FiNTAG [BETA] - Hedge Funds and Price Discovery: FiNTAG.blogspot: Hedge Fund Newsletter @ 05 December 2006

HEDGE FUND NEWS
05/12/2006 07:11:56 : GMT
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FINTAG COMMENT

And shooting into the US top 10 is that old 1970's family favourite:

1. Citigroup
2. Bank of America
3.

JP Morgan Chase
4. Wells Fargo
5. Goldman Sachs
6.

Morgan Stanley
7. Merrill Lynch
8. American Express
9.

US Bancorp
10. Bank of New York Mellon

Not sure if the branding people thought about the abbreviation, but BoNeY M is what has been created, with the merger of two old ladies who administrator many Hedge Funds. Good for the corporate bankers and in the long run bad for shareholders whatever Bob Kelly says.

The SEC is dithering again, Morgan Stanley is filling its Christmas stocking early, the Wall Street Journal rebrands into the Beano, another football club (soccer to those with a different dictionary) is taken over, Analysts are reported to earn less than the minimum wage, Mercer states the obvious and Debt is the new obesity.

I am in New York, enjoying its third world status and buying up most of 5th Avenue.

Life is tough for us Hedgies.

BONEY M

Driven by Wall Street demands for higher profits and returns to shareholders, Bank of New York's proposed $16.

5 billion acquisition of Mellon Financial is the latest in a string of blockbuster mergers transforming the financial services industry.

Annual revenues: $12.5 billion

Employees: 40,500 worldwide; 32,000 in U.

S.

Asset servicing: $16 trillion in assets under custody

Asset management: $1.1 trillion under management

Wall Street's response yesterday: Mellon up $2.

73, or 6.8%, to $42.78; Bank of New York up $4.

27, or 12%, to $39.75

Whether the partners are large, medium or small, whether their business is banking, investment management or something else, the objectives are the same: fatten profit margins by spreading costs over a larger asset base; expand product or service offerings; and extend market horizons.

The payoff, it is hoped, will benefit shareholders by creating ever bigger banks and financial service firms capable of making more money and thus, creating more value in the marketplace.

Shares in both the Bank of New York and Mellon, for example, rose a respective 12 percent and 6.8 percent yesterday, as investors viewed the combination as the best of both worlds -- two institutions getting bigger and better by merging complementary services.

The Bank of New York-Mellon combination joins two former banks that shed their retail branches to focus on fee-based businesses where, in many cases, size increases the likelihood of success.

Bank of New York Mellon will be the world's fifth-largest asset servicing manager and the 11th-largest asset manager by handling money for others, be it companies, institutions, other banks and financial services firms, wealthy individuals or investors.

Yesterday's announcement comes on the heels of Merrill Lynch combining its investment management business with PNC Financial Services Group's BlackRock unit, creating a $1 trillion money manager. But even as it relinquished majority control of BlackRock, PNC continued beefing up its core banking business, striking a $6 billion deal it expects to close early next year for Baltimore-based Mercantile Bankshares Corp.

That acquisition will complement its $652 million acquisition of Washington, D.C.'s Riggs Bank last year and make PNC the nation's 11th largest bank -- at least for the time being.

"There's more consolidation to come," said Morningstar analyst Jeffrey Ptak.

The sharp rise in Mellon and Bank of New York shares yesterday -- Mellon closed at $42.78, a new 52-week high and Bank of New York closed at $39.

75, also a new 52-week high -- signals Wall Street's faith that the merger will play out as advertised. The companies expect to reduce costs by $700 million annually, savings that will be crucial to the success of the asset servicing business of the combined company. Asset servicing includes securities lending, cash management, foreign exchange, administering hedge funds and a host of other services that rely heavily on people and computers.

"It's a scale business," Mr. Ptak said, meaning the best way to make money on it is to do a lot of it so that the costs of all those large investments necessary to build the business can be offset by volume. "There are huge personnel and technology outlays to go hand in glove with providing that kind of business.

"

The same is not true with asset management, where Mellon is providing most of the muscle through its Dreyfus funds and other investment offerings. It manages $856 billion for clients while Bank of New York oversees $155 billion.

