million of conditional consideration payable in F&C shares or loan notes if Thames River Capital meets
certain financial performance targets at 31 December 2011 and 30 June 2012

• Initial consideration for the Acquisition to be funded through a combination of a cash placing of F&C
ordinary shares equal to approximately 5% of F&C’s issued share capital (the “Placing”), F&C’s existing cash resources and new indebtedness of £15 million

• F&C will acquire, through Thames River Capital (UK) Limited (“Thames River Capital UK”), an economic interest in the management fee profits and performance fee profits generated by the Investment Teams, which for the 11 month period ended 28 February 2010 amounted to approximately 40%2 in aggregate of those total profits

• F&C has also agreed terms under which its economic interest in the share of management fee profits of all of the Investment Teams can be increased over time (the “Commutation Arrangements”)

• Retention and incentive plans have been agreed for Thames River Capital’s key personnel under which
conditional awards will be granted over F&C shares with a value equal to £35 million that will be subject, in the case of the incentive plan, to the achievement of certain financial targets and vest between 30
months and six years after completion of the Acquisition (the “Management Share Plans”)

• F&C to follow the same post-acquisition integration strategy for Thames River Capital as it adopted for its recent successful acquisition of REIT Asset Management. Appropriate governance and monitoring
procedures will be implemented whilst allowing Thames River Capital to retain the distinctive investment
style and culture that has made it successful

• Acquisition to exclude Nevsky Capital LLP, a current associated undertaking of Thames River Capital.
Prior to completion of the Acquisition, Thames River Capital’s interest in Nevsky Capital LLP will be
demerged and will, thereafter, be directly held by the current Thames River Capital shareholders

• Acquisition is anticipated to close in or before the third quarter of 2010

footnote: Based on the total management fee profits and performance fee profits of the Investment Teams for the specified period after deduction of costs and partners' base drawings. The interest that F&C will acquire, through Thames River Capital UK, in the management fee profits and performance fee profits generated by the Investment Teams differs in the case of each Investment Team.

Friday, 23 April 2010

Moore Capital's Bacon Tops the UK Hedge Fund Rich List

Each year "The Sunday Times" profiles the 1,000 richest people and families in the UK and the wealthiest 250 in Ireland. The list is based on identifiable wealth (land, property, other assets such as art and racehorses, or significant shares in publicly quoted companies), and excludes bank accounts (to which the paper has no access). The table below ranks the UK domiciled hedge fund managers in the List.

The big hedge fund winners, or at least gainers, in the last year have been:

  • London resident and macro maven Louis Bacon is the first hedge fund manager to be credited in this List with a net worth in excess of a billion Pounds. George Soros, who maintains a house in London, has only failed to make the List now and previously because he is not domiciled here.
  • Global macro clearly had a good period recently because Alan Howard (of Brevan Howard) is credited with an increase in wealth of half a billion pounds since the last ranking was compiled.
  • The other investment strategy that is strongly represented at the top of the hedge fund List is CTA. BlueCrest founders Mike Platt and Bill Reeves are ranked equal fifth, coming  just after David Harding of Winton Capital. 
  • Perhaps the only surprise is a calculation that the net worth of Arpad Busson of EIM has jumped by 71% in the last year.

Wednesday, 14 April 2010

Fund of Hedge Fund Dis-intermediation - Evidence from Japan

Following up on the  prospects for funds of hedge funds, which I have covered earlier in the month, I neglected to mention dis-intermediation by investing institutions. This is a natural phase of development for institutional investors of scale.

First the institutions use small allocations as a percentage of assets and tap into third party expertise to implement the strategic allocation. This first toe-dipping willl typically utilise a fund of hedge funds, or for the  larger institutions, several funds of funds to keep them all honest. A minority of new investors in hedge funds will use a third party advisor, like Albourne Partners, and allocate directly to single managers, or these days look to use replication, like USS of the UK.

The investing institution then gets used to working with hedge funds, gains experience and understanding, and they often move onto increased strategic allocations and change to a new mode of implementation. This may involve making strategic bets on particular hedge fund investment strategies, say emerging managers, credit hedge funds, or directional managers. Moving from diversified mandates to using more specialised mandates (in addition) might also be implemented via specialist funds of hedge funds, but is as likley to involve active selection of single managers. 

