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Pooled Investment Vehicles – Non-Traditional Hedge Fund Strategies

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The term “hedge fund” is really a misnomer as most hedge funds are not hedged.  A better term would be pooled investment vehicle.  Traditional types of pooled investment vehicle structures include hedge funds, private equity funds, venture capital funds, real estate funds, and “hybrid” funds (funds which combine components of the above).

This article is going to discuss other types of non-traditional hedge funds, that is hedge funds which do not fall within the typical types of hedge fund securities trading strategies (long/short equity, multi-strategy, global macro, fixed income, equity market neutral, managed futures, etc). As more people become familiar with hedge funds and become interested in investing in them, managers will begin to create funds to fit specific demographics.  The following are interesting projects which can be accomplished through the hedge fund (or pooled investment vehicle) structure:

Green Hedge Funds – in a vein similar to the Vice Fund*, hedge funds can concentrate their investments in any specific hot area. Green companies is currently a hot area and many people are already calling a bubble in “green” companies, at least in the private equity space.  According to this article by Richard Wilson, mandates at institutional level to invest in “green” hedge funds are expected to significantly increase in the coming years.

Horse Racing Hedge Funds – there are two ways that a fund like this would work.  First, the hedge fund can actually pool investor money and then the manager would place bets on various horses through various betting establishments.  With a fund like this the sponsor would need to make sure to disclose the exact nature of the program so that any legal or gambling issues could be vetted before the hedge fund launch.  Second, the hedge fund could buy racing horses and then race them for profit.  There are already these types of pooled vehicles out there and they are usually have a private equity structure with capital calls.

Gambling or Online Gambling Hedge Funds – with the rise in popularity of Texas Hold-em on television and the proliferation of online gambling there has been discussion of hedge funds devoted to making money from this phenomenon.  Basically this would be done through pooling money and then allocating to traders (live or online) who would then play with money.  With a fund like this there are many issues, not the least of which is the illegality of gambling in much of the US and online.  It is likely that a gambling attorney would need to be brought in to opine on the issue of the legality of such a fund.

Sports Betting Hedge Fund – like the gambling hedge fund, sports betting presents a very attractive opportunity for potential hedge fund managers.  A couple of years back Mark Cuban discussed the idea of a sports betting hedge fund on his blog (blog post).  While his fund never got off the ground, I have heard of other potential hedge fund sponsors trying to get a fund like this launched.  I have not yet heard of a successful fund like this, but I think it is just a matter of time.

Lottery Hedge Fund – about a year and a half ago I had the idea of starting a lottery hedge fund which would pool money to buy a large amount (or all possible number combinations) of number combinations at one of the very large lottery drawings.  While it is feasible to create a fund to do this, there are many technical issues which would need to be resolved if a fund like this was to launch.

Charitable Hedge Funds – while not necessarily having a different strategy from traditional hedge funds, these charitable hedge funds would take a portion of their profits and devote them to charitable causes.  Presumably the sponsor of a charitable hedge fund would create such a fund for his network of friends and family, all of whom would have similar views on the nature of the charitable donation.

Shariah Compliant Hedge Funds – such funds have become more over the past couple of years and are expected to continue such growth in the future.

Other Issues – in general, establishing a non-traditional hedge fund or pooled investment vehicle will involve the same basic steps as forming a hedge fund (see Start Up Hedge Fund Timeline).  The key issue is what type of assets the fund will buy and sell.  The nature of the assets will necessarily drive the structure.  These are they types of issues you would discuss with your attorney, include whether the manager will need to be registered as an investment advisor. Other articles of interest may include:

* The Vice Fund is a mutal fund which invests in domestic and foreign companies engaged in the aerospace and defense industries, owners and operators, gaming facilities as well as manufacturers of gaming equipment, manufactures of tobacco products and producers of alcoholic beverages.  The website can be found here.