Although size can help asset managers, it isn't as crucial to success as it is in asset servicing, Mr.

Ptak said. Small firms can be better investors than large firms, which sometimes results in large managers acquiring their smaller competitors.

But in asset servicing, "It's more difficult not to be big and still be successful," Mr.

Ptak said. "It's not really a 'high five' type of business [like investment management] where you get it right and you whoop it up. You either get it right or you don't.

What it boils down to for many clients is price."

Mr. Ptak said the Bank of New York-Mellon combination also offered plenty of opportunities for Mellon to sell services to Bank of New York customers that their banker couldn't provide and vice versa.

Consolidation in the financial services industry has enabled the survivors to offer clients far more products and services than they have in the past, said Morningstar analyst Craig Woker.

Such cross-selling, such as eliminating unnecessary workers, is an underlying rationale for consolidation. Whether textbook theory becomes reality depends on how the merger is implemented.

Mellon and Bank of New York plan to combine operations over three years, which Mr. Ptak believes reduces chances of aggravating clients with a disruptive transition.

Still, there are risks.

"There are a lot of moving parts, so it's only natural you have some attrition in your client base," he said.

The announcements heralding mergers and acquisitions always make the road to consolidation sound like a wide-open, well-paved, well-marked straightaway. It isn't, says John Frankola of Vista Asset Management of Pittsburgh.

Just ask Citigroup, Bank of America and JP Morgan Chase, three of the largest consolidators in the financial services industry whose stock performance hasn't held up to the hype that accompanied all their takeovers. "There has been a lot of underperformance among the serial acquirers," he said.

SEC DITHERS ONCE MORE

The Securities and Exchange Commission dropped consideration Friday of two hedge fund measures from its agenda for a Monday meeting, saying it wanted more time to review their language. One proposal to be considered would deal with the minimum net worth that an investor must possess to be allowed to invest in hedge funds.

Earlier this month, S.E.C.

Chairman, Christopher Cox, said that it was necessary to further isolate hedge funds from small investors. Another measure to be batted about would tighten up the anti-fraud statute dealing with hedge funds. The commission said it needed another to week to work on the language of the anti-fraud proposal.

MORGAN STANLEY FILLS ITS STOCKING

Morgan Stanley has bought a substantial stake in a New York-based hedge fund, taking the number of investments the bank has made in alternatives businesses to four in two months.

The bank has acquired almost all the assets of Brookville Capital Management, a US distressed and special situations investor with approximately $221m (€166m) in assets under management, according to an internal memo.

Last year Brookville hired Michael Silver, a former head trader in debt and equities at hedge fund Och-Ziff Capital Management.

Brookville was established in August 2002 by David Reiss, Jacob Gulkowitz and Abraham Gulkowitz, who were all formerly at Bankers Trust.

At the start of last month Morgan Stanley took a 19% stake in Lansdowne Partners, which holds approximately $12bn in management.

In the same week the bank spent about $300m (€235m) buying almost 20% of Avenue Capital, one of the largest distressed debt investors in the US with $12bn of assets, and took control of FrontPoint, a $5.

5bn US hedge fund manager, for about $400m.

Owen Thomas, president and chief operating officer of Morgan Stanley Investment Management, said at the time: "This further demonstrates our commitment to build a market-leading alternatives business. We will continue to explore a wide range of opportunities that can bring innovative, high performance products and services to our clients.

"

Thomas told analysts last month that among his critical initiatives were expanding the manager's alternatives capability, building its private equity business, expanding the non-US footprint, stemming outflows of retail mutual funds and rebuilding its US institutional reputation.

WALL STREET JOURNAL TO REPORT NEWS

The Wall Street Journal has unveiled plans to cut the size of the newspaper and revamp its website edition.

The iconic US business paper said the smaller size would result in 10% less space for news, with more breaking news stories being shifted to its website.

Publishers Dow Jones said the paper would focus on increased analysis, more colour and shorter news stories.

The Wall Street Journal, which has seen its circulation dip in the US, is keen to attract new, younger professionals.