So it is natural for investing institutions of scale, with sufficient in-house expertise, to progress to selecting hedge funds individually. There is an extra incentive to do this, a negative motivation, when the foundation exposure to hedge funds (via funds of funds) is seen as disappointing. To a significant degree this has been the case for the last two years, to the downside and then the upside, by turns. There are good reasons for the significant under-performance of funds of hedge funds, particularly in 2009, but it can have commmercial impacts through changes in underlying investor attitudes. A recent example was the change in approach of the South Carolina Retirement System. Formerly the allocation to hedge fund strategies was 70% in funds of funds and 30% directly in single manager funds: that split is to be reversed in future.  This trend to dis-intermediation is also being reflected in Japan.

Japanese life comapnies have amongst the longest experience of exposure to hedge funds amongst investing institutions. In the middle of the last decade Japanese pension funds allocated to hedge funds too. The core of the exposure has always been by fund of hedge funds. The status of funds of hedge funds as the core means of obtaining exposure is under threat. For the last five years Daiwa Institute of Research has surveyed Japanese pension funds regularly on their hedge fund investment intentions. Historically the most common intended allocations to hedge funds were to funds of hedge funds in the surveys. In the lastest survey, and for the first time, the most common intended allocations were to a hedge fund strategy other than fund of funds, in fact more pension funds of Japan intend to allocate to managed futures funds than funds of funds.

There is some anecdotal evidence that Japanese investing institutions intend to allocate more directly to single manager hedge funds, but the key point is that the share of capital in the hedge fund industry that has been routed via fund of funds will only continue to decline. Funds of funds willl increasingly be dis-intermediated at the industry level, though individual firms may grow through taking market share.  

Woke up in Early 2007?

Today’s Bloomberg headlines includes a classic time-warp headline: “AIG’s ILFC Unit Sells 53 Planes to Macquarie for $2 Billion”

So it is game on – if everyone is not quite back to where they where in risk assumption, then at least it is possible to discern a resumption of normal investment bank activities with the usual suspects doing what we know them for.

Should equity markets advance much further or stay at these levels much longer then the next phase should be more secondaries for takeovers and increasing IPOs. ..which is good for investment banks…

Sunday, 11 April 2010

Clarium Redux - Still Arguing with Markets, Still Losing

I am grateful to the website market folly ( for this input on Clarium Capital, the global macro fund manager.

Peter Thiel, source:Bloomberg

" Even more shocking perhaps is that the downward spiral at Peter Thiel's hedge fund Clarium Capital has continued. ZeroHedge noted that Clarium lost 6.1% in the first three weeks of March and was now down 5.4% for the year. This all comes as US equity markets are up over 6.4% for 2010. We're not quite sure what's going on over there but after a fantastic start to the fund, the last few years have been quite rough on them, to put it politely. They were down 25% in 2009 according to our hedge fund performance numbers post. However, as of the recent performance data, they were still up 210% since inception.

Returns from Special Situations to Become Special Again?

A few months ago I was a guest on the hedge fund radio show "The Naked Short Club" on Resonance FM. A question for the panel was "which hedge fund strategies did we each prefer this year?" My choice then and now are the event-driven strategies. I chose those strategies partly because the evidence of surveys of investors have not mentioned event-driven as a favourite (except for distressed), and on the basis of the market environment I see unfolding this year. Distressed securities funds posted the biggest inflow as a percentage of AUM in February this year (at 4.2% of assets) according to TrimTabs Investment Research and BarclayHedge - so they are hardly being ignored.

It still remains the case that investors compiling survey responses cite what has done well for the last six months, but what has changed over a shorter time-frame is the outlook for the special situations component of the event driven set of strategies. At the turn of the year it was somewhat fanciful to suggest that the market environment would be suitable for special sits investors - up to that point corporate activity was very limited in publicly traded markets. From a UK perspective we had a clear landmark takeover in the acquisition of Cadbury's by Kraft Inc, but other forms of M&A activity have taken place and there is activity in sectors beyond those that are consumer-related. The stock markets have reached recovery highs, retracing all of the fall from the second week of January into mid February. This has revived the animal spirits that drive markets, and primary and secondary issuance has picked up and will increase from here. 

IPOs  Spin-outs and Buy-ins as well as Takeovers

The issuance will be for a range of purposes- IPOs, spin-outs, and buy-ins as well as takeovers. IPOs that were scheduled to take place in February and were postponed will now be back under active consideration. The recovery in valuations in markets will encourage managements to listen to the sum-of-the-parts arguments and enhance shareholder value through spin-outs like that of Enquest from Petrofac. Just last week there was an example of a buy-in, as Agnico-Eagle Mines stepped up to the plate and elected to offer to acquire all the shares it does not already own in Comaplex Minerals.