Third Party Marketing Press Release

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Hedge Fund Third Party Marketing Firm, Agecroft Partners, Hires 5th Managing Director

Hedge fund third party marketing firm, Agecroft Partners which recently received the 2008 Third Party Marketer of the Year award, has hired its 5th Managing Director, Jarratt Ramsey. Jarratt spent the last 11 years at multi-billion dollar hedge fund Chesapeake Capital Management. Jarratt’s responsibilities will include: assisting with due diligence on potential hedge funds the firm may represent and introducing the firm’s hedge fund clients to large institutional investors located within the Northern region of the United States.

Richmond, VA (PRWEB) October 6, 2008 — Hedge fund third party marketing firm, Agecroft Partners which recently received the 2008 Third Party Marketer of the Year award, has hired its 5th Managing Director, Jarratt Ramsey. Jarratt spent the last 11 years at multi-billion hedge fund Chesapeake Capital Management. Jarratt’s responsibilities will include: assisting with due diligence on potential hedge funds the firm may represent and introducing the firm’s hedge fund clients to large institutional investors located within the Northern region of the United States.

“Jarratt is a wonderful addition to our firm. Our business model is to introduce large well established hedge funds in a consultative manner to institutional investors. It is imperative that the members of our firm are highly technically competent. Jarratt’s educational and professional experiences are very impressive. Furthermore, his knowledge of the hedge fund industry, and security markets should give him a lot of credibility with large institutional investors,” stated Agecroft Partners’ Managing Partner Don Steinbrugge.

Agecroft Partners is a global consulting and third party marketing firm for hedge funds. It was founded by Donald A Steinbrugge, CFA, a Founding Principal of Andor Capital Management when it was the 2nd largest hedge fund firm in the world. Don was also Head of Institutional Sales for Merrill Lynch Investment Managers. Agecroft Partners, LLC is a Member FINRA and SIPC.

Treasury Announces Method of Selecting Asset Managers

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The U.S. Department of the Treasury (Treasury) will use the following procedures to select asset managers for the portfolio of troubled assets, pursuant to the authorities given to the Treasury in the Emergency Economic Stabilization Act of 2008 (Act).

Securities vs. Whole Loans. The Treasury will select asset managers of securities separately from asset managers of mortgage whole loans, but in each case these procedures will apply. Securities asset managers will handle Prime, Alt-A, and Subprime residential mortgage backed securities (MBS), commercial MBS, and MBS collateralized debt obligations, and possibly other types of securities acquired to promote market stability. Whole loan asset managers may handle a range of products, including residential first mortgages, home equity loans, second liens, commercial mortgage loans, and possibly other types of mortgage loans acquired to promote market stability.

Financial Agents. Asset managers will be financial agents of the United States, and not contractors. The Act authorizes the Secretary of the Treasury (Secretary) to designate “financial institutions as financial agents of the Federal Government, and such institutions shall perform all such reasonable duties related to this Act as financial agents of the Federal Government as may be required.” As financial agents, asset managers will have a fiduciary agent-principal relationship with the Treasury with a responsibility for protecting the interests of the United States.

Organizational Eligibility. Financial Institutions are eligible to be designated as financial agents of the United States. The Act defines “Financial Institution” to mean “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.”

Open Notice. Prospective financial agents will be solicited through the issuance of a public notice, posted on the Treasury website, requesting that interested and qualified Financial Institutions submit a response. The notice will describe the asset management services sought by the Treasury, set forth the rules for submitting a response, and list the factors that will be considered in selecting Financial Institutions. The notice will also include minimum qualifications, such as years of experience and minimum assets under management, and eligibility requirements, such as a clean audit opinion. The Treasury will release one notice for securities asset managers, and a separate notice for whole loan asset managers.

