Bank Said No? Hedge Funds Fill a Void in Lending

By AZAM AHMED Hedge fund managers have been called plenty of names.
Now, they can add another: local banker.
When Rentech, a clean energy business in Los Angeles, was rejected by its long-time banker last year, it asked a hedge fund for money instead. “You have to take what’s available at the time,” said D. Hunt Ramsbottom, chief executive of Rentech, which has since borrowed $100 million in this unconventional way.
With traditional lenders still avoiding risky borrowers in the wake of the financial crisis, hedge funds and other opportunistic investors are stepping into the void. They are going after midsize businesses that cannot easily raise money in the bond markets like their bigger brethren.
The support is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.
But the lending force also poses a significant risk to the companies and the broader economy, given the unregulated nature of this shadow banking system.
These lenders of last resort typically charge interest rates that are several percentage points higher than banks. Loaded up with high-cost loans, borrowers could find themselves falling deeper into debt or worse, into bankruptcy. Over the last year, Rentech has borrowed from a group of funds, led by Highbridge Capital Management and Goldman Sachs, at an interest rate of 12.5 percent.
“On the one hand, the cost of money is more expensive than what some businesses might be used to,” Mr. Ramsbottom said. “On the other, if the money is not available, the cost is infinite.”
The lending activity is also stoking fears that speculative activities — like those that contributed to the crisis — are shifting from banks to loosely regulated firms that play by their own rules. While policy makers are moving to increase capital and other standards for banks to prevent another disaster, hedge funds and the like are not subject to the same oversight.
If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.
“These institutions are essentially servicing a part of the market where banks are not lending,” said Debarshi Nandy, a professor at York University’s business school in Toronto. “The million-dollar question is, Are we benefiting?”
Hedge funds offered a crucial lifeline for Rentech. The company is hoping to build a facility about 60 miles east of Los Angeles to transform yard clippings into fuel, enough for 75,000 cars. If it works, the project would represent Rentech’s first commercial success in its nearly 30-year history.
Unprofitable for decades, Rentech is a risky proposition for a traditional lender. While large corporations with healthy balance sheets can easily tap into the bond markets or borrow from banks, their smaller counterparts with shakier credit have fewer options.
Middle-market companies, with revenue of $25 million to $1 billion, do not typically sell bonds. And their main financing sources, specialty lenders like CIT Group and regional banks, have not fully recovered. Last year, debt securities focused on this segment stood at $12 billion, down from $35 billion in 2005, according Standard & Poor’s Leveraged Commentary and Data.
Hedge funds and other investors are flush with capital. Last year, Highbridge, which is owned by JPMorgan Chase, started a $1.6 billion fund that lends money to midsize companies. The private equity firm Blackstone Group started a $3 billion fund. Even FrontPoint, the firm hobbled by an insider trading investigation, has raised $1 billion for a lending fund and plans to double the size, according to a person with knowledge of the matter.
The concern is that hedge funds are looking for quick payoffs rather than long-term opportunities — and will bolt if there is trouble. A previous wave of money managers that jumped into lending after the collapse of Lehman Brothers in 2008 saw their loans sour. The firms, mainly smaller, fringe players, have since disappeared.
“The new funds rushing into direct lending now will learn the hard way that it is easy to make what appear to be sound loans as the economy is improving, but it becomes brutal to either collect the loans or foreclose when the downturn comes,” said Max Holmes, the founder of Plainfield Asset Management, whose lending-focused fund, once as large as $5 billion, is winding down.
Unlike their predecessors, players today say they are operating like community bankers, focusing on multiyear deals backed by significant collateral and capital. They are also locking up investors’ money for years rather than quarters. This can alleviate some short-term pressures.
“The people who last are those with a relationship-oriented business, not those who view it as a trade,” said Rob Ladd of D. E. Shaw, which manages $1.7 billion in lending strategies.
Stephen J. Czech of FrontPoint spent weeks researching Emerald Performance Materials. He scoured the chemical manufacturer’s financials, visited several facilities, and met with executives — all of which gave him the confidence to lend the company money.
Emerald used the loan to buy a European rival. “All types of financing were considered,” said Candace Wagner, Emerald’s president, but the company preferred the “flexibility and certainty” of FrontPoint.
Some who borrowed from hedge funds have not been so satisfied. Hedge funds have been lumped with payday lenders that charge usury rates. Plainfield has been accused of predatory lending in civil suits, and local and federal authorities have looked into the firm’s practices. Plainfield said it won or settled all of the suits and investigators closed their inquiries without taking action.
The creditors of Radnor Holdings, a disposable-cup company that defaulted on a roughly $100 million loan, claimed Tennenbaum Capital Partners charged excessively high rates as a takeover tactic, a strategy referred to as “loan to own.” After a protracted legal battle, the fund took control of Radnor in 2006, renaming it WinCup.
Tennenbaum did not return calls for comment.
Another worry is that funds will trade on nonpublic information they receive as lenders. A March study in The Journal of Financial Economics found a spike in investors betting against the shares of companies that took hedge fund loans. Businesses that borrow from banks did not experience the same activity, according to the authors, including Professor Nandy.
For Mr. Ramsbottom of Rentech, the benefits outweighed the risks. While the company could end up losing the profitable fertilizer plant it put up as collateral on the loan, Rentech can continue to pursue the clean energy venture.
“An entrepreneur will pay whatever,” he said, “to keep his business alive.”
http://dealbook.nytimes.com/2011/06/08/bank-said-no-hedge-funds-fill-a-void-in-lending/