The paper said the slimmer newspaper edition would be launched in the US on 2 January, and would save the company $18m (£9m) a year.

We are not agnostic about which channels readers use, we want them to use both
Paul Steiger, Wall Street Journal managing editor

Dow Jones publishes sister editions of the Wall Street Journal in Asia and Europe, both of which were cut to tabloid size last year.

The changes at the key US edition will see the page width of the paper cut to 12 inches, resulting in the loss of one of its current six columns of text.

But the move means the Wall Street Journal would be in-line with a newspaper size increasingly common in the US industry, allowing the paper to be printed and distributed more widely.

"That doesn't mean we will get out of the 'what happened' business," said the paper's managing editor Paul Steiger.

"We will squeeze that announcement news into a smaller space."

He added that more content, and more statistical data, would be placed on the newspaper's website.

LIVERPOOL FC

Liverpool manager Rafa Benitez has welcomed the news that the Premiership club is poised for a £450m takeover.

Dubai International Capital (DIC), the investment arm of Dubai's government, confirmed on Monday that they were in talks about a possible buy-out.

"I have talked to the chairman (David Moores) and chief executive (Rick Parry) about this and I was pleased with what I heard," said Benitez.

"It is always good for a club to have more money and more possibilities."

Liverpool, five-times European champions, have given DIC permission to carry out a complete study of the club's financial records ahead of a possible takeover bid.

The proposed deal is expected to include £200m to build a new 60,000-capacity stadium.

DIC chief executive Sameer al-Ansari said: "We hope we can agree a deal.

"Liverpool's investment requirements are well publicised. Hopefully this will provide us with the opportunity to fund its needs both on and off the pitch.

"

However, the deal is not expected to be concluded until early next year.

DIC owns the Madame Tussauds Group and the Travelodge hotel chain as well as one third of the London Eye.

The company is an investment arm of Dubai Holding, which is owned by Dubai Crown Prince and United Arab Emirates Prime Minister Sheikh Mohammed bin Rashid Al Maktoum.

Sheikh Mohammed, whose family is internationally renowned for its running of the Godolphin horse racing stables, is the world's fifth richest man, with an estimated personal wealth of $10 billion.

Sheikh Mohammed bin Rashed Al Maktoum holds the bridle of Electrocutionist, who was ridden to victory in the Dubai World Cup by Frankie Dettori
Sheikh Mohammed bin Rashed Al Maktoum is a keen racing fan
"Already they (DIC) have demonstrated a full understanding of, and respect for, the club's heritage and values," added Parry.

"We also believe they share our passion for success.

In particular, DIC believes in investing in the businesses it acquires.

"This is very important in terms of the proposed new stadium, which is key to plans for the regeneration of the local community.

"On the pitch, Liverpool remains focused on winning and, here again, this is all about doing a deal that gives us the long-term resources to do that.

"

Liverpool have been linked with other takeover bids in recent years.

In 2005, American billionaire Robert Kraft - owner of the New England Patriots NFL team - was linked with a bid for the club.

Thaksin Shinawatra, then Prime Minister of Thailand, also made a high-profile bid to take control of the club in 2004.

Recent suitors have included George Gillet, the owner of the Montreal Canadians ice hockey team who met with Moores and Parry in the United States last month.

The takeover news will concern those worried about the number of Premiership clubs currently in the hands of foreign owners.

Manchester United, Chelsea, Aston Villa, Portsmouth and Aston Villa have all gone through high-profile takeovers by foreign owners in recent years.

THE DEATH OF THE ANALYST

Famed market movers Joseph Granville and Ralph Acampora still make predictions -- but hardly anybody's listening anymore.

When Granville told newsletter readers to "Sell Everything" on Jan.

6, 1981, the Dow Jones industrial average fell 2.4 percent the next day. But on Oct.

26 this year, he made a similar forecast and the stock market rose.

Acampora helped boost the Dow to a 1.1 percent gain on Jan.

8, 1999, by saying a rally was beginning. On Oct. 30 this year, he wrote that the worst was over for stocks in 2006, and the Dow fell.