Reviewing Responses and Second Phase. The Treasury will evaluate the initial responses from all interested and qualified Financial Institutions, and will invite certain candidates to continue to the second phase of the financial agent selection process. This second phase, and subsequent phases, may be conducted under confidentiality agreements to facilitate information exchange, but consistent with the public disclosure and transparency provisions of the Act. In the second phase, the prospective financial agents will provide additional information about their expertise, as well as asset management strategies, risk management, and performance measurement. This phase may include telephone conversations to allow questioning by and of the Treasury.

Final Phase and Selection. The Treasury will evaluate the responses from the second phase candidates, and will determine whether a candidate will continue to be considered. In this last stage, a Financial Institution may be required to conduct face-to-face discussions on portfolio scenarios, public policy goals, and statutory requirements, and to respond to interview questions to assess the capabilities of prospective individuals to be assigned to manage assets. Following any face-to-face meetings, the Treasury will make final selections of the Financial Institutions to be designated as asset managers.

Financial Agency Agreement. Financial Institutions selected to be asset managers must sign a Financial Agency Agreement with the Treasury, a copy of which will be provided for review during the second stage of the selection process. The Financial Institution’s willingness to enter into the standard Financial Agency Agreement, with the established terms and conditions currently applied to financial agents of the United States, will be among the factors used in evaluating the Financial Institution.

Evaluations and Decisions. At each stage in the selection process, personnel from the Offices of the Fiscal Assistant Secretary and the Assistant Secretary for Financial Markets, and possibly additional personnel within the Offices of Domestic Finance and Economic Policy, will evaluate the candidate submissions and make recommendations to the head of the Office of Financial Stability, who will make the final decision.

Multiple Managers. The Treasury expects to designate multiple asset managers and submanagers to obtain the proper expertise in different asset types and different segments of the mortgage credit market. However, the Treasury may not, in its discretion, select all asset managers at the same time, but rather in some sequence that matches the Treasury’s asset acquisition schedule and project plan for the portfolio. For example, an asset manager for whole loans may not be selected at the same time as an asset manager for MBS, or a primary manager may be selected prior to a sub-manager. Furthermore, as business requirements evolve, the Treasury may issue additional notices in the future to select more asset managers, consistent with the process set forth in this document.

Small and Minority- And Women-Owned Businesses. The Treasury will issue separate notices, consistent with these procedures, specifically to identify smaller and minority- and women-owned Financial Institutions that do not meet the minimum qualifications for current assets under management in the initial notices. Such Financial Institutions will be designated as sub-managers within the portfolio.

Urgency and Timeline. Given the urgent need to implement the Troubled Assets Relief Program quickly, the selection process for asset managers may involve extremely short deadlines for submitting information and for traveling to Washington, D.C. for meetings or interviews.

Costs of Applying. The Treasury will not reimburse or otherwise compensate a prospective asset manager for expenses or losses incurred in connection with the selection process.

Citibank to hedge funds – no bank accounts for you…

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A client just informed me that Citibank will not consider opening a bank account for a hedge fund as of today.  Evidently Citibank’s compliance department thinks that being associated with hedge funds, even if it is merely through a simple bank account, is not wise in this climate.  I will be discussing this issue with some of my other banking contacts to see if this is the case at other institutions and will report back on this story.

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Please contact us if you have any questions or would like to start a hedge fund.

Hedge fund performance fees – is it time to rethink the high watermark?

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There are many news stories out covering what may be a worst case scenario for many hedge funds – the distinct possibility of no performance fees this year.  This seems to be a major topic of conversation for many people within the industry and just yesterday I received the following comment with a link to a Wall Street Journal article discussing this issue.