M&A is back in the revived energy sector, and will come back in other resource-based sectors. The Chinese have stated their desire to acquire strategic resources on a global basis, and their activities will spark the attention of other acquirers on a game theory basis. In upstream energy in 2009 alone, China spent $16 billion gaining footprints in Canadian oil sands, the Gulf of Mexico, Nigeria, Gabon, Trinidad and Tobago, Ecuador, Syria, Iraq, Iran, Indonesia and Kazakhstan. There are expected to be more National Oil Company acquisitions this year in unconventional oil and gas production primarily sourced from gas shales, tight gas sands and oil sands according to industry consultants. Energy M&A will not be confined to NOCs and producing assets as shown by the acquisition of Smith International by Schlumberger.
In mining the secondary and tertiary stocks amongst the miners and mineral exploration stocks have started to out-perform the global major mining stocks as interest warms up. Before Easter there was corporate activity in gold (Newcrest's proposal to merge with Lihir Gold) and in the coal sector, and further deals in zinc. 

Not Just Resources

However, deal flow will not be confined to resources industries, as value is apparent elsewhere to corporate buyers. Hedge fund manager Leon Cooperman of Omega Advisors has been interviewed in Fortune magazine recently. Asked about increased takeover activity he said that it reflects the fact that the stock market is selling about in line with replacement costs. "With the credit markets improving and business getting a little better, corporations are showing a willingness to buy other businesses, and they are paying up for them," he noted*.

He continued, "We have seen a large number of deals where the average premium over the market price has been approximately 40%. When Air Products (APD, Fortune 500) bids $5 billion in cash for AirGas (ARG), which is 38% over market price, Air Products is telling us they feel sufficiently comfortable about their own business that they are willing to take on a lot of debt to do the deal. It's the same thing with Merck AG's $7 billion offer to buy Millipore (MIL) and Simon Property's (SPG) $10 billion bid to acquire General Growth Properties (GGP). When you buy a share in a business, you're buying a share of its brick, mortar, machinery, and earning power. What corporations are saying is that the equity market is not overvalued."

The corporate buyer has not been absent from the market, but should be more evident in the rest of this year. The pressures resulting from the "shareholder value" mantra is still there, and the continuing recovery of the banking sector will allow some debt financing this year, which was largely absent last year. For similar reasons it would not come as a surprise to see more activity by private equity in the second half of the year, both disposals and acquisitions. This combination of factors will present an increasingly rich environment for managers of special situations capital, both on a dedicated basis and as part of a multi-strategy offering. Better returns will result for special sits strategies.

  *The article won't link directly but can be found at, using search term "Leon Cooperman"

Friday, 9 April 2010

Fund of Hedge Funds Consolidation: The gun has been fired

For just about all of the last decade it has been consistently suggested that the fund of hedge funds sector was just about to consolidate.

Industry watchers suggested that the three different size categories had very different profiles - as potential acquirers and takeover targets. The medium-sized players were going to snap-up their smaller brethren. The larger players were going to add to their assets under management by picking up medium-sized funds, and small funds of funds looked out-moded and should merge or fade away, so it was said and written.

The rationale for consolidation had several arguments:-

  1. The industry was mature, as shown by the declining average fees charged.

  2. Assets under management in funds of hedge funds as a percentage of the whole hedge fund industry peaked as long ago as the middle of 2008.

Graphic 1. Global Fund of Funds Industry


Source:IFSL estimates

3. In 2009 the attrition rate amongst funds of funds was twice the rate of single manager funds at times.
4. The costs of being in the business were on the rise as staff remuneration and the costs of compliance were only going up.
5. Institutional investors were increasingly dominating flows into the industry, and only large scale fund of funds organisations looked of institutional quality.
6. Brand names and critical mass were important to institutional investors and furthermore this client base required high-end (and therefore expensive) risk management systems and risk management professionals.
7. Assets are still leaving funds of hedge funds - according to TrimTabs they lost $17.4 billion in the three months to February 2010. 

In short, for five years it has been widely held that the margins of funds of hedge funds could only contract, and that the prevailing business models couldn’t be sustained.

In such an environment it became logical for founders of businesses, particularly of the boutique “family-office-plus”, to sell out and capitalise on the growth of their funds of funds businesses. But somehow it never quite happened to the extent expected.

However, a coincidence of recent events suggests that maybe, at last, we are about to see some M&A activity amongst funds of hedge funds. Here is a sample of some of the recent deals done.

In the last year

In January 2010 the Swiss based quoted multi-strategy firm Gottex bought the three Constellar funds of funds run by Ted Wong. The assets under management, at $150m, were not significant relative to the rest of Gottex, which manages over $8bn, mostly in market-neutral products. But they diversify the product mix into directional multi-strategy funds of funds offerings and, maybe more significantly, increase the firm’s knowledge of the US onshore and offshore markets.