Zvi Goffer Found Guilty in Insider Trading Case

A federal jury in Manhattan on Monday found Zvi Goffer and two co-conspirators guilty of insider trading, the latest development in the government’s investigation into insider trading at hedge funds.
Mr. Goffer, his brother Emanuel Goffer and Michael A. Kimelman were convicted of participating in an insider trading scheme that produced more than $20 million in illegal profits.
The case was connected to the prosecution of Raj Rajaratnam, the hedge fund tycoon and co-founder of the Galleon Group, who was found guilty last month in the largest insider trading case in a generation. Zvi Goffer, who sat in on much of Mr. Rajaratnam’s trial, was employed by Galleon.
Like the case against Mr. Rajaratnam, this trial had phone wiretaps playing a central role. The jury heard recordings of Mr. Goffer swapping secret corporate information with fellow traders.
Much of the illegal trading featured in the Mr. Goffer trial was based on on illegal tips about mergers and acquisitions from two corporate lawyers at Ropes & Gray in Manhattan. The two lawyers, Arthur Cutillo and Brien Santarlas, had previously pleaded guilty to providing Mr. Goffer and others with information about the secret deals. Mr. Santarlas testified during the trial.
Among the transactions the lawyers leaked to Mr. Goffer: TPG’s $1.3 billion acquisition of Axcan Pharam in November 2007 and Bain Capital’s agreement to pay $2.2 billion for 3Com in September of that year.
Zvi Goffer, 34, worked at a number of different trading shops before joining Galleon in 2008. After just nine months there he left to start his own hedge fund, Incremental Capital, with his brother and Mr. Kimelman.


A parallel civil complaint brought by the Securities and Exchange Commission said that Mr. Goffer’s nickname among his fellow traders was “Octopussy” — a reference to the James Bond movie — because his arms reached into so many sources of information.
During the trial, William Barzee, the lawyer for Mr. Goffer, described his client as a “gold miner” who panned for gold along the “river of gossip.”

Mr. Kimelman, who was tried as one of Mr. Goffer’s co-conspirators, practiced law at Sullivan & Cromwell before becoming a Wall Street trader.


“We are enormously disappointed with the verdict as we believed the evidence clearly showed that Mr. Kimelman had not engaged in any insider trading,” said Michael Sommer, the lawyer for Mr. Kimelman. “We will of course pursue all avenues of appeal.”



Mr. Barzee and Michael Ross, the lawyer for Emanuel Goffer, did not immediately respond to a request for comment.





http://dealbook.nytimes.com/2011/06/13/zvi-goffer-found-guilty-in-insider-trading-case/

Zvi Goffer Found Guilty in Insider Trading Case

A federal jury in Manhattan on Monday found Zvi Goffer and two co-conspirators guilty of insider trading, the latest development in the government’s investigation into insider trading at hedge funds.

Mr. Goffer, his brother Emanuel Goffer and Michael A. Kimelman were convicted of participating in an insider trading scheme that produced more than $20 million in illegal profits.
The case was connected to the prosecution of Raj Rajaratnam, the hedge fund tycoon and co-founder of the Galleon Group, who was found guilty last month in the largest insider trading case in a generation. Zvi Goffer, who sat in on much of Mr. Rajaratnam’s trial, was employed by Galleon.

Like the case against Mr. Rajaratnam, this trial had phone wiretaps playing a central role. The jury heard recordings of Mr. Goffer swapping secret corporate information with fellow traders.

Much of the illegal trading featured in the Mr. Goffer trial was based on on illegal tips about mergers and acquisitions from two corporate lawyers at Ropes & Gray in Manhattan. The two lawyers, Arthur Cutillo and Brien Santarlas, had previously pleaded guilty to providing Mr. Goffer and others with information about the secret deals. Mr. Santarlas testified during the trial.

Among the transactions the lawyers leaked to Mr. Goffer: TPG’s $1.3 billion acquisition of Axcan Pharam in November 2007 and Bain Capital’s agreement to pay $2.2 billion for 3Com in September of that year.
Zvi Goffer, 34, worked at a number of different trading shops before joining Galleon in 2008. After just nine months there he left to start his own hedge fund, Incremental Capital, with his brother and Mr. Kimelman.

A parallel civil complaint brought by the Securities and Exchange Commission said that Mr. Goffer’s nickname among his fellow traders was “Octopussy” — a reference to the James Bond movie — because his arms reached into so many sources of information.
During the trial, William Barzee, the lawyer for Mr. Goffer, described his client as a “gold miner” who panned for gold along the “river of gossip.”