The comment:

Regarding performance fees: the underlying hedge funds naturally also have high performance fees. But in the current climate, they aren’t making them. “Just one in 10 hedge funds is currently receiving performance fees from their funds.” See: http://blogs.wsj.com/deals/2008/09/22/fee-slump-hits-hedge-funds/

Unfortunately, with the current market conditions, many funds are going to be feeling the pressure of little to no performance fees at the end of the year.  For many hedge fund managers, the problem is compounded by the fact that their asset management fee is simply not enough to keep the business going.  Many managers cannot keep operations going with only the management fee.  Without performance fees, hedge fund managers may have their operations disrupted for a number of reasons, including the fact that for some, the traders will be expecting bonuses no matter the performance of the fund as a whole.  If these traders don’t receive bonuses, then some hedge funds could see talent drain, to the extent that such traders thought they could receive greater compensation at other firms or by starting their own fund.

Still worse, managers who have negative performance numbers at the end of the year will have another issue to deal with – the high watermark.  The high watermark is a concept designed as an investor-friendly provision that essentially prevents a manager from taking a performance fee on the same gains more than once.  The high watermark is a similar concept to the clawback provision in a private equity fund.

When a fund suffers a significant drawdown during a performance fee period, the high watermark will actually create a perverse incentive for the investment manager – either take extra risk to generate higher returns so that there will be a performance fee in the next performance fee period or close down the fund and start again.  Both of these potential actions would be taken to the detriment of the investor, and the investor may only have the choice of making a redemption or letting the investment ride. 

If the manager does shut his doors, the investor is going to have his assets at risk as the hedge fund wind-down takes place.  Depending on the hedge fund’s strategy, the wind-down could subject the fund to a fire sale of its assets which will reduce the value of the investment even further.  If such investor was to move into another hedge fund, he would step into the new fund with a high watermark equal to his investment and would be subject to performance fees on those assets anyway. Because such a turn of events is detrimental to such an investor, it might make sense for such investors to allow for some sort of modification of the high watermark.

Some potential alternatives to the standard hedge fund highwatermark might include the following:

No high watermark – this is probably not a viable solution as it would afford investors absolutely no protection from paying two sets of performance fees on the “same” gains.  Additionally, without the threat of the high watermark, there would be little deterrent for a manager to improperly manage risk.  Additionally, because the highwatermark provision is one of the most uniform provisions in the hedge fund industry, it is unlikely to simply disappear.  (Although I have seen a couple of funds which actually did not have the provision.)

Modified high watermark – I have seen all types of variations within the performance fee structure and the withdrawal structure, but the high watermark is one provision which is generally resistant to modification. The high watermark could potentially be modified in many ways including the following:

Reset to zero – under certain circumstances, that if stated in the offering documents prior to investment, the investment manager can be given the ability to reset the high-watermark to zero.

Amortization – one potential way could be to “amortize” the losses over a 2- or 3-year period so that some performance fees can be earned on a going forward basis.  Additionally, if the investor chose to withdraw before the end of the high watermark amortization period, there could be some sort of clawback.

Rolling – the high watermark can be taken under certain circumstances over a rolling period.  The concept is that the high watermark will be determined for a certain window so a drawdown would in essence be erased after a certain amount of time has elapsed.  This might work better for those funds that have a monthly or quarterly performance fee period.

Resetting to zero and an amortization reduction method could be both potentially valuable to investors as it will keep a manager in the game and it will reduce the incentive for a manager to abandon risk management procedures. Also, management companies may be willing to decrease fees if investors agree to keep their investment in the fund for a certain amount of time after the reset or amortization.

[HFLB note: any new investors coming into a fund during a performance fee period will have an initial high watermark that is equal to the initial investment value; depending on the time of the contribution and when the fund made its losses, there may be some performance fees paid even during a down year for such incoming investors.]

Further Resources

Another good article and some good comments on the article can be found here.

For an interesting academic paper on this subject, please click here. The paper is by William N. Goetzmann, Yale School of Management.  The abstract for the paper states:

Incentive or performance fees for money managers are frequently accompanied by high-water mark provisions which condition the payment of the performance fee upon exceeding the maximum achieved share value. In this paper, we show that hedge fund performance fees are valuable to money managers, and conversely represent a claim on a significant proportion of investor wealth. The high-water mark provisions in these contracts limit the value of the performance fees. We provide a closed-form solution to the high-water mark contract under certain conditions. This solution shows that managers have an incentive to take risks. Our results provide a framework for valuation of a hedge fund management company.