Serial acquirer Aberdeen Asset Management has added to its string of acquisitions of long-only businesses by acquiring some alternative asset management contracts. In November of last year Aberdeen picked up the management contract for Bramdean Alternatives, giving it an opportunity to look at the fund of hedge funds business at close hand. It must have liked what it saw because in February 2010 Aberdeen paid £84.7 million to RBS for assets under management of £13.5 billion (as at 30 September 2009), comprising an established, award-winning fund of hedge funds business (that of Coutts), a long-only multi-manager business and certain private equity and real estate funds of funds. Aberdeen has built good distribution, and plugging-in alternative investment strategies should further diversify the revenue streams, and the fund of funds product can be pushed into existing channels when appropriately packaged.

It is true that the long tail of fund of hedge funds businesses has shrunk somewhat in the last 18 months. Ansbacher left the business, as did Commerzbank via its COMAS subsidiary, and tiddlers like Collingham Capital Management undertook an organised retreat from the business.

Several hedge fund firms ran in-house funds of funds that they hoped to commercialise, following the template of Renaissance Technologies’ Meritage Fund, the West Coast fund of funds that was founded to invest partners’ capital in single manager hedge funds. But these “natural extensions” of the business can find it as hard as unconnected funds of funds to get traction. For example, London based money manager Millennium Global closed down its small fund of funds run by Hamlin Lovell in the middle of last year, and Brevan Howard had a good-hard-look at entering the fund of funds business before deciding against it in 2009.

In the last month

That hesitation shown by Brevan Howard has been overcome by a couple of buyers of fund of funds businesses in the last month. First, Collins Stewart, the stockbroking and wealth management firm, has bought discretionary investment management firm Corazon Capital which has £382 million in assets under management with offices in Guernsey and Geneva. Corazon Capital was itself a management buy-out from Dawnay Day in 2008. Curiously the deal with Collins Stewart has been done for only £1m cash paid. As much as a further £6m worth of shares could be paid as the balance of the consideration over three years, dependent on performance in the next 12 months. In January 2009 Corazon had $1.2bn AUM, so the shape of the deal may be explained by the drop in assets alone. As for strategic rationale, Collins Stewart has long had a Guernsey presence and a small Geneva office itself, so there is a clear scope to reduce costs – as long as they hold onto the assets.

Second, and maybe the larger surprise of the two deals announced for funds of funds last month, was the purchase of a 75.1% stake in Aida Capital by Standard Life Investments. Aida Capital is a London based, FSA registered, fund of hedge funds manager. Aida currently manages the Aida Open-Ended Fund, a Guernsey listed investment vehicle and the Aida Closed-Ended Fund, an investment fund listed on the London Stock Exchange. In total AUM at Aida are around $50m, whilst Standard Life manages around $207bn. A “modest upfront fee” will be paid for the stake. At that scale it is all upside for Standard Life – it will have access to a wider range of alternative investments than before, and new fund of hedge fund products will be created specifically for Standard Life, which may be distributed through recognised life company channels. It is also open for the life company assets to be invested in funds of hedge funds, particularly when the issues of legal structure are resolved in the UCITS III format.

Neither of the two deals done last month, nor the deals done over the last year in the fund of hedge fund sector are large or involve major firms in the business. So how can there be an idea that the starting gun has been fired for acquisitions of fund of hedge fund businesses? It is partly the passage of time from the financial disaster of the 2H of 2008, and the condition of the financial markets now, and the turnaround in flows to hedge funds. Unlike during previous rallies from bear market lows in the early Noughties there are now hedge fund businesses with listings. The value of their shares as takeover currency has been rising, and a number of them have existing fund of hedge fund businesses. Merger and acquisition activity was muted last year but has risen this year in other sectors: as market levels have risen so entrepreneurial spirits have been able to get funded. The same should apply to quoted alternative asset management and hedge fund businesses.

The flows into single manager hedge fund businesses re-started in the middle of last year. The sales cycle for funds of funds is longer than ever, but the commitment of institutional investors to their hedge fund investment programmes should mean that funds of funds will see positive flows on a net basis by the middle of this year. And so top line growth is an additional consolidation driver. There is also scope to do deals to leverage a fund of funds infrastructure that has a lot of capacity for capital growth and margin expansion, like Aida Capital.

So there are a number of motivations and corporate strategies at play in the new environment for takeovers of funds of funds businesses. The gun has been fired.

The bulk of this article first appeared on The Hedge Fund Journal website