Making accurate forecasts is harder than it was 20 years ago because the rise of hedge funds has created a bigger pool of money, muting the impact of any one strategist, said Cummins Catherwood of Walnut Asset Management in Philadelphia.

Pundits also are dealing with a more fickle audience that is "privy to much more information than they used to be," said Warren Simpson of Stephens Capital Management in Little Rock, Ark. "In the old days, you were dependent on your broker to tell you what the market was doing.

Now people have it on their desks all over the country."

He's talking about the Internet. Microsoft MSN Money, Yahoo Finance and AOL Money each attracted more than 10 million Americans to their sites in October, according to ComScore Networks, a market researcher in Reston, Va.

Granville, 83, and Acampora, 65, helped pioneer technical analysis, or the study of price charts to make buying and selling decisions.

Granville, started at what was then the brokerage E.F.

Hutton in 1957, correctly forecast the bear market of 1977-78 before his "Sell Everything" call.

DEBT IS THE NEW FAT

The Financial Services Authority was accused of not doing enough to protect consumers by Which?

magazine on the same day it was reported to have started an investigation into investment banks' lending to sophisticated hedge fund operations.

The self-appointed consumer champion said that five years after the FSA was founded, the regulator had a long way to go before it could claim that many buyers of investment products were properly protected.
Which?

criticised the FSA for failing to implement procedures that were tough enough to ensure that rules regarding the promotion of financial products to the general public were properly followed.

It wants the organisation to name and shame those found to have breached rules and says the outcome of all investigations into complaints should be made public.

The magazine said research into the results of the ending of the split between tied and independent advice in 2005 had confirmed fears the reforms would make products more expensive, make advice worse and increase confusion.

It claimed an in-depth study of 57 financial advisers had found that less than a third reached the magazine's benchmarks for good advice.

In a similar vein, Which? said reforms to pension rules currently proposed by the FSA would raise costs and have the potential to cause mis-selling.

Louise Hanson, head of campaigns at Which?, said: "The FSA has had a busy five years and yet many of their major challenges in the retail financial area have left consumers exposed.
"We believe they have not been open and transparent enough in tackling detriment or in robustly challenging the industry.

"

A spokeswoman said the FSA was committed to ensuring that retail consumers got a fair deal and had considered, or was considering, many of the matters raised by Which?.
The organisation could not "name and shame" firms subject to investigation until the process was completed because of legal restrictions.

Separately, the FSA was reported to have started an investigation into the way that investment banks measured and managed collateral that was provided to them for loans.

According to the Financial Times, the watchdog decided to act amid concerns that some banks may not be properly prepared for a sudden market downturn.

Some market watchers worry that investment banks have taken on huge exposure to markets like hedge funds and credit derivatives that have been expanding at break-neck speed in recent years.

Increasing competition for business between banks may have encouraged some to relax their lending criteria.

Any such action would increase the chances of default by hedge funds causing problems for lenders, which could prompt them to cut off the supply of funding to other firms.

The FSA declined to comment on the report.

MERCER STATE THE OBVIOUS

Bigger mandates awarded to hedge funds do not necessarily result in a lower fee scale, according to research by Mercer Investment Consulting.

The study found did find one exception, however: international currency overlay, where the median fee charged for a $25 million mandate was 0.

30%, compared with just 0.19% for one of $250 million. While size may not matter, the choice of manager or strategy could make a difference.

According to the report, fund of funds with mandates of $25 million to $200 million and that outperformed cash by 4 percentage points, charged a median 1.3%, while investors in multi-strategy single managers paid a median of 1.75%.

In contrast, fee scales for traditional active fixed income, also included in the Mercer research, have remained stable since 2004, and are marketed lower than those of alternatives, held around 0.25%, with higher rates for high-yield bonds and credit-driven products and lower fees for government products.

Fee scales also varied according to the potential performance of a strategy, such as global small cap equity and emerging market equity, which are richer sources of alpha.

'Given that we are in an environment of lower expected returns, albeit one with a dash of alpha, investment managers will find it hard to justify above-average fees unless they have demonstrable competitive advantages,' according to Mercer partner Divyesh Hindocha.