We conjecture that the existence of high-water mark compensation is due to decreasing returns to scale in the industry. Empirical evidence on the relationship between fund return and net money flows into and out of funds suggest that successful managers, and large fund managers are less willing to take new money than small fund managers.

Hedge Fund Series 7 question

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As I’ve noted in many of my posts, I will try my best to answer your questions or point you to a post within the site which discusses the subject. Below is a common question for licensed brokers who are getting into the hedge fund industry.

Question: I currently hold a series 7 agent license as well as a series 65. I am employed with a broker dealer and soon will make a job change to a hedge fund as a marketer. Can the hedge fund maintain my licenses even though they are not a broker dealer and given the fact that I do not need to have a series 7 license to market the hedge fund? I do not want my license to lapse while in the employ of the hedge fund. I do know that FINRA will hold my license for 24 months before expiring. I would like to maintain my licenses and keep them current by fulfilling my continuing education responsibilities. Please advise.

Answer: No, unfortunately the hedge fund will not be able to “hold” your license if it (or a related entity) is not a broker-dealer. Only a FINRA licensed broker-dealer will be able to “hold” your license – and by “hold” we mean that you would be registered as a representative of the broker-dealer.

This should not be confused with “parking” a license with a broker-dealer which is illegal under FINRA rules. Parking a license basically means that you are registered with a broker-dealer for no business reason other than to keep your licenses current. In the situation above, as you noted, the series 7 designation will expire two years after a U-5 has been submitted by your employing broker-dealer.

One potential way to keep the license is to stay on with your broker dealer and conduct your hedge fund selling activities through the broker-dealer. This may not be possible for a number of business reasons and the broker-dealer may not have the proper compliance procedures in place to market and sell hedge fund interests to its customers. For this reason staying with a broker often is not a viable option and unfortunately I have not come across a good solution to this very common problem.

Paulson announces conservatorship of Fannie and Freddie

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In an unprecedent move today, Treasury Secretary Henry Paulson announced that Fannie Mae and Freddie Mac will be placed under Federal Housing Finance Agency conservatorship.

I expect that this will be huge news tomorrow and I look forward to any comments on how this will affect the hedge fund industry.

For questions and answers on the conservatorship, please see: fhfa_consrv_faq_090708hp1128

From the Treasury website:

September 7, 2008
hp-1129

Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal Housing Finance Agency Action to Protect Financial Markets and Taxpayers

Washington, DC– Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers – both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.

We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

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I support the Director’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized.” The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.

Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury’s temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

And let me make clear what today’s actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a “time out” where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.

MFA hires new lobbyist

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MANAGED FUNDS ASSOCIATION HIRES ROGER M. HOLLINGSWORTH AS EXECUTIVE VICE PRESIDENT AND
MANAGING DIRECTOR, GOVERNMENT RELATIONS

WASHINGTON, D.C., August 26, 2008 — Managed Funds Association (MFA), the
leading trade association of the hedge fund industry, announced today that Roger Hollingsworth has been named executive vice president and managing director, government relations, effective September 8, 2008. He will be responsible for the implementation of the Association’s political and government relations outreach before the Executive Branch, Congress and relevantregulatory agencies. Mr. Hollingsworth joins MFA from the United States Senate Banking Housing and Urban Affairs Committee, where he served as deputy staff director and senior policy advisor to Committee Chairman Christopher J. Dodd (D-CT).

Richard H. Baker, MFA President and CEO, said, “We are extremely pleased to have
Roger join MFA in this important capacity. His exceptional credentials and proven skills are ideal for our Association, and we are confident that his expertise will help us facilitate an important expansion of MFA’s agenda as we deepen our policy engagement in Washington.”

