In The Markets
Hedge funds bank on new bank rules
Financial reform, which is hurtling down the tracks to become law, may succeed in forcing banks to curtail some of their riskier activities-but be careful what you wish for. The debate's focus on banks has drawn the spotlight away from hedge funds. Remember them? Those lightly regulated pools of money were public enemy No. 1 last year, members of an elite gang with a Ponzi-scheme-a-week habit. But beating up on hedge funds fell out of favor after politicians found better-known targets to turn on, like Goldman Sachs, Citigroup and Bank of America.
Now, it appears that the hammer of regulation will fall hardest on banks, while hedge funds will get just a taste of regulation-required registration with the Securities and Exchange Commission-which most managers had already resigned themselves to.
If proposals forcing banks to cease operating proprietary trading desks, divest their hedge fund and private equity operations, and stop trading certain derivative products make it to the statute books, that business will flow elsewhere.
Hedge funds and the nontraditional banking sector will explode in size because traditional banking will be hamstrung by increases in laws and regulations, says Dick Bove, a banking analyst with Rochdale Securities. Banks have long complained that tighter regulation would result in losing their best people to hedge funds or foreign institutions; now, they're saying they'll lose billions in assets as well.
In March, eight of Citigroup's top proprietary traders left the bank for hedge funds Moore Capital Management and SAC Capital Advisors, reportedly because of their concerns about proposed regulation. Also in March, the head of Goldman Sachs ' proprietary trading group, Pierre-Henri Flamand, announced that he's leaving to start his own hedge fund, no reason given.
Industry watchers predict that huge money flows are next.
If banks because of high capital requirements are prevented from being involved in structured products, then the money will invest in those products through a new mechanism-and the hedge fund structure is a good sector to do it in, Mr. Bove says.
Citigroup just divested itself of its $4.2 billion hedge fund operation in April, selling to Manhattan-based Skybridge Capital, a small $1.4 billion money manager. The sale was part of Citi's plan to get rid of non-core assets, said to be accelerated by the proposed Volcker Rule, which would ban proprietary trading and hedge funds at banks.
Less than two weeks ago, Bank of America sold a $1.9 billion private equity portfolio to French firm AXA Private Equity. The bank claims the sale was part of a strategy to reduce its private equity holdings and manage long-term risk.
And last week, a report surfaced that J.P. Morgan Chase was making preparations to sell its hedge fund unit, the $21 billion Highbridge Capital, should the Volcker Rule pass. The bank did not return calls for comment.
Meanwhile, there has been nary a peep from hedge fund executives during the past month's regulation frenzy. They don't want to jinx a good thing.
Hedge funds have bounced back dramatically since 2008. With about $1.8 trillion under management and a composite 12-month return of more than 22%, according to Hedge Fund Research Inc., hedgies are among the few institutions poised to make acquisitions of considerable size.
The industry finessed its position with the government over regulation last fall, stepping back from its initial protests and acquiescing to a modicum of oversight.
Combined with the $1.8 million lobbying money funneled to Capitol Hill by the Managed Funds Association during the last quarter of 2009, it seems to have turned down the political heat. Just in time for the big bucks to start flowing in their direction.
It's clear skies for M&A execs
Last month's Icelandic volcano eruption actually cleared up something for deal watchers: The mergers-and-acquisitions market is alive and kicking. Ovation Corporate Travel had so many clients raring to get to the U.K. for deal talks the week after the eruption that it was able to fill a chartered jet with 160 M&A types-hedge fund executives, private equity guys, investment bankers and corporate lawyers. Ovation's law firm practice handles travel for half of the AmLaw 100 firms.
Most of our clients work in the mergers-and-acquisitions world, says Michael Steiner, executive vice president of Ovation. And if we're any kind of decent litmus test of activity, let's just say that business started picking up in December, and it's up big-time over this same time last year.
$26B AMOUNT OF MARKET CAP that BP lost in the first 10 days after an explosion sank an oil platform it was leasing off the coast of Louisiana. Eleven workers died, and the rig is leaking 5,000 barrels of crude daily.
Story originally published in All Business by Hilary Potkewitz
AllBusiness.com (a Dunn & Bradstreet company)