Mr. Kimelman, who was tried as one of Mr. Goffer’s co-conspirators, practiced law at Sullivan & Cromwell before becoming a Wall Street trader.


“We are enormously disappointed with the verdict as we believed the evidence clearly showed that Mr. Kimelman had not engaged in any insider trading,” said Michael Sommer, the lawyer for Mr. Kimelman. “We will of course pursue all avenues of appeal.”
Mr. Barzee and Michael Ross, the lawyer for Emanuel Goffer, did not immediately respond to a request for comment.

Hedge Fund Information Database and Web Sites

• AIMA www.aima.org


• Altvest www.investorforce.com


• Albourne Village http://village.albourne.com


• Barclays Global Hedge Source www.globalhedgesource.com


• CISDM http://cisdm.som.umass.edu


• Cogenthedge www.cogenthedge.com


• EurekaHedge www.eurekahedge.com


• Greenwich-Van www.vanhedge.com


• Hedgefund.net www.hedgefund.net


• Hedge Fund Research www.hfr.net


• Hennessee Group www.hennessee.com


• HF intelligence www.hedgefundintelligence.com

Paulson’s Flagship Fund Down 4% in May

By AZAM AHMED June 6, 2011

Writing about the monthly returns of hedge funds is like writing about a boxing match in the sixth round. You get a sense of the direction, but anything can happen when you’re midway through a fight.

Such is the case for super-heavyweight hedge fund manager John A. Paulson, who took a beating in May. Mr. Paulson’s flagship fund, Paulson Advantage, fell 4 percent for the month. The Advantage Plus fund, which adds leverage, or borrowed money, into the mix, dropped about 6 percent over the same period.

The losses bring the decline this year to about 5.25 percent and 7.5 percent respectively. The Financial Times earlier reported news of the returns.

The fund’s performance was stymied in part by a drop in his financial holdings, including Bank of America, Citigroup, Sun Trust and the insurance firm Hartford Financial Services. The technology company Hewlett Packard and the miner Anglo Gold also weighed on performance.

A devout belief in the value of gold has left his holdings subject to swings in the price of the commodity. For example, the firm’s Gold fund, which invests in gold-related stocks like mining companies, was down more than 6 percent for May.

Mr. Paulson has shown a resolve uncommon among some of his hedge fund brethren. George Soros and other notable investors like Eton Park Capital Management, the hedge fund run by Eric Mindich, have fled the precious metal.

June may also prove a tough month to weather. Mr. Paulson owns nearly 35 million shares of the Chinese timber company Sino Forest, whose shares have dropped to around $6 from nearly $20 amid criticism of its accounting practices. That’s a roughly $450 million loss in just a few days.

Not all of his portfolios are faring so poorly. The Credit fund is up almost 8 percent for the year through May, and his merger arbitrage fund, Paulson Partners, is up more than 6.5 percent.
And Mr. Paulson, who rose to fortune and fame after making billions betting against the subprime mortgage market, has endured some wild swings in the past and ultimately bounced back. Last year, his flagship fund rocketed from a double-digit loss to a double-digit gain after an end of year market rally helped bolster some of his investments.

The money manager, who oversees some $37.5 billion at Paulson & Company, also warned his investors they may be in for some rocky times. At a conference in Las Vegas, Mr. Paulson told them to be prepared for some periods of volatility, according to an investor in attendance.

Here are the returns for his various hedge funds (for May and year to date):

Paulson Partners: Up .08 percent for May and up 6.64 percent Year-to-Date
Paulson Partners Enhanced: Down 0.2 percent and up 11.5 percent
Paulson Advantage: Down 4.06 percent and down 5.26 percent
Paulson Advantage Plus: Down 5.93 percent and down 7.54 percent
Paulson Credit Down: .05 percent and up 7.94 percen
tPaulson Gold: Down 6.39 percent and up 0.79 pecent
Paulson Recovery: Down 0.69 percent and up 5.03 percent

China Launches First Official Hedge Fund – Again?

Reuters reports Guotai Junan Securities plans to launch a market neutral hedge fund, registered with the CSRC, with 300 million yuan under management. The fund, according to President Zhang Biao, will use index futures as a hedging tool.

Zhang Biao says the fund will target 10-15% annual returns and would like to model themselves much like Renaissance Technologies.

No word on E Fund’s launch of China’s other first official hedge fund we reported on in November 2010.

Paulson Receives Hong Kong SFC License

Hedge fund manager John Paulson received a Securities and Futures Commission securities license in Hong Kong in February, joining other large hedge fund managers such as Soros Fund Management, GLG Partners, and Viking Global Investors in the territory.

Paulson & Co. gained fame for correctly betting against the U.S. housing markets in 2007 and 2008, and now the hedge fund is one of the largest with $36 billion under management.Hong Kong has become the top destination for hedge funds in Asia because of its proximity to China, strong legal infrastructure, and friendly operating environment.

http://chinahedgefundnews.com/2011/03/13/paulson-receives-hong-kong-sfc-license/