Mr. Hollingsworth will work directly with Mr. Baker to develop and coordinate MFA’s
legislative and regulatory priorities and initiatives.

As deputy staff director of the Senate Banking Committee, Mr. Hollingsworth coordinated
strategy for moving the Committee’s financial services legislative agenda through the 110th
Congress, including measures recently enacted in response to the ongoing crisis in global
mortgage, credit and capital markets. Before joining Chairman Dodd’s staff in January 2007, he served as vice president and director, federal government affairs for Securities Industry
Association (formerly SIA, now SIFMA). In that position, Mr. Hollingsworth was a senior lobbyist responsible for member relations and advocacy of SIA’s legislative and regulatory priorities. Mr. Hollingsworth has previously served as deputy chief of staff and legislative director for Senator Jon S. Corzine, (D-NJ) and as banking committee aide to Senator Charles E. Schumer (D-NY).

Mr. Hollingsworth received his B.A. in communications and finance from University at
Albany, State University of New York.

About Managed Funds Association

MFA is the voice of the global alternative investment industry. Its members are
professionals in hedge funds, funds of funds and managed futures funds, as well as industry
service providers. Established in 1991, MFA is the primary source of information for policy
makers and the media and the leading advocate for sound business practices and industry
growth. MFA members include the vast majority of the largest hedge fund groups in the world
who manage a substantial portion of the approximately $2 trillion invested in absolute return strategies. MFA is headquartered in Washington, D.C., with an office in New York. For more information, please visit: www.managedfunds.org.

How to grow your hedge fund

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There are several effective ways to grow your hedge fund. Many of those methods will be discussed and evaluated here. Obviously superior performance among investors with comparable risk is a great way to grow your fund. This section will delve into how investment teams can derive the superior performance that all funds strive for.

Character of the Management Team

There are certain key characteristics of successful investors that generally indicate whether the management team will be successful. A concentration on the business processes of the fund and consistent learning rather than daily results will generally lead to a knowledgeable management team. Most successful money managers understand that markets tend to be fickle and daily results are not always a good barometer of achievement. Hubris has the potential to plague intelligent investors; however, humility tends to lead to personal improvement and less risky investment strategies.

Investment managers should focus on their love for their work. Investors like to invest with people they can trust and those that exude a love for their work. A common trait amongst successful investors is a deep understanding of how investing induces the progress of our society. If investors have a sense that they are actually doing good for society, they tend to be more enthusiastic about their work which encourages investment. Investors should focus on the value that they provide to society. Many sophisticated investors want to believe in positive effects of their investments in addition to creation of wealth.

In addition, managers should focus on their skills rather than attempting to predict general macroeconomic trends. Successful managers know that there are always excellent opportunities in the markets to exploit. There are many trading strategies that successful investors can employ but the management team should focus on their abilities. Good management teams are patient. They fully understand their methodology. They rarely look for shortcuts or the easy way out.

Consistency

Investment professionals aspiring to become masters will strive for understanding and be consistent in their philosophy. Novices tend to look for an easy way to succeed. New investors will extrapolate previously successful investment models in books and project future gains. Inexperience leads investors to search for immediate profits rather than the consistent model of return that successful long term managers achieve. Thus, patience and consistency is a virtue.

Understanding and Application of Economics

A superior understanding of market forces can lead to growth of a fund. Investors that align their investment strategies with the overall economic and liquidity environment tend to be more successful and are able to maximize profit in nearly all environments. An intrinsic understanding of the drivers of market prices and examples of investment success guides successful funds. In addition, staying dynamic and perceptive of changing market trends is vital to maintaining the edge that superior economic knowledge grants.

Being able to time the liquidity cycle of the market should be a determinant in how a fund allocates capital. It has been found that 97% of equities fall in a period of tightening while 90% of equities rise in a steep yield curve environment. In addition, liquidity cycles can be utilized to determine the attractiveness of foreign markets that actively trade stocks and bonds. In an increasingly flat economic environment understanding global liquidity and economic indicators is essential to most funds.

Asset Allocation

Large cash positions provide low returns but good investors should be patient within their preferred asset class. Thus, investors looking to grow their funds should seek out other asset classes in which to allocate capital. While investors should find asset classes that best match their portfolio, it has been found that allocating 10 to 25 percent of assets to actively managed futures can increase long term returns and decrease long term risk. Many studies have found that adding actively managed futures to a portfolio of stocks/bonds can decrease volatility and increase gains.

In addition, investors should understand the almost universally recognized truth that joining several risky investments into one portfolio decreases risk and raises return. Mixing together uncorrelated assets should smooth out long term performance and increase fund size as the investments will react to different market forces.

Effective Marketing

In today’s increasingly competitive market for the capital of sophisticated investors, hedge fund managers need to market their fund properly in order to encourage large infusions of capital. A hedge fund manager may not solicit investment into the fund through any “general solicitation” or “general advertisement” per SEC regulations and thus funds rely upon advisory services to raise capital. Hedge funds used to rely on networks of advisors and their high net worth clientele; however, with the increasingly flat investment world, hedge fund consultants can be easily contact via the internet. Hedge fund advisors utilizing the internet are subject to the same SEC regulations as traditional advisors. Operational websites must adhere to the following regulations: the site is password protected, there are no references to a specific fund on the home page, the internal contents of the website are only available to qualified clients, and prospective investors are required to wait thirty days before investing.

In addition, a hedge fund administrator may be helpful in marketing and managing the fund. A hedge fund administrator provides valuable third party resources that: reduce expenses of the fund, validate performance results to investors, increase the managers’ time available to focus on investing, and provide access to accounting and finance professionals.

Hedge funds can benefit from using banks as a prime broker as it provides many resources and most importantly a centralized clearing house for transactions. Prime brokerages also provide value-added services of: capital introduction, risk management advisory services, and consulting services. Outsourcing non-investment activities to another firm decreases distractions, allowing the managers to focus on investing.

Transparency and Simplicity

Hedge funds trying to grow should encourage capital infusion by being somewhat transparent and simple. Typically hedge funds want to be relatively opaque; however, increasing investors are requesting more information and a minimum level of transparency for effective due diligence in now usually required. A level of transparency can be accomplished with an operational website that complies with all regulations. Many investors may not seriously consider investment in a fund without a website. In addition, managers should list performance on hedge fund databases. Acknowledgment of outperforming associated risk benchmarks on a hedge fund database will typically induce some investors to choose your fund over another.

What is a hedge fund?

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In short, hedge funds are pooled investment vehicles. That is, a hedge fund is a company which pools money from its investors (owners) and makes investments pursuant to the fund’s stated investment objective. There are many different types of hedge funds, which can invest in everything from stocks and bonds to more esoteric investments like derivatives, commodities and real estate. In addition to investments in a wide variety of financial or other instruments, hedge funds can “short” certain financial instruments and can also borrow to “leverage” their investments.

Unlike mutual funds, hedge funds are not registered with the U.S. Securities and Exchange Commission. While this means that hedge funds are not subject to the same level of government scrutiny as mutual funds, it does not mean that the SEC and the states cannot bring enforcement actions against hedge fund managers who break the law or make misrepresentations to investors.

While hedge funds are not subject to the more rigorous standards of mutual funds, they will need to comply with the U.S. securities laws regarding “private placements.” Hedge funds are generally sold to investors in “private placements” which means that hedge fund managers cannot advertise and that, generally, investors will need to be “accredited investors” that is they must have either (i) a one million dollar net worth or (ii). The investment managers will also need to adhere to certain filings within each state in which an investor resides. This will generally mean that they must file a “Form D” notice with each state within 15 days of the date in which each investor invests in the fund. The “Form D” must also be filed with the SEC within this time period.